Monday, April 23, 2012

Dutch Government Resignation Shows EU Failure

The shock resignation of the Dutch Prime Minister over the government's inability to negotiate an austerity package shows in stark terms the bankruptcy of the whole EU fiscal management paradigm. Government debt is 65% of GDP, and the ten year Dutch government bond spread over German paper is only 80 basis points, according to the Wall Street Journal. 

The forecast debt-to-GDP ratio in the Netherlands is 4.6%, above the arbitrary 3% benchmark set by the Eurocrats, and it's being driven primarily the the Dutch economy's sliding into recession as opposed to a bevy of new profligate government spending.  Unemployment is up and consumer spending is down.  So some members of the coalition felt that it was bad policy to force the government to hit the 3% target by 2013, which would only drive the economy deeper into a recession. 

Now, the credit rating agencies which had been partners in facilitating the real estate boom that created the mortgage debt overhang plaguing the Netherlands and other EU countries have now turned into knee-jerk alarmists who are not helping matters either.  Do they honestly believe, or can their models show, that there is an unwillingness or inability to pay on Dutch sovereign debt now?  Talk about a sovereign credit rating downgrade only adds to the pressure.

Meanwhile, back in Euroland, it is now all about getting President Sarkozy re-elected at all costs, which includes courting the execrable French far right.  Further back at IMF headquarters, meetings are being held, the coffee can is still waiting for contributions, and there aren't enough smoke and mirrors to make the fundamental issues go away.

Harmonization of fiscal policies, not centralization of control from Brussels, is a reasonable target for an economic union.  The problem is that for many years, Eurocrats looked the other way when any European knew that EU members like Greece, Italy and others were openly flouting the guidelines.  At this point in time, coming down on countries to hit arbitrary hard targets by a short-term deadline is irrational.  The leader of the Dutch Freedom party said, as would be his wont, that "damaging growth" to hit the arbitrary EU limit was something he couldn't support. 

There are no more rabbits to be pulled out of the hat for the austerity play book, and it needs to be scrapped for something more reasoned and reasonable.

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