Is Germany about to lose its best friend?
Germany, Finland Luxembourg and the Netherlands are the last AAA-rated countries left in the 17-member eurozone. Like the coolest kids in the local high school, they form their own clique with their own set of rules. Those rules are:
- Hold the eurozone together.
- Bail out the troubled countries, but only under the strictest conditions.
- Save the banks while imposing some pain on private bondholders.
- Push the weaker economies to cut budget deficits by any means necessary and restructure their economies for growth.
Germany is the undisputed leader of this Upright Brigade and believes this creed with all its heart.
Finland is the most eccentric member. It almost chose to exile itself last year as Finns started to wonder, why should we send our money to anybody else? Timo Soini, leader of the True Finns party, campaigned on this sentiment in the run-up to parliamentary elections:
“The party is over,” he said. “Why should Finland bail anyone out? We won’t hand over more Finnish money to be burned in the fire.”
His True Finns went on to take 19% of the vote, but ultimately lost to a more mainstream party won which then convinced the government to take part in further bailouts. (But only after Greece agreed to give it collateral.) Finland has shown itself to be an unreliable member of the Upright Brigade.
The Netherlands, on the other hand, has always been Germany’s reliable wing-man. The two have a lot in common (the first line of the Dutch national anthem mentions King Willem van Oranje’s “German blood”. ) The Netherlands may have its racy parts, but on the world and European stages it’s considered to be as responsible as its big brother. But this might change.
The Dutch have peered into their budget future, and they don’t like what they see. They predict a deficit next year of 4.5%. While Greece or Portugal could only dream about a figure so low, to the Dutch the news is as welcome as a dragon at a tea party. What now?
The government must try to get this figure under the 3% threshold that it agreed to as part of December’s grand fiscal pact. Now the Dutch will have to force the austerity medicine that they have prescribed for everyone else down their own throats. It will be hard: their coalition government is very fractured. If the strain of new budget cuts and tax increases force new elections, then the increasingly popular anti-austerity parties on the left might win. And it’s not just the leftists questioning the wisdom of cutting budget deficits in difficult times — the head of the country’s biggest industrial lobbying group is also calling for a “go slow” approach for an economy already suffering a mild recession.
Will Germany lose its best friend in the Upright Brigade? And if so, will this encourage Greece, Portugal, Ireland, Italy and Spain etc. to question Germany-encouraged austerity policies? Spain’s prime minister has already said that the country will not meet its deficit target this year — and that he’s not too bothered about missing it, either! On the question of austerity, Germany is looking more isolated these days. Will it soften its stance and help provide a bullish case for Europe?
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Editor’s note: For you fans of Euro 2012, have no fear, we know that Holland and Germany are not best friends on the pitch, just in economic and monetary affairs.
did n’t you forget Luxembourg https://www.paperjam.lu/communique_de_presse/fr/grand-duchy-luxembourg-aaaa-1-sovereign-ratings-affirmed-continued-strong-fi ? It seems they also have the best credit rating possible.
Regards
Very true. As editor, I have corrected the article to reflect this. Cheers.
The Dutch should always remember, Germany – Netherlands 2-1 (1974)
It’s a known unknown. The Dutch Cabinet is willing to make the necessary cuts, but it’s not clear the Dutch people are willing to accept them. You are right to point out the fragility of the coalition. If it collapses (a big if) we will be treated to an election that is essentially a referendum on European policy.
That the government will survive and continue to back Germany is more likely, in my opinion, but it will depend on events on the ground and the decisions of individual politicians.
The Dutch should immediately call the IMF for help.
https://www.macrobusiness.com.au/2012/02/hi-im-from-the-imf-im-here-to-help/
I rather doubt that point 3, “Push the weaker economies to cut budget deficits by any means necessary and restructure their economies for growth.” is correct. Pushing them to cut budget deficits by any means necessary is close but ignores the fact that the parts of said deficits that are funding imports from the export-surplus nations are considered MUCH less important to cut than social safety nets and job-supports. And the economies are specifically restructured to maximize repayment … growth is optional and only if repayments are made first. At least that’s my reading of the situation.
Which makes growth a fallacy. It cannot grow while austerity is in place. Also restructuring for growth takes years to implement. Time Greece and Portugal do not have.
The additional problem for the Netherlands is its property bubble. Austerity could cause that to implode and bring down the banks with it. ECB policy will mean that the government is forced to back its banks with guarantees like Ireland and then its deficit could balloon. Then it will rapidly enter an austerity death spiral.
I think it’s fair to say Finland being still one of the most loyal servant to the Merkel’s “fourth reich”. I’m watching politics over this matter quite closely and the National Coalition party, which won the elections last year had a taunting task to form a government. Usually it’s done in Finland within a week, but this time it took roughly two months.
The reason was trying to keep the popularity winners, True Finns out from cabinet with the euro-skeptic visions. The Social Democrats, another big party saw its opportunity to play by the policy books and demanded the collateral issue in order to back the bail-outs. National Coalition was between rock and a hard place. However, it was still crystal clear that the policy is not going to change, only the stance might be seen as more defensive.
It’s still amusing to follow how Finnish ministers react on every turn mrs. Merkel does. When Merkel says growing firepower (bigger bazooka) is out of question the Finnish ministers repeat this stance. However, when IMF and outside EZ-pressure is growing against Germany to change this opinion and mrs. Merkel is more considerable, the tone switches immediately. “Absolutely not” changes to “I don’t want to speculate”.
I hope this has got some contribution for the topic. The Dutch dilemma grew just recently, when Freedom Party asked to bring on the national currency for the Netherlands.