US embassy cable - 04THEHAGUE122

UNCLAS SECTION 01 OF 02 THE HAGUE 000122 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EUR/UBI SHERRY HOLIDAY 
 
STATE PASS USTR FOR MOLNAR 
 
USDOC FOR 4212/USFCS/MAC/EUR/OWE/DDEFALCO 
 
TREASURY FOR OASIA/ATUKORALA 
 
PARIS ALSO FOR USOECD 
 
FRANKFURT FOR WALLAR 
 
E.O. 12958 N/A 
TAGS: ECON, PGOV, NL, EUN 
SUBJECT: Netherlands: Balkenende Government Challenged by 
Slumping Economy 
 
REF: 03 THE HAGUE 2750 
 
1.  (U) SUMMARY:  Looking forward to the summer of 2004, the 
Balkenende government is contemplating its second year in 
office and a full agenda of internal and European Union 
matters as it takes the EU Presidency in July.  Continuing 
domestic economic malaise has generated incipient doubts 
over the viability and relevance of the economic consensus- 
based model that contributed to Dutch economic success in 
the 1990's.  The Dutch economy remains resilient and 
attractive to foreign investors, but the problematic economy 
will likely demand significant cabinet attention and compete 
for time and resources with a taxing EU agenda and other 
important matters.   END SUMMARY 
 
2. (U) After a relatively strong performance in the late 
1990s, during which growth averaged nearly four percent per 
year, the Dutch economy has been mired in a slump, from 
which there are few signs of an early exit.  Growth was 
barely positive in 2002 (0.2 percent), and GDP is estimated 
to have declined by .75 percent in 2003.  The outlook for 
2004 is for a return to positive - but only one 
percent-growth.  The struggling economy has caused the 
fiscal deficit (declared by the Finance Ministry at 2.75 
percent of GDP) to brush up against the Growth and Stability 
Pact's three percent deficit ceiling forcing painful and 
controversial budgetary retrenchments (reftel) to stay 
within the limit. 
 
 More Belt-tightening in the Short-Term 
-------------------------------------- 
3.  (U) Even if the more optimistic growth scenarios prove 
accurate, the government may have to consider additional 
deep - and potentially politically divisive -- budget cuts 
in order to maintain its commitment to fiscal discipline and 
stay within the (limits dictated by the) GSP limits.  The 
Netherlands Bureau of Economic Policy Analysis and 
Netherlands Central Bank have already warned that absent 
additional belt tightening, the EU GSP limits will be 
breached (analyses with which the Ministry of Finance 
disagrees).  A euro that continues to strengthen against the 
dollar will further put a damper on growth. Netherlands 
Central Bank President Wellink declared that the revenue 
shortfalls could amount to a billion euro, 0.2 percent of 
forecast 2004 GDP. 
 
4.  (SBU) The Dutch consideration of next year's budget and 
assumption of the EU presidency coincide. The Netherlands 
has a deep commitment to Europe and to showing strong 
leadership during its EU presidency, especially with key 
constitutional questions at stake.  Nevertheless, 
consideration of last year's domestic budget cuts demanded 
significant ministerial time and attention as each minister 
worked to justify and defend his/her budget interagency. 
Considering options for cutting social programs and 
government-provided benefits (e.g., unemployment 
compensation) would be politically controversial.  Some 
strains are already showing within the cabinet over how to 
address economic issues in the EU context - Economic 
Minister Brinkhorst and Finance Minister Zalm are reportedly 
estranged over the handling of immigration from  the 
countries about to enter the European Union (and also likely 
the clashing of egos between two experienced leaders with 
strong personalities who each like being in charge).  Zalm, 
a deficit hawk who has been among the EU's most vocal 
advocates of a strict approach to GSP enforcement, has also 
differed with new FM Bot, just back from an introductory 
visit to Berlin, where Bot expressed understanding for the 
Germans' more flexible approach to the GSP's deficit limits. 
 
What to do in the Long-Term 
--------------------------- 
5.  (U) In addition to short-term economic concerns, Dutch 
policymakers are increasingly worried about long-term 
economic prospects.  Dutch economic performance has not only 
been sluggish in absolute terms but also relative to other 
European countries - the European Commission forecasts Dutch 
economic growth in 2004 at about one third of the Euro Zone 
average. This economic concern is creeping into public 
discourse with Economics Ministry Secretary General 
Oosterwijk recently observing in his widely reported New 
Year's report that in a relatively short time that "the 
Dutch Miracle has turned into a Dutch depression."  The 
modern Dutch "formula" for economic growth - negotiated wage 
moderation in return for preservation of key social benefits 
and job protection - seems no longer to work as real wages 
have risen in excess of productivity gains and Dutch exports 
-- equal to nearly50 percent of GDP -- have become less 
competitive.  In addition, European competitors more closely 
match Dutch labor flexibility and advantageous tax rates 
than they did 15 years ago, a graying population requires 
more resources be devoted to health care and pensions, and 
EU expansion into Eastern Europe has stimulated increased 
investment competition. 
 
Comment 
------- 
6. (U) The need to confront these issues has produced 
considerable debate in the Netherlands over the past decade. 
No one predicts an economic meltdown, but many think a slow 
erosion of competitiveness is becoming apparent.  The 
government has taken some important steps: a political 
pledge to promote innovations, social welfare benefits have 
been cut, for example, and innovative projects stimulated 
through government incentives and increased collaboration 
between universities and business. But the Netherlands has 
been so far reluctant to take the massive, but perhaps 
socially disruptive, policy changes -- promoting increased 
immigration to reduce the chronic shortage of technically 
skilled labor, attacking cartelization by removing labor and 
product market rigidities) and, thereby, increasing 
competition, seriously trimming the bloated disability- 
benefit rolls, or attempting to match U.S. productivity and 
labor flexibility levels -- that might produce permanent 
positive changes in the Dutch long-term growth potential. 
 
7. (U) The Dutch economy remains developed and resilient and 
attractive to foreign investors.  The tough decisions needed 
to address neglected socioeconomic restructuring can 
continue to be put off or addressed piecemeal.  But the 
costs for doing so  - not only to the domestic economy but 
also to the economies of its trading partners and those 
seeking positive role models for the value of open and 
transparent trade and investment systems -- are likely to 
also start gradually increasing. 
 
 
Sobel