REVIEW & OUTLOOK EUROPE
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April 22, 2012, 3:37 p.m. ET
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The Dutch Collapse
Willem Buiter, Citigroup's chief economist, told the House of Lords last October that Germany was "the only honest triple-A rated sovereign in the G-7." The rest enjoyed their credit grades "but for the grace of God and the ratings agencies." He was referring to France, but the admonition holds equally for the euro zone's three remaining triple-A borrowers that aren't Germany: Finland, Luxembourg and the Netherlands. With the collapse of the Dutch government's budget talks on Saturday and the likely announcement of early elections, the ratings agencies may soon have reason to stop being so obliging.
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The Netherlands' problem isn't its public debt, which was 66% of GDP last year. The budget deficit in 2013 is expected to be around 4.6% of annual output—higher than the European Commission's 3% ceiling but hardly an outlier in Europe these days. Rather, the Netherlands' problem is the ongoing bust in real estate, which has saddled households with mortgage debt exceeding 100% of GDP. Total household debt stands at 249% of GDP, the highest in the euro zone.
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Geert Wilders
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Unlike Spain and Ireland, where collapsing house prices have similarly threatened household and bank solvency, the Netherlands did not experience a construction boom that would have sent joblessness skyward when the real-estate bubble popped. Dutch unemployment is, for now, below 5%. But private debt has sapped consumption and investment, putting the country into recession since the third quarter of 2011. The country's fiscal troubles are a consequence of its broader economic woes, not their cause.
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That said, it's worth asking why, with the stakes so high, Dutch lawmakers couldn't agree on cuts and savings worth €14 billion—no small change but not insurmountable. The ruling coalition is grumbling about the obstinacy of Geert Wilders, the head of the euroskeptic Freedom Party. But markets began discounting the Netherlands months ago despite its gold-plated credit rating. Even without Mr. Wilders's opposition to austerity, it was only a matter of time before market pressure would have political reverberations, as the examples of Greece, Ireland and Italy have shown.
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A Dutch downgrade would be greeted with no small degree of Schadenfreude in certain South European capitals. Dutch officials have been among the most forceful advocates of budget consolidation in the euro-zone "periphery," a category that seems increasingly meaningless with the club of troubled sovereigns closing in around Germany. But with Europe's political class still committed as ever to its model of poor-country bailouts funded by rich countries, it's hardly consolation for any European government to watch the ranks of the creditworthy paymasters culled one by one.
A Dutch downgrade would be greeted with no small degree of Schadenfreude in certain South European capitals. Dutch officials have been among the most forceful advocates of budget consolidation in the euro-zone "periphery," a category that seems increasingly meaningless with the club of troubled sovereigns closing in around Germany. But with Europe's political class still committed as ever to its model of poor-country bailouts funded by rich countries, it's hardly consolation for any European government to watch the ranks of the creditworthy paymasters culled one by one.
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