It's an odd thing, isn’t it? Not so long ago, people were talking about Belgium as being the country in northern Europe that was most in danger of going the way of Spain, Portugal and co. And for a long time, Holland – along with Germany and Finland – had been lecturing the rest of Europe about the need to live within one’s means. All of a sudden it looks a lot different. Holland is fast becoming the sick man of northern Europe, and the reason? Well, let’s hope George Osborne is paying attention, because it is a lesson he could do with learning.

According to data out recently, the Eurozone is out of recession. The German economy grew by 0.7 per cent, France by 0.5 per cent, and at face value it was encouraging stuff, but among all that good news there was one piece of worrisome news. The Dutch economy contracted by 0.2 per cent. It was not really a surprise. It contracted in the last quarter too, and the one before that and before that. In fact the country has been in recession for 18 months now. That makes this one nasty recession, but just remember, it was also in recession in 2008/09, so for Holland it has been a double dip of truly unpleasant proportions.

The reason is not rocket science.

During the boom years Dutch house prices rose too high – way too high. Seduced by the idea that owning a house in Holland was a sure-fire investment winner, sucked into the narrative that a shortage of land meant that house prices across the Netherlands were guaranteed to rise, urged on by a government that subsidised mortgages, the Dutch borrowed against their home, and borrowed against the belief their home would rise in value and they ran-up huge debts.

It really is a puzzle. Among those who lecture us the most about the need to live within our means – so that is Dutch and British finance ministers for example – there seems to be a kind of casual disregard for household debt. We must live within our means, unless that is to say you are a voter, in which case, borrow, put it on the plastic – it matters not, your home will rise in value.

According to OECD data, household gross debt to gross disposable income in the Netherlands is 285 per cent. This is the highest ratio across the OECD. To put those numbers in context, the equivalent ratio in the US for 2008 was just 108 per cent. In the UK the ratio is 146 per cent – which most would agree is worryingly high – and yet the UK household debt levels seem like prudence personified compared to those of the Dutch.
Dutch house prices fell sharply in the first quarter of 2013, in 2012 and 2011. Yet despite the falls, Dutch house prices to incomes are still above the average for the country – although admittedly not by much.

Government debt is not so bad. Gross government debt is 71 per cent of GDP, net debt just 33 per cent, which is the lowest among the Eurozone’s bigger economies.
Holland’s government appears to be in love with the idea of austerity; of prudence keeping government debt under control.

Yet consider what might happen if households find they just can’t afford their debt. Imagine what might happen if global interest rates rise, which they are likely to do over the next few years. If households find they cannot pay their way; if there is a surge in the number of properties repossessed by the banks, the chances that Holland will experience its own Northern Rock type moment seems real. The possibility of a Dutch banking crisis is very real. Yet the consensus among economists towards Holland seems to be one of relaxation. The country still boasts a top notch credit rating, for example.

The thing about austerity is that it matters not how prudent a government is, how clearly it balances its books (not that the Dutch government is balancing its books), when households run-up debts, and house prices crash, household debt can become government debt. This is what happened in Spain two years ago. It may happen in Holland, and may well happen in any country where the government tries to stimulate house prices, creating consumer confidence, in turn creating growth. Are you listening Mr Osborne?

 

 

© Investment & Business News 2013