The Netherlands is facing the rough aftermath of a burst real estate bubble in a fashion only otherwise witnessed in the US and Spain.
Most of us have been observing Cyprus, Spain and Italy (maybe even Portugal). Yet some pretty depressing numbers ought to pull our attention farther North. Thousands of homeowners in the Netherlands currently live in property borrowed against by much more than what the house is worth on the market. Prior to the financial crisis it was possible to obtain a loan for a property at more than the value of the property and there was no requirement for equity. Easy money was in part facilitated by a general belief that the value of real estate would not decline (sound familiar?) and by deductibility of mortgage interest payments from taxes. The result? Dutch banks have €650 billion of mortgages on their books.
Due to the large proportion of mortgages, the financial industry is bloated to the extent that total assets make up 4.5 times the size of economic output. Furthermore, consumer debt stands at a whopping 250% of available income. The Dutch are a productive people, renowned for a competitive economy but also for one of the highest borrowing rates in Europe, which is only exacerbating the situation. Consumption collapses, as does investment, while filings for bankruptcy and the unemployment rate are racing the other way. As interest payments are not being paid, banks become much more cautious, worsening the economic downturn, and making it even harder to repay mortgages. Although the Netherlands is far from being the worst culprit in the Eurozone in terms of public debt, the private sector debt far exceeds the safety threshold of 160 percent of GDP set by the European Commission.
The irony is that the Netherlands is one of Germany’s most prominent supporters in enforcing budgetary discipline in the indebted nations of the South. This only serves to highlight the difficulty of credibly committing to a balanced budget, when the reins of monetary policy are largely in the hands of Brussels. Dutch Finance Minister Dijsselbloem finds himself acting in two opposing roles: monitoring the indebted Euro nations as ESM-president and head of the Euro Group, while trying to manage a sinking economy in his own back yard. The Netherlands will violate the EU debt limit, since €46 billion in austerity measures are apparently not sufficient. Another €4.3 billion in cuts in public service and healthcare are to take effect in 2014.
It is not entirely clear how private debt affects the economy relative to public debt, but it is fairly certain that private debt does not exactly spur growth. If you borrowed a lot of money to buy your house, and the real estate market suddenly plummets, you are more likely to want to repay your debt than spend money on consumption, in particular if you are a prudent Dutch citizen. Those individual decisions to withhold spending, multiplied throughout the economy, are dragging on in the Netherlands, but also other European nations, such as Denmark, Sweden and the U.K. This is why it is presumptuous to expect the Great Recession to be a brief matter, soon to be replaced by growth again. Some nations are stuck with a tremendous public debt burden, while other economies struggle with sluggishness due to private debt, and yet some are five feet under in terms of both (e.g. Ireland). Public and private sectors depend on one another for growth, so the recession is here to stay, at least as long as structural imbalances remain unchanged and no policy solutions are in sight. Indebted European consumers face a long period of slow, painful deleveraging.