After attendance at an informal summit of the G20, the following report is written for both representatives and constituents of our party as an outline and basic analysis. While our own approach to economics may differ, it is crucial for us to understand what is being discussed, implemented, and advocated for. Thus, this brief focuses on an overview of policy effectiveness and response in the Netherlands related to the financial crisis, the policy options discussed by the G20 and the stance of the Netherlands on the major issues, and finally further recommendations within these general lines.
The Basics [i]
Although only the 16th biggest economy in the world, the Netherlands occupies a very important role as the 2nd largest exporter of goods in the EU after Germany and in volume it is the largest in the EU. These rankings highlight its place as an Advanced Surplus Country and define the importance of exports to the Netherlands. Along with being a major exporter of services, exports amount to 80% of GDP, almost two times the European average.
Economic Philosophy [ii]
With a limited dependency on foreign capital and a flexible labor market, the Netherlands remains one of the most stable of economies in the world, despite the impact of the financial crisis. As an advanced surplus and expert-oriented country, the Netherlands advocates for product & labor market reforms friendly to bother demand and supply in order to repair lower supply potential and reduce high unemployment. In addition, the transparency of the financial sector and establishing effective international financial standards are two of the current policy focuses.
Effects of Crisis
Initial Assessment [iii]
At the beginning of the crisis, the Dutch economy seemed untouched, with very low unemployment, large and stable account surplus, budget surplus, low government debt, and economic growth above euro area average.
Issues begin in 2008 [iv]
Global Demand for Trade Falls: 6% fall each quarter in 2008 and in the first quarter of 2009 by 11% worldwide, creating a major issue for the Netherlands as a top exporter
Bank Balances-Consolidated Foreign Bank Claims: Foreign claims of Dutch banks made up over 300% of GDP, the largest in the EU.
Bank Loans: Housing indebtedness approximately 120% of GDP and Corporate indebtedness approximately 83%, higher than most other European countries, creating issue during crisis. Debt cannot be paid and debt must be rolled over, the dependence on bank credit makes the Netherlands vulnerable to changes in credit conditions.
Pension Funds: Although an Esping-Anderson hybrid, pensions remain on the social democratic side with a generous, asset based pension fund. While this encourages savings for the future, it is vulnerable to economic changes. When the financial crisis happened, the stock markets in 2008 lost about 70 billion EUR in assets as opposed to the record high they saw in 2007.
Consumer Confidence: stronger decline in 2009 on as the crisis hit in other sectors and ways while the rest of the EU as the Netherlands experienced more issues in investment due to their role of producer.
Crisis Management & Policy Response [v]
Although not a member of the G20, the Netherlands is involved in many other international bodies and organizations. Having created and published their own data in line with the same monitoring progress members of the G20 use, the Netherlands is ahead of many of its actual member counterparts in enacting measures advised and implemented.
OECD measures aimed at the financial system [vi]
For the Netherlands, these measures focus on problems in the housing market, issues in export credit insurance, help for medium-sized companies, and measures focused on the health care sector.
Basel III Principles and the BCBS: The Credit Guarantee Scheme [vii]
The Netherlands has led the way in passing, implementing, and furthering the oversight and regulation Basel III focuses on. In response to these decisions, the Credit Guarantee Scheme was created in 2008, issuing 200 billion euro for issuance of medium term debt instruments by banks. Improvements were seen in the capital market and the independence and self-reliance of banks improved greatly. In light of concerns in the still fragile global financial market, the scheme was extended until June of 2010.
The Capital Requirements Directive (CRD III) [viii]
Due to this decision within the EU, the Netherlands passed the Dutch Financial Supervision Act 2011, strengthening the power of the Dutch Central Bank, DNB, in reviewing, regulation remuneration policies, employment contracts, and incentive schemes. The Netherlands expanded the scope beyond the CRD III to further regulate financial institutions beyond credit institutions and investment firms.
Intervention Bill 2011 [ix]
A draft bill consisting of three main parts focused on the resolution of credit institutions and insurers when problems are irreversible, measures to ensure the stability of the financial system, and to protect the rights of contracting parties after a measure is taken by a supervisor or the minister of Finance.
Currently the EU is trying to avoid trade protectionism to ensure that other major economic powers such as the US and China, do not do the same and negatively affect them in return. In all reality, the Netherlands has bounced back, and export levels are once again on the rise as highlighted in the graph at the end of this brief.
Monetary Policy [x]
As a member of the EU, the European Central Bank is in charge of creating and implementing monetary policy of the Netherlands since it uses the euro. Rather than focusing on expansionary or contractionary policy, they realize the idea that in the long term, the change in the quantity of money will come from prices, from real factors, referred to as “the long-run neutrality of money”. The primary objective then is price stability and low inflation rates at or near 2%.
The Success of the Netherlands
At just 3.7% in 2009, the unemployment rate in the Netherlands is significantly lower than in its EU counterparts, less than half the average of the EU as a whole. This figure has risen slightly this year, at a current 4.2%, however in comparison with other countries it is still far lower.
As the Netherlands is more apt to control financial systems and regulate, shown through not only their passage of Basel III, but also through their advocacy for additional restrictions beyond the basics agreed upon, Dutch policy is effective and should be considered as best policy practice.
Instead, the Netherlands has been further cut off from having a voice on an international level, as after the decision to pull out troops from Afghanistan, the Netherlands has not been invited to return as an observer to the official G20 summits. However, in this informal meeting, the Netherlands was able to both observe and advocate for the sound policy and ideas that kept the unemployment rate and financial stability it is now known for throughout the financial crisis.
G20 Policy Options and Recommendations
One of the only agreed upon issues at the past G20 summit meeting was the inability to propose a one-size fits all solution to the failures of the IMF in addressing the needs of developing countries. In order to modernize and improve the idea of loaning money to different countries, the Netherlands proposes not just an increase in transparency and accountability of the IMF, but an entire restructuring no longer focused on a neo-liberal approach, but rather a tailored approach for each situation, utilizing best policy practices in other countries where policy transfer is possible. Policy tools enable countries to create and control their own economy, but they must have some input and oversight in order to ensure that exploitation does not come from the “hand that feeds them”. Empowering government of the people to invest in not only the economic aspects of the country but also the people equally is an important part of Dutch culture, and essential to creating a sustainable and peaceful world.
Global Bank Levy [xi]
In the current economic climate, the Netherlands, along with many countries in the EU, hopes to establish a global bank levy in order to hold banks more accountable and responsible if government bailouts are needed in the future. This would essentially create a level playing field internationally, especially with the addition of a financial transaction tax. If a global bank levy is not passed, support for a more local bank levy, such as one limited to the EU, is supported by the Netherlands, although not currently by Italy. In addition, for the Netherlands and other countries in the EU, a financial transaction tax must be global to ensure banks did not simply move elsewhere. The US is the main opponent to this idea, essentially guaranteeing it will not pass at the G20 level. In response the Netherlands should advocate for a bank levy at the EU level, working with Italy to create consensus amongst the member states, establishing a system that can eventually transfer to the global level.
International Oversight & Transparency
A primary part of Basel III and the many policies in the Netherlands focus on creating oversight and transparency to ensure that financial crisis does not happen without notice and/or the ability to understand the roots of the issues. With weak bodies of international organizations, the G20 must work to create standards and real consequences for the countries that avoid taking responsibility for their actions. An example of this inequality was introduced during conversation in this meeting. The G20 can set important changes and goals advising all involved and others to follow, however these must be made on a consensus-based vote, something that many in the G20 find unfair and each insist on their own increase power through attempts to establish legitimacy. The recommendation the Netherlands proposes is to give more of a voice in recommending policy to countries who have sound, effective policy despite the financial crisis while valuing their own citizens.
As a member of the EU, the Netherlands believe the current currency control by the US is harmful to many and an unsustainable and unstable system. The Dutch government proposes the implementation of a multi-currency reserve system in which multiple countries are involved in order to link the benefits of multiple interests together. For the Netherlands and other countries in the EU, the concept of f neutrality in monetary policy could very well be a part of the future, but for now, expansionary monetary policy would help the Netherlands in two main ways. Raising investment levels would improve business and help reestablish credit and the lower exchange rate created would cause exports to increase yet again, which is still the primary part of the Dutch economy. As can be seen in the graph below, the Netherlands has successfully managed to rebound from the drop in the export market during times of recession in the US, which effects the global system.
In conclusion, as an uninvited guest to this informal summit, the Netherlands represents a powerful example of effective policy, oversight, and regulation needed to weather the storm of financial fallout. We stand as an example of a country overlooked by the world and politically cornered due to our own inability to continue an illegal, expensive, and ineffective battle in Afghanistan. In the future, we must continue to focus on what has worked, transparency of economic practices, financial regulation, and creating a foundation of support for the people of the Netherlands.