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« Greek Debt Swap: Not exactly a solution | Main | Spain's sovereign thunderclap and the end of Merkel's Europe »
Wednesday
Mar072012

Dutch Freedom Party pushes euro exit as €2.4 trillion rescue bill looms

 Geert Wilders

The Dutch Freedom Party has called for a return to the Guilder, becoming the first political movement in the eurozone with a large popular base to opt for withdrawal from the single currency.

"The euro is not in the interests of the Dutch people," said Geert Wilders, the leader of the right-wing populist party with a sixth of the seats in the Dutch parliament. "We want to be the master of our own house and our own country, so we say yes to the guilder. Bring it on."

Mr Wilders made his decision after receiving a report by London-based Lombard Street Research concluding that the Netherlands is badly handicapped by euro membership, and that it could cost EMU’s creditor core more than €2.4 trillion to hold monetary union together over the next four years. "If the politicians in The Hague disagree with our report, let them show the guts to hold a referendum. Let the Dutch people decide," he said.

Mr Wilders is not part of the coalition. However, the minority government of Mark Rutte relies on the Freedom Party to pass legislation. The two men were in talks on Monday on €16bn of fresh austerity cuts needed stop the budget deficit jumping to 4.5pc of GDP.

The study said the eurozone cannot survive in its current form. The longer Europe’s politicians dither, the more costly it will become. "The euro can only survive if it becomes a fiscal transfer union with national sovereign debt subsumed in eurozone bonds," said co-author Charles Dumas.

Greece will opt for a "negotiated exit" later this year, once the pain becomes excruciating. This will be after the French elections in May, but before the German electoral season begins in 2013.

Portugal will follow in "short order" as markets focus on its struggling banks and nasty logic of recession for debt dynamics. "At that point, if not before, attention will turn to Spain and Italy, both likely by then to be much weakened by savage austerity programmes now being implemented," said Mr Dumas.

That is the moment when the creditor core will face the decision they have "ducked" for the past two years: either accept an EMU reflation strategy, along with debt pooling, fiscal union, and transfers; or accept a break-up.

Under an "optimistic scenario" it would cost €1.3 trillion to shore up Med-Europe, rising to more than €2.4 trillion if Italy and Spain need some form of bond relief. "The staggering trillion bill to preserve the euro only takes us to 2015. In reality, most of the debts will never be repaid and subsidies will need to continue, year in and year out," said Mr Dumas.

The report said exit by Italy would be relatively easy. The country would recover once it regained currency freedom, though foreign bondholders would take an exchange rate hit. Spain’s exit would be harder to manage since it has a primary budget deficit of 7pc of GDP, and its companies have large euro debts abroad.

Exits costs will rise relentlessly for both countries over time. Prolonged economic depression within EMU would render their debt mostly worthless in the end. So if there is to be break-up, "the sooner the better".

Italy and Spain are more likely to hang on as long as they can, until Northern patience snaps. Germany and Holland would then leave, causing a general return to the "sanity" of floating currencies.

The report said Holland had fallen behind non-euro Sweden and Switzerland since the launch of EMU. Its growth rate dropped from 3pc over the preceding 20 years to 1.25pc under the euro, compared with 2.25pc in Sweden and 1.75pc in Switzerland. The Swedes have stolen a march worth €3,500 per head over the past decade.

The report said Sweden and Switzerland have performed better on every front, relying on currency swings to check imbalances. "They created more jobs than the Dutch and especially the Germans. They enjoyed lower inflation. They were more successful in balancing their budgets. And they have run larger current account surpluses. Only wishful thinking could absolve the euro from blame."

Holland had enjoyed a "one-off" gain of 2pc to 2.25pc of GDP from the launch of the euro, and transaction costs have fallen. However, the trade benefits have been scant. The value-added share of exports has not risen.

The pan-EMU convergence in borrowing costs cited for many years as the great success of EMU proved to be a curse. It let the South borrow too cheaply and too much, lulling creditors into a false sense of security, and ultimately led to the debt crisis.

The report conclude that EMU membership "locks the Netherlands into a system in which cost competitiveness is matched by massive structural over-valuation of costs in Med-Europe, resulting in deficits that will suck cash out of the core Eurozone".

Mr Wilders said the study "goes against everything we are told in the media and by the left-wing elite on a daily basis".

The Dutch government is unlikely to pay any attention to the findings, but the Freedom Party’s populist campaign may force Mr Rutte to take an even harder line in loan talks with Greece, Portugal and Ireland, or over the expansion of the EFSF rescue fund.

The Dutch are major net contributors to the EU budget and have long resented serving as a cash cow. They rejected the European Constitution by a wide margin in 2005. A bitter edge has crept into Dutch political discourse.

Mr Wilders is known for his astute political instincts. His demarche tells us all too clearly that Dutch patience is wearing very thin.

 

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