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Monday, 13 May, 2002, 08:09 GMT 09:09 UK
Dutch hold on prosperity weakens
Houses by a canal in Amsterdam
Righting the Dutch economy could be difficult
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by Steve Schifferes
BBC News Online economics reporter
The Dutch economy is undergoing a testing time after two decades of strong growth and low unemployment.

The economic slowdown is adding to pressures for political reform and the tensions over immigration policy.

During the 1990s, the Dutch economy grew by 4% annually - the fastest in the European Union - and unemployment fell from 8% to 2.4%, while it was rising to nearly 9% in the EU as a whole.

The "Dutch economic model" - which encompassed a strong central bank, a social consensus on wage restraint, and limits on government spending - was lauded throughout Europe.

Indeed, its success supported the appointment of Wim Duisenberg, the Dutch central bank chief, as head of the European Central Bank.

Terrorist effect

The Dutch economy was already slowing before the 11 September terrorist attacks, but it was among those most highly exposed to the slowdown in global trade that followed.

Phillips logo
Big international companies dominate the economy

Growth virtually ground to a halt in the last quarter of 2001, and this year it is expected to be around 1.2%, before recovering to around 2.3% next year - lower than in the rest of the EU.

Meanwhile industrial production fell 3.2% in the first three months of the year, and retail sales were down 1.1%.

As one of the most international economies in the world, the Netherlands is the third biggest recipient of international investment, and trade accounts for two-thirds of its GDP.

Two of the Netherlands' biggest trading partners - Germany and the US - are both experiencing economic slowdowns of their own.

Meanwhile, inflation rose to around 5% yearly, the highest in the EU, as wage costs rose sharply, making the Netherlands less competitive.

That has been exacerbated by the relative under-valuation of the Dutch guilder when it joined monetary union, and the further weakness of the euro.

As a result, the profitability of firms has also fallen sharply.


And the Dutch economy is also facing some long-term problems, according to the Organisation for Economic Co-operation and Development.

Wim Kok: Symbol of consensus
Wim Kok: Symbol of consensus

The first is the problem of concealed unemployment.

One in seven of the workforce has retired early on generous disability benefits, and consultancy McKinsey estimate that without this scheme the real Dutch unemployment rate would be 20%.

Employers back the scheme because it provides an easy way to get rid of workers without sacking them.

The second issue is the ageing of the population, and the need to reform health care and pension policy to pay for it.

The OECD says that the Netherlands needs to run a budget surplus of around 1.25-1.75% of GDP for the next decade, cutting government debt, in order to be able to afford future benefits.

A major health reform is already underway, but it will add to government costs in the short-term.

And tax reform, which has cut the highest rate of tax from 72% to 52%, but increased indirect taxes such as VAT, has added to inflationary pressures.

As a result, the budget surplus has disappeared.

Open economy

Nevertheless, the Netherlands remains an attractive place to do business, according to international surveys.

One of the strengths of Dutch firms has been their open outlook towards the rest of the world.

Sex shop in Amsterdam
A tolerant outlook towards business

Dutch companies often use English as the language of business, and it has been their investments and trade overseas that has given the Netherlands the fifth highest GDP per capita in Europe.

Dutch companies are world leaders in many fields, such as banking and insurance (ABN Amro, ING Barings, Aegeon), oil refining (Shell), food processing (Unilever) and electrical goods (Philips).

These firms also have followed a very Dutch pragmatic and consensual approach to policy making, which has helped cement the loyalty of an international workforce.

It would be ironic indeed if the current economic difficulties led to an abandonment of that model in politics.

Ronald Van der Kroll, Financieele Dagblad
"Deals may have to be scrapped altogether if the Christian Democrats become part of the government."
See also:

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