Michael Ellman on the Dutch Elections

The Dutch elections of 15 March have been widely interpreted as a “resounding defeat” for populism. This is very hard to reconcile with the government coalition losing 37 (8 out of 41 Rutte’s VVD, in spite of having moved towards Wilders’ agenda – “Be normal or Begone” - and 29 out of 38 Labour Party PvdA) i.e. almost half of its former 79 seats. Rutte will need new allies to form a government. Geert Wilders’ Party instead gained 5 seats and rose by one third to become the second party of the Netherlands. "Everyone is entitled to his own opinion, but not to his own facts" (Daniel Patrick Moynihan). So I asked Professor Michael J. Ellman, of Amsterdam University, for his assessment of the results. Here is his reply, which I found particularly enlightening, and which I have his permission to reproduce as a Guest Post on this Blog, with many thanks.

From Michael Ellman (16 March 2017):

It seems to me as follows, subject to the fact that currently we only have preliminary results and the final results may differ somewhat.

(1) The turnout rose significantly. This indicates that in addition to the people who normally vote, there were some additional people who strongly wanted to express their disapproval of the policies of the ruling coalition and others who strongly wanted to express their fears about Wilders.

(2) The coalition which has ruled since the last elections (in 2012) has done badly. They have gone down from a majority (79 in a 150 seat Parliament) to a minority of only 42. This indicates that the majority of the population rejects the policies of the last four years (fiscal orthodoxy/austerity).

(3) The main loser is the traditional Social Democratic party, the Labour Party or from its Dutch initials PvdA. This party has played a major role in Dutch politics since 1945 but fared dismally in these elections. I think the main reason is that it was the junior partner in the coalition and went along with fiscal orthodoxy/austerity which hit many of its traditional voters who turned elsewhere to express their dissatisfaction. For many years now it has been a 'New Labour' type of party and not a home for victims of globalisation. This has not pleased many of its traditional voters. It is also a culturally liberal party which also did not go down well with many of its traditional voters.

(4) Prime Minister Rutte can feel pleased with himself. Although the coalition which he led did very badly, his own party did not do too badly, losing only 1/5 of its voters and becoming by far the biggest party (at the last election it was only just ahead of the Social Democratic party). In addition, many of the votes he lost went to the Christian Democrats who are ideologically close to his party. Furthermore, Rutte's party did substantially better than the party of Wilders. As a result, Rutte's party will play a dominant part in the negotiations to form a new coalition.

(5) The mainstream parties won 2/3 (102) of the seats. This indicates that Dutch politics and society are quite stable. The coalition negotiations may well take some time (this is quite normal) but the resulting government will be a mainstream one.

(6) The election was largely fought on cultural/identity issues. Traditional economic issues played a lesser role. Dutch national identity, the role in the Netherlands of ethnic minorities, migration, and the role of the Netherlands in the EU were the main topics. (Of course migration also has an economic aspect.) The resulting Government will be very sceptical about plans to increase EU integration or expand its membership (in 2 referenda in the past, on the proposed EU constitution and on the Ukrainian trade agreement, majorities rejected the EU-preferred policy.) This means, inter alia, that the Netherlands will be hostile to plans for an EMU bank union or a transfer union. One of the 6 founder members of the EU is now opposed to deeper integration.

(7) In order to win and beat Wilders, Rutte took over some of his main themes. The need for immigrants and their descendants, if they want to be welcome, to assimilate, abandon some of their customs and accept Dutch ones, was strongly emphasised by Rutte. Also the stand he took against Turkish ministers holding open-air election rallies in the Netherlands was popular and probably won him votes.

(8) Although Wilders can be pleased that some of his themes have entered the mainstream and are repeated by the Prime Minister, he must be dissatisfied with the result. It is true that his number of seats has increased by a third. However, whereas at one time it was thought that his party might emerge as the largest one, it remains a long way (20 to 33) behind Rutte's party. Hence Wilders has not the slightest chance of entering the Government and becoming a minister.

(9) The other populist party (which gets less publicity outside the Netherlands) is the Socialist Party. This is a traditional leftist party in favour of more public expenditures, higher wages, lower rents, higher taxes on the rich and on companies etc. It seems that it will fall from 15 seats to 14.

(10) The result of the relatively poor showing of the 2 anti-system parties is that politics as normal, subject to a cultural/nationalist shift to the right, has won. For 'Brussels' that might be reassuring, but the lack of support for further EU integration and expansion, and the general acceptance of a more nationalist stance will not seem so positive.

(11) What policies the new coalition will agree on is highly uncertain at the moment (in the Netherlands the parties forming a coalition have to agree on policies, set out in a detailed written Coalition Agreement, before the new Government is formed and takes office - in the meantime the old ministers remain in office but are expected not to take any radical measures). To what extent the popular rejection of austerity and concern for national identity will influence future policy remains to be seen.

Forza Iceland!

On 7 October 2008 the global financial crisis spread to Iceland, when the Icelandic government put Landsbanki, the second largest bank by value, into receivership. On 8 October the government took control of Glitnir, the third largest bank, buying a 75 per cent stake for €600m; on 9 October it took control of Kaupthing, its biggest bank. These events triggered off a row between Iceland and the United Kingdom over the losses of UK depositors with the collapsed banks, especially in high interest accounts held with Icesave, an online arm of Landsbanki; Dutch depositors also lost out to a lesser degree. Icelandic funds for deposit guarantee were grossly insufficient to provide cover. The Brown-Labour UK regime actually used anti-terror legislation against a fellow NATO-member to freeze Landsbanki and other Icelandic assets held in the United Kingdom. The UK, and Dutch governments, reimbursed most of their depositors for their Icelandic losses, and claimed the money back from Iceland – UK depositors had lost something of the order of over €2.4 billion, the Dutch over €1.3 bn. This represented a per-capita burden of the order of €12,000 for each of the 317,000 Icelanders, or about €40,000 per household, or roughly 50% of Iceland’s GDP. On this, debt interest would be charged at 5.5% per year – a superb rate of return these days. According to the FT, “A year’s interest equals the running cost of the Icelandic healthcare system for six months.”

The deal was approved by the Icelandic Parliament on a narrow 33-30 vote, but over 60,000 people (some quarter of Iceland’s voting population) raised a petition against it, so that President Olafur Ragnar Grimsson refused to sign legislation and blocked the settlement – an implicit vote of no confidence in the Centre-Left Premier Johanna Sigurdardottir. A referendum will take place before 6 March. “The involvement of the whole nation in the final decision – said the President – is … the prerequisite for a successful solution, reconciliation and recovery.”

















Two out of the three opinion polls taken since the president’s decision indicate that the legislation will be rejected in the referendum. Considerable pressure is being placed on Icelandic voters, under threat to lose a $10 billion loan package by the IMF, the EU and Nordic countries, and to see the rejection of Iceland's application to join the European Union, which was submitted last July.

The roots of the Icelandic crisis are in the unrestrained neo-liberal policies followed over the last ten years: the privatisation of the banks in question, their de-regulation, the policies pursued by a former Prime Minister of Iceland both in government and then as governor of the Central Bank, not to mention the responsibilities of British and Dutch regulators faced with inordinately fast growth in the foreign operations of the Icelandic banks. “Since the banks had turned Iceland into a hedge fund, with massive short-term foreign currency liabilities used to finance risky long-term assets, the economy was doomed.” (Martin Wolf, FT, 14 January 2010).

Deposit guarantees at the time of the Icelandic banks' collapse differed across Europe, with different national ceilings (only €22,000 in Iceland); what counts is the nationality of deposit-taking banks, not that of depositors. EU regulations require only that a deposit-guarantee system must be in place with “sufficient resources” to cover deposits, but leaves the central bank’s top up (up to 100% in the Netherlands) to bilateral treaties that neither the UK or the Netherlands have with Iceland. Moreover the Dutch Finance Minister Wouter Bos admitted that deposit guarantees are not designed to cover the case of systemic crises (see Sveder van Wijnbergen, NRC Handelsblad, 12 January 2010). And of course such guarantees are not a claim that can be instantly executed at the request of the depositor or his government, but a credit that can be challenged and tested in courts. It is not by chance that Alistair Darling still has not compensated foreign investors in Northern Rock.

The UK and the Dutch are at liberty to cover their nationals’ deposits with Icelandic banks but – until an agreement with Iceland not only has been signed but has also cleared all the protective hurdles put in place by the Icelandic constitution – they cannot unilaterally and automatically execute their resulting credits towards Iceland. The use of anti-terrorist legislation by Gordon Brown to seize Icelandic assets in Britain undoubtedly damaged Iceland’s credit rating and credibility; it was an outrageous, illegitimate insofar as it had nothing to do with terrorism, crass and aggressive move that backfired, notably the referendum initiative was taken by an Association that called themselves “Icelanders are not terrorists”. If Iceland needed a pretext to have second thoughts about the deal, which it does not, redoubtable Gordon Brown’s use of anachronistic gunboat diplomacy is more than enough.

Iceland is already over-indebted. Its stock exchange fell by 90% in the crisis, the krona has lost more than half its value against the euro since July 2007, and even the IMF reckons that “further depreciation of the currency would not be feasible, as it would raise the debt-to-GDP ratio to 240%. The Icesave deal would have done the same. The country’s ability to pay foreign debts – out of net exports – is limited” (Michael Hudson, FT 13 January 2010). According to an OECD economic survey (September 2009) between 2007 and 2010 Iceland's real consumption will have fallen by almost a quarter and domestic final demand by almost 30 per cent. Iceland can invoke customary provisions for "onerous debt". A renegotiation of the original settlement with the UK and the Netherlands would be in the interest of creditors as well: claiming the impossible is bound to result in obtaining less than if a more modest but feasible claim was put forward.

The same bullying tactics – not to say blackmail – that pushed Ireland into ratifying the Lisbon Treaty in last year’s referendum under threat of losing all kind of EU subsidies, are now being used to bully Iceland. Wouter Bos threatened an EU boycott and International Monetary Fund blockade, and a Dutch director of the IMF, Age Bakker, announced that all aid already committed to Iceland would be delayed – a decision that is not his to take but for the IMF Board of Directors, within which he would have to abstain on this issue because of his evident conflict of interest. This is a further disgrace, for neither the interests of Ireland nor those of the EU, or the interests of global financial stability, are changed by a jot with the settlement of a relatively small claim (by EU and IMF standards) with or without a dispute – a settlement which will have to be negotiated, or ruled upon in the European Court of Justice, but either way will be resolved in due course. There is no legal or moral case, and – more to the point – it is not in anybody’s economic interest, to imprison Icelanders in their own country for debt.

'Lord' Myners, the UK Financial Services Secretary, has said that if the deal with the UK and the Netherlands is rejected in the referendum, voters would “effectively be saying that Iceland does not want to be part of the international financial system” (Martin Wolf, cited). It is true that after the President’s decision Fitch has already downgraded Iceland debt to junk status (though not other rating agencies, who have refused to aid the pressure), but it is up to the Icelanders to decide at what price they want Europe and access to international finance. Not unnaturally Icelandic support for joining Europe has decreased significantly since the dispute: by last September a Gallup poll showed that 48.5 per cent now were opposed and only 34.7 per cent in favour. Support cannot have improved since then. The threat of not joining the EU might be treated by Icelanders as a welcome promise.

There are only two redeeming features of this particular Icelandic saga. One is Iceland’s small size. Small is not only beautiful, it is also economically manageable and digestible. €3.8 billion is chump change these days. Which offers the main, probably only ground left for hope in Latvia.

The other piece of good news is that, at the end of last October, McDonalds announced the closure of its three outlets in Iceland and said that it had no plans to return. This was due to the “very challenging economic climate” and the “unique complexity” of its operations (i.e. importing most ingredients from Germany at rising costs, with the Economist’s Big Mac Index still making the krona very much over-valued). Such a privilege for Iceland is shared with only Albania, Armenia and Bosnia and Herzegovina in Europe. A high price to pay for exclusivity, but a privilege nevertheless.

A non-bail-out bail-out?

In our latest post (30 November) we discussed the possibility of a European bail-out in case of sovereign default by an EU member state, regardless of EMU membership. As it happens, The Economist of 3 December has a piece under Economic Focus on precisely “What would happen if a member of the euro area could no longer finance its debt?”.

The Economist recalls “That famous headline from the Daily News ran after President Gerald Ford refused to bail out New York City in October 1975, when the city was close to bankruptcy ... “: “Ford to City: Drop Dead.” “Within weeks Ford relented. Behind the belated rescue lay a fear that default by New York would hurt the credit of other cities and states, and perhaps of America.“

At present even high deficit and high debt countries like Greece, Ireland and Latvia can borrow at no more than 2-3 percentage points over the 3.1% rate on German bonds – hardly a danger signal yet – but this might not last forever, especially in view of their poor wage competitiveness.

The Economist acknowledges the ““no bail-out” clause that prohibits one country from assuming the debts of another [art. 103 of the Treaty establishing the European Community, see our earlier post]. That makes Greece’s public finances a matter between it and its creditors. Any promise, tacit or otherwise, of a bail-out by others would only encourage more profligacy (a view that mirrors Ford’s initial stance towards New York). In principle, a default by Greece or by any other euro-zone country would not threaten the euro any more than default by New York City in 1975, or California today, would mean the end of the dollar. Indeed, membership of the euro could help make debt-restructuring more orderly, since it would remove currency risk from the equation.”

But The Economist suggests an alternative, which is what actually happened to New York: “The non-bail-out bail-out”. Meaning: technical default, with some debt-holders not getting their money back, and a drastic fiscal squeeze. “The city had to cut public services, shed jobs, freeze pay, abandon capital projects and raise taxes to make sure it could pay back the federal loans. Such belt-tightening had proved necessary even in the months before the rescue. When it came, the president could claim that “New York has bailed itself out.”

“It is easy to imagine a similar kind of hard bail-out, should a euro-zone country ever run short of cash.” “It would be hard to sell [the bail-out] to voters in rescuing countries unless, as in New York’s case, the interest rates on bridging loans were punishingly high.” “A tough-love bail-out would still need someone with deep pockets to provide the cash. Given the state of public finances even in more stable countries, such as France, that cannot be taken for granted. Germany is better placed but would be unwilling to act alone.”

The Economist is confused and confusing. Would there or would there not be a bail-out? This is the question. Even unilateral aid from Germany would have to be authorized by the Council, for it not to be prohibited by art. 103 of the Treaties establishing the European Community (see our earlier post). That conditions for a bail-out, if any, would have to be tough, or be preceded by self-imposed austerity, is another matter. The defaulting country can always turn down financial assistance if it does not like the conditions, but they may still be preferable to no bail-out.

The Economist fails to provide an answer. The crux of the matter – as pointed out in last week’s post, is the absolutely discretionary nature of a bail-out, depending exclusively on a Council’s decision on “exceptional occurrences”, on a recommendation by the European Commission.

And, in view of their analysis, what for?

Sovereign Default: Absolutely No Bail-Out... Perhaps...

There is a general feeling, in IMF statements and among financial commentators, that there are increasing risks of sovereign default (Dubai World’s crisis is not strictly a case of sovereign default but strengthens this feeling). Willem Buiter talks of “the likely imminence of the start of the final leg of the journey from household default through bank default to sovereign default”.

Within the EU, for at least a year, Latvia has been permanently on the verge of default by virtue of its Argentina-like combination of: the commitment to a hyper-fixed exchange rate tied to a strengthening currency, managed by a Central Bank acting as a Currency Board; large scale twin deficits, fiscal and commercial; rising foreign indebtedness; decreasing external competitiveness; increasing interest rates; lower FDI and financial capital outflows.

During the same period from time to time other EU members have seen the lowering of their credit ratings and the rise of their interest premiums above the German benchmark – early warnings of possible default. At the beginning of 2009 eurozone bond spreads suddenly widened. At some point Ireland had its credit-rating downgraded by Fitch from AA+ to AA-, while the OECD and the European Commission demanded drastic budget cuts, and its GDP accelerated its decline. Greece is the most recent EU candidate for default since mid-November, after the discovery of a government deficit suddenly rising to 12.7% of GDP, instead of the expected 6%, and public debt-to-GDP ratio headed for 135%, amply overtaking that of Italy while nobody was watching (gross external debt, public and private, was 149.2% of GDP at the end of 2008; the real exchange rate has appreciated by 17% since 2006, losing competitiveness; see Munchau, FT 30 November).

Suppose an EU member state, whether or not a euro-zone member, experienced a serious financial crisis to the point of default. Would the European Union and its financial agencies, and/or the other Member States, come to its rescue?

Art. 103: No Bail-Out

The possibility of a bail-out is considered and specifically forbidden by Article 103, section 1, of the Treaty establishing the European Community (TEC; ex-Article 104, currently in force and directly applicable from 1 January 1994; see the latest consolidated version of the current treaties, Official Journal of the European Union (OJ) 29.12.2006 C 321 E/84).

“The Community shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of any Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project. A Member State shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of another Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project.”

It should be stressed that Article 103 rules out not only any obligation to bail-out, but also any unilateral, voluntary and generous “assumption of the commitments of central governments, regional, local or other public authorities, etc.”, whether on the part of the Community or a Member States. No bail-out, period.

Nevertheless…

On 18 February 2009 the then German Finance Minister Peer Steinbrück speaking in Dusseldorf “signalled that [Germany] would support emergency action to protect the eurozone if one of its 16 member-states found itself in such serious difficulties that it could not refinance its debt.” (FT, “Germany ready to help eurozone members”, by Bertrand Benoit and Tony Barber). Mr Steinbrück noted that "We have a number of countries in the eurozone that are clearly getting into trouble on their payments", adding that "Ireland is in a very difficult situation". “The euro-region treaties don’t foresee any help for insolvent countries, but in reality the other states would have to rescue those running into difficulty” (EU Observer, 18 February 2009).

One might be inclined to say that Mr Steinbrück is no longer the German Finance Minister; and that in any case he had no authority to make that statement. And if the state of California can face the prospect of bankruptcy without any of the other federal states or the Fed or the US government turning a hair, why should an EMU country, especially if small, be bailed out in a considerably looser Union which is not even a Federation? Except that Steinbrück was not alone in his pronouncement, and there are two other clauses in the TEC that could plausibly be interpreted as providing for a bail-out, not only for EMU members but also for non-EMU member states. Not an automatic provision, but a possible course of action that could be taken on a majority decision.

Steinbrück’s statement was echoed shortly afterwards by Angela Merkel, speaking to foreign journalists in Berlin. Der Spiegel commented that “If Germany were to pay into a bailout based on its size relative to other eurozone countries, it would be forced to cover one-fourth of the entire tab. Peter Bofinger, a member of the German Council of Economic Advisors, actually quantified in €1.5bn a year the likely cost to the German taxpayer of a rescue operation within the eurozone. Then, in March 2009, Joaquín Almunia, then European Commissioner for Monetary Affairs and usually a tough custodian of fiscal and monetary rigour (the man who single-handed tried – though failed – to reduce the ERM-II band of exchange rate variation around the entry parity from 15% to 2.25%, just by his saying so), said: "If a crisis emerges in one eurozone country, there is a solution before visiting the IMF. Don't forget we are equipped to interact politically and economically to face the crisis, but these kinds of things should not be explained publicly." In March, the Irish Times reported that: "Unofficially, leading figures in Berlin admit that assistance for several EU members, including Ireland, is all but inevitable." In June 2009, Times columnist Anatole Kaletsky wrote: "Germany is at the heart of a huge plan to prop up crippled EU economies - not that the German people would ever know" (these quotations are taken from Openeurope.org, 17 July 2009).

Articles 100 and 119: discretionary bail-outs

How could the unambiguous No-Bail-Out provision of Art. 103 be circumvented? Almunia did not say, at first, invoking discretion. One way in which it could be done with impunity is via the EU or its member states giving credit guarantees rather than subsidies or credits. A guarantee costs nothing if it is not called upon, though in case of default it may cost up to 100% of the sums guaranteed; but in any case such a contingent, quasi-fiscal, future liability does not usually appear in the current budget. After all, this is how the EU supported eastern European transition economies beyond its budgetary constraints in the early 1990s.

But there no need for such an escamotage. There is always the possibility of the Council granting financial assistance to a member state experiencing exceptional difficulties (Eurointelligence, “Did you know that there is an explicit bailout clause in the Maastricht Treaty?” 18.02.2009). Art. 100, section 2, states that:

“Where a Member State is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control, the Council, acting by a qualified majority on a proposal from the Commission, may grant, under certain conditions, Community financial assistance to the Member State concerned. The President of the Council shall inform the European Parliament of the decision taken.” A similar provision for eurozone non-members is provided in Art. 119.

This provision was specifically referred to by Der Spiegel magazine in connection with the German Finance Minister’s statement. Angela Merkel also specifically referred to Art. 100 procedures. The possibilities were also mentioned of Germany issuing 'bilateral bonds' to raise money for struggling countries; or groups of several member states collectively floating a bond; Jean-Claude Juncker had proposed issuing a common euro zone bond for the 16 countries sharing the currency, a revolutionary idea that was supported by Almunia but met opposition from Germany. The source and therefore the scale of financial assistance would be affected, but clearly Art. 100 and 119 are sufficient to drive coach and horses through the No Bail-Out clause of Art 103 of the TEC.

Moscow rules

It is bad enough for EU member states to be subject to the fiscal straitjacket of the so-called Growth and Stability Pact, without those members that comply being subjected to the cost of bailing-out those who do not comply. It is bad enough for the ECB to provide emergency financial assistance to banks at its own discretion, without being subject to rules as a Lender of Last Resort; now the Council is to provide financial assistance to member states at its own discretion.

It used to be said that Soviet Law could be summarized by three basic rules: 1) Everything is forbidden. 2) Everything is allowed in special cases. 3) Special cases are decided by the Party. There is enough of that in Brussels already. Mutatis mutandis, this model is being replicated exactly by EU rules on financial assistance to member states: 1) Bail-outs are forbidden. 2) Bail-outs are allowed in special cases. 3) Special cases are defined by the Council.

Without rules, assistance may be provided not only on economic but on broadly political grounds: clearly the prospect of European assistance was used blatantly as an offer that Ireland could not refuse by failing for the second time to ratify the Lisbon Treaty. In March 2009, the German Ambassador to Ireland, Christian Pauls, warned that Ireland would "throw away its future" if it voted No to the Lisbon Treaty for a second time. He said, "A second No would have horrific consequences for Ireland and I am not the first to say it. I don't think there is anything particularly new in that." On 25 June, German MEP Jo Leinen said the Irish must vote "Yes" if they wish to continue to benefit from the "protective umbrella" the EU provides (Openeurope.org, cited). Political pressure now is also being exercised on Greece: it is presumed that Greece would not enjoy EU financial assistance unless it complied with EU demands for budgetary cuts (as in the no-longer-secret letter by Eurogroup President Junker reported today in the Greek press).

Unsettled State of Play

With Moscow rules, there can be no foregone conclusion.

German taxpayers expressed their opposition to using public money to bail out other countries that have got into financial difficulties: 70.9% were against “helping countries like Ireland or Greece”, 24.8% were in favour, 3.4% did not know (Open Europe in collaboration with the Institute for Free Enterprise, Berlin; published by Openeurope.com cited). One could argue that opposition to bailouts was also implicitly expressed in the German elections.

At present, EU borrowing is against the rules, but would be necessary to fund financial assistance to member states. Almunia recognizes that “a common bond” “is not politically viable today because some important member states said 'no'. This requires a political decision that is not in the hands of the Commission."

Doubts have been expressed about the possibility of intra-EU bailouts. The Former Chief Economist at the ECB, Otmar Issing, told the Frankfurter Allgemeine Zeitung that it would be a catastrophe to water down the 'no bailout' clause in the EU treaties, arguing that it would spell an end to "the political stability of the monetary union". He said that in order for financial discipline to prevail every member state must be responsible for its own debt and deficits: "without this there would be no end", he said (Openeurope.org, cited).

But the best comment on bailouts was by Karl Otto Pohl, former President of the Bundesbank. He said that if Germany decided to bail out other members of the eurozone it would open a Pandora's Box, adding "It would be like jumping in a swimming pool without water".