Headline: Dutch Economy Teeters on Edge of Stagflation

Source: International Herald Tribune, 3 July 2001

URL: http://www.iht.com/articles/24879.html

AMSTERDAM -- Among Europe's most advanced economies, the Dutch don't really like to think of theirs as a bellwether. Too small, too specialized to be a universal example, they protest, while murmuring sotto voce, yeah, and probably more nimble, less doctrinaire and better managed than the rest.

Quite literally, such was the case: As Germany and France thrashed with low growth and high unemployment from 1995 to 2000, the Netherlands was expanding at a pace of near 4 percent per year while moving, statistically at least, very close to full employment.

Accomplished without stripping the vast portfolio of welfare state services, all this was put down as the triumph of good sense by labor, management and government - a mix of wage moderation paired with tax breaks and incentives that Klaas de Vries, the home affairs minister, once modestly called "the Dutch model and all that nonsense."

Now the impressive numbers are slipping away. In the European Union's latest accounting, inflation in the Netherlands was running at 5.4 percent, the highest in the euro zone, and well above the European Central Bank's 2 percent target. Last week, while Germany and France were acknowledging that their economies were seriously weakening, with growth projections revised steeply downward for the year, figures published here showed business confidence off for the ninth straight month, while consumer confidence fell to the lowest level in five years.

At the same time, Philips NV, Europe's biggest consumer electronics company and a national symbol of competitiveness, announced that it was abandoning its role as an independent manufacturer of cellular phones. The state statistical office projected growth declining to 2.75 percent for the year, but two major banks quickly said that seemed optimistic.

If there once had been a good case for putting the Dutch economy on a pedestal - proof, it was said, that a European country could combine strong growth, low unemployment and social protections - that perch seems to be wobbling.

Rational explanations here for the slowdown and the rise in prices are far from lacking. They center on a Dutch tax increase, an insufficient labor pool that has forced wages upward, increased oil prices, higher food costs because of bad weather and foot-and-mouth disease, and the weakened world economy.

But the combination of inflation - now at the highest cumulative level in Europe since 1993 - and declining business activity, plus limited progress in developing Dutch productivity, has led to talk about whether the Netherlands might be sliding, if only just, in the direction of a low-growth, inflationary trough of the kind called stagflation.

In Germany, where the gross national product is expected to expand by just over 1 percent this year but price increases remain lower than in the Netherlands, there have been much shriller public warnings about stagflation from research institutes, bankers and Christian Democrats who have hopes of discomforting Chancellor Gerhard Schroeder ahead of the national elections next year.

In Portugal, with an International Monetary Fund growth projection for 2001 roughly level with the Dutch, and current inflation at 4.9 percent, a half-point lower than the Netherlands, Jose Tavares Moreira, a former head of the central bank, has stated the country "is extremely close to a stagflation situation." The ECB, although wavering throughout the year on whether inflation is a major concern, has been dismissive of the prospect of stagflation, saying there is sufficient domestic demand in Europe to rule it out.

Harmen Versluis, an economist at Rabobank Nederland NV whose growth projections for the Dutch are much lower than those of the state statistical bureau and who worries about an implosion of Dutch consumer spending, insists nonetheless that it is premature to talk about a situation of the kind that afflicted Europe for parts of the 1970s and '80s.

"When we speak about stagflation here," he said, "growth would have to go lower and inflation higher. That could happen if there were a worsening world economy, no recovery in the United States and no consumer spending. As I see it now, our growth in the Netherlands can be about 2 percent and wage increases about 4 percent. The debate here is whether we're reaching a new equilibrium for the next years or whether we have a very real problem. In that respect, I suppose, you can make a stagflation scenario."

Unlike many official voices in the Netherlands who talk of a decline in prices here in 2001, Robert van den Bosch, chief economist at ABN AMRO Bank, said he did not see inflation in Europe coming down quickly, and he projected that the euro would fall to 80 cents against the dollar by the end of the year. That could raise inflation further, help dwindling exports, or both. Still, he said he does not believe recession or stagflation were at hand.

Economists such as Mr. Versluis at Rabobank say the Dutch situation may be nearing a decisive moment. He contends a wealth effect has vanished from the Dutch equation, making big personal investments like buying a house much less likely, and he is concerned about the June report that showed consumers now avoiding spending money.

"Ah yes, the dreaded S-word," said Jasper Kat, an economist at the Dutch Employers Association. "At the moment, we don't see it as a real problem. But if wages go up, and too quickly, and there is an accelerated loss of competitiveness, then there's some sense of stagflation."

Mr. Kat is especially concerned about Dutch productivity. If the Netherlands has achieved nearly full employment, its method, unique in Europe, depends heavily on part-time jobs and a policy of holding down numbers on the job market through very supple disability standards and early retirement.

The result has been enviable statistics. But it is now clear that the resulting shortage of manpower forces up salaries, this year at a projected 4.9 percent. Employers say they must choose from a pool of candidates whose limited skills have pushed down productivity growth rates to a point, according to the International Labor Organization, where the Netherlands is next-to-last in Europe, just ahead of Greece.

There is also a painful irony in operation. Although it is not often discussed in a country profoundly in favor of European integration, the government's function within the Dutch economic model has been seriously impaired by the coming of a single European monetary policy. "We don't have local national rates anymore," said Robert P.W. van Wassenaer of the consulting firm McKinsey Co. "Inflation is rising faster here than in the rest of Europe. Wage rates are going up faster, and the ECB is looking elsewhere. I don't think it's the end of the Dutch model, but it certainly is the end of a low-wage environment."

-- Andre Weltman (aweltman@state.pa.us), July 03, 2001