Dutch economy was built on debt

published 6 December 2013

Not long ago, the Netherlands was a "model" economy, says Economist.com's Charlemagne blog. But in the past few years it has fallen from grace into "a morass of recession and budget deficits". This is due not to excessive public debt at 75% of GDP, government debt is below the eurozone's 96% average but to the hangover from a huge pre-crash housing bubble. The mortgage binge left the Dutch with the euro bloc's highest household debt, worth 110% of GDP. As house prices have plummeted, shaken households 16% of whom are underwater on their mortgages have cut back on their spending.

The ongoing deleveraging in the domestic economy has negated reasonable export growth, causing a long recession. GDP has shrunk 3.5% since 2008 and is unlikely to exceed its pre-crunchpeak until 2017. Meanwhile, ongoing austerity to squeeze the budget deficit below the eurozone limit of 3% of GDP has undermined confidence and growth further, and thus become self-defeating. No wonder credit-ratings agency Standard & Poor's has stripped the Netherlands of its top-notch triple-A rating.

The worst may now be over, says Viktoria Dendrinou on Breakingviews. Property prices are bottoming out; GDP rose by 0.1% in the third quarter, the first positive result in six quarters; and unemployment has edged down since hitting 9% earlier this year. But the Netherlands faces a long slog. And its travails are a reminder that we can't count on robust growth in northern Europe to pull the debt-ridden periphery out of the mire.