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00THEHAGUE1868 2000-06-22 14:15:00 UNCLASSIFIED Embassy The Hague
Cable title:  

SCENESETTER: VISIT OF CODEL GRAMM TO THE

Tags:   OREP ASEC EFIN NL EUN 
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					  UNCLAS SECTION 01 OF 04 THE HAGUE 001868 

SIPDIS


E.O. 12958: N/A
TAGS: OREP ASEC EFIN NL EUN
SUBJECT: SCENESETTER: VISIT OF CODEL GRAMM TO THE
NETHERLANDS: THE DUTCH ECONOMY AND EMU

REF: SECSTATE 104182




1. Summary: With a booming economy, ample budget
surpluses, and a rapidly declining national debt,
the Netherlands is exceptionally well positioned
for the coming of the euro. So far, businessmen
believe that the benefits of the transition have
far exceeded the costs, but the Dutch Central Bank
has urged the business community not to fall
behind in their preparations for the 2002
transition. Substantial U.S. corporate investment
here, and accelerating Dutch acquisitions in the
U.S., underscore the continuing importance of the
U.S. link for the Dutch economy. U.S. regulatory
issues, particularly in the financial services
sector, remain a major interest for many Dutch
corporations. End Summary.


THE DUTCH ECONOMY: LEADING EUROPE


--------------------------




2. After near disaster in the early 1980s, major
players in the Dutch economy, business and union
leaders forged a historic consensus linking long-
term wage restraint to increased investment. This
consensus is generally referred to as the "polder
model" after the artificially-drained fields
characteristic of the Dutch landscape, and later
allied to increasing fiscal conservatism. It has
yielded impressive results. The Dutch now enjoy
an economic growth rate of more than 3 percent, an
unemployment rate under 4 percent (with 200,000
job vacancies), and a second consecutive year of
budget surplus. National debt has declined from
67 percent to 58 percent in the past two years,
leaving the Dutch well within the conditions for
joining European economic and monetary union. All
in all, the economy is perhaps the soundest in
Europe. The labor market, while in some respects
more rigid than in the U.S., is among the most
flexible in Europe. Burgeoning temporary-help
agencies -- the latest labor-market trend -- offer
employers additional flexibility.




3. There are some clouds on the horizon, however.
For example, the low unemployment rate does not
take account of persistent long-term unemployment
among certain groups, especially those over 55,
the less educated, and immigrants with limited
language skills. Labor participation is also
relatively low among married women. Moreover,
years of government effort have failed to reduce
substantially the unusually large proportion of
the workforce out on disability payments -- a
total of 930,000 people out of a labor force of
about 7 million. Although the Dutch pension
system is currently financially sound, an aging
population, combined with the Dutch penchant for
retiring early, points to the need to raise
participation in the labor market.




4. The government has taken a number of measures
to address these issues. Among other things, it
has budgeted more money for day care, and reformed
the tax system to reduce disincentives to work.
It is also attempting to combat age discrimination
among employers.


TRADE AND INVESTMENT PATTERNS


--------------------------




5. The Netherlands is a quintessentially open,
service-oriented economy, with trade accounting
for over 80 percent of its GDP. The US had a
trade surplus with the Netherlands in 1999 of USD
11 billion on close to USD 30 billion of total
trade, reflecting the importance of the
Netherlands as a distribution base for US products
in Europe. The U.S. is one of the largest
investors in the Netherlands with a total of over
USD 80 billion in existing investment.




6. The Netherlands has long been one of the top
three investors in the U.S.; while statistical
lags make it impossible to say for certain, we
believe that the rapid rate of Dutch investment in
1999 and 2000 has pushed them into the top slot.
In the year 2000 alone, widely reported Dutch
acquisitions in varied sectors including financial
services and food products have totaled USD 79
billion. U.S. acquisitions in the Netherlands have
attracted less attention and are difficult to
quantify, but US foreign direct investment in the
Netherlands continues apace. Most recently Cisco
Systems announced a large long-term direct
investment near Amsterdam. US investors generally
cite the quality of the Dutch workforce, efficient
infrastructure, a favorable and predictable tax
system and general regulatory structure, and the
unbeatable location of the Netherlands as a
transit hub as reasons to locate here.


EFFECTS OF EMU ON THE DUTCH ECONOMY


--------------------------




7. As strong supporters of the EU, the Dutch also
naturally backed EMU. As a practical matter, the
Netherlands linked its currency, the guilder, to
the Deutschmark in 1990, thus effectively giving
up independent monetary policy as an economic
tool. The potential loss of sovereignty involved
in EMU was therefore less troubling to the Dutch
than to larger member states. Due to careful
fiscal management in the 1990s, the Dutch also had
little to do to meet the so-called "EMU criteria"
regarding budget deficits and debt as percentage
of GDP.




8. However, the move forward in 1997 to the
second stage of EMU caused some trepidation among
Dutch policymakers, and aroused little enthusiasm
among the general public. Among other things,
some politicians (including Finance Minister Zalm)
were uneasy about the inclusion of
macroeconomically marginal candidates such as
Italy, and about French attempts to establish some
measure of political control over the decision of
the European Central Bank. French efforts to
displace Dutchman Wim Duisenberg as first European
Central Bank (ECB) President did nothing to allay
these concerns. In the end, however, the
political establishment suppressed any qualms and
held firmly to its commitment to EMU.




9. In general, the business community expects
EMU to be a net benefit to the Netherlands. Early
studies estimated that the costs of preparing for
EMU would be more than offset by the benefits,
ranging from lower exchange costs to competitive
gains. The Dutch are confident of their own
competitiveness and expect EMU to offer them
increased market opportunities by lowering
remaining barriers to neighboring markets and
increasing price transparency.




10. Dutch banks are also looking to EMU with
optimism. Two of the three major Dutch banks are
among the top twenty in Europe; ABN-AMRO is hoping
to develop a niche market as a clearing bank
throughout Europe as well as jumping into the
Internet banking market. In the long term, Central
Bank studies have also predicted that EMU would
spur disintermediation in European financial
markets and a shift from debt to equity financing
that could help lower capital costs, especially
for healthy Dutch firms.


STAGE THREE: ARE THE DUTCH READY FOR THE EURO?




11. The third stage of EMU -- the irrevocable
fixing of exchange rates and introduction of the
Euro in financial markets -- took place in January


1999. While the Dutch have had no difficulty
meeting the basic criteria for EMU, and have
enjoyed relatively low inflation under European
Central Bank monetary policies, Dutch efforts to
prepare for actual introduction of the currency
appear to be lagging behind.




12. The latest survey by the Dutch Central Bank
(DNB) estimates that the Dutch business community
can expect about USD 3.5 billion in increased
revenues as a result of the introduction of the
euro. The survey also predicts that the euro will
bring around USD 2.5 billion in new investments
into the Netherlands. Despite these attractive
prospects, many Dutch businesses have been slow to
begin accepting euro payments.




13. Fewer than 1 percent of Dutch companies do
business, or pay taxes, in euros. 80 percent of
large businesses have a plan for switching over to
the euro, but many smaller firms have not yet
focused on the issue. The Central Bank has warned
that companies without a plan for euro conversion
risk missing the deadline.




14. The banks began the necessary software
revision for transition to the Euro over a year
ago, but some of these preparations were retarded
by the need to troubleshoot for Y2k, which led to
an acute shortage of technical personnel.
Moreover, while the banks have begun to issue bank
statements in guilders and euros, and to offer
business-to-business transactions in euro, they
have been reluctant to encourage consumers to open
euro accounts or pay bills in euro.




15. Nevertheless, the Central Bank survey
concluded that an overall majority of households
and businesses have faith in the euro. However,
although most Dutch people and companies feel
fully informed about the euro, attempts to
increase euro knowledge in the last year through
intense media campaigns seem to have failed.




16. Dutch Trade Minister Gerrit Ybema has argued
that EMU will benefit both Europe and the US.
Europe will see increased price stability and
transparency, and experience fewer deadweight
losses from currency conversion costs. Ybema
predicted that US companies will benefit from the
stabilization of prices and exchange rates as much
as their European counterparts. He also suggested
that EMU will increase the demand for imported
goods throughout the EU, as well as decrease the
costs of EU imports headed for the United States.




17. We believe that US companies in the
Netherlands will be among the prime beneficiaries
of EMU. As most US companies based here operate
Europe-wide, elimination of exchange costs will be
a substantial saving. The introduction of the
euro in consumer transactions will probably
further accelerate development of e-commerce in
Europe.


THE ROLE OF MINISTER ZALM


--------------------------




18. Finance Minister Gerrit Zalm, whom you will
meet on your visit here, is in his seventh year as
Minister and has been a key figure in the shaping
of Dutch fiscal policy and the Dutch approach to
EMU. In his first five years as finance minister,
he was responsible for holding the government on a
fiscally conservative course. Under his leadership
the government also rationalized its previously ad
hoc and chaotic budget process. As finance
minister, he has also taken a tough line both on
the budget and on European issues, negotiating a
substantial reduction in the net Dutch
contribution to the EU budget.




19. In the current coalition government, which
began in August 1998, Zalm's ability to maintain
fiscal discipline was vastly aided by windfall
revenue gains that pushed the budget into surplus.
While government spending will increase, portions
of the windfall have been used to pay down the
national debt, with the result that debt service
payments have declined substantially.




20. Zalm has also led an effort to overhaul the
Dutch tax system in order to lower marginal tax
rates (still higher than those in the U.S.),
eliminate loopholes, remove tax disincentives for
two-income couples, and to eliminate the "poverty
trap" created by the fact that total benefits and
subsidies granted to the unemployed often exceed
net income at the minimum wage.




21. Zalm was among the Dutch politicians calling
for care in the selection of entrants to EMU.
Along with the leader of his party, the right-of-
center VVD, he was accused of "spaghettiphobia"
for voicing his doubts about the inclusion of
Italy, Spain and Portugal in the initial eleven
EMU entrants. Nevertheless, Zalm has publicly
proclaimed himself satisfied with the transition
so far; as he noted, getting eleven European
countries to vote on a single coin design is in
itself a signal success. He has also said, as
have other observers, that EMU proved itself by
maintaining European economic momentum during the
Asia crisis.




22. Bio notes: Although he is the senior VVD
minister, Zalm is not a career politician. Zalm
was born in the historic Zuider Zee port of
Enkhuizen on May 6, 1952, and was educated at the
Free University of Amsterdam, where he received a
doctorate in economics and was generally regarded
as a brilliant student. He immediately began a
career in public policy in the budget division of
the Ministry of Finance, then moved to the
Ministry of Economics where he became director of
general economic affairs. He visited the U.S. on
a USIS grant in 1986. In 1988, he joined the
Central Planning Bureau, the independent
government planning and forecast agency, and
became director a year later. He was appointed
finance minister in August 1994 at the start of
the first Kok cabinet.




US BANKS IN THE NETHERLANDS


--------------------------




23. US banks are well-established in the
Netherlands, but concentrate on serving their
global customers and exploiting niche markets
rather than retail banking. Most observers believe
that the large Dutch retail banks will continue to
dominate their own domestic market even with EMU.
However, we have heard no complaints about market
barriers or "doing-business" issues from the U.S.
banking community.


DUTCH BANKS AND INSURERS IN THE UNITED STATES


--------------------------




24. Dutch investment in the U.S. financial
services sectors totalled USD 21 billion in 1998,
the last year for which we have statistics; taking
account of the 1999 takeover of Transamerica by
Dutch firm Aegon, (USD 19 billion) the total is
probably considerably higher this year. The two
biggest Dutch banks are big players in U.S.
financial services sectors: ABN-AMRO has over USD
100 billion in holdings and 18,000 employees in
the U.S., including Lasalle Group and Standard
Federal Bancorporation in the Midwest, while ING
has over USD 30 billion in US insurance
activities.




25. Dutch banks, especially ING, welcomed the
easing of Glass-Steagall restrictions. Current
concerns include the role of US regulatory
authorities in the debate over restitution of
assets confiscated from Holocaust victims. Aegon,
which cooperates with the Dutch Jewish Community
in finding and paying insurance-related claims,
appears to have resolved the issue with U.S.
insurance commissioners and the Eagleburger
Committee. The banks and the Amsterdam Stock
Exchange have just reached a settlement worth
about USD 150 million with the Dutch Jewish
Council and the World Jewish Congress.


SCHNEIDER