NETHERLANDS: GLOOMY ECONOMIC INDICATORS GENERATE

UNCLAS SECTION 01 OF 02 THE HAGUE 001018

SENSITIVE
SIPDIS

STATE PASS FEDERAL RESERVE BOARD - INTERNATIONAL DIVISION, TREASURY
FOR IMI/OASIA - VATUKORALA, USDOC FOR
4212/USFCS/MAC/EURA/OWE/DCALVERT

E.O. 12958: N/A
TAGS: ECON EFIN PGOV PREL NL
SUBJECT: NETHERLANDS: GLOOMY ECONOMIC INDICATORS GENERATE
PARLIAMENTARY DEBATE

Ref: A. THE HAGUE 910, B. THE HAGUE 981

THE HAGUE 00001018 001.2 OF 002



1. (U) SUMMARY: The Netherlands' leading statistical agency
forecasts a recession in 2009 and only slight GDP growth of 1.0
percent in 2010. Although the Netherlands likely will weather the
economic crisis better than many of its EU neighbors, it still faces
rising unemployment and significant declines in trade and
investment. The expected government budget surplus in 2009 has
disappeared, to be replaced by a deficit of 1.2 percent of GDP in
2009 and 2.4 percent in 2010. The rising deficit predictions
prompted heated debate December 10 as Prime Minister Jan Peter
Balkenende and his cabinet defended their economic policies before
parliament. While some parliamentarians called for new government
measures now to offset the impending deficit, Balkenende advocated
staying the course until the effects of the government's recent
interventions in the financial sector and economic stimulus package
could be evaluated. End summary.

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GLOOMY ECONOMIC INDICATORS
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2. (U) The Netherlands Bureau for Economic Policy Analysis (CPB)
released a gloomy forecast December 10 that predicts shrinking
international trade, rising unemployment, a growing budget deficit,
and recession in 2009 - the first annual shrinkage of the Dutch
economy since 1982. Following are the key elements of CPB's
forecast:


-- GDP: Dutch GDP is expected to shrink by 0.75 percent in 2009
(compared to 2.25 percent growth in 2008),but a modest recovery of
trade and credit markets beginning in the second half of 2009 should
produce GDP growth of 1.0 percent in 2010.

-- Unemployment: 2009 will see an end to a period of three years of
decreasing unemployment. This year's level of 4.0 percent will rise
to 4.5 percent in 2009 and 6.5 percent in 2010. The number of
unemployed will rise from 300,000 in 2008 to 500,000 by the end of

2010. Given the currently low level of unemployment, however, CBP
predicts that the labor market will remain tight deep into 2009.

-- Inflation: Inflation is expected to fall sharply, from 2.5
percent in 2008 to 1.5 percent in 2009 and 1.0 percent in 2010.
This drop is due mainly to lower prices of oil and raw materials.

-- Trade: International trade, the cornerstone of the Dutch
economy, will be hit hard by the deteriorating international
situation, but CBP expects it to improve quickly in 2010. Exports
of goods (excluding energy) will decline from 7.3 percent growth in
2007 to 2.75 percent in 2008. Exports will shrink by 2.25 percent
in 2009, but rebound quickly to 3.0 percent growth in 2010.
Although the price competitiveness of Dutch exports will improve
because of the recently depreciated euro, the overall decline in
exports will offset this advantage. Meanwhile, imports will shrink
by 2.5 percent in 2009 but grow by 1.5 percent in 2010, compared to
5.75 percent growth in 2008.

-- Business investment: Although the volume of business investments
grew in 2008, it is expected to decline sharply in 2009 and 2010.
Weak demand and reduced production will offer little reason to
invest in new machinery, while lower profits will reduce returns on
investment. The tighter credit market also will make financing new
investment more difficult.

-- Purchasing power: Purchasing power will improve, from zero
Q-- Purchasing power: Purchasing power will improve, from zero
growth in 2008 to 1.75 percent growth in 2009, but only 0.25 percent
in 2010. Several factors contribute to this increase, including
lower inflation, declining oil prices, the Dutch government's
decision not to require employees to pay unemployment insurance
contributions as of 2009, and collective bargaining agreements
(concluded earlier in 2008 when inflation was expected to rise) that
provide for an overall wage increase of about 3 percent.

-- Government budget: The Government of the Netherlands (GONL) will
enjoy a budget surplus of 1.3 percent in 2008. Before the full
onset of the financial crisis in September, CBP had predicted a 2009
surplus of 1.2 percent. That has now transformed into a projected
budget deficit of 1.2 percent in 2009 and 2.4 percent in 2010.
Primary contributors to this downturn are substantially lower tax
revenue, higher expenditure on unemployment benefits, and declining
natural gas profits.

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THE HAGUE 00001018 002.2 OF 002


PARLIAMENT DEBATES NEXT STEPS
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3. (U) CBP's predictions generated a heated, albeit largely
theoretical, parliamentary debate December 10 about what steps
should be taken if the budget deficit threatens to rise above 2.0
percent. The terms of the agreement governing the ruling tri-party
coalition call for immediate government measures if the deficit
exceeds that level. Such measures likely would include cuts to
existing government programs or tax hikes to increase government
revenue. Some parliamentarians, including members of Prime Minister
Balkenende's Christian Democratic Alliance (CDA) party, argued that
the terms of the coalition agreement must be strictly honored.
Liberal Party (VVD) members asserted that budget cutbacks should be
made now to offset a growing deficit, pointing to the GONL's foreign
development assistance budget (currently 0.8 percent of GDP) as a
prime target for reduction. The general consensus, however, was
that the GONL had taken correct actions to date to stimulate the
economy, and no spending cuts should be considered at this early
stage.


4. (U) For their part in the debate, Prime Minister Balkenende,
Finance Minister Wouter Bos, and Economic Affairs Minister Maria van
der Hoeven advocated patience in evaluating how the Dutch economy
was responding to recent GONL stimulus efforts. Minister Bos's
Labor Party (PvdA) largely agreed with this approach, arguing that
the coalition agreement was not sacrosanct and flexibility was
needed in these unprecedented economic times. Since September, the
GONL has extended bank deposit insurance, guaranteed new bank loans,
nationalized the Dutch holdings of Belgian conglomerate Fortis, and
provided total capital injections of over 30 billion euro to needy
Dutch banks (ref A). Meanwhile, the GONL's 6 billion euro economic
stimulus package has introduced corporate tax breaks, shorter
working hours and corresponding unemployment benefits, and
accelerated infrastructure projects to stimulate job growth (ref B).
Balkenende cautioned against the GONL changing course too quickly
until the results of these interventions in the economy could be
evaluated. He asserted that the current GONL budget was appropriate
and should not be amended until the start of the regular 2010 budget
cycle in spring 2009 - a conclusion with which most parliamentarians
agreed.

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COMMENT
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5. (SBU) Comment: The CBP is the Netherlands' most respected
statistical agency, and its predictions have hit home the bleak
economic reality that the country likely will endure over the next
two years. Despite looming recession, the Netherlands nonetheless
is expected to fare better than many of its EU neighbors; CBP
predicts GDP shrinkage of 1.0 percent in the Eurozone in 2009, for
example, compared with only -0.75 percent in the Netherlands. The
agreement among Balkenende and his cabinet ministers - in particular
Finance Minister Bos - on the need for patience in evaluating next
steps in the economic crisis is noteworthy. Fierce rivals in the
November 2006 national election, Balkenende and Bos have coordinated
closely on how to handle the crisis and presented a confident,
unified front - to the general praise of the Dutch public. As the
economy declines, businesses suffer, and unemployment rises,
Qeconomy declines, businesses suffer, and unemployment rises,
however, public criticism of GONL action is likely to increase. The
goodwill that Balkenende and his cabinet have enjoyed since
September likely will erode. End comment.


CULBERTSON