This record is a partial extract of the original cable. The full text of the original cable is not available.

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