VZCZCXRO5987
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV RUEHSR
DE RUEHTC #1018/01 3500700
ZNR UUUUU ZZH
R 150700Z DEC 08
FM AMEMBASSY THE HAGUE
TO RUEHC/SECSTATE WASHDC 2326
INFO RUEHAT/AMCONSUL AMSTERDAM 4059
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

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. 
 
-------------------------- 
GLOOMY ECONOMIC INDICATORS 
-------------------------- 
 
¶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. 
 
----------------------------- 
 
THE HAGUE 00001018  002.2 OF 002 
 
 
PARLIAMENT DEBATES NEXT STEPS 
----------------------------- 
 
¶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. 
 
------- 
COMMENT 
------- 
 
¶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