Abstract
Since the beginning of the financial crisis in 2008, the Dutch economy lost 6% of gdp relative to Germany, even though the Netherlands (unlike the GIPSI countries) did not face serious problems to finance its sovereign debt. This bad performance is explained by the interaction of fiscal policy and the housing market. This makes the Netherlands an interesting case because these effects can be analyzed in isolation of stress on financial markets. We sketch a simple overlapping generation framework. House price declines lead to a temporary drop in consumption, forcing a reallocation of labour from domestic to tradable industries. This leads to a loss in industry specific human capital, causing a jump in unemployment. The analysis yields a number of lessons for fiscal policy in the aftermath of a financial crisis and for the current EU framework for the evaluation of member states’ fiscal policy. Fiscal policy provided too little intergenerational insurance and the EU framework is an obstacle to do that.
Highlights
At the day of the bankruptcy of Lehman Brothers, the Dutch finance minister, Wouter Bos, published his budget
If fiscal policy is contractionary in the transition period, this will further increase the share of burden of the financial crisis that is put on the shoulders of current generations
Wrapping up the previous discussion, the initial effect of the financial crisis on the Dutch economy has probably been threefold: (i) 5% drop in permanent drop in productivity, (ii) 15% of gdp increase in sovereign debt, and (iii) a loss of credibility of the system of mortgage subsidies leading to an increase in the user cost of housing by 10%
Summary
At the day of the bankruptcy of Lehman Brothers, the Dutch finance minister, Wouter Bos, published his budget. If fiscal policy is contractionary in the transition period, this will further increase the share of burden of the financial crisis that is put on the shoulders of current generations They will reduce their consumption even further, requiring an even larger shift of employment to the export industry. The interest rates for Dutch sovereign bonds moved largely parallel to those for Germany, the difference between both countries being in the order of magnitude 30 basis points since 2011, compared to several hundreds for countries like Ireland and Spain This makes the Netherlands an interesting case, since it can be used to analyse the effect of falling house-prices in isolation of the effect of the changes of a country’s access to financial markets. Unemployment is the reflection of the time needed to build new specific human capital.
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