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Backgrounds: Netherlands Economy
Dutch economic policy is geared chiefly toward sustained and environmentally sustainable economic growth and development by way of fiscal consolidation, labor and product market reforms, economic restructuring, energy conservation, environmental protection, regional development, and other national goals. Successive governments have combined rigorous and stable macroeconomic policy, with wideranging structural and regulatory reforms. Sharp cuts in subsidy and social security spending combined with consistent wage moderation, deregulation and privatization of former state-owned companies, and increased competition have helped the Dutch economy to achieve sustained economic and employment growth.
After the center-right previous cabinet fell in October 2002, general elections in May 2003 resulted in a new coalition government consisting of Christian Democrats (CDA), liberals (VVD), and left of center Democrats D66. The government policy program for its 4-year term in office stresses the need for reforms and more spending on security, healthcare, education, and transport infrastructure, while maintaining budget discipline and expanding the labor market. The government recognizes the need for further structural reforms emphasizing product market flexibility and the creation of more dynamic and deregulated capital and financial services markets. This will help boost seriously eroded Dutch competitive position on European Union (EU) and world markets.
After several years of sustained noninflationary growth and low unemployment, the macroeconomic performance of the Dutch economy has deteriorated markedly. A slowdown in the global economy and erosion of the Dutch competitive position dampened foreign demand and investment, while a slumping stock market and a growing number of layoffs announced by many multinationals resulted in a sharp drop in household and business confidence. The global growth slowdown affected all effective demand components, and led GDP growth in 2002 to decelerate to 0.2%, after slumping to just 1.3% in 2001.
Despite an expected recovery of world trade growth in the latter part of 2003, the outlook for the Dutch economy has deteriorated. Further loss of Dutch competitive position resulting from appreciation of the euro vis-à-vis the dollar is expected to dampen exports and reduce output. The Organization for Security and Cooperation in Europe (OECD) optimistically predicts Dutch GDP growth to slow to less than 1% in 2003 and to recover to 2.6% growth in 2004. The official (Netherlands Central Bank NB) growth forecast is more pessimistic and expects economic growth in 2003 to fall by 0.4%, followed by 0.8% GDP growth recovery in 2004. The NB expects a sharp drop of consumer confidence (down to the lowest level since the 1980s), and erosion of real disposable incomes to choke consumer spending as major growth engine. Poor macroeconomic demand and worsening price competitiveness are at the root of deteriorating profit margins and an expected sharp drop in nonresidential investment. A gradual recovery of foreign demand (up 0.5% in 2003 and up 5% in 2004) will have to compensate for sluggish domestic demand and pull the economy out of current recession in the latter part of 2004.
Reflecting the economic downturn employment growth has come to a grinding standstill, while the number of redundancies is growing by the day. These unfavorable labor market developments are expected to raise the level of unemployment to well over 6% of the labor force in 2004. After peaking at close to 5% in 2001, inflation eased to 3.4% in 2002, and is expected to soften further to 2.5% in 2003 and 1.25% in 2004. Current price and wage developments show no indications of an imminent deflation risk.
The Netherlands was one of the first EU member states to qualify for Economic and Monetary Union (EMU). Fiscal policy aims to strike a balance between further reducing public spending and lowering taxes and social security contributions. The unexpected sharp economic downturn will tip the fiscal balance back into deficit and catapult the nominal deficit from 1.1% of GDP in 2002 to 1.9% in 2003 and to 2.6% in 2004. The structural deficit will come out at 0.7% of GDP in 2003 and to 1.1% in 2004. The stock of public debt is forecast to fall from a high of 63.1% of GDP in 1999, to 52.8% in 2004. While the level public debt has converged well below the debt criteria, the fiscal deficit is moving close to the deficit ceiling mandated by the EMU's Growth and Stability Pact.
The government's goal is to achieve a structural surplus of 1% on the fiscal balance by 2007 to reduce the stock of debt to zero by 2025. The resulting fall in debt servicing costs (equal roughly to 3.5% of GDP) would create the budgetary room needed to absorb an anticipated increase in spending on the public pension scheme (AOW), and on health care programs. To achieve its goals, the government will have to cut spending by at least another four billion euro on top of the 13.1 billion euro consolidation package already agreed in the coalition agreement.
Trade and Investment
Sectors of the Economy
Although Dutch crude oil production is small, the Netherlands ranks among the largest producers and distributors of natural gas. The Slochteren gasfields in Groningen Province in the North are among the world's largest-producing natural gas fields. Total proven reserves of natural gas situated on the mainland--the remaining 20% accounted for by relatively small deposits on the North Sea's continental shelf--currently amount to about 2 trillion cubic meters. Roughly 80% is accounted for by reserves on the mainland, the remaining 20% accounted for by relatively small deposits on the North Sea Current gas production is running at an annual average of close to 80 billion cubic meters, roughly half of which is exported to EU member countries. General government revenues from royalties on the production of gas and oil totaled about $ 2.5 billion (0.5 % of GDP) in 2002.
The National Environmental Policy Plan (NMP) sets out Dutch environmental policy. The first version was published in 1989, followed by second and third versions in 1993 and 1998, respectively. NMP-4, laying out government environmental policy over the next few years, was published in 2001. Under the NMP, the government seeks to cut back on all forms of pollution by 80%-90% within one generation, meaning that by 2010, the present generation should be able to pass on a clean environment to the next one.
Although the environmental quality in the Netherlands has improved significantly, some important targets, particularly with respect to nitrogen oxide and ammonia emissions, climate change, and noise reduction, will not be realized within the timeframe set in the NMPs. The main reason for this is the close relation between economic growth and its negative effects on the environment. The NMP-3, therefore, proposes drastic measures in order to be able to meet the targets.
The Dutch Government works closely with industry and nongovernmental organizations on implementation of environmental policy. To be able to reach environmental targets, the government has signed agreements with the private sector and other relevant organizations.
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