Political crises and Dutch interest rates
|Date||3 May 2012|
Compared to most of the other euro area countries the difference in interest rates between the Netherlands and Germany is minor.- Nevertheless the difference between the two countries’ interest rates is currently higher than it has ever been since the early 1980s. And it rose to 84 basis points after the collapse of the Cabinet. Never before, with the exception of the political crises in the early 1980s, had the interest rate difference risen so sharply in response to a political crisis.
This was the high price that the Netherlands had to pay for deciding in 1983 to break the link between the guilder and the Deutschmark. Policymakers learned their lessons from this and have since sought to maintain the link rigidly. Thanks to this policy and the Netherlands’ good economic performance, Dutch interest rates in the 1990s were regularly below those of Germany.
The country experienced various political crises in the early 1980s, and these all had an impact on the difference between Dutch and German interest rates. The second Van Agt cabinet resigned on 16 October 1981 as a result of its failure to agree on a plan for jobs. Although the problem was ultimately resolved, the crisis it caused resulted in Dutch interest rates rising to 234 basis points above those of Germany. The interest rate difference also rose after the second Van Agt cabinet subsequently collapsed on 13 May 1982; this time from 136 to 180 basis points. The reason for the collapse was because the coalition parties could not agree on the level and specific details of spending cuts required.
It is remarkable that subsequent political crises have had little if any impact on differences between the two countries’ interest rates. Even during the politically difficult period of the first Balkenende Cabinet, financial markets barely responded when, in October 2002, the Cabinet collapsed after only three months in office. Elections were scheduled for January 2003, and even though the position of the Dutch economy at the time was decidedly lacklustre and vital time was lost in finding an effective solution to the problems, the difference between German and Dutch interest rates narrowed.
The current situation seems, however, to be more reminiscent of that in the early 1980s. The difference between Dutch and German interest rates is at an all-time high, while the financial markets’ initial response to the collapse of the Cabinet was nervous. The challenge now facing us, if we are to prevent the interest rate difference rising even further, is to get the country’s economic house in order. The agreement that has been reached between five of the country’s political parties (and referred to as the ‘Kunduz coalition agreement’) has helped to reduce the interest rate difference since the shock wave that initially rippled across the financial markets immediately after the Cabinet’s collapse. This is important because a sharp rise in the difference between Dutch and German interest rates is undesired and would result in an unnecessary increase in the amount of spending cuts needed. It would also make it more expensive for households and businesses to borrow money, and this in turn would make economic recovery more difficult.