The latter is in part thanks to the ECB. The ECB has done its utmost to support the adjustment processes within the currency union through the use of unconventional monetary instruments. But let there be no misunderstanding; the ECB measures cannot solve the debt crisis. They have merely bought time to put public finances in order, increase competitiveness of European countries and recapitalise the banking sector without delay.
The necessity for drastic adjustments varies from country to country, but it is certainly no longer exclusively a South-European issue. The Netherlands, which can still boast a relatively good economic performance, is also facing major challenges. With the highest credit rating and a relatively low unemployment figure, we have a great deal to lose.
As growth of the labour force is slowly grinding to a halt, we must factor in structurally lower growth figures for the years ahead. It is especially against this background that the development of public finances is worrisome. Even if the government deficit next year remains limited to 3% of GDP, public debt will continue to rise. As a consequence, the debt-to-GDP ratio will diverge more and more from the 60% threshold. If the Netherlands wants to continue to enjoy low interest rates, now is the time to get down to business on reducing the public deficit.
It must also be noted that Dutch competitiveness is not as strong as is often assumed. Since 1999 Dutch unit labour costs have risen by some 25%. In contrast, unit labour costs in Germany, for example, have hardly increased over the same period. Besides, Dutch export growth has been lagging behind growth of the relevant world trade for over a year and a half now, meaning that the Netherlands is losing market share. In addition to moderate wage developments, structural reforms of the labour market are therefore the way to increase the adaptability and labour productivity of the Dutch economy.
For the Netherlands, mortgage indebtedness is a source of particular concern. The high debts by international standards make households and the government sensitive to the developments on the housing market and poses a funding problem for banks. This calls for a comprehensive approach, in which the maximum loan-to-value ratio and mortgage interest tax relief should gradually be reduced in a predictable manner. This will help put an end to the current practice of maximum mortgages and minimum redemptions.