Press release: Introductory statement by the President at the press conference for DNB's 2016 Annual Report

Press release
Date 30 March 2017

The world economy is performing remarkably well. Unexpected events, such as Brexit and the result of the US presidential elections have to date not particularly hindered economic recovery. However, there are certainly downside risks in the longer term, with the looming shadows of protectionist sentiment and resistance to globalisation. These risks are threatening the very foundation of an economic order based on free trade and multilateral cooperation, which has brought unprecedented prosperity to participating countries.

Persconferentie Jaarverslag

In the meantime, Europe is staging a reasonable economic recovery, which, stimulated in part by the ECB’s measures, has been continuing for some four years now. It is therefore time to gradually start normalising monetary policy in the euro area. The threat of deflation as far as this was relevant at the outset of the asset purchase programme has since subsided. Meanwhile inflation is actually picking up, eroding the basis for unconventional monetary policy. Undesired side effects are also increasing, however. The risk compass for financial markets is spinning, and there is a growing danger that households, businesses and governments will be overindulged by the low interest rates. This means they will lose the incentive to clean up their balance sheets, push through structural reform and thus develop resilience for less favourable times. Yet we must be patient in phasing out accommodative monetary policy; after a course of heavy medication, doses should be reduced gradually. 

By pursuing unconventional monetary policy, the ECB has also bought time for European governments to push through reforms aimed at strengthening their economies' competitiveness and capacity for growth. This process of adjustment has been insufficient and uneven, as convergence between European economies has lost all momentum in recent years. A "quantum leap" in European integration is difficult to imagine at this time. However, several smaller steps can be effective in increasing stability and prosperity in the monetary union and reducing disparities. These steps may include widening and deepening the single market; enforcing, simplifying and strengthening European rules on national fiscal discipline and tackling macroeconomic imbalances. Strengthening the banking union through the introduction of a European deposit guarantee scheme would also contribute in this respect. Finally, it is essential to restore discipline to the financial markets, particularly where there are indications of ongoing problems in compliance with mutual agreements. 

The Netherlands
The Netherlands has emerged from a period of considerable austerity and reform, and the Dutch economy is in good shape. We have seen strong economic growth, a surprisingly rapid fall in unemployment, and even a budget surplus. Now that the period of crisis management is behind us and we have fixed the roof, we are in a relatively comfortable position to put the rest of our house in order. The aim remains to make the Dutch economy more resilient, more stable and therefore more sustainable.  

A continuing source of imbalance is the saving and lending behaviour of Dutch households. As Dutch households both borrow (mortgage loans) and save too much (mainly through pension savings), they are highly exposed to economic and financial market swings. These long household balance sheets partially explain volatility in the Dutch economy, which in turn provokes strong fluctuations in government finances. An economy that develops in fits and starts causes unrest and uncertainty, and is on balance detrimental to prosperity.  

Further phasing out of the tax incentives underlying the saving and lending behaviour of Dutch households is therefore required, including accelerated reduction of mortgage interest tax relief. This should be part of a wider reform of the tax system, which should also ensure a more neutral treatment of wealth and a more neutral treatment of consumption. This will make room for lowering the rate of income tax, stimulating further employment growth.  

For that matter, the government itself can make an important contribution to achieving more stable economic growth. Maintaining a budget surplus of around 1% of GDP in times of economic prosperity obviates the need to take austerity measures in vulnerable years.   

Another challenge is to address the growth imbalances between permanent and flexible labour contracts. Where growth in the number of flexible labour contracts is primarily driven by tax or legal motives, there is reason to intervene, as an excessively wide disparity between permanent and flexible contracts inhibits labour market efficiency. Nonetheless, a permanent contract in the Netherlands is significantly more "permanent" than in other countries.  

Our pension system is past its sell-by date. Pension funds are failing to meet expectations, support from young people is eroding, and pensioners are insufficiently protected against curtailments. In today's economic climate, we need a pension system that provides its members with clarity about their personal pension assets, and offers scope for age-related investment policies. 

Further reforms are also needed in the housing market. In addition to scaling back mortgage interest tax relief, the maximum mortgage loan-to-value ratio must also be gradually lowered to 90%. This requires strong growth in the supply of rental accommodation in the middle segment of the market, to stimulate healthy mobility in the housing market. 

The financial sector is still undergoing far-reaching changes. Almost ten years after the financial crisis erupted, financial regulations and supervision have been fundamentally changed. Technological innovation in the financial sector (FinTech) is now rapidly accelerating. The prolonged period of low interest rates is being felt across all sectors, putting pressure on business models. Risk management in the areas of terrorist financing, sanctions legislation and money laundering also presents a challenge. This combination of factors places major demands on financial institutions' capacity for change, and requires undiminished vigilance in our supervision. 

All these reforms have one common characteristic: they contribute towards sustainable prosperity in the Netherlands. This entails economic growth that is financially, socially and ecologically sustainable in the long term. In terms ecologic sustainability, our most urgent and comprehensive challenge is addressing the necessity to make our economy climate neutral. To this end, we need to develop a long-term vision, possibly enshrined in a climate change act prescribing how the various sectors are to implement the transition. More effective pricing of carbon emissions is key to a successful transition. 

The energy transition also presents the Netherlands with new opportunities, and credible and predictable policies will certainly help us to seize them.