Perfect storm in the Dutch economy

A perfect storm is bearing down on the Dutch economy. On Tuesday the Netherlands bureau for economic policy analysis CPB published an unprecedently bleak scenario for 2009 and 2010. The predicted economic shrinkage of 3.5 percent promises to be the greatest drop since 1931, on the eve of what became a lost decade. The recession at the beginning of the 1980s is no longer the reference point, nor that in 1974 and 1975. The comparison with the crisis in the 1930s is getting more real.

There is one ray of light in the darkness: our experience with the Great Depression. Many policy mistakes that needlessly deepened and prolonged the recession can now be avoided. The fiscal policy was much too restrictive at the beginning of the 1930s. We've already avoided that trap: central banks have greatly lowered interest rates. In the United States the interest rate is practically zero.

Banks were basically left to their fate in those days, while today stronger action is being taken in that respect, even if it's not very coordinated. The credit facilities for citizens and companies must keep going. The severely affected banks need support.

Budget discipline was initially maintained in the 1930s, regardless of the cost. But the lessons that the economist John Maynard Keynes drew from that time can now be applied in practice. This is not a time for budgetary quibbling. In crises like this one, the government's budget deficit is allowed to rise. Frugality will only make the downturn worse. CPB director Coen Teulings called it unthinkable that the predicted budget deficit of 5.5 percent in 2010 can be returned to levels of 2 or 3 percent, which is considered acceptable by the Dutch and European norms, respectively. That is a message that the cabinet and parliament can take to heart.

Dutch policy cannot operate alone. Not only because international cooperation and coordination form the one answer to this worldwide crisis. The Netherlands is too small and too open to conduct a national policy effectively without considering conditions in the rest of the world. With foreign trade making up three-quarters of the gross domestic product, our country is a plaything of the international economic climate – as today's prognoses make clear.

Pull out all the stops then, but the means are not unlimited. Full support of the banks can exceed the state's wealth. The Dutch state can pay for a much too big demand for additional funding on the international capital market by raising the interest rate in the long term.

We thus need a strategy that balances means and ends and that is linked with the international playing field in which the Netherlands operates. It has been a long time since the government was faced with an emergency like this. Time is running out for an integral, comprehensive and powerful plan.