Banking rescue and economic recovery plans in the Netherlands and other EU Member States: Why the Dutch should do more

Sylvester Eijffinger 05 February 2009

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In response to the global economic and financial crisis, the European Commission presented a recovery plan on 26 November aimed at spreading the financial burden between the member states and the EU.1 The plan is based on “short-term measures to boost demand, save jobs, and help restore confidence,” while promoting “smart investment to yield higher growth and sustainable prosperity” in the long term. The plan amounts to €200 billion – €170 billion from national budgets and €30 billion provided by EU funding.

Here I summarise the national plans of the Netherlands, Germany, France, the UK, Belgium, and Spain and their likely consequences.2 I also draw a distinction between general and specific measures, and those aimed at promoting investment versus consumption.

Netherlands: The rescue and recovery plans

In November 2008, the Dutch government approved a recovery plan of €6 billion. It includes:

  • Tax deductions for firms that make large investments and hire workers for short periods of time. It does not offer tax refunds to the taxpayers.
  • Measures to increase labour market flexibility by providing the possibility to temporarily reduce working time.
  • Efforts to speed up public sector investments and payments to businesses.

The plan focuses on the economy as a whole rather than particular industries, implying no distortion to the economic structure and competition amongst firms.

On 16 January, the government added additional measures.3 Specifically, the government:

  • covers export insurance for countries that have no available commercial export credit insurance;
  • guarantees 50% of company loans up to €50 billion to spur investments;
  • enlarges the guarantee fund for social housing and the contribution to the financing of hospitals to stimulate construction of homes and expansion of hospitals.

The recovery plan would impact on the public accounts of 2009, although only mildly since it mostly consists of guarantees. Only the €6 billion announced earlier will have a direct impact. The other measures only have an impact in exceptional conditions, when the guarantees indeed materialise. The benefits of boosting investment may produce positive effects in the medium run through additional tax receipts and higher growth and employment.

New capital in the financial system

On 9 October 2008, the government made €20 billion available for the recapitalisation of the national banking sector. Since those funds are not enough to cover all needs, the government continues to distribute funds on the same conditions. So far, the interventions have topped €31.55 billion.

The rescue plan will, in general, have the ailing bank issue new shares that qualify as core capital without the dilution of existing shareholder structure. These shares yield a fixed dividend to the government by 8.5% (eventually higher if the ordinary shares pay a higher dividend).

Board members’ bonuses for 2008 have been cancelled and all redundancy packages are limited to one years’ salary. Finally, the existing shareholders have the faculty to redeem the state participation after 3 years at 150% of the nominal value.

In the case of ABN AMRO and Fortis Netherlands, the state nationalised the bank completely with the intention to privatise the bank in three years time again. In addition, the Dutch government provides a guarantee for loans between banks and financial institutions. The guarantee amounts to €200 billion. So far, banks have hardly used it for fear of reputational losses. The government announced on 16 January 2009 that it would increasingly stimulate the use of this guarantee to spur credit granting to businesses.

This plan has a short-term impact on the public accounts. If the privatisation or the sale of the state shares does not occur by the third year, the budgetary effects would last beyond 2011. However, since most of the money involved is borrowed on the international capital markets at quite low rates4 and the government expects quite high interest rates and dividends (up to €2.7 billion) on the capital provided, these measures will not have very large impact on the fiscal deficit. The public debt, however, will increase from 45.7% to 57.3% of GDP, including all the outflows caused by the bank assistance programme. This figure remains well below the limits of the Stability and Growth Pact (SGP) and may be sustainable over the medium term, when the acquired stakes are sold again.

The rescue and recovery plans in other EU member states

Table 1 summarises the rescue and recovery plans of Germany, France, the UK, Belgium and Spain.

Table 1. Other EU members' recovery plans
Country and measures Budget consequences
Germany
Recovery plan
  • Tax cuts in depreciation, travel costs deductibility for commuters, special designations for families
  • Investments in infrastructure, housing; structural programs for specific regions
  • Credit to SMEs, CO2-savings and energy-efficient innovation by companies

Financial sector

  • Loan guarantees, recapitalisations or equity support, and assumptions of risky assets
  • Equity support with conditions similar to those in the Netherlands
  • Several banks applied for loan guarantees, limited attention for capital support
  • € 50 billion in total for the recovery plan
  • € 470 billion for the financial sector, of which € 400 billion consists of guarantees subject to uncertainty.
  • Given its strong fiscal position, Germany should face a balanced budget with the recovery plan.
  • The financial rescue plan's short-term fiscal impact could be large, but with low interest rates, high dividends, and capital gains from privatisation, government debt should not increase over the medium term.
France
Recovery plan
  • Fund investment projects in automobiles, housing, construction (i.e. infrastructure and public facilities) and public debt
  • SMEs will get tax breaks
  • Unemployed persons will be retrained
  • Rescuing the automobile industry

Financial sector

  • Recapitalisation and buying up troubled banks' assets by a state-owned company
  • Credit guarantees for the medium term, to stimulate financing for businesses (especially SMEs)
  • € 26 billion for the recovery plan and another € 6 billion for the automobile industry
  • € 360 billion for the financial sector, of which € 320 billion is guarantees.
  • The recovery plan will raise the deficit to 4% of GDP, despite the economic benefits.
  • Government debt would rise to 67.5% of GDP, mainly due to the financial sector plan.
United Kingdom
Recovery plan
  • Reduction in VAT
  • Postponing corporate tax increase, and small firms can defer payments
  • Advancing investments in housing, energy, infrastructure, and schools
  • Home owners' support package
  • Guarantee 50% of small and medium-sized firm lending up to £ 20 billion.

Financial sector

  • Nationalisations of Northern Rock and Bradford & Bingley
  • Large stakes in RBS and Lloyds Banking Group
  • Bank recapitalisation for Tier One capital
  • Special liquidity scheme: short-term swap of illiquid assets for T-Bills
  • Additional debt guarantees
  • Buying up assets and guarantee some top-rated asset-backed securities.
  • Initially £ 20 for the recovery plan; additional guarantees for firm lending (but these do not immediately materialise)
  • Additionally, £ 94.4 billion is used to bail out Northern Rock, £ 51 billion for Bradford & Bingley, £ 50 billion for recapitalisation, and £ 450 billion in guarantees.
  • The newly announced plan can costs up to an additional £ 50 billion in buying assets and even more in guarantees.
  • Total debt is expected to rise from 41.2% to 48.2% in 2009, increasing after that. The fiscal deficit increases from 5.4% to 8.1% but decreases after 2009.
Belgium
Recovery plan
  • Tax cuts including lower VAT on construction, delaying VAT payments for companies and energy rebates for households
  • Higher unemployment benefit
  • Food and energy vouchers for workers
  • Credit guarantees for SMEs
  • Accelerating infrastructure projects

Financial sector

  • Nationalisation of Fortis, which has been partly sold to BNP Paribas
  • Capital injections for Dexia and KBC Bank
  • Stabilising the interbank market
  • Borrowing guarantee
  • € 2 billion for the recovery package
  • € 19.9 billion for bank bail-outs and guarantees, and a further € 90 billion for guarantees in the interbank market and liabilities and assets guarantees
  • Total impact on the fiscal deficit will be -2.6% in 2008 and balanced in 2009.
  • Public debt will have increased from 84.9% to 88.3% by end of 2008, well above the SGP limit.
Spain
Recovery plan
  • Public infrastructure investments, environmental projects and investment in R&D
  • Stimulus for the auto industry
  • Credit provision to SMEs
  • Income tax deduction
  • Extension of housing construction support
  • Abolition of wealth tax

Financial sector

  • Buy up healthy assets to provide liquidity
  • Provide bank debt guarantees
  • Enlarge deposit insurance coverage
  • € 50 billion for the recovery plan.
  • € 250 billion for the financial sector, of which € 200 billion consists of guarantees
  • The Spanish government intends to fund mainly by debt, making the impact on the deficit fairly small
  • Since many measures are contingent, the impact on debt is not big; coming from a low debt position, the 60% SGP limit will only be reached if everything materialises

General vs. specific

In stimulating the economy, governments can use general measures to give consumers and companies incentives to consume and expand business. It can also direct its attention to specific industries. Given that the latter requires that the government determine which enterprises are viable and worth saving and which are not, and government generally cannot do so, it is better to use general measures and let economic mechanisms do their job.

Investment vs. consumption

We can also distinguish between stimuli directed at investment and those directed at consumption. The investment measures will have a medium- to long-term effect, while consumption-directed measures will have a more direct effect. However, in times of crisis, when people face large debts and uncertainty, extra money for consumers will largely be used to pay off debts or boost their savings accounts. Therefore, investment measures are preferable because they have a larger effect in the end.

Additionally, governments have the possibility to advance planned public sector investments. This measure brings hardly any extra costs, since the investments were already planned, and has a large stimulating impact.

Comparing European plans

The Dutch and German plans stimulate private and public investments and provide very few consumption-directed measures. Many member states are providing tax cuts and consumption stimuli, which will most likely be saved rather than consumed. The Dutch and German plans are better, stimulating private and public investments and providing very few consumption-directed measures. However, those measures will not be enough – the forecast for the recession has worsened lately, for the whole EU as well as for the Netherlands.

The Dutch government should take additional measures and not wait until April 2009 to see how the crisis develops. One important point is the Dutch housing market, which is completely locked at the moment. The government should stimulate housing mobility, which it could do by lowering taxes on house sales. At 6% of the purchasing price, those taxes mean that new owners cannot move homes without incurring losses for a couple of years until it appreciates. Additionally, public investments in “hard” and “soft” infrastructure and private investments in research and development have to be increased and front-loaded. The former can be accomplished by advancing already-planned investments in roads, bridges, and railroads, but one could also think of investments in research institutes and universities. The second can be stimulated by tax breaks for R&D, which guarantee more long-term growth. That would be especially useful in fending off a long and dragging recession.


1 A European Economic Recovery Plan, European Commission, November 26th, 2008
2 This column is a shorter version of a briefing paper for the Annual Meeting of the Committee on Economic and Monetary Affairs with the National Parliaments on 11-12 February 2009 at the European Parliament in Brussels (updated to 21 January 2009). The author gratefully acknowledges the very helpful comments of Edin Mujagic and the excellent research assistance of Rob Nijskens.
3 “Dutch Government Announces Economic Support Measures”, Dow Jones, 16 January 2009
4 The Netherlands enjoys an AAA rating.

 

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Topics:  Europe's nations and regions Macroeconomic policy

Tags:  EU, financial crisis, fiscal stimulus, economic recovery plan

Professor of Financial Economics at Tilburg University, President of the Tilburg University Society and CEPR Research Fellow

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