What is sensible policy in times of geopolitical tensions, a temporary dormant trade war and an unpredictable president with the name Donald Trump in the White House? The three most important economic advisers of the government were considered that question. Today, the Nederlandsche Bank (DNB), the Central Planning Bureau (CPB) and the Netherlands Authority for the Financial Markets (AFM) each came with their findings, and the message they give is at least a double.
Because on the one hand, the starting position of the Netherlands is not at all wrong, the three conclude. The Dutch economy – with its low national debt and manageable financing deficit – and the Dutch financial sector are in good shape despite the global economic uncertainty. The buffers of banks are in order and also stay on the right side of the line in a trade war, according to a stress test. Dutch institutional investors such as insurers and pension funds, which are heavily in US shares, keep their solvency ratios ‘dry’ in the event of an escalation of the trade conflict with the US. And households and companies have also reduced their debts in recent years. Robustness trumps in short.
On the other hand, Trump’s unpredictability causes uncertainty about the economic future. “The geopolitical situation ensures a historically high level of uncertainty,” said DNB president Knot. The fickle ‘policy’ of import duties is an example of this, but the effects of uncertainty penetrate deeper into the Dutch and the European economy. This applies, among other things, to the global financial system, which runs on dollars and US government bonds. Investors now openly doubt how safe they are. And it is also about Europe’s digital dependence on the United States, both in terms of payment transactions and IT services of, for example, Microsoft.
Signals are on red
In the ‘traffic light model’ that DNB uses in its reports on financial stability, there are different signals on red for the first time in a long time: the geo-economic fragmentation, the cyber threat and the so-called volatility on the financial markets all require the highest degree of attention, DNB said. Earlier, DNB has calculated that a trade war such as Trump announced on 2 April can quickly cost the Dutch economy a full percentage point economic growth. “That might even end up in the quadrant of economic contraction,” he said.
The Netherlands is vulnerable to geopolitical instability, because we are an open economy
The CPB also sees the expected Dutch growth for the coming year largely evaporate when the trade war really continues. CPB director Pieter Hasekamp emphasized that the Netherlands has a good starting position. “But the Netherlands is vulnerable to geopolitical instability, because we are an open economy,” he said.
One of the great worries at DNB and CPB is in the position that the US has had in the last eighty years through the dollar as a safe haven in the financial world. In the aftermath of the announced import duties, not only stock prices, but also the dollars and the US government bonds fell away. And last Friday the US even lost the highest credit status of credit rating agent Moody’s.
Both Knot and Hasekamp said that this was not good news, certainly because there is no real alternative to the dollar as a global reserve currency. When asked, Knot said it was “not good” that the US dollar is losing its status as a safe haven as a result of Trump’s policy. “The world is running on dollars and American government bonds. And I don’t see that the euro or the [Chinese] Renminbi could take over that role. At most, the euro can ‘recalculate’ as a reserve currency, “said Knot.
Hasekamp mentioned the phase in which the world is now “unknown territory” and expressed the fear that a world in which the dollar would no longer be seen as safe will in any case operate more uncertain and less efficiently compared to now. In that respect, Knot put hope from the fact that Trump turned out to be “not entirely insensitive” for competitive market convictions of his policy.
DNB President Klaas Knot Put hope from the fact that Trump turned out to be ‘not completely insensitive’ for competitive market condemnations of his policy
Breaking down international order
American Isolationism goes further than just directly through the trade balance, warned CPB and DNB. Both Knot and Hasekamp referred to it Project 2025the conservative republican blueprint for the coming years that the Trump government would send. It states that the US would like to step out of the International Monetary Fund. Hasekamp said he had understood from the Dutch representative at the IMF that such steps are not (yet) concrete. Knot also did not recognize that image from his international contacts, but did a delay in the US in the introduction of international banking rules. “That is a risk to all financial institutions worldwide,” he said. Weakening of international institutions is aware American policy, said Hasekamp.
All three institutions demanded attention for the digital dependence on the US and the increase in cyber attacks in the current geopolitical situation. The AFM called on banks on ‘digital and operational resilient [te] his “and Knot from DNB said:” The back of European payment transactions runs 100 percent on American providers. And that also applies to other technological services, “he said. He was referring to the dominance of companies such as Microsoft and Amazon at cloud services. Knot said that within DNB, alternatives to this American dominance are also actively considering and argued for the introduction of the digital euro as an alternative payment system for citizens and companies in addition to the current payment infrastructure.
European cooperation needed
The most important message that the three have for the cabinet is a further strengthening of European cooperation, just now that international collaboration is no longer a matter of course. “The increasing geopolitical tensions underline the importance of the economic and political resilience of Europe and the need for risk sharing,” said the CPB. Europe must therefore work on increasing strategic autonomy. Knot: “Work must be done on deepening the European internal market and the removal of a number of obstacles on the market. This also applies to the European capital market, where supervision must be more harmonized.” The AFM adds: “Now the time is to realize the promise of a real European internal market.”
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This is possible along different lines: for example, Europe has to work on a banking union and a capital market union, so that European companies and investors become less dependent on the American capital market and can set up a robust system of investments themselves. “The capital market in the EU is now too fragmented,” said Hasekamp. The three institutions argue for a further simplification of the many national rules that now apply in the Union. Companies suffer from that.
Europe must also do what is needed together: think of public investments in defense, sustainability and innovation. According to the CPB, this should be financed through the European budget through common European taxes. This is structurally a better solution than financing by entering into joint European debts or temporarily stretching the budget rules in the euro zone. “At most, that would be temporarily a solution and then it is preferable to do that at European level,” said Hasekamp.
Next week the House of Representatives will debate with the three institutions about their findings and their recommendations.