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Eurosceptic jujitsu

10 Feb 2014 By Hugo Dixon

Many eurosceptic treatises, such as the recent report saying the Netherlands would be better off quitting the European Union, are exaggerated and unconvincing. But mounting euroscepticism could still have a silver lining if it helps those wishing to reform the EU advance their agenda.

Few people think the Netherlands is close to quitting the EU. In this way, it is different from the UK, where exit is a genuine possibility. That said, euroscepticism is on the rise following years of economic stagnation. The right-wing Freedom Party, led by Geert Wilders, is leading in the opinion polls and is likely to be the largest party in May’s European Parliament elections. Other eurosceptic and nationalist parties such as France’s National Front and Britain’s UK Independence Party are also likely to perform well.

To see what is wrong with the eurosceptics’ arguments, look no further than the study on “Nexit” – the Netherlands’ potential exit from the EU – commissioned by Wilders and written by Capital Economics, a London-based consultancy. Although the case for Nexit has been dressed up about as well as it is possible to do so, it is still full of holes.

A Nexit would have two elements: quitting the EU and quitting the euro. It would, therefore, be a combination of Brexit (Britain’s exit from the EU) and Grexit (Greece leaving the single currency). According to Capital Economics, exiting both the euro and the EU would be beneficial for the Dutch.

Look first at leaving the single currency. Capital Economics thinks this could be achieved relatively painlessly. The advantages would be that the Netherlands would not be exposed to the risk of bailing out other euro countries and that it would be free to run much looser monetary and fiscal policies to boost its economy.

There are several things wrong with this argument. First, there is the implausible assumption that the core euro countries such as Holland will pick up the tab to write down government debt in all peripheral economies, including Italy, to 90 percent of GDP.

Then there’s the view that the solution to the Netherlands’ economic problems is loose monetary and fiscal policy. Its stagnation is mostly the result of home-grown problems – such as high household debt following a credit-fuelled housing bubble and the high tax burden needed to fund its generous welfare state – rather than its membership of the euro.

If Capital Economics’ proposals had been followed, the Netherlands would have had lower interest rates during the upswing, fuelling an even bigger bubble. Meanwhile, its independent central bank would now be running a super-loose monetary policy. One chart in the consultants’ report fancifully suggests it would be setting interest rates at minus 13 percent – which is probably impossible.

One problem with running such loose macro policies is that it would divert Holland from addressing its deeper structural weaknesses. It also might make both local and foreign investors wary of holding new Dutch guilders.

This, in turn, means any exit from the euro could be traumatic. Depositors might take their money abroad fearing that they would be repaid in devalued guilders if the government really was intent on loose macro policies. And that could cause trouble for the Dutch banking system given that it is heavily dependent on foreign funding to plug the gap between its loans and deposits.

Given that a decision to quit the EU would presumably only take place after a referendum, or at least a general election campaign fought on that issue, there would be plenty of time for capital flight.

Capital Economics’ case for quitting the EU is as unconvincing as its case for leaving the euro. Here, the main argument is that the Dutch could gain full access to the EU’s single market without paying for membership or being tied up in Brussels’ red tape. It could also dramatically boost its trade with the faster-growing BRIC countries.

It is true that the Netherlands would cut its net contribution to the EU budget of 4 billion euros a year, 0.7 percent of GDP, by quitting. But it would then struggle to retain full access to the single market. Losing that would be damaging, given that over 70 percent of its exports are to the EU.

The Dutch could admittedly keep full access to the single market if they followed Norway and joined the European Economic Area. But in that case they would still have to follow the bulk of EU regulations – and wouldn’t even have a vote on drafting those rules.

It’s also not clear that Holland would do better exporting to the BRICs if it left the EU. True, it would have flexibility to cut trade deals with China on its own. But its small size would mean it would lack clout in negotiating those deals. In any case, Capital Economics’ “conservative” estimate that exports to the BRICs would more than double over a decade looks anything but conservative.

So the case for Nexit, Brexit or whatever is unconvincing. But this isn’t the same as saying the EU shouldn’t be reformed. Rather, governments need to redouble their efforts to make Europe more competitive – for example by addressing their home-grown structural problems, while completing the EU’s single market in services and negotiating free trade deals with America and China.

Reformers should use the rise of euroscepticism to persuade more complacent politicians of the need for change. Like jujitsu experts, they should take the momentum from Wilders and his ilk, and divert it to better ends.


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