Dutch Central Bank president Klaas Knot said on Thursday politicians have ‘no time to lose’ if they want to maintain the Dutch strong economic position, at the press conference for the Dutch Central bank (DNB) Annual Report 2011.
The year 2011 was a turbulent year for the economy. It was a year characterised by great uncertainty, volatile markets and disappointing growth. In short, all the ingredients for financial instability were present. In particular the period after the summer saw renewed turmoil, following the European sovereign debt crisis, which affected DNB in all its key duties.
In the policy response to the crisis a good deal of progress was undoubtedly made in 2011, but at too slow a pace. Deficit countries implemented adjustment programmes, European agreements on stricter fiscal policy discipline were drafted, a European funding facility was created and banks started on recapitalisation. The urgency for seeing these policy efforts through has not diminished now that markets have arrived in somewhat smoother waters.
The latter is in part thanks to the ECB. The ECB has done its utmost to support the adjustment processes within the currency union through the use of unconventional monetary instruments. But let there be no misunderstanding; the ECB measures cannot solve the debt crisis. They have merely bought time to put public finances in order, increase competitiveness of European countries and recapitalise the banking sector without delay.
The necessity for drastic adjustments varies from country to country, but it is certainly no longer exclusively a South-European issue. The Netherlands, which can still boast a relatively good economic performance, is also facing major challenges. With the highest credit rating and a relatively low unemployment figure, we have a great deal to lose.
As growth of the labour force is slowly grinding to a halt, we must factor in structurally lower growth figures for the years ahead. It is especially against this background that the development of public finances is worrisome. Even if the government deficit next year remains limited to 3% of GDP, public debt will continue to rise. As a consequence, the debt-to-GDP ratio will diverge more and more from the 60% threshold. If the Netherlands wants to continue to enjoy low interest rates, now is the time to get down to business on reducing the public deficit.
It must also be noted that Dutch competitiveness is not as strong as is often assumed. Since 1999 Dutch unit labour costs have risen by some 25%. In contrast, unit labour costs in Germany, for example, have hardly increased over the same period. Besides, Dutch export growth has been lagging behind growth of the relevant world trade for over a year and a half now, meaning that the Netherlands is losing market share. In addition to moderate wage developments, structural reforms of the labour market are therefore the way to increase the adaptability and labour productivity of the Dutch economy.
For the Netherlands, mortgage indebtedness is a source of particular concern. The high debts by international standards make households and the government sensitive to the developments on the housing market and poses a funding problem for banks. This calls for a comprehensive approach, in which the maximum loan-to-value ratio and mortgage interest tax relief should gradually be reduced in a predictable manner. This will help put an end to the current practice of maximum mortgages and minimum redemptions.
Resilience of Dutch banks has considerably increased over the past years. However, further buffer recovery through cost reductions, profit retention, and very constrained remuneration policies remain necessary. This holds true not only for banks, but also for insurers and pension funds. The value of adequate buffers cannot be overestimated, as we have learnt as the most important lesson from the credit crisis.
Finally, as DNB we thoroughly tightened and strengthened our supervisory duties in 2011. Working practices, organisation and culture have been overhauled to achieve a more risk-focused and result-oriented supervisory approach. We remain relentlessly committed to financial stability, which is absolutely essential for ensuring sustainable prosperity in the Netherlands. Restoring confidence therefore has top priority for us, the Governing Board of DNB.