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The Netherlands & The EuroThe Full Report
March 5, 2012
Special Report
www.lombardstreetresearch.com
Statement of Purpose:
A study of the fundamental flaws of theEconomic and Monetary Union (EMU) and the damage done by the euroto date to The Netherlands was commissioned from Lombard StreetResearch by the Dutch Partij voor de Vrijheid (‘PVV’, the Party forFreedom). This is the main report on which the Special Report, “TheNetherlands and the Euro” is based. The two should be consideredtogether, so this report will not have a summary and conclusions, sincethe Special Report starts with those.The study falls into five chapters and two appendices, covering the flawsof the euro in principle, the debt crisis in Mediterranean Europe (‘Med-Europe’) and Ireland, the damage to The Netherlands and Germany fromeuro membership, the superior performance in the past ten years of non-euro Sweden and Switzerland, and the benefit to The Netherlands fromquitting the euro as soon as possible. The first appendix covers theglobal economic background and prospects. The second covers theECB.
 
 
Special Report
March 5, 2012
The Netherlands & The EuroThe Full Report
Charles Dumas
Chapter A: The inherent economic flaws in EMU 1
 
Chapter B: Consequences of debt in Med-Europe & Ireland 17
 
Chapter C: Austerity and waste in The Netherlands and Germany 34
 
Chapter D: Netherlands/Germany v. Switzerland/Sweden 42
 
Chapter E: Near-term prospects and euro break-up 53
 
Appendix A: The grim global 2012-13 context 61
 
Appendix B: The ECB – the last chance saloon 66
 
This Lombard Street Research report is intended to encourage better understanding of economicpolicy and financial markets. It does not constitute a solicitation for the purpose of sale of anycommodities, securities or investments. Although the information compiled herein is consideredreliable, its accuracy is not guaranteed. Persons using this report do so solely at their own risk andLombard Street Research shall be under no liability whatsoever in respect thereof. The contents ofthis publication, either in whole or in part, may not be reproduced, stored in a data retrieval systemor transmitted in any form or by any means electronic, mechanical, photocopying, recording orotherwise without written permission of the Managing Director.
 
 
Special Report - March 5, 2012 1
 This chapter will explain in detail both why the euro was highly likely to fail from thestart, and other aspects of the development of Eurozone economies since 1999that have made the current position worse. The subsequent two chapters willdescribe the build-up of the debt crisis in Mediterranean Europe (hereinafter ‘Med-Europe’) and Ireland, with its forecast consequences if the stricken economies allremain in EMU, and the damage the euro has done to The Netherlands andGermany, the supposedly strong Eurozone economies. The following topics will becovered:
•
The high likelihood of divergent inflation that was clear before the start of EMUin 1999, leading to large cumulative variance of cost competitiveness betweencountries. This is distinguished from the deeper concept of competitivenessthat arises when productivity is increased – ie, real output per hour worked – orproducts or processes are in other ways improved, permitting higher prices tobe charged for what on the surface may seem an unchanged product orservice.
•
Strongly divergent potential growth trends – either through relatively low-income countries catching up with more advanced economies (eg, Spain andarguably Greece) or through the combination of catch-up potential with plentifulresources, permitting fast growth via employment of more labour, capital andland (Ireland)
•
“One size fits none”! – the perverse operation of a common nominal interestrate in all the countries of the euro, despite their different inflation rates andpotential growth rates, an effect that was reinforced by the low-growth and low-inflation countries largely coinciding. This single interest rate has been higherin real terms (ie, inflation-adjusted) for the “slow” countries and lower (oftennegative) for the “fast” countries, in both cases reinforcing and distorting theirdivergences
•
As the divergences accumulated, “slow” countries moved into large current-account, ie, trade, surpluses and “fast” countries into deficits, though theEurozone remained roughly in balance with the rest of the world.
•
Inevitably, the “fast” countries developed large cumulative debts, sometimes atthe government level, sometimes private debts, both of which have beenexposed as unaffordable by the global slowdown since the 2007-08 financialcrisis.
•
The random acceptance of Greece in the euro in 2001, as well as the waivingof certain Maastricht criteria in the admission of Portugal and Italy at the start,have exacerbated the debt problem in Med-Europe
•
The focus by Germany on government deficits, both in the 1998 Stability andGrowth Pact and in the recent pact to rescue the Eurozone, addresses neitherthe sources of the current crisis nor the fundamental design faults of theEurozone – for example, the German government deficit was above theEurozone average in the run-up to the 2007-08 crisis, while Spain and Irelandwere in budget surplus.
•
In parallel to the divergences, the growth of “true” competitiveness, output perhour worked and value received for a given volume of product (“terms oftrade”), has worsened sharply in the apparently stronger, Dutch and German
Chapter A: The inherent economic flaws in EMU
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