June 14, 2012 / 2:55 PM / 6 years ago

Fragile Dutch economy at mercy of euro crisis

AMSTERDAM (Reuters) - The Dutch economy, struggling to escape recession, will face years in the doldrums if Europe’s political leaders fail to put together a package of measures to contain the region’s debt crisis, a government advisory body said on Thursday.

The AAA credit-rated nation would fail to balance its budget as planned by 2017 unless it made an extra 25 billion euros of tax hikes or spending cuts, it said.

Publishing fiscal and economic forecasts up to that year, the CPB also broke ranks with the ministers it advises on economic policy, saying a banking union in the euro zone would help prevent the crisis from worsening.

The country’s caretaker government has opposed such a move.

The current administration replaced a pro-austerity coalition that collapsed in April, leaving a political void and unnerving markets that have long viewed the country as a key component of the euro zone’s stable core.

Its economy is also struggling, with the European Commission expecting a GDP contraction of 0.9 percent this year, making it one of the worst performers in the euro zone.

The CPB agency forecast the Netherlands would emerge from recession in mid-2012 and grow 0.75 percent in 2013. The budget deficit would meanwhile dip to 2.9 percent of economic output, dropping below the European Union’s 3 percent threshold.

But its forecasts assumed the euro zone debt crisis would be solved, Spanish and Italian debt would not be restructured and the global banking system would not face another severe downturn.

“If the crisis escalates, growth will be lower in the next few years than currently forecast and the Netherlands will suffer big losses,” it said.

RISK FACTORS

Several political and financial risk factors threatened the Dutch economic recovery, notably the weakness of Spain’s banking system and divergence among euro zone policymakers that urgently needed addressing.

“If European government leaders do not succeed in reaching agreement on a package of measures to prevent an escalation of the euro zone crisis the chance of a euro zone disintegration will increase,” it said.

“In that scenario, growth will be much lower for several years.”

Differing policy approaches by France and Germany, which have emerged since the presidential election victory of Francois Hollande, and another round of Greek voting has added to the uncertainty.

Anxiety about a possible Greek exit from the euro zone had increased, though the contagion effect of such a move would probably be manageable, the agency said.

Mindful of the rapidly escalating crisis, EU leaders are hoping to develop a roadmap to fiscal union at a June 28-29 summit.

But there is unlikely to be progress towards the banking union that the CPB advocates and both the Dutch and German governments oppose, despite European Commission President Jose Manuel Barroso pushing for a cross-border agency to be granted supervisory powers over major lenders by next year.

The CPB predicted a Dutch budget deficit of 2.6 percent of GDP in 2017 without additional fiscal measures.

Billions of euros of budget cuts were needed to balance the budget, Dutch Finance Minister Jan Kees de Jager told Dutch TV station RTL 7.

In April, political parties agreed on an emergency budget to reduce the deficit to or below 3 percent in 2013 from an expected 3.8 percent this year, and preserve the country’s precious triple-A credit rating.

But with a general election due on September 12, the political outlook remains uncertain, and the European Commission warned last month of risks to the deficit targets because of the upcoming vote.

Reporting by Anthony Deutsch and Gilbert Kreijger; Editing by John Stonestreet

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