September 7, 2012 / 10:48 AM / 6 years ago

Analysis: Dutch economic consensus model frays as challenges grow

AMSTERDAM (Reuters) - No matter who comes out on top in next week’s election, the Netherlands will find it hard to revive the practice of economic policymaking by consensus that has been one of the secrets of the country’s prosperity.

From fast-rising health care costs to the need for greater labour flexibility as the population ages, the Netherlands faces a host of challenges beyond Europe’s current cyclical slowdown if it is to maintain its competitiveness.

Yet even as hot-button issues such as increasing the retirement age and relaxing dismissal laws cry out for cooperation, the Dutch may be in danger of losing the ingrained habit of extensive policy consultation and compromise among government, employers and trade unions.

Parties on the left and the right of the political spectrum have emerged to challenge the traditional order, although latest polls indicate two mainstream parties - Liberals and Labour - could win enough seats on Sept 12 to form a coalition with another party from the middle ground.

“We need each other more than ever, and what’s happening? We’re just growing apart,” said Jaap Paauwe, a professor of human resource studies at Tilburg University.

Putting aside differences for the greater good is not an optional extra in the Netherlands. More than a quarter of the country lies below sea level. So communities simply must work together to build and maintain the dykes that protect their reclaimed land, or ‘polder’.

The story of the little Dutch boy who stuck his finger in a leaking dyke to prevent a catastrophic flood resonates in a country where more than half the 17 million population lives in areas prone to floods.

The polder model of managing economic and social policy has been under strain for about a decade in tandem with a reordering of the Dutch political system as radicals on both the right and the left have outflanked the established mainstream parties.

A well-organized activist minority allied to the left-wing Socialist Party has burrowed its way into the biggest trade union confederation, the Labour Party-affiliated FNV, preventing it from agreeing on negotiating positions. The FNV’s president resigned in June.

With the unions hamstrung and sidelined, employers have built on what critics see as already undue influence with Prime Minister Mark Rutte’s fiscally conservative Liberal Party.

“This is crippling the whole polder model at the moment, and that’s a terrible thing,” said Jaap Smit, head of the smaller Christian democratic CNV union confederation.

In an interview in his office in Utrecht, the former church minister and business consultant said the Netherlands needed a strong union movement to help bring in labour reforms and adjust to a rapidly changing global economy.

“The West has dominated the world for many decades, but with other economies now rising, Europe needs to shape up,” Smit said. “What’s difficult for me is that I have to tell my members that we need more flexibility and mobility. Old answers won’t work for new questions.”

Yet the union movement will not regain its vigor unless the FNV - “our big brother,” Smit calls it - closes ranks.

Eelco Tasma, a senior policy adviser to the FNV’s board, admits he is not confident that the views of the radical wing can be reconciled with those of the mainstream.

“There’s still a risk that we’ll split in two. It’s a delicate balance,” Tasma said.

REALITY CHECK

The question for markets is whether a further deterioration of the polder model would damage Dutch economic performance.

Jens-Christian Hoj, who follows the Dutch economy for the Organisation for Economic Cooperation and Development (OECD), a club of industrial democracies, said the process instilled realism into policymaking.

The Netherlands Bureau for Economic Policy Analysis (CPB), an agency whose forecasts and assessments play a central role in the tripartite polder model, runs the rule over each party’s manifesto, right down to the impact that proposals would have on traffic jams.

“Everybody has to go into the election with something that is credible, and that facilitates reaching compromises after the election,” Hoj said. “That strengthens the ability of the Dutch to implement reform way more than anywhere else.”

Others are less convinced.

Paul de Beer, a professor of industrial relations at Amsterdam University, noted that the collapse in spring of Rutte’s coalition did not prevent five parties from rapidly cobbling together a program that addressed the country’s two burning economic issues - a package of tax increases and spending cuts to cut the budget deficit below 3 percent of GDP in 2013 and a timetable for gradually raising the pension age.

“They showed that it’s possible to implement policies in the Netherlands without the support of trade unions and the social partners in general,” de Beer said.

And despite the cracks in the consensus, unemployment is still well below the European average, growth has been respectable and the trade surplus has remained high.

“The fundamentals of the Netherlands are not bad,” said Casper van Eewijk, deputy director of the CPB.

A RICH COUNTRY’S PROBLEMS

Van Eewijk expressed concern that ultra-low interest rates were increasing precautionary savings as people fretted about their pensions, thus depressing consumption. Uncertainty over house prices, which are falling, could also drag on.

On the positive side of the ledger, the CPB was satisfied that, despite a greying population and generous old-age provisions, the budget plans of the parties contesting the September 12 election would ensure that Dutch public finances were sustainable in the long run.

“We have more or less solved the ageing problem in the Netherlands,” van Eewijk said. “As long as our banks don’t get into difficulties and the housing market is more or less stable, we have no very deep problems.”

Indeed, the Netherlands for the most part can be said to face problems of plenty: if its ageing costs are among the highest in Europe, that is because of the ambitiousness of the Dutch social model, according to the Paris-based OECD.

Dutch retirees enjoy the highest purchasing power in Europe, with the average pension reaching 74 percent of the national wage. And long-term care costs are double the European average because coverage is so comprehensive and co-payments are low.

Yet the Dutch, sensible with their money, are ready. Pension reserves reached 1.14 trillion euros at the end of 2011. That is almost 190 percent of GDP, the biggest pension pot in Europe.

“The Netherlands has the problems of a rich country, but a well-prepared rich country,” said Hoj.

He said the government could act more forcefully to dispel uncertainty over pensions and the housing market. But, by and large, the country has shown it understands external constraints on the economy as they arise and has adjusted very well to them.

“They have issues, but seem perfectly prepared to deal with them,” Hoj said. “I’m pretty sure that the Dutch will get through their problems and remain a rich, prosperous country.”

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