The Dutch Approach to Fighting the Economic Crisis

The Dutch government announced a stimulus package on March 24, 2009 after nearly three weeks of laborious negotiations between the three coalition parties (Christian Democrats, CDA; The Labour Party, PvdA; and the Christian Union, CU). In separate negotiations with the government, the social partners agreed to accept the deal (with some reservations). The central elements of the stimulus plan are (Prime Minister’s Office, 2009):

€6 billion in additional spending in 2009 and 2010. These will be primarily

environmentally sustainable investments, including subsidies for energy-efficient cars and houses. The deal also includes extra funds (€220 million) for fighting youth unemployment.

Budget reduction measures totalling €5 billion starting in 2011 if the Netherlands Bureau for Economic Forecasting (Centraal Planbureau, CPB) forecasts economic growth of at least 0.5% for 2011. These cuts would include €3.2 billion savings from freezing public sector salaries and social insurance benefits linked to the statutory minimum wage. An additional €1.8 billion in savings would come from sources to be discussed in next year’s regular budget negotiations.

increase in the retirement age for the state pension (AOW) from 65 to 67.

Other long-term measures include a reduction in the health insurance subsidy¹ (zorgtoeslag) and limits on mortgage interest deductions for homes worth more than €1 million.

In a separate decision in early 2009, the Minister of Social Affairs extended the deadline for occupational pension funds to restore full solvency after heavy losses in financial markets (see details below). Without the extension, many pension funds would have to raise contributions or cut pension payments, thereby dampening consumption.

Table 1 shows the breakdown in stimulus spending contained in the March 2009 crisis package as well as additional spending by local and provincial government. The table does not include spending to stabilize Dutch banks.

1 All residents of the Netherlands are required to purchase basic health insurance on the private insurance market.

Basic insurance is relatively inexpensive (about €100 per month), and low-income households receive a subsidy to offset these costs. The subsidy is financed by earmarked contributions paid by employers and taxes paid by employees on these contributions.

Table 1. Stimulus Measures 2009-2010 (millions of euros)

source: www.minfin.nl

Besides these concrete measures, the government secured agreement from the social partners on wage moderation, occupational pensions and the state pension. The latter two issues have been high on the political agenda for several years and the subject of much conflict. The fate of the proposed increase in retirement age for the state pension is still in doubt. Unions bitterly oppose the measure, and the government and social partners agreed to seek alternative solutions (see below).

After the crisis package was announced, the cabinet started negotiations with the social partners. The reaction of the largest union federation, the Dutch Federation of Trade Unions (FNV)², was lukewarm, largely because of the proposal to raise the state pension retirement age from 65 to 67. Union pressure resulted in a compromise: the tripartite Social Economic Council (SER)³ will have 6 months to study the issue and propose alternatives that will result in similar savings for the state budget. In an internal referendum on the social pact, 94%

of voting FNV members approved the agreement (turnout was about 20% ; the vote was conducted by internet and postal mail. See www.fnv.nl).

2009 2010

labor market, education and innovation 709 1049

environmentally sustainable economic measures 621 606

infrastructure and housing construction 724 1087

liquidity-enhancing measures for firms 677 464

subtotal 2731 3206

stimulus measures by municipalities and provinces 500 1000

higher unemployment insurance/assistance payments 1000 3900

total 4310 8234

2 The Dutch Federation of Trade Unions (FNV) has 17 member unions for a total membership of 1.4 million workers.

3 The tripartite Social Economic Council (SER), established in 1950, plays an important advisory role in the legislative process; in nearly all important matters, the government asks the SER for an advisory opinion before initiating legislation. The SER has 33 members; 11 each from unions, employers and the Crown. The SER’s influence has declined in recent years, but its advisory opinions are still important. According to van Waarden (2002, 56), the SER “forces the social partners to engage in scientific discourse to justify their demands.”

The Details of the Crisis Measures

The first response of the Dutch government to the crisis involved the largest financial

institutions in the country. Since October 2008, the government has pursued an active policy of supporting Dutch banks, most prominently ABN AMRO (the country’s largest bank), with capital injections and stock purchases. ABN AMRO was effectively nationalized; on 3 October, the Dutch state assumed ownership of the Dutch division of Fortis Bank and the parts of ABN AMRO owned by Fortis Bank. The government also increased its guarantee for individual savings accounts to €100,000. In addition, the government has made €20 billion available for financial institutions facing liquidity shortages, and €200 billion in guarantees for inter-bank loans and loans from institutional investors to banks (www.regering.nl). These initial measures are considerable: in total the government has pumped €80 billion into the financial sector with another €200 billion in guarantees. The automatic stabilizers (discussed below) add another €50 billion in 2009 and 2010.⁴ This includes €1 billion in 2009 and €4 billion in 2010 in higher spending for unemployment insurance payments (www.minfin.nl; see table 1 above).

In Autumn 2008, the government initiated its first crisis policies concerning the labor market.

The 2009 budget (presented in September 2008) included measures aimed at maintaining employment (PM’s Office 2009, 7). Tri-partite negotiations (the ‘participatie-top’ or ‘labor market participation summit’) between the government, unions and employers began in 2007 in the context of tight labor markets. The negotiators agreed to mobilize ‘less active’ groups, primarily immigrants, low-skilled women, and older workers to work more hours or, in the case of older workers, to work longer.⁵ These policies are aimed at increasing labor supply, both in the short-term and long-term. As noted, pre-crisis labor markets were tight. But this supply-side strategy is also an important component in the government and social partners’

strategy for dealing with the labor market effects of ageing. As the baby boom generations retire, the number of pensioners will increase substantially, exacerbating labor market shortages.⁶

4 This number includes both increased spending and decreased tax revenues.

5 The Netherlands is Europe’s largest part-time labor market, largely because women work part-time (Visser 2002).

6 The core elements of the government and social partners’ strategy for increasing participation is to improve active labor market policies and increase labor supply. In 2007 and 2008, Parliament adopted several amendments to existing legislation government active labor market policies (the Dutch call these policies “re-integration” policies) in order to step up activation and improve the coordination between central and local government as well as between public and private actors.

The Autumn consultation with the social partners also provided an opportunity to devise an early response to the emerging crisis and to build on the re-orientation in labor market policy initiated earlier. At the suggestion of the social partners, the government agreed to delay a planned increase in the VAT (from 19% to 20%) and to reduce unemployment insurance

contributions. The government and social partners also agreed to increase financial resources for training and re-training and to speed up the introduction of new active labor market policies.

The government also moved quickly to create some breathing room in the market sector by introducing subsidized working time reductions and speeding up the introduction of the already planned “mobility centres.” The Minister of Social Affairs, Donner (CDA), made €200 million available to firms facing a 30% of more decrease in volume (sales) in a two month period.

This measure is intended to be temporary, and it is by nature conservative. Firms apply to the Ministry of Social Affairs for subsidies so that they can continue to pay full wages for reduced working time. The idea is to provide temporary financial support to firms facing temporary dips in sales and production because of the recession. The Ministry of Social Affairs closed the scheme on 21 March 2009. The Ministry approved 849 applications for support, for a total of 761,678 subsidized working hours. The highest number of approved applications were in the metal-working sector (Ministry of Social Affairs, 2009b). A part-time unemployment insurance benefit scheme has been introduced (in 2009) to replace the working-time reduction scheme.

The cabinet negotiated the scheme in cooperation with the social partners. The Minister of Social Affairs has allocated €375 million for the new scheme.

The mobility centers are an institutional innovation: they are regionally organized, and their central task is to manage the transition from one form of employment to another. The idea is to prevent unemployment by shifting workers from declining sectors/firms to expanding ones, and where necessary to provide re-training in order to facilitate this transition. The approach is innovative in that it tries to shift workers threatened with unemployment into new jobs before they become unemployed. The mobility centres provide job counselling, job search assistance, and other related services. They are also linked to the so-called “LWI-plus facilities”, which are regionally-organized “Locations for Work and Income” whose task is to coordinate the activities of local government and the UWV in facilitating clients’ job searches.⁷ There are thirty mobility centres are planned, and ten have already opened.⁸ The centres cooperate closely

7 The LWIs provide access to unemployment support and provide job-seekers with resources such as an individual coach.

8 The first mobility centres opened on 1 March 2009.

with all stakeholders in a region, both public (usually local government) and private (private employers). The Labour Foundation (STAR) assists the centres by providing detailed labor market analyses.⁹

The overall strategy of the stimulus package negotiated in March is to allow the “automatic stabilizers” to do their work, which will result in increased government spending in 2009 and 2010, primarily for employment-related measures. In addition, €3 billion are allocated for both 2009 and 2010 in the areas of employment (especially fighting youth unemployment), education, policies to enhance environmental sustainability, spending on infrastructure and housing, and measures to increase the liquidity of firms. The municipalities and provinces are estimated to add another €1.5 billion in stimulus measures. The costs of increased unemployment insurance payments are estimated to be €1 billion in 2009, €4 billion in 2010 and €4.5 billion in 2011 (see table 1 above). These extra expenditures will not be subject to the budget rules that require increased spending to be compensated by cuts in other parts of the (sectoral) budget.¹⁰

The investment projects are based on several motions presented to Parliament in early 2009.

Three motions, all introduced by governing parties or governing parties in cooperation with opposition parties, focused on four areas:

maintaining employment, especially among youths;

investing in environmentally sustainable infrastructure (the goal is 20% renewable energy use by 2020). This includes investments in wind energy, energy-efficient housing, subsidies for switching to newer, more fuel-efficient cars, and sustainable agriculture;

speeding up infrastructure investments in housing, roads/water transport, health care, and education;

expanding the liquidity of firms

The package includes a hard promise to pursue budget consolidation measures starting in 2011 in order to compensate for the extra spending in 2009-2010. Under ‘normal’

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9 See Ministry of Social Affairs (2009a) for more details. The mobility centres complement the existing institutions for active labor market policy. In 2008, the old CWIs (Centre for Work and Income) were merged with the UWV (Uitvoeringsinstituut WerknemersVerzekeringen), the organ responsible for administering the unemployment benefit system (among other things). The new agency is called UWV Werkbedrijf, and its primary responsibility is to match job-seekers with potential employers, as well as to administer unemployment benefits and other work-related benefit schemes.

10 The major parties agree that reducing the public debt is a priority, so they have introduced a budgeting rule that requires additional spending to be offset by reduced spending elsewhere when the projected budget deficit is 2%

of GDP or higher.

circumstances, a projected budget deficit (according the EMU definition) of 2% or more triggers budget consolidation rules. The public debt is forecast to increase by €130 billion within a few years: €80 billion in aid to the financial sector¹¹ and €50 billion because of the increase in the deficit resulting from the automatic stabilizers and stimulus measures (Prime Minister’s Office 2009, 12). The rescue plan thus envisions a speedy return to budget discipline as soon as economic circumstances permit.

Finally, the package includes measures aimed at pursuing the long-term goals of environmental sustainability, the promotion of innovation and the knowledge economy, and urban renewal.

In addition, the package includes measures aimed at improving the long-term sustainability of collective social welfare arrangements. This is to be achieved by cost-containment in the health care sector, increasing the state pension retirement age to 67, and limiting the tax deductibility of mortgage interest for houses worth more than €1 million.

The Crisis and the Dutch Economy

The Netherlands is often viewed as a model for successful economic and social reform. After the difficult decades of the 1970s and 1980s (skyrocketing unemployment, increasing budget deficits, etc.) governments since the 1990s have adopted an impressive array of reforms aimed at making the welfare state more efficient, increasing employment, and reducing budget deficits and accumulated public debt. By the mid-1990s, the Netherlands could claim to have produced an ‘employment miracle (Visser and Hemerijck 1997).” As recently as 2008 the OECD

proclaimed the Dutch economy to be “in good shape” (OECD 2009). All of the major parties agree on the goal of reducing the public debt and building budget surpluses that can offset the projected costs of ageing. When the baby boom generations retire starting in 2020, health care and pension costs are forecast to rise substantially.

Before the crisis hit, the Dutch economy was for many observers the envy of Europe. Dutch policy-makers had found a way to reverse the trend of ‘welfare without work’ (see Visser and Hemerijck 2007). In 2007 and 2008, economic growth was 3.5% and 2.0% respectively, and the budget showed a surplus of 0.3% in 2007 and 1.0% in 2008. In the Fall of 2008, the main economic institutes were forecasting respectable growth for 2009, but as the crisis deepened, the forecasts turned increasingly alarming. According to the latest government statistics, the economy will shrink by 3.5 percentage points in 2009. Unemployment is forecast to more than

11 One half of this amount consists of loans and the other half represents ownership in financial institutions.

double, to 9% of the labor force in 2010. Government finances are showing similarly dismal numbers: the 1% surplus achieved in 2008 will be a 5.5% deficit by 2010, and the public debt will increase from 42% to 58% of GDP in one year (CPB 2009, 6).

Given that the recovery of the Dutch economy depends on international developments, the logic behind the crisis package is to maintain households’ and firms’ consumption in the short term and to use the crisis as an opportunity to step up efforts to promote the long-term sustainability of public finances in the long long-term. The latter goal is consistent with the central concerns of the main political parties, especially the Christian Democrats (CDA). A central theme in the addendum to the coalition agreement is intergenerational fairness; younger generations should not be saddled with high levels of public debt caused by older generations.

Another key aspect of the stimulus package is the maintenance of social cohesion, expressed most clearly in the decision to suspend budget consolidation rules when the budget deficit exceeds 2% of GDP. Most of the extra money will finance increased unemployment insurance payments as well as measures to counter youth unemployment (training, apprenticeships, and other policies). The emphasis on social cohesion is clearly in line with the political priorities of the main political parties as well as the social partners. The contours of consociational politics and the consensual support for comprehensive social policies militate against policies that reduce the social safety net.

Negotiating the Stimulus Package

In the Netherlands, political power is centralized, but power-sharing is institutionalized in several practices: multiparty majority governments and extensive consultation norms. A good example of this consultation is the Autumn and Spring negotiations on social and economic policy between the unions, employers and the government in the Labor Foundation (STAR) These negotiations usually form the basis for government legislation. Although there has been some decline in corporatist practices, consociationalism continues to characterize political decision-making. After a period of corporatist decline in the 1970s, the 1980s saw the re-emergence of Dutch consociationalism with the 1982 Wassenaar Accord. Unions promised wage restraint in return for increased emphasis on boosting employment. The Wassenaar Accord facilitated a period of sustained economic growth and welfare state reform that Visser and Hemerijck (1997) call the “Dutch Miracle.” (see also Hemerijck and van Kersbergen 1997 and Cox 2001). It is fair to say that the spirit of Wassenaar continues to guide policy-making, even if negotiations are not always smooth.

Because of the specific workings of Dutch parliamentary democracy, the stimulus package required the three governing parties to re-negotiate their coalition agreement from February 2007 (negotiated following the parliamentary election on 22 November 2006). The current three-party government is led by Prime Minister Jan-Peter Balkenende (CDA). Labor Party leader Wouter Bos is Minister of Finance, and Christian Union leader André Rouvoet is Minister of Youth and Family.¹²

The negotiations resulting in the stimulus package were very difficult. Dutch parliamentary democracy is based on detailed compromises, such as the coalition agreements negotiated after national elections. Majority coalition governments are the norm in the Netherlands, and the process of coalition formation is relatively long. It usually takes several months for the coalition parties to work out the details of their governing accord and to form a government. According to Andeweg and Irwin (2002), Dutch coalition agreements are among the most detailed and lengthy for countries that usually have coalition governments. Negotiating the stimulus package required revisiting the painstakingly agreed coalition agreement and hammering out amendments to it.

As soon as the coalition parties concluded their agreement, they met with the unions and the employers in the Labour Foundation (Stichting van de Arbeid, STAR) to seek their support for the deal, as well as commitments concerning wage moderation. The negotiations were based on three relationships: solidarity between those in employment and those out of employment;

solidarity between the collective and market sector; and solidarity between the generations.

A key example of these goals is that financial resources are to be used for re-training and job security before it is used on income support. The cabinet called on the social partners to seek wage moderation in order to promote employment and secure competitiveness. The cabinet’

s contribution was the stimulus package, especially efforts to deal with rising unemployment.

The cabinet called on the social partners to do their part by concluding moderate wage agreements so that Dutch firms could profit immediately when the world economy begins its recovery (STAR 2009).

As noted, the key line of conflict between the social partners (mainly the unions) and the government concerns the proposal to increase the retirement age for the state pension from 65 to 67 years.¹³ The FNV in particular has led the opposition to this measure, forcing the

12 The three parties control 80 of the 150 seats in the Second Chamber (CDA=41 seats, PvdA=33, and CU=6) 13 The proposal stipulates that workers with physically demanding jobs should be subject to less stringent rules.

government to delay the decision while the Social Economic Council investigates alternatives.

The other union federation, the CNV (Christian Trade Union Federation) is more willing

The other union federation, the CNV (Christian Trade Union Federation) is more willing