Edition 29 May 2018, by Phoebe Potter
Figures provided to De Volkskrant at the end of April have shown just how fortunate the Dutch Treasury has been from central banking policies. In fact, the European Central Bank’s (ECB) monetary policy in recent years , which has set extremely low interest rates – has led to a windfall for the Dutch government. According to the calculations provided by the ECB in Frankfurt, the Dutch government has saved € 84 billion over the past decade. For all countries using the euro, this figure stands at a huge € 1149 billion.
These figures were obtained after the ECB’s update on its monetary policy at the end of April. On the 26th of the month the ECB announced that it was to continue its controversially cheap monetary policy unchanged. Put in place in 2016, the monetary policy cut interest rates in the Eurozone , originally to zero – in an effort to revive the economy and fend off deflation. The Governing Council of the ECB announced that it expected these key ECB interest rates, which are set at 0.00%, 0.25% and -0.40% (for the main refinancing operations, the marginal lending facility and the deposit facility respectively) to remain at their present levels for an extended period of time. Defending any delay to beginning to raise interest rates, Mario Draghi (President of the ECB) told reporters at a press conference after the announcement that, ‘In the end, steady hand were words used in the discussion in the Governing Council. Our policy has served us well and will continue to do so. Therefore, the other words we used were patience, prudence first of all in assessing and persistence.’ An overly pre-emptive drastic change to policy was something the President of the central bank was clearly incredibly keen to avoid.
Though lucrative in the short term, the ECB monetary stimulus policy has many enemies, mostly from the richer northern European countries. President Klaas Knot of De Nederlandsche Bank (DNB), in particular warned about the creation of financial bubbles that may arise as the result of persistently low interest rates – translating into rising real estate prices and business investments that would not be profitable at a higher interest rate. Further to this, he worries that financial markets in certain European countries are not adequately disciplining their local economic policies, because borrowing money costs so little at the moment. Of Eurozone countries, it appears that the Netherlands is one of the countries that benefits the most from the ECB policies – after Germany, France and Italy. Without the policies all these countries would have owed hundreds of billions more euros. Though certainly playing a part in the situation, the idea that the low interest paid on the national debt is purely due to the ECB policies should be treated speculatively.
Last autumn, the then Minister for Finance, Jeroen Dijsselbloem, told the House of Representatives that ‘The ECB policy is one of the factors that has an effect on the interest paid by the Dutch state on the national debt. But because the interest on government bonds is also dependent on many other factors, it is not possible to estimate the effect of (reducing) the monetary policy on the interest rate of government bonds.’ In general, the interest had already been showing a declining trend for decades, a trend that was simply reinforced by the crisis policies of the ECB. Across Europe, economists have also been speaking of a global abundance of savings. This is caused partly by an aging population and an associated swelling of pension funds.
In contrast to the ECB’s figures, De Nederandse Bank (DNB) released a slightly more conservative figure of 50 billion last year, in terms of an interest rate windfall for the state. DNB also stressed that this not only benefits the national debt. In addition to this, mortgage interest deduction expenses fell from almost € 10 billion in 2008 to € 7 billion in 2017, whilst the general Dutch mortgage debt increased, said DNB. This allowed the Dutch government to roll back cuts in recent years and comply more quickly with European fiscal rules.
But Paul Schmelzing, a researcher in financial history at Harvard University, has put out a word of warning. Historically, periods of exceptionally low interest rates do not last long. This is working off analyses of real interest rates (the nominal interest rate minus inflation), based on loans from Italian cities in the 14th and 15th centuries, followed by those from Spain, the Dutch Republic, the United Kingdom from 1703, Germany and finally the USA. Over the last two centuries, he has worked out that the real interest rate has averaged to around 2.6%, or 4.78% if one looks at the last 700 years.
Regardless of this, since the ECB has confirmed that the interest rates will remain low for at least a year, the Dutch Treasury can continue to enjoy its benefits. As such it is working to steadily increase the duration of government debts, since the loans are so cheap. By 2019, the average duration of a loan is set to have been 6.4 years. Critics aside, currently the policy certainly proves lucrative for the Dutch Treasury. Written by Phoebe Potter EC B monetary policy lucrative for dutch treasury