Impact of the Corona virus on the Dutch economy

As hopes for an avoidance of a pandemic scenario across Europe tumbled over the last fortnight, economists have been just as quickly scrambling to update their economic predictions for the Netherlands with ever increasing pessimism. Currently with around one fifth of the Dutch economy paralysed by the measures brought in to deal with the Corona virus crisis, the director of the Central Planning Bureau (CPB) has declared a recession almost inevitable. Because of this unique economic crisis – where predictions are inseparably tied to a raft of epidemiological uncertainties – how deep that recession may be is almost impossible tell at this point.

Rather than abstract graphs, with lines falling sharply, or stock market traders with their heads in their hands, the images of this economic crisis are playing out in front of our eyes. Forced inside by the invisible virus, the streets are emptied of consumers. Shops, cafes, restaurants and clubs are closed for an unknown period. Indeed, it is unclear whether some will be able to survive through the crisis and open their doors again. For most people, never has an economic crisis been so immediate and personal. What happens in the streets is not the collateral damage of a crash in the banks – our neighbourhoods are the epicentre of the economic shock.

Just as the effects on the economy are radical, with governments forcibly sacrificing huge parts of the economy for the good of our health, so are the economic responses. So far, we have not seen governments act as one, as the virus wreaks its damage with little heed to borders. But radical rescue plans, aimed at keeping alive the economies and protecting the wages of those who worked behind those now closed doors have been seen across Europe. Huge bags of money are being offered by governments to businesses and workers to try and prevent the wave of bankruptcies that would cause long-lasting damage the economy and employment in the Netherlands and far beyond. Responses across the European Union have largely revolved around some form of work time reduction, tax forbearance, and guarantees for businesses. So far, the Netherlands has committed around 20 billion euros to the economy – quite a lot behind the highest stimulus in Europe, Germany’s 150 billion euros – but in line with a number of European countries.

One shouldn’t underestimate the need for radical economic policies in the Netherlands to protect us from the worst of the economic effects still to come. Rabobank has predicted a recession in virtually all G10 countries. Markets across the world are in turmoil, with major currencies such as GBP and AUD moving by 3-4% a day, the kind of movement one might normally see in a year. For the Netherlands, Rabobank is currently expecting a contraction of 0.2% for 2020. Measures put in place by the government will alleviate problems, but cannot do enough to stop a contraction. There are major caveats to any economic predictions as there are too many unknowns to say anything with any certainty at this point. With the economy so closely linked to the control of the pandemic, it is far from clear whether the economic fallout will be limited to a year.

If the outbreak is under control in the second quarter, the economy could go back to normal in the second half of 2020. If the aid measures by the government and central banks ensure that companies can survive the recession in 2020 and then increase production again to meet the demands of customers, who then spend money, so that other companies then resume their investment plans, some recovery could be seen in 2021. But at the moment, this is a precarious hypothesis by Rabobank – if the virus outbreak takes longer to control and restrictions aren’t removed, the economic impact could deteriorate further.

It is not just the 20% of the economy that has been forcibly shut down that are affecting the economy. Productivity could see major decline as well, as large swathes of the population are required to work from home and some of the workforce are off sick because of the virus. The Netherlands has not yet gone this far in its economic lifeboat plan, but market commentators discussing such radical policies as ‘helicopter money’ and central banks extending unorthodox policies such as quantitative easing to even smaller countries like Poland, suggest that nothing should be ruled out in the response to the economic crisis.

The European Commission has taken a number of steps that will affect the Dutch resilience to the crisis. To support healthcare, SMEs and the labour market, a Corona Response Investment Initiative of 37 billion euros has been announced for all member states. Though normally a country’s budget deficit should not exceed 3% of its gross domestic product, and its government debts should not exceed 60% of GDP, the European budget rules have allowed for additional expenditure on Corona virus responses.

So far, the Dutch government has already announced a selection of exceptional economic measures with the aim of protecting jobs and income in addition to the health of the country, as well as absorbing the consequences for self-employed professionals, SMEs and large companies. Just like other countries, such as the UK, its has promised that billions of euros of support will be available for as long as the crisis goes on. The economic measures are essential, the cabinet ministers jointly state, so that ‘every Dutch citizen always follows health decisions and advice. These measures also have a major impact on entrepreneurs of all sizes, in all sectors. We are not leaving them alone. They receive extra support in a new package, and the cabinet also simplifies access and relaxes conditions to be eligible for assistance, so that employees can keep their jobs and self-employed support their businesses as much as possible.’

To pay for this package, the government has decided to increase the national debt. This is possible because the government finances are sound and the debt has been brought down in more prosperous times. The most major of the support measures compensates wage costs through government subsidy. If an entrepreneur is expecting a loss of turnover (of at least 20%), he can apply to the UWV (Institute for Employee Benefits Schemes) for a salary contribution for a period of three months. The UWV will pay up to 90% of the wage bill, depending on the loss of turnover. The UWV will provide an advance of 80% of the requested contribution, allowing companies to continue to pay their staff. This aims to safeguard jobs – and importantly, keep people tied to their jobs – by the guarantee that no staff may be made redundant for economic reasons during the subsidy period.

Extra support is also given to independent entrepreneurs, including self-employed persons. Self-employed people can receive additional income support for a period of three months, through accelerated procedures. This will supplement their income up to the minimum wage for a period of three months. Unlike in normal times, there are no asset or partner tests attached to this subsidy, and the money will not have to be repaid. Support under this temporary arrangement is also possible in the form of a working capital loan at a reduced interest rate.

Huge flexibility is also being implemented on tax. Affected entrepreneurs can now apply for a deferment of tax, with the tax authorities immediately stopping collections. This applies to income, corporate, wage and value added tax. Any default penalties for late payment will be annulled, and it will not be necessary to immediately send evidence to receive this tax assistance. The interest added to tax for late payment, has been reduced from 4% to almost 0%.

For businesses that experience problems in obtaining bank loans and bank guarantees, the Guaranteed Business Financing Scheme (BMKN) will be opened up with an increase in its guarantee ceiling from 400 million to 1.5 billion euros. This helps both SMEs and large companies with a 50% guarantee on bank loans and bank guarantees.

Smaller businesses and entrepreneurs will get assistance from the microcredit provider Qredits, which has opened a temporary crisis measure. This measure gives small entrepreneurs who have been affected by the crisis a six-month deferment on the repayment of loans, with interest reduced to 2%. The cabinet is supporting Qredits with a maximum of 6 million euros.

For the agricultural and horticultural sector, there will be a temporary guarantee for working capital, through which the cabinet will guarantee the credits of agricultural entrepreneurs. The cabinet is also considering temporarily cancelling the tourist tax.

Of course, there are some sectors which are particularly hit by the government’s health restrictions – especially the mandatory closure of food and beverage outlets and cancellations in the travel industry. The government is aware that the lost income will be very difficult for these sectors to recoup after the crisis is over. As such, it is currently putting together a compensation scheme with appropriate measures to support these sectors. This will be urgently submitted to the European Commission for the assessment of state aid.

 

Edition 10 April, by Phoebe Potter