Opinion: High economic growth masks old and new problems

Statistics Netherlands (CBS) announced this week that the Dutch economy grew by more than 3% in 2017. This is the highest rate of growth since 2008, and in the last 20 years the economy only grew faster in 2006 and 2007. In Dutch political circles people have been in a jubilant mood for some time. The private sector is also very confident about the future. But at every party there is always someone who puts a damper on the mood; in this case, the writers of this article who cast a long shadow over the prevailing euphoria. Our country is doing well economically, but the problems that arose at the outbreak of the crisis in 2008 are yet to be fully resolved and too little is being done to tackle new challenges.

A large-scale crisis, such as the one we have just had to endure, presents us with an excellent opportunity to tackle fundamental problems in the economy. Unfortunately, however, far too little has changed in the aftermath of the 2008 financial crisis, and the current positive growth figures mask the fact that the weaknesses in the financial environment, which emerged in 2008 and went on to characterize the subsequent recession, still exist.

Central banks in particular made a significant contribution to the recovery by pursuing unprecedented, far-reaching monetary policies. The European Central Bank and its American counterpart, the Federal Reserve, have kept interest rates at historically low levels since the outbreak of the crisis in 2008. Both banks continue to pursue this policy, but it has since become a major cause of economic imbalances. The price rises on both the stock markets and housing markets are, to a large extent, fuelled by the policy of keeping interest rates low. However, it is absolutely vital that we see a change of course as soon as possible. Similarities with the high levels of growth recorded just before the previous crisis are becoming apparent: in the years before 2008 there was also substantial economic growth that was accompanied by bubbles on the housing market and the stock market. Hindsight, as they say, is a wonderful thing. The central banks do not seem to have found a good exit strategy for their monetary policy, even in this boom. And any inkling that they will raise interest rates leads to immediate panic, as evidenced by the shocks on the stock markets earlier this month.

More importantly, perhaps, solutions are yet to be found to the fundamental problems that were exposed over 10 years ago. This is especially true for the Euro. In 2010, Greek debt problems threatened the survival of the currency. The reason being that when the Euro was established insufficient consideration was given to alternative mechanisms to offset the loss of the exchange rate mechanism, which is now one of the major drawbacks of the Euro.These mechanisms imply the need for more policy at EU level in the form of income transfers between Euro countries, increased migration within the EU or more flexible wage and price policies.All of these are controversial issues, to which national politicians and their electorate would prefer to turn a blind eye, and this despite the fact that a common currency also requires more EU-wide policies in other areas.

The heart of the problem is that Germany, Italy and Greece are just too different to all be part of the same currency union, and that the Euro’s chance of long-term survival relies on there being sufficient mutual adjustment mechanisms at EU level to accommodate these differences. If we fail to do this, weak Euro countries such as Greece and perhaps Italy will face problems sooner or later. Once the current economic boom is over, these old problems will unfortunately rear their heads once more, closely followed by the next Euro crisis.

To rub more salt in the wound, how stable are our banks now, 10 years after the outbreak of the crisis? The nationalization of our own banks is still fresh in our minds. Progress has been made here, but not enough. After the crisis, banks were forced to hold more capital, but according to many economists these additional buffers are still not enough to cope with the next big blow. And some banks do not even meet the current minimum capital requirements. Last year, it emerged that Italian banks needed large-scale state support to stay afloat, and at the end of 2017 it turned out that our own banks were 14 billion euros shy of meeting the new (modest) capital requirements. They now have until 2027 to do something about it.

The most challenging fundamental problem we face is not the legacy of the Euro and a (still) unbalanced financial sector, but the future labour market. Statistics Netherlands points to rapidly increasing shortages on the labour market and estimates that 55,000 construction workers are needed, for example. The real problem for tomorrow’s labour market, however, runs much deeper than simply a shortage of workers. It is increasingly apparent that globalization and automation are disruptive forces on the labour market. For those losing out due to globalization, it is becoming more difficult to find work elsewhere because production has moved abroad. And many jobs have disappeared due to automation. A glance inside a modern car factory says enough; robots are everywhere. AI and machine-learning algorithms can do more, better and faster. Statistics on the labour market show that a specific group in particular is suffering as a result of this development: the middle class. The current middle class is having a much harder time than their counterparts in the last century, partly because certain tasks and jobs are disappearing and partly because the social safety net does not sufficiently support this group. The ubiquity of flexible contracts increases the level of uncertainty for this group even more. In these times of relative economic prosperity, politicians have been handed an excellent opportunity to take major steps and to reform the labour market, but beyond setting up a working group little else has been achieved.

All in all, the favourable economic growth rates not only mask the fact that too little has been done in recent years to tackle the financial causes of the previous crisis, but also the fact that, now that the economic tide is high, we should do more to ensure we are in a good position to tackle and overcome future developments.

Steven Brakman & Harry Garretsen, both professors of economics at the University of Groningen, Faculty of Economics and Business