Prof. Elmer Sterken: ‘Emergency economic measures rest on false certainties’

In its approach to the economic crisis, the Cabinet is relying to a significant extent on false certainties, thinks Elmer Sterken. Instead of taking emergency measures, in his opinion the Cabinet should be concentrating on developing the Dutch knowledge economy. ‘A course we should have been following before the crisis, too’.

Will the crisis approach of the Dutch government work? FEB economist Professor Elmer Sterken has his doubts. The economic crisis is so complicated that it’s virtually impossible to predict its course. As a result of great social pressure, economists are being seduced into making predictions and politicians are developing unfounded policies, he thinks. ‘We should follow the example of the weathermen and women of the news programmes on TV. They not only show how much rain they are expecting in their diagrams, but also how sure they are of their case.’ Sterken thinks that the CPB prediction – an economic shrinkage of 3.5% in 2009 – should be put against a backdrop of 2-3% either way. ‘But we don’t want to have to deal with that uncertainty. We prefer to take decisions based on false certainties.’

Biggest problem

Houses and shares losing value is an irritating but surmountable consequence of the crisis, in Sterken’s opinion. The housing bubble had to burst sometime, and stock markets will gradually regain their value. The main problem of the crisis is increasing unemployment, thinks Sterken. ‘If large groups of young people are now marginalized for a long time, that will lead to major problems in the long term, as we saw in the 1980s and early 1990s. That crisis has taught us how important it is to keep people working.’

Hi-tech economy

Nevertheless, the decisions that have to be made regarding job opportunities are very complicated. Sterken: ‘By making labour cheaper you can keep certain industries alive, for example polluting ones. That’s the short-term temptation. In the longer term it is probably more sensible to drop the older, polluting industries and provide sustainable alternatives.’ Sterken thinks that policy choices should support the transformation of the Netherlands into a hi-tech economy. ‘The Netherlands is developing into a real knowledge economy at a snail’s pace, despite all the government’s fine words. Perhaps the economic crisis will now give us the chance to change to the course we should have been following before the crisis.’

Recovery in 2010

The Dutch government waited too long before taking economic measures, thinks Sterken. ‘Bos was still claiming in January that it would be some time before we would enter recession, whereas we were already in the middle of it.’ In the meantime, there looks like being an economic recovery at the end of 2009 in Southeast Asia, and the house prices in the United States are slowly beginning to recover. If these developments continue, an economic recovery in Europe could start during 2010, in Sterken’s opinion. Laughing: ‘There’s every chance that that’s when the first effects of the Dutch government interventions will become clear. They’ll probably be too little too late.’

Extra supervision

Extra supervision of the financial sector, as agreed at the G20 top in London, will not work wonders, in Sterken’s opinion. ‘It’s easy to say that we need more supervision. However, the effects of that are still unclear, and we shouldn’t forget that it will always be a matter of shutting the stable door after the horse has gone. You can compare it to drugs in sport. No sooner is EPO banned than a new performance-enhancing drug appears on the market.’ Instead of forbidding markets and imposing restrictions, financial institutions should be stimulated to think in the long term, is Sterken’s opinion. ‘And supervisors should just keep doing what they should always have done – assess in an independent, rational way. If the Nederlandsche Bank had been able to do its work properly, Icesave, for example, would never have been admitted to the Dutch market. That would have saved us a lot of problems.’

Curriculum vitae

Elmer Sterken (Apeldoorn, 1961) is professor of monetary economics and Dean of the Faculty of Economics and Business of the University of Groningen. He studied Econometrics in Groningen and gained his PhD in Economics at the University of Groningen in 1990. He went on to become Assistant Professor (UD) and Associate Professor (UHD) of Macroeconomics and in 1994 he became Full Professor. In addition, he has been visiting professor at the universities of Yale, Munich, Kobe and Atlanta. Sterken is also a macroeconomics advisor for the investment bank Theodoor Gilissen N.V. of Amsterdam.