Top economist warns against more cuts

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European countries should not introduce extra cuts but rather reforms, says the director of the Bureau for Economic Policy Analysis (CPB) Coen Teulings. His comments come in an article co-authored for the Financial Times with Jean Pisani-Ferry, director of the Brussels-based Bruegal think-tank.

University of Tilburg economist Lans Bovenberg agrees with them:

“…it’s not sensible to demand that all European countries get to below the three-percent line next year. I think that would be bad for Europe’s economy.”

European rules
The European Commission has to make sure the budget deficits of member states do not exceed three percent of GDP - a difficult job in these financially challenging times. The CPB boss thinks countries not in “danger of being denied access to the international capital market” shouldn’t be introducing extra cuts.

The Netherlands falls into this category. Teulings and Pisani-Ferry write that structural reforms will be better for the economy in the longer term. Countries in worse financial shape, such as Spain, should take care not to damage their economies too much by imposing swingeing cuts.

The article comes just a few days before the CPB is due to publish its figures on the Dutch economy. These are expected to herald a new round of government cutbacks.

Bovenberg also reckons the Netherlands can put up with a higher budget deficit in the short term – as long as structural reforms are introduced.

“For instance, speeding up the increase in the age when people can receive state pensions, reducing job security and the period for which unemployment benefit is paid, reforming the housing market, a thorny issue bearing in mind the [generous] mortgage interest tax breaks, and reducing healthcare - these sorts of measures. They would mean the budget deficit would in the short term be a bit too high. The financial markets, though, would remain confident that the books would be balanced again in the long term.”

Wouter Koolmees, the democrat party D66’s financial spokesperson, however, stresses the importance of the Netherlands keeping to European agreements.

“That means you’ve got to start introducing the measures next year. You can’t keep putting off decisions. It’ll be good for the economy and for government expenditure if you start easing the pensionable age upwards next year. And you’ll be keeping to European agreements into the bargain.”

The spectre of a rise in the pensionable age was the cause of heated national debate a couple of years ago. A compromise was finally agreed on: that it would gradually start to be raised from 2020. Is it realistic to talk about opening up the debate again?

“If you look at the 2010 manifestos of the VVD conservatives and the Christian Democrats [the two parties in the minority coalition government], they both planned to raise the pensionable age during this government term. They have dropped the message because of pressure from Geert Wilders’ [populist] Freedom Party [which has agreed to support the minority cabinet from parliament on most issues]. The situation is now so serious that the issue has to be up for discussion again.”

Bovenberg says Germany is a good example of the positive effect of structural reforms: 
“A number of years ago, Germany implemented a few important reforms, especially around the labour market. It’s clear that it’s now reaping the rewards.”

The German budget deficit is not expected to exceed the European Commission’s three-percent limit.