What links the fiscally prudent Netherlands to the indebted Eurozone periphery? Recession. While Germany and France are leading the way back to growth the Dutch are struggling and admit recession is likely to the rest of the year. Berenberg Bank's Christian Schulz says households have too much debt - but the Netherlands can find a way out of the situation.
1. SOUNDBITE (|English) BERENBERG BANKS' SENIOR ECONOMIST, CHRISTIAN SCHULZ, SAYING:
JOURNALIST ASKING CHRISTAIN SCHULZ: 'It looks like it's getting worse to start with, doesn't it? They've just revised the yearly growth down.'
CHRISTIAN SCHULZ: 'Well the Netherlands economy is still contracting which at first sight looks like a surprise because the Netherlands is always considered to be part of the core of the Eurozone and its neighbour Germany just reported quite significant growth of 0.7% quarter-on-quarter. So something is indeed going wrong in the Netherlands. In many ways the Netherlands remind me of Ireland a couple of years ago. It's an economy which is small and open which had a bit of a housing bubble, less bad than in Ireland but significant still. Households have too much debt. They have to deliver. So there's a lot of pressure on domestic demand but like Ireland they should actually find it easy to get out of this.'
JOURNALIST: 'Alright. Well we'll come to that in a second but to you housing bubble point, this is a statistic I just read. A quarter of Dutch households in negative equity. I mean that seems astonishing to me, that number. How can they get that down? How can they get that number down?'
SCHULZ: 'Well by saving, I guess. They have to put aside a larger part of their income to repay debt. Dutch households are among or maybe even the highest indebted in the Eurozone. So it's all about saving at the moment which means less consumption, which means less domestic demand which is the major reason why the Netherlands are currently in recession.'
JOURNALIST: 'Okay. Back to this comparison with Ireland. Your point is the domestic adjustment that needs to happen in the Netherlands can be done in a less painful way that it can in Ireland, is that right, or can in the periphery?'
SCHULZ: 'Indeed. Ireland has found it much easier than countries like Portugal or Greece to get through the adjustment of the Euro crisis. Why, because more than 100% of its GDP is in exports and of course huge imports offsetting that mostly. But external demand plays a much bigger role for these small open economies like Ireland, like the Netherlands. Then for countries such as Greece or Portugal which are only exporting maybe 30% of their GDP. So countries like Ireland or the Netherlands can offset a harsh domestic adjustment by growing external demand. Now in the case of Ireland, most of that demand came from the US or the UK. In the case of the Netherlands, most of it is coming from Germany. '
Okay, but 100% of GDP or whatever the exports, why is this not sorting them out sooner?
Well, because in the case of Ireland, the US is and always has been a growing economy, has growing demand from the US whereas the Netherlands is much more dependent on the Eurozone and in particular Germany which has struggled over the last years. German growth that we're seeing in Q2 is extremely recent. So we have to see whether the Netherlands won't benefit from that a little bit further on. But also Ireland has been tackling its problems. It was forced to by financial markets and by the troika. The Netherlands has delayed the problem, it has postponed the solutions and is therefore still struggling.
Yeah. And do you expect that to change? I mean there's potential of political gridlock as well in the Netherlands. The anti-austerity, anti-Euro sentiment also seems to be on the rise. This is something we've talked, you and I have talked about at length before. How bad could that get in Holland?
Well the problems that the Netherlands is facing has nothing to do with the Eurozone. It's domestic-made, homemade problems, it's housing bubble that they have to deal with, it's the lack of austerity, not too much austerity, but the lack of austerity that's facing the country. We've seen it all before in all the peripheral countries. Once the government does get serious, there is of course a resistance in the public, there will be protests. But once these things start showing positive effects as they are in much of the periphery now, these protests tend to fade. So it's about taking hard decisions which is much more difficult in the Netherlands because there's no outside pressure than it was in the periphery where that outside pressure came both from the markets and from the troika.
Alright. Christian, many thanks for that. Christian Schulz from Berenberg. Our Chart Point today is Zurich Insurance, one of Europe's biggest fallers. Net profit down nearly 30% in Q2, missing expectations weighed down by more natural catastrophes such as floods in Europe and tornados in the US. That is it for now. Do join us again at 1200 BST every weekday. We'll take the pulse of the market. I'm Axel Threlfall. This is Reuters.