The macroeconomic policy of the Netherlands is ineffective

Het Financieele Dagblad
Erasmus School of Economics

For the first time in history, the interest rates on Dutch government bonds have become negative for all maturities. The blame for these negative interest rates is often put on the European Central Bank (ECB). But according to Bas Jacobs, Sijbren Cnossen Professor of Public Economics at Erasmus School of Economics, it is wrong to blame the ECB. 'Interest rates on government bonds are declining for more than forty years now, and not just since the Great Recession or the introduction of the bonds purchase programmes of the ECB. On the contrary, the effect of these programmes on interest rates is limited and cannot be shown econometrically.'

Interest rates have been declining for many decades already, and this is a result of structural changes such as the ageing of the population, the increasing income- and capital inequality and technological changes. As a consequence, savings increase and the demand for capital, that should be used to finance investments, decreases. As such, the extremely low interest rates are nothing but a signal from the markets that the macroeconomic policy of the Netherlands and Europe as a whole is ineffective. We save too much and invest too little. Nevertheless, the Dutch political summit has decided to use budgetary surpluses to pay off the government debt. While paying off government debt now in fact costs money.

The CPB Netherlands Bureau for Economic Policy Analysis (CPB) is also contributing to the development of wrong fiscal policy by presenting misleading figures when it comes to giving an indication of whether the current level of government provisions will remain affordable in the long term ('houdbaarheidscijfers'). When calculating these figures, the CPB uses a discount rate of 3%, which is too high. This discount rate should be equal to the risk-free interest on government bonds plus a risk premium that is derived from stock returns. As a result of the low interest rates, the discount rate should now be around 1.5% and probably even lower. The figures, however, lose any economic significance when the discount rate falls below the structural growth rate of the economy, which is now 1.5%.

In the Netherlands we should start worrying about whether our economy has become dynamically inefficient. That is often the case when the discount rates becomes lower than the growth rate of the economy. This indicates that we save too much and consume & invest too little. This conclusion is also underlined by the fact that we have such a large surplus on the current account, of almost 10% of GDP, as well as by the fact that wage- and income development has been very low over the past few years.

More information

Read the article (attached) in Het Financieele Dagblad, 17 August 2019 (in Dutch).

Read the comprehensive blogpost of Bas Jacobs on ESB, 16 August 2019 (in Dutch).

Read the article of Het Parool, 23 August 2019 (in Dutch).

Read the article at, 23 August 2019 (in Dutch).

Read the article of de Volkskrant, 23 August 2019 (in Dutch).

Read the article of Algemeen Dagblad, 23 August 2019 (in Dutch).