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The Netherlands should have the option to leave the euro, but remain in the European Union. This is what former central banker and professor Lex Hoogduin and assistant professor of International and Monetary Economics Christiaan van der Kwaak are arguing for. They Figures that in a European transfer union and fiscal union, the Netherlands will have to transfer €21 billion annually to other, predominantly southern, euro countries. Moreover, by loosening fiscal discipline, the euro will become a weaker currency with high inflation, which will cause Dutch pensions to evaporate. What can we do about this?
Hoogduin and van der Kwaak are very concerned about the path that the currency union has taken. It started with the non-enforcement of the fiscal rules and is now going one step further with the creation of an €800 billion corona recovery fund. European countries borrow this amount jointly, but a disproportionate part of the money is destined for Italy. This is a major step towards a transfer union and a fiscal union, in which northern countries contribute to the debts of southern countries. The Netherlands and Germany pay a higher interest rate on these joint bonds than if they were to borrow money themselves.
If this trend continues, it cannot be ruled out that at some point there will also be a eurozone budget with a European finance minister and a European fiscal policy. Hoogduin and van der Kwaak calculated on the basis of the situation in the United States (which is a federal fiscal union) that it is likely that the Netherlands will transfer €21 billion annually to other euro countries. Over a period of forty years, this would involve a total transfer of between €645 billion and €1,075 billion, converted to the net present value of these cash flows. On top of that, there will be an amount of around €10 billion per year if euro countries decide to pool all their sovereign debt.
Also Read: Lex Hoogduin: 'Governments and central banks are making the wrong diagnosis'
An additional problem for the Netherlands is that the assets in our pension funds will melt away in this scenario, because the southern countries of the currency union will enforce an accommodative monetary and fiscal policy. This will lead to high inflation and a weak euro, from which the Netherlands will suffer the most as the only country in the currency union with a capitalised pension system. For other countries, this is less of a problem.
Hoogduin refers to the statements of former VVD leader Frits Bolkestein, who warned before the turn of the century that our pension system within the eurozone would eventually become unsustainable. This is hardly discussed in politics, even though it has much more impact on the future of our pensions than the current discussion about reforming our pension system.
Also Read: Lex Hoogduin: "Our money system needs an anchor"
The former central banker concludes that although a European fiscal union can reduce the financial vulnerability of individual member states, the situation for the Netherlands will deteriorate. We will have to pay more money to the countries of the South, pay more interest on the national debt, possibly become partly responsible for the debts of other countries with weaker budgetary discipline and collect on pension assets that we have built up over the past decades.
That is why the Netherlands should have the opportunity to leave the currency union without having to leave the European Union immediately. Countries such as Sweden and Denmark already have such an exceptional position and can easily function within the European Union with their own currency. Hoogduin and van der Kwaak conclude that the Netherlands must weigh the costs of joining a 'Latin' currency union against the costs of leaving it. "Within Dutch politics, the discussion about this must start quickly.", says Hoogduin.
Tip: Syp Wynia recently spoke with Lex Hoogduin about the future of the currency union and why he believes the Netherlands should have the opportunity to leave the euro. Below you can see the video of this conversation.
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On behalf of Holland Gold, Paul Buitink and Joris Beemsterboer interview various economists and experts in the field of macroeconomics. The aim of the podcast is to provide the viewer with a better picture and guidance in an increasingly rapidly changing macroeconomic and monetary landscape. Click here to subscribe.
