Finland and Netherlands display problems at core of eurozone

21/5/2014

By Richard Milne and James Fontanella-Khan

The circle keeps on turning in the eurozone. Just as some previously troubled southern European states, such as Spain, stage a tentative recovery, problems are looming in the core.

In underwhelming first-quarter growth figures for the eurozone, two northern countries stood out for their poor performance.

The Netherlands saw the deepest slump in the EU, with its economy contracting 1.4 per cent in the first three months. Meanwhile, Finland recorded its eighth consecutive quarter without growth. All this comes only months after the Netherlands lost its cherished triple-A credit rating from a leading agency and Finland was threatened with a downgrade.

“Within Europe there is a mini-rotation going on,” says Nick Gartside, a bond fund manager at JPMorgan Asset Management. “A couple of years ago we had the peripheral countries being downgraded. Now they have been upgraded and the core countries have either been downgraded like the Netherlands or, like Finland, are on negative watch.”

Of the two states, the fate of Finland appears worse.

The Nordic country is fighting with deep structural issues unrelated to either the global financial or eurozone crises. Instead, it can almost be summed up by one word: Nokia.

Matti Pohjola, an economics professor at Aalto University, says IT used to account for a tenth of Finland’s GDP whereas it is now 4 per cent amid the fallout from Nokia’s toppling as the world’s leading seller of mobile phones. The depth of the current slump – Finland last recorded strong positive growth in 2011 – brings up unfavourable comparisons with its dramatic financial crisis in the 1990s when the collapse of the Soviet Union, a big trading partner, caused a sharp recession.

“In many ways it is more serious than the crisis we had in the 1990s. We have lost most of the manufacturing that was competitive, especially in electronics. We have also lost the recipe for growth. We knew what we had to do in the 1990s. Now . . .” Prof Pohjola trails off.

Finland’s other main industries, such as metals and pulp and paper, are also struggling. The country’s fragile situation has been worsened by the weakness of the economy in neighbouring Russia, once again a big trading partner and investor in Finland. Alex Stubb, the frontrunner to become prime minister in next month’s elections, says that a fall in GDP of 3 per cent in Russia knocks 0.5 per cent off Finland’s.

Prof Pohjola is optimistic for the long term but the nearer term is a different matter: “The next 5-10 years will be difficult.”

The situation appears less gloomy in the Netherlands. Economists argue that the sharp decline in first-quarter GDP was more of a blip due to a warmer-than-expected winter, which led to a significant drop in gas sales.

Raymond Van der Putten, economist at BNP Paribas, says that – excluding the mining sector – manufacturing production increased 3.7 per cent. In its latest forecasts, the European Commission expects the Netherlands to expand 1.2 per cent in 2014, in line with the rest of the euro area.

“The economy is likely to strengthen in the coming quarters. Confidence is back: for consumers as the housing market is turning around and for manufacturers thanks to the improvement in world trade,” he says.

But the feeling on Dutch streets does not coincide with this rosy outlook. Donatus Uduji, an itinerant hat seller from Utrecht, says that “anybody suggesting the economy is getting better is either a liar or is fixing the numbers”.

S&P’s downgrade of the Netherlands’ triple A rating in November was justified by weakening growth prospects.

After the Dutch housing market bubble burst during the crisis, bringing prices down by as much as 15 per cent since 2008, many households found themselves repaying mortgages higher than their depressed property values.

This helps to explain why a large proportion of Dutch citizens is angry with the EU. For many of them, the idea that their cash was used to rescue countries such as Greece when they were struggling to pay back their own mortgages is unpalatable.

Arno, an antiques salesman at the Free Market in Amsterdam, has tears in his eyes as he pulls out an old 25 guilder banknote from the pre-euro era. He complains that life has become miserable for small businessmen like himself since the Netherlands joined the euro in 2002. His frustration is shared by the millions of people expected to back Geert Wilders, the populist, anti-EU leader of the Freedom Party, which is topping the polls ahead of next week’s European elections.

“The [sovereign debt] crisis just made things worse but it all started with the euro,” Arno says. “Before [2002], this market was full of people, now we are lucky if we sell one piece a day. We are all poorer than before. It’s a disaster. A total disaster.”

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