Dutch give up on EU deficit target for 2013

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By Gilbert Kreijger | February 28, 2013 10:14 PM EST

The Dutch government finally conceded on Thursday it would not meet the budget deficit target set by the European Union this year given the bleak state of the economy and limited scope for even more unpopular cutbacks.

While the Netherlands is far from being in the sort of trouble afflicting Italy or Spain, its failure to deliver on its own budget comes after it has played hardball on the need for crippling austerity in the Europe's struggling southern half.

The failure to meet the target is also a blow for Finance Minister Jeroen Dijsselbloem, who heads the Eurogroup of euro zone ministers, and adds to a growing body of evidence that harsh budget austerity is not resolving Europe's debt problems.

New forecasts from economic agency CPB on Thursday showed the Dutch deficit would hit 3.3 percent of gross domestic product this year and 3.4 percent in 2014, exceeding the EU target of 3 percent, and increasing the risk of a cut in one of the euro zone's few remaining triple-A credit ratings.

"It is probably not possible to get the deficit below 3 percent in 2013," Prime Minister Mark Rutte told Dutch broadcaster RTL7, saying the government would now meet the target a year later.

"This will be necessary for 2014. For 2013 it means limiting the damage, taking measures to help the economy recover, continuing reforms, and making sure government finances are in order in 2014," said Liberal leader Rutte, who was re-elected to power in September.

The Netherlands is considered part of the euro zone 'core': a fiscally conservative, export-driven mini-Germany. Rutte has long maintained that the Netherlands would meet the budget deficit rules this year, and has strongly criticised other countries for failing to meet EU targets in the past.

But he is now faced with an economy in recession, rising unemployment, deteriorating consumer confidence, and a lack of political will to impose yet more spending cuts.

"For 2013 it would be a good step to say: We will give the economy a chance to recover, we will not cut the budget further this year to reach 3 percent at all costs. We'll explain that in Brussels, we'll have to do that," Labour Party leader Diederik Samsom, a partner in the ruling coalition, told RTL7.

"It doesn't make sense to make budget cuts in 2013. We will still be a shrinking economy then. In 2014, the economy will recover, will show growth again," Samsom said.

RATINGS DOWNGRADE?

The three main rating agencies have warned of a potential downgrade of the Netherlands' coveted triple-A sovereign rating, citing the euro zone debt crisis and an economy struggling with its third recession since 2009.

Dijsselbloem, also charged with steering the broader euro zone out of crisis, has already said he is looking at extra austerity measures and is talking to opposition parties for support.

He told reporters that he expected the cabinet to announce measures on Friday to cope with the deficit but it was not clear whether these would be steps for 2013 or 2014. In general economists say he has few options to cut spending or raise extra funds at short notice.

The government is already executing a 16-billion-euro austerity programme over the 2013-2017 period and made reducing the budget deficit and reforming the economy a top priority when it took office in November.

The CPB said the 3 percent target would be exceeded by 2 billion euros this year and 3 billion euros next, hit by a 0.5 percent contraction in the economy this year before growing 1.0 percent in 2014.

"Private consumption will decline sharply in 2013, just as in 2012, by 1.5 percent. Housing investments will fall even stronger: by 7 percent," the government's forecaster said.

The cabinet must submit its annual budget plan to the European Commission in April, something which all euro zone member states are obliged to do.

EU rules allow a country to take more time to reduce its deficit if there are difficult economic circumstances.

EU Economic and Monetary Affairs Commissioner Olli Rehn said last week the Netherlands was taking the right structural steps to improve its government finances and reform its economy.

(Reporting by Gilbert Kreijger; Editing by Patrick Graham)

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