With borrowing costs and odds of defaults spiking across Europe, a wave of fiscal conservatism has swept across the continent, bringing about drastic changes to countries accustomed to generous social services and seemingly endless government pockets. In recent days even Germany, which boasts a relatively robust fiscal health, has rolled out deep austerity measures designed to counter swelling budget deficits. The Netherlands, home to the “Dutch model” welfare economy, is next up, as general elections scheduled for Wednesday are poised to bring on economic reforms and steep budget cuts.
The Netherlands has historically maintained a reputation for fiscal responsibility, but changing demographics and economic environments have prompted pressure on the status quo. As the Dutch population ages, the cash required to provide all citizens over 65 with a pension that guarantees 70% of minimum wage has surged. The price tag for current jobless benefits, which include 70% of salaries for up to 36 months, have skyrocketed.
“The Netherlands has been envied as offering a balance between enterprise and a comfortable welfare state, whose largesse ranged from free child care to generous health care and jobless benefits,” writes Anna Marij Van der Meulen. “But government spending is estimated to rise to 51% of Dutch GDP this year, from 45 % of GDP ten years ago, and tax rates on higher incomes have been ratcheted up to 52%.
The issue of immigration, which has historically dominated debates and campaigns, has taken a back seat this time around to economic reform. The People’s Party for Freedom and Democracy, also known as the Liberal Party, seem poised to gain influence. The Liberal Party has proposed the most aggressive budget cuts, aiming to trim the deficit by €20 billion by 2015. Less ambitious plans, including those put forth by the Socialists, call for cuts of roughly half that amount.
Although voters seem certain to shift power towards more fiscally conservative politicians this week, the ultimate impact on the Dutch economy is uncertain. No party is expected to claim more than 25% of the parliamentary seats, leaving reform efforts subject to the vagaries of political alliances.
Netherlands ETF In Focus
As election results are released, the iShares MSCI Netherlands Index Fund (EWN) figures to be in focus. EWN tracks the MSCI Netherlands Index, a benchmark made up of the largest and most liquid Dutch companies. Compared to most international ETFs, EWN is relatively balanced across different sectors of the economy; consumer goods make up about 24% of holdings, with financials (18%) and hardware (16%) also receiving significant weightings. EWN is fairly concentrated in its top ten holdings, which make up almost 75% of assets. Unilever, at 17%, accounts for a big chunk of that, as does Philips Electronics (11%) and ING Groep (11%). Also see Three Tech-Heavy International ETFs.
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Disclosure: No positions at time of writing.