Netherlands, the Next Chip to Fall?

Most attention lately has been on Cyprus, Spain, and Italy. Long-time troubles have been brewing in Portugal and I have an update coming up shortly.

First consider Underwater: The Netherlands Falls Prey to Economic Crisis.

The Netherlands, Berlin's most important ally in pushing for greater budgetary discipline in Europe, has fallen into an economic crisis itself. The once exemplary economy is suffering from huge debts and a burst real estate bubble, which has stalled growth and endangered jobs.

"Underwater" is a good description of the crisis in a country where large parts of the territory are below sea level. Ironically, the Netherlands, widely viewed as a model economy, is facing the kind of real estate crisis that has only affected the United States and Spain until now. Banks in the Netherlands have also pumped billions upon billions in loans into the private and commercial real estate market since the 1990s, without ensuring that borrowers had sufficient collateral.

Private homebuyers, for example, could easily find banks to finance more than 100 percent of a property's price. "You could readily obtain a loan for five times your annual salary," says Scheepens, "and all that without a cent of equity." This was only possible because property owners were able to fully deduct mortgage interest from their taxes.

Instead of paying off the loans, borrowers normally put some of the money into an investment fund, month after month, hoping for a profit. The money was to be used eventually to pay off the loan, at least in part. But it quickly became customary to expect the value of a given property to increase substantially. Many Dutch savers expected that the resale of their homes would generate enough money to pay off the loans, along with a healthy profit.

No nation in the euro zone is as deeply in debt as the Netherlands, where banks have a total of about €650 billion in mortgage loans on their books.

Consumer debt amounts to about 250 percent of available income. By comparison, in 2011 even the Spaniards only reached a debt ratio of 125 percent.

The Netherlands is still one of the most competitive countries in the European Union, but now that the real estate bubble has burst, it threatens to take down the entire economy with it. Unemployment is on the rise, consumption is down and growth has come to a standstill. Despite tough austerity measures, this year the government in The Hague will violate the EU deficit criterion, which forbid new borrowing of more than 3 percent of gross domestic product (GDP).

It's a heavy burden, especially for Dutch Finance Minister Jeroen Dijsselbloem, who is also the new head of the Euro Group, and now finds himself in the unexpected role of being both a watchdog for the monetary union and a crisis candidate.

Even €46 billion in austerity measures are apparently not enough to remain within the EU debt limit. Although Dijsselbloem has announced another €4.3 billion in cuts in public service and healthcare, they will only take effect in 2014.