After the longest coalition negotiations in Dutch parliamentary history, a new government was finally sworn in on January 10, 2022. As Mark Rutte returns to lead his record fourth government, one of the most significant changes has been the appointment of Sigrid Kaag as finance minister. Kaag is the leader of the liberal-democratic and pro-European D66 party and one of the winners of last year’s elections. Now the big question is whether his pro-EU credentials will also translate into a different approach to the Eurozone?
In recent years, the Netherlands has become the unofficial leader of a group of “frugal” EU member states. The government’s tough negotiating stance on the EU’s multi-annual budget, a lukewarm attitude towards the 2020 EU Recovery Fund – which was set up to kick-start economic recovery from the Covid-19 pandemic – and a principled position on the Stability and Growth Pact have given the Netherlands the reputation of a tax hawk. Prime Minister Mark Rutte picked up a biography of Frederic Chopin to read at an EU budget summit. Earlier, he even joked that he carried a “loaded gun” during such budget discussions.
This approach to euro area issues is reflected in Dutch domestic policy. There is widespread opposition to any move towards an ‘transfer union’, the Dutch parliament has a large cohort of Eurosceptics, and in 2019 a parliamentary majority called on the government to remove references to an ‘ever closer union’. of the EU Treaties.
At the same time, the Netherlands is a founding member of the European communities and, unlike the – say – Danes, the Dutch have adopted the euro as their currency and do not benefit from any opt-out policy. It is the fifth largest economy in the EU with a major stake in the functioning of the internal market.
Who is Sigrid Kaag?
Dutch financial policy will now be defined by a committed pro-European. And from Paris to Athens, it is expected to turn the Dutch tax hawk into a dove.
One thing is certain, there will be a change in tone. As the leader of the Liberal Democrats, Kaag became the embodiment of her party’s pro-European DNA and she openly campaigned for a more constructive – some would say federalist – approach to Europe. The new coalition agreement bears his fingerprints. He says the Netherlands wants to play “a leading role” in Europe. The Dutch Ministry of Finance plays an oversized role in shaping the Dutch approach to the EU. This puts her at ground zero to bring about this change.
A change of tone from the Dutch is welcome, but The Hague won’t easily shed its hawk feathers.
On fiscal and monetary issues, the goalposts have also moved. The Dutch objective is no longer to reduce public debt and control spending. The new government’s domestic investment plans – particularly in the areas of climate transition, digitalisation, housing, education and defense – are substantial. It marks a fundamental change from the austerity policy of the mid-2010s. The Dutch budget deficit could even cause Dutch public debt to exceed 60% of GDP in the coming years. You might as well be “frugal”.
The opportunities and limits of EU budget reform
In other good news for Southern Europe, the new coalition agreement has opened the door to the reform of the Stability and Growth Pact. Many southern member states argue that the eurozone needs more flexible spending rules to loosen the fiscal stumbling block around their necks. The Dutch government recognizes that modernization is necessary and aims to promote “upward convergence and sustainable debt levels”. The French presidency of the EU in the first half of 2022 has put this issue on the agenda. Apparently there is room for negotiation.
But despite this initial enthusiasm in the capitals of southern Europe, less change than expected. A change of tone from the Dutch is welcome, but The Hague won’t easily shed its hawk feathers. Low interest rates and a healthy balance sheet mean the Netherlands has plenty of fiscal space for its new spending plans. The Covid-19 pandemic also requires stimulus spending. This favorable tax environment will allow Kaag to show more flexibility during Eurogroup meetings. But it’s temporary, not structural. In other words, if ever there was a time to show greater understanding of southern European concerns, it would be now.
Although Dutch deficits will increase, they will be nowhere near the debt-to-GDP ratios of France, Spain, Italy or even Germany. Moreover, in exchange for their support for the reform of the Stability and Growth Pact, the Dutch will insist on other changes. Expect more enforcement and monitoring conditionalities as Dutch flexibility pricing.
The realignment of the Netherlands with Germany
Rather than moving closer to southern Europe, the new Dutch government is seeking to realign itself with Germany. The Netherlands and Germany have always been close on eurozone issues. Successive Dutch finance ministers have had a very good working relationship with Wolfgang Schäuble. But when Germany’s new government took office in 2018, The Hague mistakenly assumed it would be “business as usual”. The Franco-German Meseberg declaration in 2018, which announced the development of a common eurozone budget, took the Netherlands by surprise. Even though Meseberg’s proposals were eventually watered down, they signaled a certain separation on eurozone issues between Berlin and The Hague.
In 2020, this divergence gave way to disagreement. Olaf Scholz, then finance minister, openly criticized his Dutch colleague Wopke Hoekstra after the latter called on the European Commission to investigate why southern European countries were ill-prepared to deal with the exogenous shock of the Covid-19 pandemic.
A first test will be the question of applying to the European Commission for Covid-19 recovery funds.
The Netherlands traditionally views the EU less as a political project than as a market. Economic and financial issues are considered in isolation and less in relation to broader political considerations. While Germany shares Dutch concerns about unsustainable debt levels in the South and resists moving towards fiscal union, Berlin also feels a historic responsibility to keep the EU together. Recently, this has meant that Dutch and German eurozone policy has become out of sync. Kaag will now oversee a political correction that is overdue.
A first test for Sigrid Kaag
The Dutch coalition agreement echoes that of Germany. The Netherlands now recognizes that the European Union is also a community of values. The words he uses to describe Dutch support for the modernization of the Stability and Growth Pact echo the relevant paragraphs of the German coalition agreement. Its massive spending program for the climate transition is in line with the ambitions of the German government. Furthermore, the Dutch government will strongly support Berlin’s assumption that the EU recovery fund is temporary and limited. Kaag will quickly agree with her German counterpart that there is no blank check on eurozone reform, even if she adopts the language of flexibility.
Of all the relationships that Minister Kaag will develop, the most interesting is perhaps the one that links her to Minister Christian Lindner. Although Lindner and Kaag come from the same European political family, they come from different wings and play different roles in their respective cabinets. While Lindner is a fiscal hardliner, his Social Democrat and Green coalition partners will push him to show more flexibility within the EU. By contrast, Kaag is the longest-serving champion of European solidarity at a Dutch cabinet that retains many of his frugal instincts. How Kaag and Lindner work together can go a long way in shaping the debate over the future of the eurozone.
A first test will be the question of applying to the European Commission for Covid-19 recovery funds. The Netherlands is the latest EU member state to submit its proposals, which could amount to 6 billion euros. But the funds come with strings attached. To receive them, the Netherlands will have to accept reforms to its labor market and mortgage system.
If Kaag decides not to seek the funds, other capitals will point to the familiar sight of a Dutch finance minister rejecting EU solidarity. They will say that the Dutch do not want to take the same medicine that they willingly prescribe to others. “A leading role” in the EU, that would not be the case. If Kaag asks for the funds, she faces criticism at home for pandering to EU demands and giving ‘Brussels’ greater influence over Dutch finances. She should be glad that even Germany has asked for similar funds, and do so too. The proposal is due before the summer. Only then will we truly know if a hawk can change feathers.