Whenever the Dutch economy turns sour some politicians and economists start clamoring for a return to the guilder. Geert Wilders’ right-wing PVV party is the biggest Dutch political party taking this position since the announcement of the EU crisis packages.
It is hard to judge whether it makes sense to replace the euro for the guilder. The euro era is incomparable to the guilder era. Economic integration in the eurozone has moved forward and other economic aspects have changed as well. What we can do is to try answering the following two questions. First, has it happened before that countries stepped out of a currency union? How did these countries fare afterwards? Second, what would have happened if the Netherlands would have kept the guilder?
Since 1945 a number of African countries share a common currency, the CFA Franc. In 1973 two countries – Madagascar and Mauritania – stepped out of the union. The figure below shows their per capita GDP (in $) for the period 1960-2008. Since 1973 the economy in these countries mostly moved downhill.
Does this also hold for the remaining countries? Benin, Burkina Faso, Ivory Coast, Niger, Senegal, Togo, Cameroon, Central African Republic, Chad, Congo and Gabon have been members from the start. Economic growth in these 11 countries averaged 1.3% for the period till 1972, and 0.1% afterwards (1973-2008). For Madagascar the corresponding numbers are 0.1% and –1.2% and for Mauritania 4.1% and 0.1%. Although on average growth declined from more than 1% to 0%, growth turned negative in Madagascar and decreased much more strongly in Mauritania.
The CFA experience does not present a particularly rosy picture. Of course, the Netherlands cannot be compared to Madagascar and Mauritania and right-wing PVV will prefer to take example by Switzerland. But this is as speculative, as we will see below.
Now let us approach this issue from another angle. Suppose that the Netherlands would have kept the guilder. What could have happened? We briefly outline two scenarios, that is, a fixed Danish and a floating Swiss one. Denmark opted out of the euro and has kept its exchange rate pegged to the euro ever since. To maintain the peg, Danish interest rates on average have been 10 to 20 basis points higher than Dutch rates. This is partly the result of liquidity premiums (who wants to invest in the small kroner market?) and partly due to risk premiums (the krone-euro peg could be changed in the future). Applied to the Dutch public debt and the sizable Dutch mortgage debt, such interest spreads would imply hundreds of millions of euros in higher annual interest rate burdens. Pig-headedness comes at a price. So, we suggest to keep the euro.
On the surface, the Swiss scenario sounds more attractive. Switzerland has a strong currency, low interest rates, a high value-added and competitive export industry and a strong financial sector. But alas, the reintroduction of the guilder will not turn Holland overnight into Switzerland on the North Sea. Since the 1982 Wassenaar agreement between employers, labor unions and government, the twin pillars of Dutch economic policy are wage restraint and fixed exchange rates. In this way, Dutch exporters try to be just a little bit cheaper than their fellow Europeans. For the Swiss, this is not an option. No amount of wage restraint can cope with the huge currency fluctuations of the Swiss franc (see the graph). Swiss industry therefore has to compete on quality, not cheapness. And the Swiss mountains and bank secrecy are two competitive advantages which the Dutch will never be able to replicate.
Part of the franc volatility results from a safe haven effect. Between 2004 and 2007, when everything went along fine in the eurozone, the markets could do without the Swiss safe haven and the france weakened by about 10%. The credit crisis turned the tide and has resulted in a franc appreciation of about 15%. Periodic nervousness in the international financial markets therefore exposes the Swiss industry to strong exchange rate volatility, from which eurozone members are better shielded. In short, the Swiss scenario puts Dutch trade and industry at risk.
We close with a rhetorical question. With a separate guilder, how would the FX markets have reacted to the political murders of Pim Fortuyn and Theo van Gogh, the political instability since and the uncovering of the weaknesses in the Dutch financial system? The guilder will not turn Holland into Switzerland. Cinderella is a fairy tale.
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One Response to “A Return to the Guilder?”
The success of the euro is now turning out to be a fairy tale. No “happily ever after” for the eurozone I am afraid.