The trouble with Holland and Hollande

I am sure the Dutch Consul General in Turkey is extremely disappointed.

Despite being the top investment destination for Turkish businessmen in the last decade and relations going back centuries, the country is fairly unknown to Turks. For example, I found out only recently that the mother of all asset bubbles, the Dutch tulip mania, actually started with bulbs imported from the Ottoman Empire much earlier than the Ottomans’ own Tulip Era.

But celebrations for 400 years of diplomatic relations between the two countries have raised interest in the Netherlands. Many Turks, including your friendly neighborhood economist, actually learned the name of a Dutch prime minister for the very first time when Mark Rutte made headlines going to work on his bike during President Abdullah Gül’s recent visit to the country. 

Unfortunately, and to the chagrin of Dutch diplomats in Turkey, that PM is gone! Although he will stay in his position until the elections in September, and can win again then, Rutte resigned last Monday after budget talks collapsed. A deal was eventually reached on Thursday, so Holland can meet the European Union deadline today to explain its plans to cut the country’s deficit. 

Just a couple of hundred miles south, Nicholas Sarkozy finally made his mark on French politics by becoming the first incumbent since the start of the Fifth Republic in 1958 to lose the first-round of presidential elections. Socialist François Hollande has revealed his intention to modify the German-driven Fiscal Compact to include more growth, should he win in the runoff on May 6. 

Taking on the cue, European Central Bank President Mario Draghi called for a “growth pact”, whereas the other Super Mario, Italian PM Monti, noted that fiscal restraint is not working. He is probably right. The German obsession with austerity stems from the assumption that the crisis was a result of profligacy. On the other hand, Paul Krugman argues that the real problem was huge private capital flows and the lack of a mechanism for adjustment when the music stopped.   

So you may think it is a good thing that the Europeans are finally getting it right, but that’s not the case at all. A recent World Bank report, which I previously discussed in my column, does a pretty good job in showing how Southern Europe has fallen behind in competitiveness. France itself has some of the tightest labor regulations in the world. Rather than address the structural deficiencies in his country, all Hollande is intending is tax-and-spend.

Besides, even if abandoning mindless, one-size-fits-all fiscal restraint might be sound economics, dumping recent agreements might signal to markets that the Eurozone just does not have the political will to pull through. And that’s why German Chancellor Angela Merkel need not worry too much about Hollande: Bond markets, with their unmatched ability to intimidate, will tame him soon enough. 

More disturbing is why Holland and Hollande are having “fiscal reckonings” in the first place: There are many in France and the Netherlands who are openly against European integration. That is an even greater danger for the Eurozone project than the austerity debate.