Late last month, Standard & Poor's downgraded the Netherlands' credit rating . The news may not have received a lot of attention in the U.S., but it was certainly startling in Europe, especially in neighboring Germany. If the Netherlands, a country that seemed to be doing all the right things post-crisis, and sporting a relatively low debt to GDP ratio, could be downgraded, what does that mean for others? Tilburg University economists Sylvester Eijffinger and Edin Mujagic say that Germany is right to be concerned, and that the rest of the EU needs to be watching the German response closely. From Project Syndicate : The economies of Germany and the Netherlands are closely linked, with the latter highly dependent on its larger neighbor. For decades, Dutch monetary policy was based on matching German interest rates and maintaining a stable exchange rate between the Dutch guilder and the Deutsche Mark. Likewise, both countries emphasize low deficits and public debt, with the Netherlands having long been Germany’s most loyal ally in European fiscal, economic, and monetary matters. Indeed, Germany and the Netherlands were among the main proponents of the European Union’s Stability and Growth Pact. Germany’s public debt is higher than the Netherlands’, especially considering that the Dutch have a natural-gas supply worth well over 20% of GDP and pension-fund savings of some €1 trillion ($1.37 trillion), or roughly 140% of GDP. And, while Germany’s fiscal position is currently much healthier than that of the Netherlands, owing to its exceptional economic performance since the crisis began, faltering output is now threatening to weaken it considerably. S&P cites weakening growth prospects as the reason for its downgrade of the Netherlands. The Dutch economy contracted by 1.2% this year, and is expected to grow by a meager 0.5% next year. But the outlook is not much better for Germany. While the Bundesbank projects a 1.8% annual growth rate for next year, this figure is highly uncertain. And, in the medium term, Germany will face significantly greater challenges from population aging than the Netherlands. Another potentially destabilizing factor is the cost of saving the euro, which could skyrocket if the crisis escalates further. Given that Germany and the Netherlands have provided large guarantees, they risk a substantial increase in public debt. Read Germany's Coming Downgrade here .
Filed under: debt, EU, Standard and Poor's, S&P, Germany, Euro Zone, euro, austerity measures, netherlands, euro area, debt to gdp ratio, downgrade, credit rating, Edin Mujagic, Sylvester Eijffinger