Analysis

Dutch Gov't Under Pressure To Accept Plan For Coronabonds

By Matt Thompson
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Law360 (March 31, 2020, 5:07 PM EDT) -- The Dutch government is coming under increasing pressure to stop opposing a plan by nine European Union countries to issue new risk-sharing Eurobonds, their proposed solution to filling holes in national budgets opened by the spreading coronavirus and withering revenue.

Leaders in Belgium, France, Italy, Luxembourg, Spain, Portugal, Greece, Slovenia and Ireland have signed a letter proposing the plan for so-called coronabonds, which would mutualize debt issued by countries sharing the euro currency. The emergency measure would allow countries in the south to borrow at lower rates by combining their debt with the higher-rated northern European countries — a type of solution the Netherlands has traditionally opposed.

Dutch Finance Minister Wopke Hoekstra recently warned his parliament that common debt issuance could undermine the incentives for prudent national fiscal policy, echoing earlier opposition to north-south fiscal aid packages after the 2008 financial crisis. But the center-right government is facing growing opposition at home as Italy and Spain, so far the hardest hit by the pandemic, fall deeper into debt as tax receipts from a collapsing economy dwindle.

Klaas Knot, president of the Dutch central bank, told the newspaper NRC Handelsblad in an interview published Friday the combined bond program was a logical response to a rising fiscal emergency.

"Coronabonds are one way," he said.

Knot was backed up by his predecessor, Nout Wellink, who said Monday that fiscal response to the crisis is a shared European responsibility, and also in the Netherlands' best interest.

"We will no longer be a rich country in the north if the south falls," Wellink said.

The Dutch government's opposition to the plan comes down to politics, according to Erik Jones, professor of European studies at Johns Hopkins University. There is a perception among the electorate in the Netherlands that the Dutch are expected to pick up the bill for the irresponsible economic decisions of the European south, Jones said.

"This is one of those situations where there needs to be a bit more understanding on all sides, an understanding of the delicate Dutch political situation," Jones said.

Dutch legislation for years has drawn criticism from EU policymakers for a lenient tax code that attracts companies from across the eurozone. Analysts say the country's status as a haven for corporate tax avoidance undermines its arguments against a plan that would represent an act of fiscal solidarity with the rest of the eurozone.

"For them to talk about fiscal discipline is undiplomatic," Chiara Putaturo, an EU tax policy adviser at global development charity Oxfam, told Law360.

The head of the think tank Tax Watch UK agreed. "Countries that have spent a long time pursuing policies that have restricted the ability of others to collect taxes shouldn't give lectures about fiscal responsibility," George Turner told Law360.

Ultimately, experts say, the rising fiscal emergency caused by the fast-spreading pandemic is likely to see the program go ahead amid forecasts that locked-down eurozone economies could shrink by 25% or more this year.

Pressure from other EU countries on The Hague to agree to the plan is likely to mount, said Jacob Funk Kirkegaard, senior fellow at the Peterson Institute for International Economics.

There is "no doubt" that some countries are looking at the Netherlands as attempting to portray itself as virtuous while having a corporate tax system that is "essentially tax evasion," putting the country in a precarious political situation, Kirkegaard said.

"I think this will happen. The question is whether it will be big enough," Kirkegaard said.

Paul Tang, of the Dutch Labour party and a member of the European Parliament, called his government's position "embarrassing." Steps must be taken to absorb massive hits to government as production drops and unemployment rises into double digits, he said.

"To solve this we need to have international initiatives to come to a fair tax system — one that can't be abused," Tang said. "This is a defining moment for Europe. We need to step up to the plate."

--Additional reporting by Todd Buell. Editing by Tim Ruel and Neil Cohen.

For a reprint of this article, please contact reprints@law360.com.

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