Trading relations between the European Union and the United States are under pressure in a way not felt for many years.
For decades, the U.S. has been the largest source of foreign direct investment into Europe, based on a strong partnership of common values on rules, taxation and fair financial rewards shared across national capitals.
However, that status quo now appears less stable. Not only as a result of increased tensions in trade relations, but perhaps even more importantly, in the arena of foreign direct investment. What is even more surprising is that this instability is originating from one of the most traditionally open and liberal European economies for U.S. business: the Netherlands.
Of all EU countries, the Netherlands has been the top recipient of U.S. investment – 17 percent of all U.S. foreign direct investment as of 2015 – something investors attribute to a solid and steady business climate, excellent transport links, respect for the rule of law, and favorable taxation.
Last week, however, Wouter Paardekooper, the president of the American Chamber of Commerce in the Netherlands, expressed his concerns about Dutch government plans to introduce onerous tax rules exceeding those proposed by the EU. These new rules would represent an unprecedented break with decades of pro-trade, fiscal policies that have attracted billions in foreign investment as well many companies to the country. Other signs of erosion to Dutch attractiveness to foreign investors continue to emerge, particularly through a radical shift in energy policy.
Taking office last October, the new coalition government headed by Mark Rutte of the pro-market People's Party for Freedom and Democracy announced plans to idle all coal-fired power stations, including three only recently constructed, at the request of a previous government. Granted, governments come and go, but one of the basic underpinnings of policy is transparency and consistency. So, while policies may drift over time, the real sting came when Rutte’s government made clear it was not planning to compensate the owners for the billions previously invested in good faith. At least one of the companies impacted, Uniper, now claims the decision is an “infringement of its property rights”, demanding financial compensation for the economic damage as a result of a unilateral U-turn in policymaking.
More recently, growing concerns about damage created by seismic events have led the same Dutch government to call for ceasing production from one of the world’s largest natural gas-producing fields, the fabled Groningen. Since its discovery six decades ago, Europe’s largest onshore gas field has produced over 2 trillion cubic meters (equivalent to over 40 years of the Netherland’s current gas consumption; or 5 years of all the EU’s current gas consumption) of natural gas for customers all over Europe, not to mention more than €250 billion in government and taxpayer revenues.
And there is plenty still left. The company that operates the field in partnership with the Dutch government, NAM, estimates that 550 billion cubic meters of recoverable gas remain, with a value of €50 to €125 billion.
While the current Dutch government may be within its rights to close Groningen, the decision must be balanced, and based on rational policy decisions. Dozens of earthquakes have created significant damage to homes, schools, and landmark historical buildings, so protecting property and safeguarding its citizens is therefore understandable. Yet, given the Netherlands dependence on gas from Groningen to heat homes and power industries, and the wider impact on northern European gas markets that its closure will have, it certainly wasn’t an easy one to make.
While the government is aiming for a mutually satisfactory agreement with NAM, the Dutch must not underestimate how an unsatisfactory outcome could hamper the nation’s ability to attract further investment. At stake are serious questions for the Netherlands about the rule of law and sanctity of contracts.
Undoubtedly, this decision will establish the lens through which investors will consider the Dutch business environment compared to other attractive neighboring economies. In this way, the Groningen and coal plants issues are not really about energy companies such as RWE, Uniper, Engie and others, so much as it’s about the next company to consider investing in the Netherlands.
Economic Affairs and Climate Policy Minister Eric Wiebes clearly already grasps that point: “For our future economic growth and employment it is important that the Dutch business climate remains attractive.” Given that America’s founding fathers sought business arrangements from the Dutch for our own fledgling economy 200 years ago, Minister Wiebes words cannot be understated which is why these cases present such a critical test. The way in which the government acts in dismantling relationships with private investors will send a serious signal to markets about what kind of investment climate the country offers.
Will the Netherlands continue as a beacon nation, seen as a safe and attractive country for foreign capital? Or will the mixed signals the current government is sending to investors risk the very reputation that has helped make it one of the wealthiest countries on the planet?
While only time will tell, one thing is for certain. There will be a lot of companies representing billions of euros in potential investment capital – whether in the financial, energy, or chemical sectors – watching very carefully for the answer.
