Stronger Europe more essential than ever, DNB says as trade war intensifies

The need for a stronger Europe is greater than ever due to the threat of a global trade war and unrest in the world, president Klaas Knot of De Nederlandsche Bank (DNB) said during the presentation of the central bank’s annual report on Thursday. Knot also pointed out the advantages of Eurobonds, joint debt insurance to finance European defense efforts, for example. The DNB suffered a loss of over 3 billion euros for the second year in a row due to higher interest rates.

“After the coronavirus and the energy crisis, this is now the third time in a short period that the world has been upside down,” Knot said, referring to rapidly rising global tensions with Donald Trump at the helm of America and arguing that the Netherlands cannot turn the tide on its own. According to him, the most urgent challenges are the looming trade war and the European desire to quickly increase defense spending.

Knot advocated for removing the remaining trade barriers between EU countries “as an economic antidote to global fragmentation.” He also believes that economic benefits can be achieved if national rules and subsidies are brought more into line with each other. In some countries, there has recently been a strong lobby for the relaxation of common capital requirements for banks. According to Knot, this is not a good idea, since he believes these rules actually promote sustainable, long-term growth.

There has been a lot of discussion about Eurobonds recently, mainly in that the Dutch parliament is against using such loans to fund European defense spending. Knot stressed that the choice for this is ultimately a political consideration. But he does think the debate about it has gone too far. When doing more things together at a European level, such as improving defense, then some European financing makes sense.

“Because EU bonds are seen as a safe investment, the interest on European debt issuance would be lower for many member states than the interest on their own government bonds,” he pointed out. The Netherlands already borrows at a low rate, so the Dutch government is against this.

According to Knot, a major risk surrounding the additional defense expenditure is that it could further increase the high public debts. In the short term, according to Knot, it is easy to defend that countries are given a temporary exception to the budget rules for the additional defense expenditure. “This exception should really be temporary,” he stressed. A temporary relaxation would allow countries to see how they can best structurally fit everything into their budgets in the longer term.”

Annual results

DNB has suffered a loss of more than 3 billion euros for the second year in a row as a result of the previously rapid increase in interest rates. As a result, the central bank will once again not pay dividends to the Dutch State. DNB also expects losses in the coming years, although they will likely be smaller. The central bank expects to achieve a positive result again in 2028, a year earlier than predicted last year.

The 3.2 billion loss did not come as a surprise. Although the European Central Bank (ECB) lowered the interest rate in the eurozone several times last year, DNB lost a lot of money to banks that deposited money with the central bank. At the same time, the bonds that had previously been bought en masse at a lower interest rate no longer yielded any returns.

In 2023, DNB suffered a loss of almost 3.5 billion euros. The bank could absorb the largest part of that loss by a previously taken provision for financial risks. As a result, the bottom line was ultimately a minus of over 1.1 billion euros. This time, there was no more money to withdraw from this provision, which means that the loss is now entirely at the expense of capital reserves.

The size of the bank’s buffers shrank from 7.3 billion to 4.2 billion euros last year. However, as it looks now, this is sufficient to absorb losses in the coming years. DNB emphasized in its annual report that it experienced no obstacles in carrying out its core task - ensuring price stability.