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The level of private debt in the Netherlands is exceptional in both historical and comparative terms. High debt ratios inhibit economic growth, induce financial fragility and lead to deeper and more tenacious recessions. Facilitated by fiat money creation, private debt in the modern economy mainly consists of bank credit. Internationally shared causes of the rise in bank money are the decline in cash payments, tax deductions and a narrowed focus in monetary policy. In the Dutch case, liberalized mortgages, the side effects of the funded pension system and the strong concentration of the banking system add to these. It is the confluence of these factors that has made Dutch debt growth since the 1970s exceptional. Some of these, notably the deduction of interest on mortgages and financial deregulation, have dominated the debate on this subject and hence are part of public perception. However, this does not apply to other mechanisms mentioned, such as the role of bank money and that of bank concentration. As a result, policy analysis of the debt problem thus far has been selective. The lessons of Dutch financial development are of importance to the realization of the European banking union and to monetary policy and taxation in the euro area. Our analysis demonstrates the usefulness of applied history.

The creeping stock market collapse eroded the wealth of funded pension systems. This led to political tensions between generations due to the fuzzy definition of property rights on the pension funds wealth. We argue that this problem can best be resolved by the introduction of generational accounts. Using modern portfolio and consumption planning theory we show that the younger generations should have the higher equity exposure due to their human capital. Capital losses should be distributed smoothly over lifetime consumption. When stock markets are depressed equity should be bought, savings and consumption should be scaled down equiproportionally, and retirement should be postponed. Portfolio investment restrictions are quite costly.

The stock market collapse led to political tensions between generations due to the fuzzy definition of the property rights over the pension funds' wealth. The problem is best resolved by the introduction of generational accounts. Modern consumption and portfolio theory shows that the younger generations should have the higher equity exposure due to their human capital. Stock market losses should be distributed smoothly over lifetime consumption by adjusting both current contributions and future entitlements. We present expressions for the substantial welfare losses involved in various practically relevant deviations from the optimal system.

There is a widely held view that existing differences in the capital and moneymarket structures across EMU countries are an important matter of concern forthe ECB, because they might hinder the uniform transmission of monetary policyactions. We argue that many aspects of financial structure are endogenous to themonetary policy regime in place. It is shown that capital market structures areheavily correlated with past inflation and inflation uncertainty.Since the EURO regime imposes a unified monetary policy, we suspect that thedifferences will wither. A single currency, a single money market rate and a uniformreserve requirement will rapidly harmonize the money markets. In sum, wepredict that differential responses in the transmission of monetary policy actionsthrough the money and capital markets are of minor concern for theECB.

European-wide monetary aggregates constructed from pre-unification data cannot be used as evidence that money demand in the Euro area is stable. To overcome the Lucas critique, we apply the standard foreign exchange rate model. Since the uncoordinated country-specific money supply system is abolished, the increased comovement between local monetary aggregates leaves little room for a free ride on the law of large numbers. Current monetary policy decisions must be based on untested relations, & given "the long & variable lags." We conclude that the road toward monetary stability is a nonactivist steady money supply policy. 4 Tables, 1 Figure, 36 References. Adapted from the source document.