Is a slow formation good for economic growth?

Published on: 25 January 2024

Current issues in related to economy, (responsible) investment, pension and income: every week an APG expert gives a clear answer to the question of the week. This time: chief economist Thijs Knaap on whether a slow formation is good for economic growth. “It's okay to let go of the wheel once in a while, but when a turn comes you want to be able to adjust.”

At the time of this writing, it has been 62 days since the election. That is exactly the number of days it took Prime Minister Lubbers to form his third cabinet. Currently, it does not look like the potential coalition partners in The Hague will be able to reach an agreement quickly and start implementing their policy plans. Is such a slow formation good for the economy?


To answer that question, Knaap refers to the so-called “Eisenhower matrix”, named after the former U.S. president and general. The matrix consists of two axles, one of which stood for the degree to which something was important, and the other for the degree of urgency. According to Eisenhower, the problem lay in the quadrant of things that were important but not urgent. He wanted to pay attention to those, like he did with the construction of the Interstate Highway System. Knaap: “The risk with an outgoing administration is that there is only attention to the urgent matters. Often that is not so bad. The country keeps going anyway, thanks in part to the decentralized governments. There is a good reason that civil servants are known as the fourth power."


Exceptionally long formations

In the case of radical and unexpected events that require new policies, a caretaker government is clearly a disadvantage. One example is Covid. The system of elected politicians who have a mandate to act and can be removed by the House of Representatives is there for a reason, Knaap says. “That mandate is the foundation for new policies, to manage and address both acute and latent problems.”


With two exceptionally long formations, Belgium serves as a good example of what can happen when the government lacks a mandate. “The first formation lasted a whopping 541 days - a world record. That was in 2010-2011, when many countries were implementing severe austerity measures after the financial crisis to put public finances back in order. However, the caretaker government in Brussels refrained from taking drastic measures, an approach that worked out better for the economy than the austerity policy of the Netherlands and others at the time. Belgium’s economic growth for 2011, for example, came out one percentage point higher than the eurozone average.”

Adverse effects
Belgium got hit again in 2019-2020, with a 494-day formation. “Then Covid broke out and there was a need for strong government intervention to support the economy. Something that proved difficult because of the political situation in Belgium. Consequently, in the second quarter of 2020, the country experienced a bigger economic downturn than most other euro countries, including the Netherlands.”


The level of Belgium’s public debt, especially compared to that of the Netherlands, also provides an argument that a slow formation could have adverse consequences. “Before the creation of the euro zone, Belgium had a very high national debt,” Knaap explains. “That was then significantly reduced thanks to intervention by successive Belgian governments. In 2010-2011, however, it rose again, even to more than 100 percent of GDP. Since then, the situation has not really improved. So, it helps if there is a government that can keep a constant eye on that.”


All in all, Knaap still prefers to see a government that can intervene at any time. “It’s okay to let go of the wheel once in a while, but when a turn comes, you want to be able to adjust. The situation in Belgium at the beginning of the Covid crisis shows that. Nor can a country be run effectively without a solid government for four years.” The Netherlands also has a history of long formations, Knaap points out. “We are not necessarily worse off for that, but luck also plays a role in that. And you can’t count on that too much. On top of that, politicians should not only focus on the issues of the day - the urgent issues in the Eisenhower matrix - but also on issues that may not seem important now, but will be in the long run. And that requires politicians with a mandate.”