A look at economic history shows that change occurs quickly. Economies move from boom to bust, from prosperity to economic ruin. Some see this economic roller-coaster of dramatic drops and slower climbs to the top as the natural outcome of cycles, while smart people and businesses identify the trends and take advantages of the opportunities.
Boom/bust cycles go back hundreds of years. During Gov. Gary Herbert’s recent trade mission to Western Europe, a stop in the Netherlands reminded us of one of history’s most famous cases of economic bubbles — the “tulip bubble” of the 1630s.
The Netherlands, which became an independent kingdom in 1648, is the world’s 17th largest economy, and the fifth largest in the European Union. It is the third largest investor in the United States, and the second largest exporter of agriculture and food products, behind the United States.
Its economy is highly dependent on international trade and finance. Some of its characteristics sound like Utah: a young, highly educated, multilingual workforce, and a relatively low tax structure. Netherlands citizens value individual freedom and tolerance. It is a country with easy access to the major cities of Europe, in addition to the Middle East and Africa. Within 300 miles of Amsterdam there are 180 million consumers. Immigration and health care are two big issues it faces.
But the Netherlands has not been immune to boom/bust cycles, the most famous of which was the tulip bubble that burst in 1637. Many articles and books have been written about “tulip mania,” where the price of tulip bulbs reached astronomically high levels. In fact, one bulb — the Semper Augusts — sold for about 3,000 guilders in 1624, about double what Rembrandt received for his painting, "The Night Watch," which now hangs in the Rijksmuseum in Amsterdam.
During the tulip bubble, fortunes were made and lost as individual bulbs traded as many as 10 times a day. Author Cynthia Wood writes that at the height of the tulip bubble in 1636, "a good trader could earn up to 60,000 florins in a month —approximately $61,710 adjusted to the current U.S. dollar rate." The crash came in 1637 when at a major tulip auction, buyers failed to show up and the market collapsed.
Today, no major economic bubble appears to threaten the economies of the Netherlands or the European Union (EU), but economic clouds are on the horizon. The lead article of the summer issue of The Brussels Times Magazine is titled, "A Make or Break Decade for Europe?" It discusses the problems EU countries face as they climb out of the last eight years of recession.
The article points out that in 2007, the EU "accounted for 31 percent of the world economy, measured at market prices. This year (2015) it will account for only 22 percent, according to the International Monetary Fund (IMF). Eight years ago, the EU's economy was a fifth bigger than the U.S. economy; this year it will be smaller."
The declining value of the Euro, along with the European Central Bank's quantitative easing just as the U.S. Federal Reserve is ending its monetary expansion program, could create additional bubbles in the various economies of the EU as liquidity increases faster than opportunities. In fact, members of the EU that the governor's trade mission met with said they have asked the Federal Reserve to hold off on increasing interest rates in the United States (even a gradual increase), for fear that a rate hike in the U.S. would pull money from Europe to the U.S. because of potential higher returns on investments.
Robert Spendlove, Zions Bank’s senior economist, sees the declining value of the euro compared to the dollar as a mixed bag for Americans. The euro has traded above the U.S. dollar since the end of 2002, reaching a peak of just over U.S. $1.60 in July 2008. However, in response to a troubled European economy, the euro has seen a steep decline in value compared to the dollar over the past year, steadily approaching parity and bottoming out at $1.046 in March 2015.
Spendlove explains that while a low euro makes tourism in Europe cheap, it hurts U.S. and Utah's exports, and also U.S. and Utah companies with operating divisions in Europe that must consolidate their earnings in Europe into their U.S. dollar balance sheets.
Even with these challenges, Utah’s foreign trade prospects with Europe seem bright. Good transportation connections are crucial in trade, and Delta's direct flight from Salt Lake City to Amsterdam is a very big asset for Utah. It should increase tourism and business travel and deals with Utah companies.
Also, the Trans-Atlantic trade and investment negotiations that Sen. Orrin Hatch is working on are critical to ensure trade between Utah and Western Europe continues to grow. These negotiations with the U.S. are a top priority for policymakers both in the Netherlands and in the EU. Hatch’s efforts to win approval for Trade Promotion Authority received high marks from the EU ministers and vice presidents we met with.
A. Scott Anderson is CEO and president of Zions Bank.