Question

Groningen Valley Bank (GVB) invests in hydrogen production in Eemshaven. To finance this, it finds a Dutch investor in December 2022. This is Mr Heiko Sprik, a wealthy individual residing in Veendam who buys 100 mln of unlisted shares. Mr Sprik borrows 20 mln of this from ING bank. The GVB is successful and in January 2023 the Australian Retirement Trust (ART) borrows Dollars in New York to buy more unlisted GVB shares, at a higher price than Mr Sprik bought them in December. The bank of ART converts its member’s pension payment into US Dollars so that ART can buy the shares, and the Rabobank of GVB converts the dollars received from ART into Euros for GVB. Rabobank then invests the Dollars in US Treasury Bills. As the value of participations in GVB rise, Mr Sprik sells some of his shares to build a second home and to buy a ship in Hamburg, fine wines in France and three Maserati’s in Genoa, as well as living the good life more generally. Many of his local investor friends do the same, and the Groningen economy registers high economic growth.

a) What are the changes in the current account, the financial account and the BoP in the Netherlands over the time period described?

Answer 1

The current account of the Netherlands will increase due to exports and imports initiated by Mr. Sprik. The financial account will see an influx from ART's investment but a partial outflow from Rabobank's US investment. The BoP should remain neutral as inflows and outflows balance each other out.

Step-by-step explanation:

The changes in the Netherlands' current account, financial account, and balance of payments (BoP) can be outlined based on the transactions described. For the current account, there will likely be an increase due to Mr. Sprik's export activities such as selling items (fine wines, Maserati cars) to other countries, while he imports goods for personal use, which indicates a mixed but overall positive impact. The financial account will experience an influx as foreign investment has increased due to the ART's purchase of GVB shares. However, it will be partially offset by the Dutch investor banking funds overseas, like Rabobank's investment in US Treasury Bills. As for the BoP, it should reflect a neutral position over time because the current account and financial account transactions will eventually balance out.

For example, an export sale to Germany implies a financial flow from Germany to the Dutch economy, similar to the import activities of Mr. Sprik bringing financial flows from the Netherlands to the economies of France, Germany, and Italy. Conversely, when the Dutch bank converts the dollars from ART into Euros and then invests back in the US Treasury Bills, there is a financial flow from the Dutch economy towards the U.S. However, it's not just about the investments made, but also about the returns on these investments, like the Dutch investor's sale of shares for personal luxuries, involving financial flows back into the Netherlands.