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How the Dutch can save their 'abysmal' economy

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Whichever way you look at it, the Dutch economy is on its knees. The country is staring in the face of a credit downgrade.

House prices have crashed, unemployment is rising, consumer spending has tightened and incomes have declined. What little manufacturing the country did has contracted further, social security dependence has grown, fringe politicians have garnered support.

The "green shoots" seen in the euro zone in the second quarter have failed to materialize in the country. Economists at Capital Economics have even labeled the country's performance in recent years as "abysmal".

As attention now turns to the Dutch government's budget plans - due to be unveiled on September 17 – experts say guiding the country out of its recession will be a long and painful process.

(Read More: 'Abysmal' Dutch economy threatens euro zone recovery)

Elwin de Groot, a senior market economist at Rabobank International believes it will require a combination of cures, including "strong" structural reforms in several industries. In housing, Groot says the market needs to be able to flow, to create better opportunities for people to sell, buy and rent. There has been a slew of measures already but more is needed, he said.

"It certainly won't be easy and it'll take many years," he told CNBC. In education, investing more in technical studies like engineering could deal with concerns regarding the Netherlands' long term (future), meaning a return to productivity and easing large discrepancies in the labor market.

"The government needs to stimulate research and development, the interaction between companies, and invest in universities," he said.

Bart van Leeuwen, a senior spokesperson for the Dutch Banking Association said that banks are very willing to help rekindle growth by giving out new loans as much as possible. It is important that the Dutch government facilitates economic stability and can stimulate house prices, he added.

(Read More: Debt-crippled Dutch wake up to housing crash)

"It seems that the Dutch government is trying to do as much as they can. But it should be noted that they have to operate within a difficult political context, as they have no majority in the senate. This causes some uncertainty. From an economic perspective that is undesirable," he told CNBC.

'There will be protests'

Simon Lelieveldt, an independent banking and compliance consultant who also writes about Dutch financial history, believes that main hurdle is a political one. The government is trying hard to cut expenses without making fundamental choices and politicians are scared to lose votes to the populist players that promise a lot but cannot deliver a consistent policy.

"Our government is living on borrowed time, hoping that the other countries (like Germany) pull us out of the mud," he told CNBC.

Lelieveldt believes that those most affected by the government's budget cuts have sought solace with populist parties at the left and right side of the political spectrum. One such party is Geert Wilders' anti-immigration party PVV (Party for Freedom), which according to one poll, would win the most seats in parliament if elections were held tomorrow.

"We want to cut back on government bureaucracy, on the European Union, on international development aid, on environmental subsidies, on the arts, on mass immigration," Wilders told CNBC. "The government should focus on economic growth. Lowering taxes is the best way to generate economic growth."

(Read More: Dutch government agrees to another $8 billion in budget cuts)

Wilders says that he is inundated with letters and emails from citizens who are worried about the future of the country.

"There will be protests. The Dutch do not often demonstrate, but they have had enough," he said.

But mass protests are unlikely, according to Groot, except in localized pockets in sectors badly hit by the budget cuts. The ruling coalition government will close ranks, bring more clarity to the path forward and implement cuts that cannot be avoided, he said.

"It's still early days but the mood may be changing", he said, pointing to upbeat data from Dutch producers and the optimism they have found from new orders. "We have a very open economy...the Netherlands has a strong position in Europe and in the world," he added. The "green shoots" from the rest of the euro zone could boost the country's economy and lay foundations for it to pull itself out of recession, he said.

By CNBC.com's Matt Clinch. Follow him on Twitter @mattclinch81.

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