Dutch Elections Risk Muddying Merkel’s Crisis-Fighting Efforts

Dutch Elections Risk Muddying Merkel’s Crisis-Fighting Efforts
German chancellor, Angela Merkel and Netherlands' Prime Minister, Mark Rutte in Berlin, on June 20, 2012. Photographer: Adam Berry/AP Photo

Next month’s Dutch elections risk complicating Europe’s efforts to resolve its debt crisis, with the coalition government that emerges likely to reflect both anti-European sentiment and resistance to more austerity.

A third of Dutch voters in the run-up to the Sept. 12 vote back the Socialists, who oppose more spending cuts and refuse to hand over more sovereignty to Europe, or the Freedom Party, which seeks an exit from the European Union and the euro. That will make it tough for caretaker Prime Minister Mark Rutte’s Liberals to find support from perhaps three or four parties for a majority in parliament and keep cutting the deficit.

Rutte has been a loyal ally to German Chancellor Angela Merkel as she staves off calls to provide more aid to cash-strapped southern European countries. A new Dutch government less willing to pursue austerity or readier to see the euro break up might make Merkel’s task more complex at a time when the chancellor is striving to find common ground with French Socialist President Francois Hollande.

“The September election outcome will be an important indicator of the willingness of one of Germany’s most important pro-austerity allies to continue to support euro-zone rescue measures,” Juergen Michels, chief euro-region economist at Citigroup Inc. in London, said in a telephone interview. The Liberals “may struggle to find coalition partners who support their pro-austerity, pro-Europe program.”

Poll Tie

The Socialists, led by Emile Roemer, and Rutte’s party, known as the VVD in Dutch, are tied in first place at 34 seats each out of the 150 in parliament, according to a TNS-NIPO poll published Aug. 21. The survey gave the Freedom Party 14 seats, fifth behind Labor and the Christian Democrats. TNS-NIPO questioned 1,308 people between Aug. 19 and Aug. 21 and the poll had a margin of error of 2.2 percentage points.

Under the Dutch electoral system, parties’ vote shares translate directly into seats in parliament. Just 0.67 percent of the nationwide vote is needed for a single seat.

That leads to a proliferation of parties -- 11 are set to win seats, according to TNS-NIPO. Unless the next coalition involves both the Socialists and the VVD, at least four parties will be needed for a majority.

Elections were called after Rutte’s Cabinet resigned on April 23, when Freedom Party leader Geert Wilders, who’d been backing a minority government of Liberals and Christian Democrats, withdrew support for spending cuts and tax increases.

Austerity Deal

Rutte’s administration and three opposition parties struck a deal three days later on an austerity package to make sure that the budget deficit next year stays within 3 percent of gross domestic product. The 2013 deficit is now forecast at 2.7 percent, the government’s planning agency said Aug. 22.

The five parties that signed the austerity deal are two seats short of a majority in the TNS-NIPO poll.

The election, which takes place on the same day that Germany’s Constitutional Court rules on the legality of the permanent euro-area rescue fund, adds to the uncertainty over Europe’s anti-crisis efforts almost three years after the turmoil emerged in Greece.

With contentious decisions looming in the 17-nation euro region on whether to grant Greece more leeway to keep it in the currency area and on European Central Bank bond purchases to keep down borrowing costs in Italy and Spain, the Dutch may not have a functioning government before Christmas.

Coalition Talks

It has taken an average of almost three months to set up a coalition since World War II. The Rutte Cabinet took 127 days of negotiations following the 2010 election, the third-longest ever. The record was set in 1977 when it took 208 days to form a two-party government led by Christian Democrat Dries van Agt. The quickest was in 1948, at only 31 days.

“We expect to see an inconclusive outcome followed by weeks, if not months, of coalition negotiations before an unstable and possibly more euro-skeptic new government emerges,” Alastair Newton, senior political analyst at Nomura International Plc in London, said by phone. “Although we doubt that either a Socialist or a VVD-led coalition would assure government stability, we believe that the latter would be the better outcome from the perspective of euro-zone cohesion.”

Almost three years after the crisis started in Greece, the country remains at the heart of the turmoil even as contagion has spread to Italy and Spain, prompting ECB President Mario Draghi to announce proposals on Aug. 2 to re-enter the bond market to help lower government borrowing costs.

‘How Quickly?’

“In the event of a sudden Greek exit before the new government was in place, how quickly could the Netherlands respond in agreeing to emergency measures which the euro zone might wish to put in place to contain the contagion risk?” Newton said.

With Greek Prime Minister Antonis Samaras seeking more time from his European partners to meet the terms of its international rescue, Roemer said Aug. 19 that the Socialists would be willing to consider a request for more aid to Greece only under very strict conditions. Saying he “can’t tell whether we will be able to preserve the euro,” Roemer told reporters that “the pace of austerity measures implemented throughout Europe isn’t working.”

Rutte and Christian Democrat Finance Minister Jan Kees de Jager say Greece must overhaul its finances and go ahead with privatizations without delay.

Skeptic Tone

Any more bailouts would threaten to fuel anti-Europe sentiment, which has been simmering since 2005, when Dutch voters rejected the EU constitution. Under Rutte, who took office in October 2010, the government has taken a more euro-skeptic tone, including opposing moves to let Romania and Bulgaria join the Schengen passport-free travel area.

Wilders has made Europe the key issue of his election program under the slogan “Their Brussels, our Netherlands.” He’s demanding a return to the guilder, after a report commissioned by the party said in March that the Netherlands would eventually profit from abandoning the euro.

A TNS-NIPO poll in June found that only 58 percent were in favor of EU membership, down from 76 percent in May 2010. In a de Hond poll, 48 percent said the economy would suffer too much if the Netherlands took the steps needed to meet the 3 percent deficit limit.

Even amid the uncertainty, investors have shown renewed confidence in Dutch politicians’ attempts to tackle their budget difficulties.

After the government’s collapse in April, they demanded as much as 79 basis points of extra yield to lend to the Netherlands for 10 years rather than to Germany, the highest premium in three years. The extra yield, or spread, that investors get for holding Dutch 10-year bonds instead of similar-maturity German bunds narrowed 40 basis points to 39 basis points after Rutte got his emergency austerity package.

“I’ve argued for a long time that the Netherlands is Germany’s key partner in its endeavor and that Merkel will want to keep the Netherlands on board with her vision,” Nomura’s Newton said. “This election is a hugely important event for Europe.”

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