Political Turmoil in Netherlands Raises Concerns Across Europe

The collapse of the Dutch minority government followed seven weeks of talks aimed at agreeing an austerity package worth up to EUR16 billion in order to bring the budget deficit down from 4.7% of GDP to 3% of GDP in 2013, in line with EU rules. The centre-right minority cabinet, in power since October 2010, consists of the People's Party for Freedom and Democracy (VVD) and the Christian Democratic Appeal (CDA). The party relied on the support of the right-wing anti-immigration Freedom Party (PVV) for a parliamentary majority; however, PVV leader Geert Wilders walked out of the budget talks on 21 April, triggering the government's collapse. Wilders stated that he could not support a package that would damage the economy and increase unemployment simply to satisfy rules he described as being imposed by The EU in Brussels (Belgium). Many supporters of the PVV are against further spending cuts, particularly given their objections to Dutch contributions to EU bailout funds for stricken Eurozone member states. The latest measures under negotiation would follow an EUR18-billion (USD23.billion) package announced in 2010.

Opinion polls suggest that many Dutch voters are fed up with austerity, and the political manoeuvrings that have accompanied discussions over the cuts. This shifting mood among the people in part explains an increase in support for the Socialist Party (PS), which has opposed austerity and advocated more measures to stimulate growth. A poll taken over the weekend of 21–22 April suggested that the PS would take around 30 seats in a fresh election, making it the second largest party in parliament after the centre-right VVD.

A Fresh Election, But When?

The prime minister's resignation will almost certainly lead to an early election. The precise timing of this, however, is unclear at this point. Leaders of the more popular parties, including Labour and the Socialists, are calling for a ballot as soon as possible, perhaps as early as the end of June. Several other party leaders, however, advocate an autumn election, perhaps in September. This would provide less popular parties, including junior government partners the CDA, the opportunity to regroup and nominate a leader to take them forward into the campaign.

In the mean time, the government will take on a caretaker role, and will try to win support for an austerity package of some form with opposition parties. The government is required to submit plans to reduce its deficit to the European Commission on 30 April. An agreement with the opposition that meets EU rules could be difficult, given sharply different views on the depth of cuts required and the nature of the austerity measures to be taken. Moreover, the government's collapse could also endanger controversial government policies that are yet to be fully implemented, including reforms to the education system and plans to reform welfare benefits. Failure to present a convincing deficit reduction plan to the EU could lead to fines, although it is doubtful whether the Commission and other EU member states would seek to pursue such a punishment immediately.

Outlook and Implications

The Netherlands now faces a challenge if it is to present a budget deficit reduction plan that will meet EU-mandated rules by the end of the month. Indeed, a fresh election may well lead to a new government that has less stringent views on austerity and fiscal consolidation. Although the centre-right VVD remains the most popular party in the country, polls suggest that the Socialists and Labour are in second and third place. The PVV and CDA are currently in fourth and fifth place in polls of voter intentions. Should a left-wing party enter government, even as part of a coalition, the Netherlands' hawkish fiscal stance could shift considerably, even putting in doubt the Dutch ratification of the recently agreed EU Fiscal Treaty, which aims to enshrine strict budget discipline among Eurozone member states. This would be a sharp turn-around for a country hitherto having a reputation as one of the most forceful advocates of budget discipline within the currency union.

Whatever the outcome of the future election, the Netherlands looks set for several months of political uncertainty that risks damaging investor confidence, increasing borrowing costs, and endangering the country's AAA credit rating.