On March 15, 2017 there will be parliamentary elections in the Netherlands, and this election will be viewed by the market as an important test of euro-scepticism ahead of the French elections.
The current government is composed of the centre right People’s Party for Freedom and Democracy (VVD) with junior coalition partner Labour Party (PvdA) and is led by Prime Minister Mark Rutte. Polls suggest both parties are set to lose a significant number of seats, given a high degree of distrust in the current government.
The far-right, eurosceptic Party for Freedom (PVV) – led by Geert Wilders – is likely to make significant gains at their expense. PVV is anti-immigration and anti-EU with Wilders one of the most outspoken far-right party leaders in Europe. Key policy issues in this election campaign have been: the impact of immigration upon social cohesion and public service availability, cuts to pensions, increasing healthcare costs and the increasing duality of the labour market. In this respect the socio-political backdrop is akin to other European countries.
Polls continue to point to PVV getting both the highest share of votes and parliamentary seats, followed by the incumbent VVD. In our base case scenario, the far-right and euro-sceptic PVV will get the most votes – although far from a majority – but will be unable to form a government. Thus, we expect the incumbent centre-right VVD to form the next government and for Mark Rutte to remain as prime minister. Thus, our base case projection is for stability within government – albeit with tail risks around this central scenario.
PVV has committed to holding a referendum on EU membership should they be elected. While the majority of the Dutch population are in favour of remaining in the EU, the degree of euro-scepticism in the population means that this referendum is likely to be closely fought (with turnout a crucial component in the outcome).
The formation of a government led by PVV would likely lead to a sell-off in Dutch spreads relative to bunds, although would also have significant implications for French and periphery spreads as an integral member of the EU holds a referendum on EU membership. This would have particular implications for pan-EU issues such as Brexit and debt relief for Greece.
A VVD government would continue in reducing the impact of austerity upon the Netherlands, but may also engage in discussions with other EU leaders focused on renegotiating the terms of EU membership. This is expected since the Dutch population will have used these elections to clearly highlight their desire for EU reform.
While the markets are firmly focused on the risks of an anti-European government being formed in the Netherlands, we believe they are overlooking the risk of a prolonged government formation process, which could lead to a fragile government. Such a government would be technically pro-EU but with strong euro-sceptic undercurrents and thus may not be strong enough to curtail the growing populist forces across the EU. This is important as it poses risk to Pan-European stability in a year of difficult elections (France and Germany) and one where policy decisions are yet to be made (Greece and Brexit).
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