Even in the face of worsening odds of re-election (no sitting government has been returned to power in EU elections since the start of the crisis) one would expect national governments to do what is necessary to maintain current stability. As Deutsche Bank notes, there has been an increase in 'extreme' parties; but the ultimate arbiter of burden sharing capacity, or whether the Euro will continue on the steady incremental path to integration is whether regular voters vote for it. Hence the importance of elections, like the Dutch election this week; and the theme is not great.
The anti-austerity Socialist Party has gained significant ground on the incumbent VVD party - focusing the market's attention on the willingness of the Dutch to meet the 3% of GDP deficit targets in 2013. The two 'extreme' parties look set to gain considerably more seats, and either a very broad coalition would be required, including a tail of small parties (Green Links, Christian Union, SGP, 50 Plus), or all four mainstream parties will have to participate in the new government: either way, government stability might be questionable.
The scenario troubling markets is the potential for a long government formation process coinciding with the euro area’s need to fight the crisis and progress communal policies - though in the last week or two, support for the SP has declined. With the 2013 budget an immediate test, a 'new' Dutch government faces decisions over Greece, Cyprus, EFSF bond buying, and a common-bank supervisory body - none of which have anything like majority support across the coalitions.
The most likely outcome remains a centrist, pragmatic coalition, which clearly is the preferred option in Brussels and Berlin. The Dutch elections are therefore unlikely to radically change the immediate political dynamics of the eurozone crisis in the short-term.
As Open Europe [10] explains:
There are 150 seats in the Dutch lower chamber – the Tweede Kamer and 76 seats are needed to gain a majority. This leaves at least three main possibilities:
- A centrist ‘grand’ coalition The most likely outcome remains a centrist coalition, which clearly is the preferred option in Brussels and Berlin, with VVD, PvdA and CDA and could also include D66 if needed for majority. This could also feature the Christian Union – though the PvdA is likely to oppose the latter on the grounds that it would push the Coalition too far to the right.
- A centre-left+ coalition, with the Social Democrats, the Socialist Party, CDA, and the GreenLeft. This would, at best, narrowly obtain a majority and might in reality need the support of D66 as well. It is questionable, however, whether the CDA would go for it, and whether other parties will want to have what is perceived as a far left party in a dominant government position.
- A ‘purple coalition’, with VVD, PvdA and D66, could possibly muster a majority. However, in the 1990s, similar constellations were perceived as increasing the gap between voters and the government, and it is likely to be resisted by Rutte and others.
Other coalitions are, in theory, possible but remain unlikely: the gap between the VVD and Socialists looks too wide, while it's unlikely that the VVD will want to rely on Geert Wilders again, after he effectively brought down the last government in the spring by opposing proposed budget cuts. There will also be a desire to avoid another minority government.
Although the parties will to want to avoid drawn out negotiations, particularly in light of the decisions that needed to be taken as a result of the eurozone crisis, it could take months to agree a coalition. The last election preceded four months of negotiations before a government was formed. The record is seven months (in 1977).
As Deutsche Bank notes though:
One should not assume it will now be ‘easy’ to form a government.
[11]
While a Purple coalition works arithmetically, there is little love lost between the two main parties of the three. Diederik Samson says his PvdA party and the VVD are “miles apart”. He does not rule it out categorically, but says the PvdA would only consider it if Samson was the Prime Minister. Mark Rutte, the leader of the VVD, said power sharing with PvdA is “a long way off”. He also said the PvdA had shown its “red feathers”. But, likewise, Rutte has not categorically excluded the possibility of a coalition with PvdA.
2013 Budget: An immediate test for the new parliament
The ability of parliament to continue to function and make difficult decisions through the government formation process will be tested before the end of September with the 2013 Budget. The Dutch Constitution requires that the parliamentary year begins on the third Tuesday of September with the ‘Queen’s speech’. On the same day the Finance Minister (Jan Kees De Jager until a new government is appointed) presents the next year’s Budget. On 18 September, six days after the election, the 2013 Budget will be presented to parliament.
Greece, Cyprus, EFSF bond buying programmes, common bank supervision: Many tests for the new Dutch parliament
The 2013 Budget might be the most immediate test of what the new Dutch parliament can achieve in the absence of a new government — assuming it takes a few months to form a government — but will not be the only test. Quite likely the euro area will be asked to decide on the status of the second Greek loan programme in October. This is also probably when a full bailout programme for Cyprus will be ready. October is also in our estimation the most likely time when ECOFIN will be deciding on a Spanish MoU. We believe an Italian MoU will follow and possibly by year-end the euro area will be deciding on the banking union (common supervisory regime).
Even if Dutch parliamentary approval for the EFSF aid is not strictly required, one might think that decisions taken by the outgoing government when a new parliament is sitting will be controversial. Seeking the support of parliament might be politically (if not strictly) necessary.
In this regard, we highlight here some interesting details from pollster Maurice de Hond’s recent opinion polls. Specifically, voter attitudes to Europe and European integration on the one hand and Greece and its request for more aid on the other (results published on 5 September).
On EU Integration, none of the parties shows anything close to majority support for outright EU integration. This highlights the challenge of the Netherlands forming either an ad hoc coalition or a new government with a strong pro-integration stance.
[12]
Similarly, the skew on Greece is to the skeptical/anti-new aid side. 53% of voters support giving Greece more time but not more money, but twice as many voters say Greece should get no more time even if that means a Greek default (29%) compared to giving Greece money one more time (15%). As with the EU questions, the breakdown by party preference is informative. The ‘no time, no money’ stance is heavily backed by the PVV. But there are five parties with majority support (>50%) for ‘time but no money’.
[13]
Elections are the ultimate arbiter of burden sharing capacity. Under duress, one might expect national governments to do what is necessary to maintain current stability, even accepting worsened odds of reelection as the price (no sitting government has been returned to power in euro area elections since the start of this crisis). There has been an increase in support for 'extreme' parties, but across the euro area all that has happened so far at the elections is one mainstream party or coalition has been voted out of power in favor of another mainstream party or coalition. The ultimate arbiter of whether the euro area will continue on the steady, incremental course towards integration is whether regular voters vote for it. Hence the importance of elections, like the Dutch election next week, the Italian election next spring or the German election in a year's time.