Will the Dutch Election Trigger Another Economic Shock for the EU?

The Dutch parliamentary election on 15 March is drawing global attention since it is deemed a barometer of populist strength in Europe in the wake of the EU referendum and President Trump election. Historically known as a supporter of open trade, a liberal nation and one of the EU’S “founding fathers”, the Netherlands has witnessed a significant surge of anti-immigrant, Eurosceptic sentiment over the past few years as was evident in other EU countries.

Although Wilders’ right-wing Freedom Party (PVV) is narrowly behind Rutte’s Liberal (VVD) Party, the populist movement in the Netherlands has gained even more strength in light of the recent tensions over Turkish minister ban. Once a political outsider, Wilders has seen his popularity soaring in recent years and is viewed as one of the most influential far-right politicians in Europe. The prospect for the populist party leader to thrive in the election has led to fears of another Brexit or Trump-style electoral shock that could disrupt financial markets.

The Main Protagonists

Mark Rutte, current Prime Minister and leader of the People’s Party for Freedom and Democracy is vying with Geert Wilders of the far-right Party of Freedom. With the Dutch economy improving and unemployment falling to pre-crisis level, the election rhetoric seems to concentrate on the issues of migration and integration.

Both candidates appear to place emphasis on national identity and unity, with Mark Rutte openly stating in a letter that people who refuse to adapt to Dutch values should “act normally or leave”. On the other hand, PVV Party leader Geert Wilders, has vowed to “de-Islamise” the Netherlands by blocking immigration from Muslim countries, shutting mosques and Islamic schools and banning the Quran. He has also pledged to withdraw the Netherlands from the EU, close Dutch borders and increase spending on security and defence. On the contrary, Rutte takes a pro-EU stance, supporting greater EU cooperation on migration but is in favour of fiscal austerity and advocates that countries that do not reform should be ejected.

Who’s Ahead in the Polls?

The two candidates appear to compete neck-and-neck in the polls; the Dutch Polling Indicator shows that VVD is set to win 24 of the 76 seats needed to form a coalition in the Dutch House of Representatives versus 22 seats for the PVV. However, it should be noted that Wilders has really been able to maintain a significant lead over the past two months. Polls in early March were indicating a clear victory for Wilders’s PVV, predicting him to win 29 seats vs 25 for Rutte’s VVD.

The prospect for Wilders to become Prime Minister though is challenged by the fact that all majority parties have shown reluctance to form a coalition government with the Party for Freedom. This fact alone is expected to create a political mess and may result in a political stalemate after the election. Interestingly, it could take two months or more to form a coalition in the Netherlands. A protracted period of coalition negotiations would increase uncertainty and could undermine sentiment towards the euro in the short term.

Market Impact

So far there was little reaction to the Dutch election uncertainty by currency markets. It seems that global financial markets keep half an eye on the Dutch election but most of the attention is on the French election where there is more at stake given far-right Le Pen’s leadership in the French presidential election race. Of course, a strong performance for Wilders is likely to further mobilise support for Le Pen in France.

It is expected that there will be a significant surge in currency volatility in the days preceding the election while two Euro-negative scenarios are looming: First, the prospect for the populist leader to become the frontrunner in the election. Second, the parliamentary arithmetic makes it impossible to form a government without his participation.

Whatever the outcome of the Dutch election, the euro is likely to remain under pressure this year due to a series of high-volatility events including the upcoming French and German elections, the Greek crisis, and the triggering of article 50 by the United Kingdom.

Vipro Markets Review