Market Overview

Dutch Election: Markets Ignore Populist Risk (Again)

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On March 15, the Netherlands holds a general election. The election campaign is in its final stages and the repercussion for the Netherlands and the wider EU is now coming under the microscope.

To date, the Dutch election has been largely ignored by markets. The Amsterdam Stock market, the AEX sits near 18 month highs. The Germany / Netherlands 10 year government bond yield spread has widened but by less than the France equivalent. The euro has fallen this year but that is arguably more to do with diverging monetary policy between the ECB and the US Federal Reserve.

The blasé reaction in markets to the election makes sense in that the Netherlands economy is less integral to the EU and its markets are less interconnected than ‘core’ countries like France and Germany. There are not as many channels for a Dutch upset to turn markets sour. Still, it’s considerably bigger than Greece, which has caused its fair share of jitters.

Who’s going to win the election?

Polls (if they are to be believed) indicate Party for Freedom (PVV), a far-right; populist and anti-EU party will take the biggest share of the vote. PVV, led by Geert Wilders, have promised an EU referendum so ‘Nexit’ is a real possibility.

The saving grace is that the Dutch election system is proportional representation. The political landscape is very fragmented so PVV is unlikely to gain a majority by itself so will need coalition partners. The other main parties, including outgoing Prime Minister Mark Rutte’s VVD, have said they will not form a coalition with the PVV. This means that Wilders probably won’t be able to form a government. Even if the PVV were to form a coalition government in the House, it still needs votes in the Senate where support is much weaker.

If 2016 is any guide, polls underestimate public dissatisfaction with the status quo. We expect the PVV to do better than polls suggest, perhaps getting as many as 30% of the seats. In this scenario we can envisage several smaller parties, or perhaps one of the larger parties succumbing to form a coalition with PVV.

Key for populist success will be a campaign focused on mistrust of the establishment and immigration. Other issues like pensions, healthcare, jobs could see other parties with better formed policies come out in front.

Is there going to be a Dutch EU referendum?

If mainstream parties form the government, a referendum is very unlikely. If populists pull a ‘Trump / Brexit’ style surprise a non-binding referendum would be fulfilling Geert Wilder’s campaign promise.

A binding referendum is less likely because it would require support in both houses of parliament. An existing proposal to change the constitution to allow binding referenda is unlikely to make it past the Senate in the near term. Still, as has been proven by Brexit, if the political will is behind a referendum, then the result will be respected, whether it is binding or not.

Would the Dutch vote to leave the EU?

The basis for the UK voting to leave the EU was economic, political and ideological. In the Netherlands the economic case for leaving the EU isn’t as strong, but political and ideological motivations are not to be dismissed.

The Dutch economy on most counts is doing pretty well. The Netherlands has low public debt and a large current account surplus. Consensus is for Dutch GDP to grow 1.6% in 2017. Typically a stronger economy supports the incumbent government. ‘Nexit’ would be costlier than ‘Brexit’ since the Netherlands is part of the Eurozone and has one of the highest reliance on intra-EU trade of all the European Union members.

Immigration has become a big moral question in the Netherlands, especially since the increase in refugees from Syria. A recent survey of 10,000 Europeans (not including the Dutch) by Chatham House showed 55% support for stopping all immigration from Muslim-majority countries. Again, we believe the consensus view underestimates the chances of euro-sceptic, anti-immigration candidates.

The risk for France and EU integration

Our belief that Geert Wilder’s PVV will have a strong showing in the election means a political shift towards Euro-scepticism. The PVV may not be able to govern in coalition but can be a strong voice in opposition. A win for a far-right party in the Netherlands in isolation would be manageable, but as a member of the EU, it would have strong implications for France and Germany which hold elections later in the year.

In an acknowledgement of public opinion, Dutch Prime Minister Rutte called “ever closer union” dead at the World Economic Forum in Davos. The new government should in principle be pro-EU but will have to take a more Eurosceptic stance to avoid populist discontent.

The Eurozone debt crisis showed the fallibility of monetary union without fiscal union. The rising influence of Eurosceptic populism will impede necessary structural reforms and unwind European integration. Europe needs integration to survive; a populist result in the Dutch election increases the odds of breakup.

If PVV can get 30% of the popular vote, it has a real hope of forming a government. In that scenario we’d expect the euro to fall (EURGBP to 0.8), the Germany / Netherlands government bond yield spread to widen above 0.25 and the AEX to significantly underperform other equity benchmarks. In extension, we would expect the Germany / France government bond yield spread to widen and the CAC to come under pressure in sympathy.

 

The information and comments provided herein under no circumstances are to be considered an offer or solicitation to invest and nothing herein should be construed as investment advice. The information provided is believed to be accurate at the date the information is produced. Losses can exceed deposits.

Posted-In: Forex Markets

 

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