It’s going to be one of those high volume news weeks for Europe. Obviously the most watched event of the week will be the German constitutional court decision on the legality of the ESM but there is also some other notable events.
Mario Draghi’s ECB action plan of last week has opened a new political semester in Europe as the mantle has been passed back to the politicians to sort out exactly what the next steps are for Europe under the umbrella of “unlimited” conditional support. My sense is that this is the limit of Mr Draghi’s mandate, possibly over it, but he has kicked the burning can far enough back into the politician’s court that it cannot be claimed that he did not do enough.
Over the weekend Angela Merkel has come out in defence of the ECB, but there are rumblings from within Germany about Mr Draghi’s plan and over the weekend Mariano Rajoy demonstrated, once again, he wasn’t in any rush to push Spain towards a bailout.
All along, while the politicians and bureaucrats politick and jawbone each other, the real economy of the Eurozone continues to deteriorate which is now where the risks lie. As fiscal austerity further bites into economic growth and Europe enters recession these risks are sure to grow. The taxpayers of the northern creditors are already questioning why they should continue to fund the zone, while the citizen’s of the southern debtors question just why they should suffer it. The on-going rise of Golden Dawn in Greece should be a reminder to all of the dangerous political fragmentation that is occurring and it is becoming increasingly apparent that southern Europe is struggling with its own ‘lost decade’. I am doubtful, however, they will take it as well as the Japanese.
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As I have continued to talk about over this year, without a massive change in direction, the economic outcomes of Europe have already been decided. Attempts at supra-Eurozone fiscal consolidation all but guarantee a fall in economic output for the EZ, and the recession has really only just begun. In that regard it is the politics that will become increasingly important over the next 12 months as the economic fallout opens new fractures in the political systems of participating nations. I have previously mentioned that Italy in particular poses a significant risk and its economy is slowing rapidly. If Mario Monti steps aside the existing Italian politicians will have no problems reminding their constitutes that German and French banks are the true beneficiaries of the current strategy. It is little wonder Mr Monti is asking for new EU rules to shut people up.
While the German constitutional court is delivering its initial verdict it will also be time for citizens of The Netherlands to take to the polls for national elections. There has been a limited amount of coverage of the event in the English-speaking media given the economic world has been focussed in other places, but the event is of significance.
The Dutch economy is relatively strong but domestic consumption has been slowing over the last few years and there is a real risk that the European crisis has the potential to slow the economy further. One of the major points of concern is the housing market which, like Australia, is backed by large private sector debt. Dutch housing had deflated 15% since 2008 but the downtrend appears to have picked up pace in recent months.
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Dutch housing- % change in value YoY
With all this in mind I thought I would ask one of our readers, AnonNL, to give his opinion on the likely outcome of this week’s election and what it could mean for the country and rest of Europe. AnonNL now lives in Adelaide but was born in The Netherlands, has a Masters degree in public administration and is an avid follower of Dutch politics. I’m sure you’ll enjoy his insight.
Up until now The Netherlands, together with Germany, Finland and Austria formed a block advocating austerity as the way for the eurozone to solve the current crisis. The Netherlands however is starting to feel the pinch of the crisis and calls for government to push back on austerity are gathering strength. It is no wonder that The European Union and the Economy are issues which dominate the campaigns for the upcoming elections.
A shift in government is likely so it will be interesting to see how the results of the upcoming Dutch elections, on 12 September, will influence how Europe deals with the crisis. One thing is already clear, the EU need not fear The Netherlands pulling out.
Most of you probably know that continental Europe is dominated by multi-party democracies and The Netherlands is no different. As I write I am looking at a paper ballot offering me the option of selecting one of many representatives of a whopping 20 parties. About half of these parties will make it into Parliament and about 6 to 8 parties can potentially get enough seats to become a viable candidate for coalition forming.
Due to proportional voting, who wins the elections is not as important as which parties will be in the best position to form a coalition. This makes it quite hard to offer a clear prognosis and as such this post probably offers more shades of grey than women’s arousing literature.
The Dutch House of Representatives[1] consists of 150 seats which means that in order to form Government a coalition of at least 76 seats needs to be formed (excluding the possibility of a minority Government). Coalition forming will probably be a difficult and potentially lengthy process due to a splintered vote, not ideal with European leaders discussing some major decisions in the coming months.
Polling results
The table below shows the latest sample based polling results for the 6 largest parties[2].
Interestingly, the only party which could be classified as anti-EU, the populist PVV, has lost 25% of its seats. In addition the PVV is now considered to be an untrustworthy partner after some erratic behaviour earlier this year, meaning none of the other parties will want to form a coalition with them for a significant time to come unless there is absolutely no way around it. It is therefore doubtful that PVV’s anti-EU retoric will become more than just that.
Another intersting polling result highlighted by the table is that the top three candidates populate opposite sides of the political spectrum. The Libs have always had a quite significant foothold in Parliament and are likely to again become the largest party. The Socialist Party however were always considered to be a fringe party of borderline communist activists and the only reason why they have gained so much in popularity lately is that the Dutch people have become less supportive of Libs’ advocated austerity. The same reason explains the resurrection of Labour after a significant dip in popularity up until only a couple of weeks ago. This is a perfect example of how the winner may not end up in Government as the second and third party seem to be much more compatible in regards to forming a coalition.
The above is also why I am expecting a shift to the left, although once again due to coalition forming, not as dramatic as one might expect. While the Calvinistic Dutch generally still see the benefit of fiscal responsibility and financial sustainability, more and more people doubt that now is the best time to try to reign in the deficit as it is becoming clear that the cutbacks deepen the crisis rather than solving it.
Possible outcomes
If Dutch elections were held today two options seem possible of which a left-leaning government the most likely outcome[3]. This left-leaning government would probably consist of the Socialists (SP), Labour (PvdA), Social Liberals (D66) and Centre-Christian (CDA). None of these parties can be considered anti-EU with D66 even outright pro-EU, advocating Political Union as a way to solve the crisis. However, I doubt that the two largest parties, Socialists and Labour will entertain Political Union and are more likely to call for easing of the austerity measures to prevent exerting too much pressure on the Dutch economy. This of course would be a good outcome for the mediterranean memberstates as this would mean political pressure on them would decrease. Steps toward Political Union will probably be out of the question in this scenario.
The second possibility would be a coalition by Libs (VVD), Labour (PvdA), Social Liberals (D66) and Centre-Christian (CDA), a so-called “purple coalition”. For Australians Labor and Liberals forming a coalition seems like the equivalent of hell freezing over but The Netherlands has experienced a purple Government twice before, both of which were actually quite successful (gotta love balanced debate)! This coalition would again not be overly excited by the prospect of Political Union and is more likely to keep advocating austerity due to decreased power of left-wing parties in this coalition.
The third option would also be a “purple” coalition consisting of Libs, Socialists and Labour but because of the major differences between Libs and Socialists this seems unlikely to me.
Trying to forecast the outcome of coalition forming unfortunately is not unlike crystal ball gazing which means that by next week I may well be eating my words. Even the “likely” options that I have identified will pose many challenges as differences between parties are still quite significant. For example, Socialists will want to increase spending to stimulate the economy but Social Liberals will advocate austerity as much as they can. Whatever happens, I don’t expect a landslide change in the Dutch stance, although just a bit more breathing room for the mediteranean states is not an unlikely outcome.
