After the political tsunamis of 2016—with the unexpected decisions by the British to leave the EU, and the Americans to elect Donald Trump president—the political nexus in 2017 shifts to the eurozone. The coming months herald parliamentary and presidential elections in the Netherlands, France and Germany—all founding members of what became the EU—and all vulnerable to the rising populist tide. The immediate focus is on...
the Netherlands and France (on which this paper will primarily concentrate), whose electorates make their choices over the next two months, and are seemingly most vulnerable to political rebellion. What is the likelihood of success for the anti-establishment parties? What are the implications of such success politically? And what will it mean for financial markets?
The Dutch go to the polls to elect the 150 members of its second chamber, the Tweede Kamer, on 15 March, 2017, from which a new government will be formed. In common with 16 other eurozone members, the Netherlands operates a proportional representation (PR) electoral system. However, unlike its near neighbours Germany and Belgium, it does not have an onerous minimum threshold by which a political party gains members of parliament. As long as a party gets 0.67% of the votes cast, it will gain a seat, consequentially, around 10 parties have representation in the Tweede Kamer post an election. As a result, the Dutch system has led to formation of coalition governments for all of its post-WWII history. With the rise of populist and single-issue parties in recent years, the fragmentation of political support will leave, in our opinion, the electoral situation no different—if not worse this year—with a coalition of up to five parties likely, as opposed to the usual two or three.
The current government is headed by Prime Minister Mark Rutte’s centre right, People’s Party for Freedom and Democracy (VVD), in coalition with the centre left Labour Party (PvdA). The latter has seen a sharp haemorrhaging of support over the last five years, such that it is predicted to lose nearly two-thirds of its Members of Parliament (MPs) on 15 March. The VVD is thus closely tied at the top of the polls with the far-right Geert Wilders-led Party for Freedom (PVV) at a projected 25 seats each—both well short of the 76 seats necessary to have a parliamentary majority. With the PVV marginally ahead in the polls, are they likely to form a government? In short: No. The other major parties have explicitly ruled out going into coalition with them, such that it is now virtually impossible for the PVV to garner enough support to form a government.
The election is being fought around the issues of healthcare and pension reform, which favours the centre left, and single-issue parties, housing and immigration, which is favourable territory for the PVV. The degree of compromise necessary to reach agreement on these issues by potential coalition partners will determine the final make-up of the government.
As can be seen from the current opinion polls, the VVD will likely be in a position to form a coalition with the CDA, D66, PvdA and a minor party or two. Indeed, it is difficult to see the PVV being involved in any way unless they get 45 or more seats, making them far and away the largest party and difficult to ignore in any government formation. However, the current state of the polls, which has seen the PVV losing a quarter of its support in recent weeks, suggests there is virtually no prospect of this occurring.
A VVD-led government is thus the most plausible outcome—a continuation of the current situation—and thus unlikely to result in any disruption in European asset markets. Dutch government bond spreads are still at the tighter end of recent trading ranges, and in our opinion, offer little value at current levels. While obviously vulnerable to any PVV-inspired political surprise, given the likely result, a modest widening is likely to occur if we see some rolling back of recent pension reforms as a price of coalition agreement with the attendant negative fiscal consequences. We would look to invest at spreads of 30 basis points (bps) or more relative to German bonds.
Bloomberg as of 7 March 2017. The chart shows the difference between German and Dutch sovereign 10-year yields. Please find definitions in the disclaimer.