On 15 March, the Dutch electorate will visit polling stations across the country to place their vote in a general election. Forming a government is likely to be a laborious task on account of the highly fragmented parliament, characterised by a large number of medium-sized parties, although this is far from a rare occurrence in the Netherlands. If we take average polling data across the past few weeks, at least five parliamentary parties will be required to form a coalition government without the inclusion of the Party for Freedom (PVV – headed up by Geert Wilders). The most likely scenario appears to be a coalition formed by Prime Minister Mark Rutte of the People’s Party for Freedom and Democracy (VVD – conservative), supplemented by various minority parties including the Christian Democratic Appeal (CDA – Christian Democrats), Democrats 66 (D66 – social-liberal), GroenLinks (GL – green) in addition to a fifth minority party to secure an absolute majority. It is to be assumed that the PVV will not form part of the government, despite their role as the largest parliamentary faction. This is because all other parties are outright rejecting the possibility of collaborating with the right-wing populists. Should governmental negotiations fail so that the moderate parties are unable to come to an agreement, there theoretically remains the possibility that the VVD and PVV could ultimately end up approaching each other to form a government in tandem with two other factions. This scenario is, however, very unlikely. If the parties of what is likely to be a highly fragmented parliament are unable to establish a governmental alliance capable of forming a majority from the outset, there is also the chance that new elections will be called as a last resort.
Overall, everything is pointing to a period of political uncertainty following the elections for the Netherlands. Should, as expected, a coalition of several parties come to fruition, the government’s work is likely to lack the requisite agility and reform dynamic because of the diverse ideological differences between the parties.
It can further be assumed that cement holding together this kind of coalition is quite porous, thereby increasing the likelihood that the collaboration will be terminated early.
So far there has been nothing to suggest that Eurozone bond markets fear a coalition involving the PVV. This is likely to continue to be the case when, as expected, a coalition of several parties excluding the PVV is formed. On account of the Brexit referendum and the presidential election in the USA, the markets are currently reacting quite sensitively to potential political risks. This has recently been reflected in France, where the apparently increased victory prospects of the National Front, under the leadership of Marine Le Pen, have introduced a degree of anxiety. In the unlikely event that Mark Rutte of the VVD does in fact team up with Wilders to form the government together with a third or perhaps even fourth minority party, this is expected to have a significantly detrimental effect on Eurozone bond markets, at least initially. The conviction that a potential “Nexit” is merely a marginal risk on account of various legislative and other obstacles will only set in at a later point in time.