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Dutch Government Collapses

By Marc Chandler

Seven weeks of government negotiations in the Netherlands to agree on new austerity measures failed on Saturday suggesting the German-led program for Europe is about to take head of another government and this is on the eve of the first round of the French elections, where polls consistently show the Socialist candidate Hollande poised to win the decisive second round in early May.

We have been following this story as it was first began here and then as it unfolded here. Our work has offered two levels of analysis: one the country-specific dynamics and the other the more systemic elements. To be sure, we are not arguing that the Netherlands is about to default, though given political and economic considerations, as well as the greater risk that it loses its triple-A rating, warns it ought to pay a larger premium of German bunds.

The origins of the political instability in the Netherlands can be traced to the fall (Feb 2010) of the previous Christian Democrat Appeal-led government over its support for the mission in Afghanistan.

The government that replaced is weak and had to rely on the extremist Freedom Party. It made concessions, for example, in the form of curbs on immigration and the prohibition of wearing the full Islamic veil in public.

In early March the key government office, with ominous name of the Central Planning Bureau, warned that without new action, the government would overshoot next year’s deficit target. The coalition government has found 18 bln euros in savings and now was told it needed another 9 bln.

To find more savings when the Dutch economy is contracting is, according to Geert Wilders, the head of the Freedom Party, to surrender to the "dictators in Brussels". He would not sanction cuts in domestic spending and walked out of talks. Ironically, Wilders is to be in the US in the coming days, promoting his new book"Marked for Death: Islam’s War against the West and Me".

Wilder’s political agenda does not appear to be representative of a majority of people in the Netherlands or more generally in Europe. Yet the nationalism he speak to and the antipathy toward the EU (Brussels) seems very real, and make no mistake, the EU is just a thinly veneer covering Germany, which is understood to be setting the agenda.

To pursue fiscal austerity during a contraction and when the private sector is de-leveraging seems simply frightful. Germany wants to dismiss such misgivings by claiming they are shortsighted and that winning back investors confidence by fiscal prudence is the only way to create the conditions for future growth.

The political backlash to the Berlin Consensus (there is, after all, a Washington Consensus and a Beijing Consensus) may be beginning, but it is still to be determined.

In Amsterdam, the next step is for the government’s cabinet to meet on Monday and 1) see if it can cobble together support for some smaller parties and 2) discuss the mandate for a care-taker government until elections can be held. The Dutch are to sell very long dated bonds in the week ahead. These have a key constituency, namely life insurance companies and pension funds, and will look past the current political instability.

Marc Chandler

About 

Marc Chandler joined Brown Brothers Harriman in October 2005 as the global head of currency strategy. Previously he was the chief currency strategist for HSBC Bank USA and Mellon Bank. In addition to frequently providing insight into the developments of the day to newspapers and news wires, Chandler's essays have been published in the Financial Times, Barron's, Euromoney, Corporate Finance, and Foreign Affairs. Marc appears often on business television and is a regular guest on CNBC and writes a blog called Marc to Market. Follow him on twitter.

2 Comments

  1. David_Lazarus says:

    There is no difference between the Berlin and Washington consensus. They are both different views of the same vision. Ultimately the policy will fail. What is needed is debt write downs not more austerity to keep insolvent banks alive. That is why the US is in zombie land right now. Consumers are too indebted to boost the economy and the policy is to keep asset prices high. That stops the clear out of bad loans, and over time impales tax payers on the hook to bail out the banks. 

    Ultimately the Berlin Consensus will destroy Germany. The government bail outs of Greek and Irish banks are really bailouts of German banks. Now when these are unsustainable then the German government will find that the loans that they made to Greek and Irish banks are bad, and that will instantly sour the national balance sheet. The German banks will immediately look very vulnerable and there will be surge in interest rates for Germany. 

    This is going to happen for the Netherlands. The housing bubble there added to the bad lending of their banks will have the same impact on the Dutch household and the whole house of cards will crumble. Austerity makes things worse. With recession now happening and cutting more GDP to “balance the books” will mean that taxes will have to rise. 

    In the medium term the Berlin consensus will destroy the euro and the problem for Germany will be that initially their new currency will surge making exports much tougher to achieve. Lowering interest rates will be ineffective as initially the new DM will be seen as a safe haven, until its banks books are clearer. This will happen to the Dutch banks as well. 

    In fact the solutions that will solve this crisis are simply not being allowed or are currently banned by EU laws and treaties. In the meantime the Dutch will start to see the erosion of decades of improvements to living standards in order to compete with third world nations with no such safety nets. So I would expect small extremist parties to do well all across Europe as a result of the Troika policies. Maybe this is why the Freedom party opted out of the coalition, before it harmed their chances.