Fisher Investments Editorial Staff

Dutch Power-Play, French Populism

By, 04/24/2012

Eurozone fears resurfaced Monday as the Dutch government collapsed over the €16 billion in budget cuts needed to meet EU deficit limits in 2013. Prime Minister Mark Rutte and his People’s Party for Freedom and Democracy (VVD) supported the cuts, but their coalition partner, the Freedom Party (PVD), abandoned negotiations over the weekend, prompting Rutte’s resignation.

The supposed need for swift cuts seems more political than economic—the Netherlands is one of the eurozone’s fiscally stronger nations, with debt near 65% of GDP. Even without the debated cuts, the deficit would be but 4.7% of GDP—higher than the Maastricht Treaty and fiscal compact’s 3% limit, but tamer than many eurozone members. Dutch GDP contracted a bit in Q3 and Q4 2011, tied to eurozone weakness, but some recent data (like February’s +13% industrial production increase) suggest its economy’s not fundamentally weak. But the European Commission requested a budget draft by April 30, and if the deficit exceeds 3%, Brussels may try to exercise its newfound budget police powers.

Of course, whether EU officials can do much remains to be seen, considering the Netherlands hasn’t yet ratified the compact—which some say could up-end it, given Rutte was a key supporter and, as the dissolving government illustrates, there’s little parliamentary agreement on Dutch budget matters. However, only 12 of 25 participating nations must ratify the pact for it to take force. Three already have, and nine more seems entirely possible. If the Dutch (or French or Irish) ultimately opt out, it needn’t be a European game changer—it just illustrates the agreement’s fecklessness. Moreover, it’s highly unlikely any non-participating nation would suddenly turn profligate. All seem to understand the need to keep national balance sheets in order, regardless of whether they enshrine a largely arbitrary budget limit in their constitutions.

In our view, the PVD’s decision to walk seems less about the Dutch budget or the fiscal compact’s fate. It’s a classic political gambit. Leader Geert Wilders, the face of the Dutch far right, is known for anti-immigrant, euroskeptic, nationalist views. These values haven’t been mainstream in Europe in recent decades, but as the periphery’s troubles have mounted, supranational organizations’ exerting influence has fueled some ire among a minority in Europe, increasing the following of formerly fringe-ish leaders like Wilders. He quit budget negotiations the same weekend his French counterpart, Marine LePen, captured an unprecedented 17.9% of the presidential first-round vote. Wilders’ timing seems less budgetary and more carpe diem—sensing an opportunity to gain seats as nationalist zeitgeist peaks. Thus, expect protectionist blundering as he seeks to curry voter favor.

Similar politicking seems likely in France over the next two weeks. If recent polls are to be believed, President Nicolas Sarkozy needs basically all of LePen’s supporters in May 6’s runoff against first-round victor, François Hollande. Sarkozy has already pandered to them with proposals to close France’s borders to migrant workers and protectionist measures like “Buy French.” On Monday, he gave a direct appeal, “I tell them that I have heard them,” suggesting his hawkishness escalates from here. It’s an odd campaign strategy—usually, in a two-man race, candidates find more votes in the center than in outflanking ideological extremists. But even if it works, it shouldn’t alter much for France, considering policy didn’t follow Sarkozy’s 2007 protectionist campaign.

As for the broader EU, we wouldn’t be surprised if nationalist populism spread beyond France and the Netherlands. However, it’s still a minority view, albeit a very vocal one. Most politicians and voters understand the free flow of labor, goods, services and capital has been a net benefit. Crises often beget populism, which bears watching, but pragmatism tends to win more often than not.

Click here to rate this article:

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


Get a weekly roundup of our market insights.Sign up for the MarketMinder email newsletter. Learn more.