Wall Street Journal | April 23, 2012
AMSTERDAM (Dow Jones)–Dutch Prime Minister Mark Rutte and his cabinet Monday tendered their resignation to Queen Beatrix of the Netherlands, after his ruling coalition lost support of a populist party due to disagreements over austerity budget measures.
The Queen will take the resignation into consideration and has asked the cabinet to continue to work “in the interest of the Kingdom,” the government said in a statement.
Rutte is due to address the Dutch parliament at 1200 GMT Tuesday.
The widely expected step, which marks an end to Rutte’s center-right minority government after just one and a half years, comes after weeks-long talks over measures to slash the Dutch government’s budget deficit collapsed over the weekend, raising questions about the future commitment of one of the euro zone’s foremost proponents of fiscal stringency to a German-led austerity agenda.
The Netherlands has been a key ally of Germany and one of the most vociferous supporters of austerity since Greece’s debt problems initiated the euro zone’s debt crisis more than two years ago. But its economy is performing poorly and is expected to shrink this year, widening its budget deficit and making it one of the worst-performing in the euro zone.
The talks collapsed after the right-wing Freedom Party pulled out of talks with Rutte’s center-right liberal party. The negotiations had been aimed at cutting the budget deficit to 3% of gross domestic product next year, in line with European Union rules, from a forecast 4.6%.
Geert Wilders, the head of the anti-euro Freedom Party, called for elections “as soon as possible.” He said agreeing to the budget cuts would have hampered economic growth and triggered unemployment.
The Dutch news adds to a growing catalog of governments facing internal rifts and public protest rising from the growing strain that fiscal consolidation has been having on euro-zone economies. The euro-zone has set deficit reduction as a top policy priority to defuse the region’s sovereign debt crisis, but the cost in lost demand and jobs is sorely testing political consensus.
This leaves Germany’s Chancellor Angela Merkel facing an increasingly lonely battle of keeping austerity plans on course, even among what had been some of the euro-zone’s strongest supporters the German doctrine of fiscal probity.
Francois Hollande, the French socialist who just edged out President Nicolas Sarkozy in the first leg of the French presidential elections, has built support as an anti-austerity candidate. The Spanish government, only in government since December, is facing increased popular opposition to redoubled cutbacks as unemployment keeps rising. As Greece braces for new elections, set for May 6, the country’s splintered political landscape has become increasingly radical after two years of harsh reforms.
Europe’s financial markets showed the strain Monday after the Netherlands became the latest country in the euro zone to be thrown in political turmoil.
The euro fell to the day’s lows against most other major currencies following the Dutch government’s resignation. The euro shed almost 1.4% against the yen today and 0.3% against both the dollar and the pound. The euro’s now just off its lows, but only just.
Government bonds from the euro area also came under early pressure, but later recovered somewhat. The Netherlands suffered more clearly, with 10-year yields rising by five basis points to 2.38%. The extra yield demanded by investors to hold 10-year Dutch bonds instead of haven German Bunds widened to 80 basis points, the highest in three years.
Meanwhile, the cost of Dutch five-year credit default swaps, used by investors as a way to insure against non-payment on a government bond, jumped towards a record high. The rate moved 13 basis points wider to 132 basis points, according to data provider Markit. That means it now costs $132,000 a year to insure a notional $10 million in Dutch five-year bonds against default. The record level, struck last November, was $136,000.
The spreading of market tensions to even higher rated euro-zone economies marks another chapter in the debt crisis and reflects the waning capacity of countries in the common currency region to weather additional austerity measures. Political leaders in Greece, Italy, and Spain have already been ousted but discontent is now rumbling even in some of the countries that prescribed the austerity medicine.
Attention will now turn on the timing of new elections in the Netherlands and the country’s ability to push through with the budget reforms while it’s faced with a political vacuum that could last several months.
If the Queen accepts the current cabinet’s resignation, it generally takes about three months before elections are held, although in theory elections could be held late June, according to a Dutch organization that advises the Government on elections. It said early September appeared to be the most likely date.
But several opposition parties have called for elections as soon as possible.
“The longer we wait, the longer the uncertainty continues,” Diederik Samson, leader of Dutch labour party, or PVDA, said in a TV interview.
Finance Minister Jan Kees de Jager indicated the government will try to push through with its planned budget cuts soon, even without parliamentary majority. Euro-zone countries have until April 30 to submit to the EU commission any additional budget reforms.
“The Netherlands will be up to its responsibilities, even in this difficult political situation,” De Jager said at the sidelines of the International Monetary Fund meetings in Washington over the weekend.
Opposition parties, which are also calling for early elections, haven’t indicated so far if they would support the government’s austerity package.
European Commission economics chief Olli Rehn on Sunday said he expected the government would continue to seek an appropriate solution to its budget problems.
“We trust that the Dutch government will continue to seek budgetary solutions that are important for the financial stability of the country and for the welfare of Dutch citizens,” he said.
A public-opinion poll conducted by polling institute Maurice de Hond among 4,500 people after the center-right minority government lost the Freedom Party’s support shows Rutte’s liberal party would emerge slightly stronger if elections were to be held now. But he would still need support from at least three other parties to form a majority government, in which analysts say left-wing parties could play an important role.
Without extra measures, the Netherlands will breach the budget rules it has been fiercely advocating as one of the euro’s founding nations. This has fueled a debate on whether the country still belongs to the group of “core” euro-zone states with solid public finances.
Last week, Fitch Ratings threatened to strip the Netherlands of its cherished triple-A credit rating if it failed to take action to cut its budget deficit and stop its debt from rising.
The ratings firm will consider its rating of the Netherlands in June, and placing it on negative outlook is a possible first step toward a downgrade, it said.
The Netherlands is one of the four remaining triple-A-rated countries in the euro zone, along with Germany, Finland and Luxembourg.
Klaas Knot, Dutch central bank chief and ECB governing council member, has said the government’s borrowing costs could rise significantly if it were to lose its top rating.
-By Archibald Preuschat, Dow Jones Newswires; +31 20 5715 218; email@example.com
(Robin Van Daalen in Amsterday and Geoffrey T. Smith, Jessica Mead, Katie Martin and Neelabh Chaturvedi in London contributed to this article.)