Do you know your PVV from your VVD? Of course you do! One is the Party for Freedom, while the other is the People’s Party for Freedom and Democracy. And, at the risk of turning this into a Monty Python sketch, it’s time to turn our attention to our European neighbours as the Dutch go to the polls on Wednesday, kicking off a European election cycle that has been a source of concern to investors and the powers that be on the continent in recent months.
After the Dutch vote, we can look forward to the French presidential election (rounds one and two), German regional elections and French parliamentary elections, before finishing up with the German Federal elections in September. Populist, anti-EU sentiment has been on the rise across the continent and political analysts have been making connections between this phenomenon and the Brexit and Trump votes. To some extent, the Dutch vote eases us into the 2017 election obstacle course and will give us a relatively low-risk gauge of how dispirited voters in Europe’s core are.
The continued rise in popularity of Geert Wilders’ anti-EU, anti-Islam PVV, which has been winning seats from the ruling coalition, led by Mark Rutte, is regarded as yet another symptom of the European malaise. The two will go head to head in a TV debate on 13th March with identity at centre stage following a weekend of high drama during which the Dutch banned Turkey’s foreign minister from entering the country, sparking riots in Rotterdam, and president Erdogan referred to the Netherlands as a “banana republic”. Whether or not Wilders tops the polls on the 15th March, he is unlikely to become prime minister. No party in the Netherlands has ever won an outright majority, which means that coalition is inevitable, and none of the larger parties are willing to go into government with the PVV.
Interpreting the outcome of Dutch elections is tricky at the best of times due to the proliferation of parties (there may be more than a dozen represented in the lower house after the vote). However, a greater than expected swing to the PVV may lead to elevated volatility in European asset prices, if only because it keeps the anti-establishment momentum going, ahead of the far more interesting French presidential election first round 23rd April. The yield spreads between both Dutch and French bonds and their German equivalents have been rising in recent months, partly due to the election cycle.
While meeting clients recently, it was obvious that the upcoming elections are being interpreted as votes on the future of Europe. It is hard to know how much of the PVV’s support reflects genuine anti-EU sentiment and how much is due to Wilders’ anti-immigrant rhetoric. Europe’s elite will be hoping that Wilders support falls short of his recent poll showing and the anti-EU tide subsides.
Meanwhile, in France we have yet another long-shot, anti-establishment candidate who, according to the experts, can’t possibly win. Sound familiar? Conventional wisdom has it that Marine Le Pen may win the first round of the election before being defeated by whomever she encounters in the second round on 7th May. Recent polls have former economy minister Emmanuel Macron neck and neck with Le Pen for the first round. Macron has been the main beneficiary of Francois Fillon’s dramatic fall from grace amid corruption allegations and is running on a reformist agenda that would please the markets. Le Pen, on the other hand, like Wilders in the Netherlands, would seek to take her country out of the euro and restore the franc.
The financial markets’ worst nightmare was a lose-lose run off between Le Pen on one side and a single left wing candidate, most likely Benoît Hamon, on the other. However, the left has so far failed to agree on a single candidate and the deadline for registration is Friday, 17th March.
Whatever the outcome of the Dutch vote on Wednesday, don’t expect to see a government formed any time soon. Coalition building in the Netherlands takes months and we may have a new French president before we see the next Dutch government. In the meantime, we will have a better sense of whether European voters have stalled the populist march or seriously hurt the European project.
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