Rutte's liberal People's Party for Freedom and Democracy (VVD) formed a government with the Christian Democratic Appeal (CDA) after elections in 2010. A special agreement with the right-wing and eurosceptic Party for Freedom (PVV) ensured the government had enough votes to secure a narrow parliamentary majority.
The three parties spent March and April negotiating budget cuts that the Netherlands needs if it is to reduce its budget deficit and comply with the 3 percent deficit target set by the European Union. The government is expected to present its budget plans to the European Commission on April 30 to be reviewed under the excessive deficit procedure, which requires countries to reduce their deficits under the commission's supervision. The Netherlands has violated the deficit rules set out by the Maastricht criteria since 2009.
PVV leader Geert Wilders stopped negotiations with the coalition the weekend of April 22 and said the austerity measures under discussion would hurt the Dutch population. He withdrew his support hoping that his party — which is struggling internally after a PVV lawmaker left in protest of Wilders' leadership — would not be affiliated with future austerity measures.
A Wealthy but Troubled Economy
The Netherlands is one of the richest countries on the Continent in per capita terms and is one of four remaining AAA-rated countries in the eurozone (the others are Germany, Finland and Luxembourg). Along with other northern European countries, particularly France and Germany, The Hague has pressured peripheral countries to implement drastic austerity measures since the beginning of the European debt crisis.
Although the Netherlands has one of the lowest unemployment rates in the European Union, the Dutch economy is currently in recession, and the country is experiencing a real estate crisis that has increased household debt levels and reduced an already low domestic consumption rate. Because of the ongoing recession, the Netherlands is expected to carry a budget deficit of 4.6 percent gross domestic product in 2013 if no additional budget cuts are implemented. The Dutch government was negotiating cuts of around 14 billion euros ($18.4 billion). It reportedly planned to increase certain student and medical fees, raise the retirement age to 66 in 2015 instead of 2020, freeze salaries in the public sector and increase the value-added tax.
A core eurozone country, the Netherlands is now less able to comply with the EU deficit rules that it supported in the past. Rutte is expected to lead a caretaker government and to iron out an agreement with opposition parties that will allow him to present a half-finalized budget plan to the European Commission on April 30.
From Eurozone Anchor to Source of Uncertainty
The European Commission is unlikely to take concrete measures to enforce Dutch compliance, showing that the institution, especially regarding core EU countries, is incapable of fully enforcing its own rules. At a time when such countries as Spain and Italy already have softened their deficit goals, peripheral European countries will use the Dutch to justify their own resistance against austerity and against their failure to achieve deficit targets. This will make it more difficult for Germany to ensure compliance with the fiscal rules.
The Netherlands has a low threshold for entry into parliament, which makes it harder for a single party to win an outright majority. Because of the high number of parties in parliament, forming a government coalition takes a relatively long time. Elections in the Netherlands would take place no earlier than June. However, due to electoral laws they will likely take place in September. Current polls show that Rutte's VVD would remain the strongest party in the country but would still be required to form a coalition. Until then, the Netherlands will remain an uncertain force at the core of Europe, which so far has supported the German and French attempt to stabilize the eurozone to ensure containment of German power and the push for austerity measure implementation in the periphery.
Apart from leading to higher borrowing costs, the coming months of political paralysis in the Netherlands will weaken current and imminent eurozone rescue measures.
Ratings agencies have indicated that the country's political uncertainty could lead to a downgrade. A loss of the Dutch AAA-rating could have wider European implications because the country's rating affects the rating of the European Financial Stability Facility (EFSF), the only European bailout fund currently in place.
Furthermore, the Dutch parliament has not yet ratified the second and permanent European bailout fund, the European Stability Mechanism (ESM), which is supposed to replace the EFSF in July. The Dutch parliament in its current situation may not ratify the ESM, which could mean that the ESM will not be operational by July. This would create new market tensions and a reluctance in the International Monetary Fund to help Europe.
The Netherlands has not yet ratified the fiscal compact. Several parties oppose the pact, which they see as a dictate from Brussels that imposes budget rules that are too strict. While Dutch participation is not required to make the fiscal compact functional, it would be a big defeat for Germany if its immediate neighbor did not sign up.
A Key Moment for Austerity and Euroscepticism
These three points are likely to lead to further market pressure. To some degree they will force the Dutch parties to collaborate and form a government as soon as possible. Once again the European Central Bank will have to step in as the only institution able to delay a further severe expansion of the eurozone crisis.
So far the Netherlands has remained stable throughout the crisis. The government's April 23 resignation means the country could become a source of uncertainty and trouble. The upcoming Dutch elections will show how strongly voters in a core eurozone country stand behind austerity as a solution to the crisis and how strongly voters support eurosceptic parties.
