The Dutch elections taking place 15 March may be of considerable importance to investors, or not, depending on the different views that have emerged in the run-up to an event that may set the blueprint for how far electors in key European jurisdictions decide to swing towards ‘populist’ politics.
Viktor Nossek, director of Research at WisdomTree, has said that the event does matter, because of the symbolism that a win by the far right PVV party led by Geert Wilders would send to those voting in subsequent elections, firstly in France, then potentially also in Germany and Italy.
“What matters is the signal of confidence a PVV election win will send to the far-right and Eurosceptic movements in the EU. It will come timely to embolden and build momentum for the National Front in France just five weeks ahead of their elections. A win by Front National in turn could reinvigorate the AFD in Germany and the Five Star Movement in Italy,” Nossek said in a note.
“More importantly, a Netherlands far right win will put pressure on mainstream centre-left and centre-right parties, both in the Netherlands as well as in wider Europe, to adopt increasingly hard-line policy proposals so as to not appear weak in front of their own electorate. Putting national interest ahead of the EU would be a logical response to blunt the populist rhetoric of the far right.”
The risk to investors from this type of change is that it focuses more attention on the imbalances in the eurozone, between the surplus economies of the Netherlands and Germany, versus the deficit economies of France, Italy, Greece and Portugal, where governments may be in favour of additional fiscal transfers.
“At stake is European financial solidarity which, while being side-lined by immigration issues in 2017, may become a central theme in 2018 and beyond by stronger EU members.”
“At risk too will be the Stability and Growth Pact which is constraining weaker EU members in their ability to recover sustainably. This polarised political stance is exacerbating the divergence in economic growth, and feeds onto itself in a vicious circle.”
“Eurozone government bonds with deteriorating creditworthiness, most notably issued by Italy, Portugal and Greece remain at risk. French government bonds, too, look vulnerable to speculative short term attacks. We believe the safe havens are German bunds and potentially gold as the euro comes under renewed pressure.”
However, taking a different view is Robeco’s chief economist Léon Cornelissen, who has recently stated that the nature of local politics, with some 28 political parties looking to win seats in the Parliament “means that the final result is likely to be as flat as the country itself”.
“The Netherlands uses a system of proportional representation, with a smörgåsbord of political parties where no-one is dominant. Although the PVV has consistently polled as the largest party for about a year, that doesn’t translate to much in terms of seats and parliamentary power.”
“These polls predict that the PVV will probably get 24-28 seats out of the 150, and there’s no chance they’ll get an absolute majority. And since few people are prepared to work with the PVV and Wilders, they wouldn’t be able to form a coalition even if they were the largest party. So there’s no cause for alarm.”
“The PVV is more of a long-term risk because the party has long punched above its weight, suggesting that they’re the only true opposition as an anti-establishment group. In fact, Wilders is already an establishment figure, having served for 19 years in the Dutch parliament; he cannot claim to be an ‘outsider’ given his longevity.”
“Of course, some people will look to the result in the Netherlands as being a bellwether for France, where Marine Le Pen and her far right National Front is standing for president. An unexpectedly strong showing by Wilders would suggest the populist tsunami is still going on, increasing the risk of a Le Pen presidency. Investors would then switch their holdings into safe havens, including ironically, the Netherlands.”
“But there just isn’t the same anti-EU feeling in Holland as was seen with the Brexit. A recent poll by TNS Nipo showed that only a quarter of Dutch people are in favor of leaving the EU, and a firm 55% backs Remain. The Netherlands is a founder member of the EU, and has important trade relations with the UK, where the Brexit is already a worry about lost trade for the Dutch.”
“So there is a consensus in the Netherlands that leaving the EU would be madness, though there are worries about the euro, because the feeling is the same as it is in Germany – that we pay up for the southern periphery countries.”
As for the impact on local stocks, even a Wilders’ win is seen as having limited influence: the PVV would have to form a coalition government to rule, and this would require toning down more radical policy ideas. The bigger danger might be a spillover effect onto other European stock markets given the possible reaction that such a win signals another step away from the euro.
But locally listed companies such as Shell, Unilever and Phillips gain most of their earnings outside the Netherlands. And the plethora of financial stocks are unlikely to be much influenced by a Wilders’ win because a significant share of the regulation that affects them comes via the ECB.
“Unless the Netherlands actually goes for a Nexit, most equities are just not affected by Dutch elections.”