Dutch election result does not extinguish European nationalist threat
Voters in Netherlands have put a new spring in the step of the euro, election pollsters and those alarmed by the rise of European nationalism, but the result does precisely nothing to vanquish the potential for nationalist victories in the upcoming elections in France and Italy.
While many observers have hailed the crushing of nationalist hopes in Holland as having contained the wider contagion for the European Union, several others felt it was far from enough to put the populist genie back in the proverbial bottle, with UBS even suggesting France's Marine Le Pen has a 40% chance of victory.
There were also suggestions the eventual make-up of Netherlands' government was likely to result in more stress for peripheral members of the bloc, such as Greece.
Focusing first on the facts, results of Netherlands' election in the early hours of Thursday indicated incumbent Prime Minister Mark Rutte's centre-right VVD party retained the most seats in parliament, down to 33 from 44 last time.
Joining up again with other centrist parties, Rutte should be able to form a new coalition government.
However, eurosceptics now have more of the balance of power in the 150-seat Tweede Kamer lower house, with a total of 63 seats compared to 51 after the previous election.
Furthermore, while Geert Wilders' far-right, eurosceptic and paradoxically coined 'Freedom Party' rose to become the second largest party, with 20 seats, the PVV had been tipped for a stronger result and the number of seats won was down from the 24 won in 2010.
Populism is one thing, but while in Greece, Spain and Portugal there has been a leap in leftist populism, Wilders and France's Marine Le Pen are seen as posing a darker threat of nationalism, with Germany's far-right Alternative for Deutschland (AfD) party are also poised to enter federal parliament for the first time in September.
The self-styled 'Dutch Trump' has been taken to trial for inciting racial hatred and based a large part of his campaign on bigotry, though French National Front leader Le Pen, while she has moved the party some way from its foundations under her racist father, remains a potentially destructive nationalist, with right-wing credentials built on a vehement anti-immigration and eurosceptic stance.
Into the Wilder-ness
After the Netherlands' 2010 election, coalition negotiations lasted 127 days, a considerable improvement on the European record of 207 days from 1977, but on average it takes about three months to form a Dutch government.
An eventual coalition between Rutte's VVD and other pro-EU centrists was seen as pretty much certain, leaving Wilders and his colleagues shouting from the fringes, which, listening to many Europe-focused economists, suggested the death knell had been sounded for populism, if not nationalism.
Barclays' Fabrice Montagne said the results "suggest that the rise of populism and fragmentation has been contained and bode well for the elections to follow across Europe."
HSBC's take was that the election sent a signal about a bigger European political event -- the French presidential election -- and that markets might "interpret the Dutch result as an indication that the wave of populism sweeping across Europe is no longer rising". That would "restore some faith in political punditry and polling," said Schroders.
Schroders added: "The market should take some confidence from the outcome of the Dutch election, as it's the first sign that mainland European economies may turn against the political parties with more anti-EU policies."
The upbeat feeling was reflected in the euro's 1.2% overnight surge to a five-week high against the dollar.
France and Italy are a different story
While markets and pro-Europeans clearly took some comfort from Netherlands' election result, analyst Bas van Geffen at Rabobank said the situation could not easily be compared with other upcoming ballots, such as in Italy and France.
"We caution that pollsters have concluded that a large majority of VVD voters ultimately decided in favour of the party -- at least partly -- because of the economic conditions. With the French economy still lagging the Dutch (sic), French voters may still be wooed by populist promises," said van Geffen.
Capital Economics' Europe economist, Stephen Brown, was another who felt that there was "little reason" to think the PVV’s disappointment would translate to eurosceptic parties in France and Italy.
European Commission’s most recent Eurobarometer, which monitored changes in public opinion, found that Netherlands was not the most eurosceptic country, leaving that honour to the UK at 33%, France at 31% and Italy at 30%. Thereafter trailed Netherlands at 28%, Germany at 21% and Spain at 19%.
Brown also noted the EU was likely to see another effect from the shift in the balance of power in the Netherlands, with both soft- and hard-eurosceptic parties now holding 63 seats: "That suggests that there is now less chance of the Netherlands agreeing to further EU integration or fiscal bailouts for indebted member states," opined Brown.
Gabriel Sterne, head of global macro at Oxford Economics, took a closer look at the market reaction to the Netherlands' result, commenting it was plausible to think that even the defeat of popularist Marine Le Pen alone would not be enough to push French or other Eurozone bond spreads back towards August-2016 levels.
"It would take further populist defeats and sinking support for populism more generally to put the populist genie firmly back in the bottle."
Focus on Le Pen
Polls showing support for hard-line Le Pen in both the first and second rounds of the election have been stubbornly stable, despite plenty of volatility in support for other candidates.
"This vote suggests that her capacity to broaden her appeal and improve her standing in the polls may be limited," said Credit Suisse in a note.
"If that is the case, her chances of winning the presidency are indeed limited."
When Netherlands was faced with radical populist candidates such as Wilders the electorate turned out in force in a bid to vote them down, but was not entirely successful given.
Barclays noted that Wilders ran on a far more extreme platform than Le Pen, which meant that the last minute withdrawal of voter support for the political extremes might be less of a theme in France.
"Also, fragmentation, even if less pronounced than polls suggested a couple of weeks ago, is still an important feature of the Dutch (sic) election (first four-party coalition since the seventies) and more widely in the western world.
"Hence, it is also likely to play a role in the upcoming French elections, in particular in the first round, were vote dispersion to lead to surprises as candidates may poll close to each other."
UBS said the unconvincing performance from Wilders' party in the Netherlands may increase French voters' sense of urgency when heading for the ballots for their elections.
"Hence, we caution against extrapolating the Dutch results, and continue to see a 40% chance of a Le Pen victory in France," UBS analysts said.
From one purely financial perspective, defeats for Le Pen's and the continuation of liberal governments in Western Europe are key for the single currency to maintain is level, otherwise the euro and dollar may both wobble and allow the pound to regain some ground.