Netherlands kicks off exciting election cycle

Tomorrow, the Netherlands will hold its general election to elect all 150 members of the House of Representatives (the “Second Chamber”).

The Dutch election is the first of three elections (possibly four if Italy decides to hold early elections this year) in European Union founding member states this year, followed by France (April/May) and Germany (September).

As the nationalist and anti-euro Party for Freedom (PVV) of Geert Wilders has been leading the polls and could become the biggest party in the Dutch Second Chamber, many people fear that the Dutch election outcome will further strengthen the wave of populism and protectionism that is spreading across the globe. And as the first round of the French presidential election will be held a little more than a month later, it may also enhance the popularity of Wilders’ sympathizer Marine Le Pen of the National Front, putting more fuel to the fire of rising anti-EU populism.

Risk of the Netherlands leaving the euro remains very slim
Political risk in Europe translates to a considerable extent into the risk that a populist party like Wilders’ PVV or Le Pen’s National Front will call and win a referendum on either EU membership or leaving the euro. Both have called for such a referendum. It is however extremely unlikely that Wilders will gain a majority in the Second Chamber. His party will likely not even become part of a new Dutch cabinet, as other political leaders such as the current Prime Minister and leader of the Party for Freedom and Democracy (VVD) Mark Rutte have already ruled out forming a cabinet with them.
A referendum on EU membership in the Netherlands is therefore not likely in the foreseeable future. A much stronger position of the PVV could bring such a referendum closer, but this will be a lengthy political battle, covering both houses of Parliament. Currently, an advisory referendum is only possible on approved but not yet enacted legislation. This clearly excludes the issue of Dutch EU membership. An advisory referendum on that issue would need an absolute majority in both Houses of Parliament.

France likely to have a far larger impact on markets
We do not expect the Dutch elections to have a meaningful impact on financial markets, irrespective of the outcome. They do however play a role in the bigger picture of rising anti-EU populism, in view of the elections in France, Germany and Italy that follow. Should Le Pen win the second round of the French elections, it would have a much larger impact on markets. Currently the polls are indicating she might win the first round, but would have limited chance to win the second round. So a Le Pen win currently is a tail risk, but we know from last year that political tail risks do turn into reality sometimes.