Merkel holds firm at the tiller as Dutch crisis rocks the boat

ANALYSIS:GERMAN CHANCELLOR Angela Merkel held firm to the policy that fiscal rectitude is the answer to Europe's financial woes as the Dutch political crisis fuelled anxiety about the return of disruption to debt markets.

In defiance of the advancing Socialist campaign for the French presidency, Dr Merkel insisted yesterday that balanced budgets were the way out of the crisis.

Her remarks came as French Socialist candidate François Hollande, who hopes to oust president Nicolas Sarkozy in the final poll on Sunday week, steps up his argument against the austerity policies championed by Dr Merkel and Mr Sarkozy.

“We’re not saying that saving solves all problems,” the chancellor said in Berlin.

“You can’t spend more than you take in. You can’t live your whole life this way. Everybody knows this.”

Dr Merkel now faces the loss of a key ally in Mr Sarkozy while political ructions in The Hague present the risk that the Netherlands might lose its triple-A credit rating, further destabilising the euro zone.

In their political rhetoric at least, EU leaders have been seeking for months to tackle the lack of growth in their economies.

Still, Europe remains wedded to the policy of cutting debt and deficits with a view to regaining the confidence of private sovereign debt investors.

Renewed tension over the appropriate response to the crisis, now well into its third year, comes amid concern about resurgent volatility on bond markets.

In political circles, and the financial community, this is largely attributed to the unwinding of the benefit from the European Central Bank’s €1 trillion loan scheme for euro zone banks.

After a rocky day on Monday, however, markets regained some composure yesterday.

More uncertainty looms in the Netherlands after Geert Wilders of the Freedom Party and the main opposition parties declared they would not back budget cuts sought by prime minister Mark Rutte.

His government collapsed two days ago after failing to agree a budget plan for 2013. Mr Rutte must present a new budget plan to the European Commission next Monday, although Brussels officials say there is no requirement for parliamentary approval for the proposal.

In Brussels yesterday, a senior International Monetary Fund (IMF) official suggested the country had scope not to deepen its budget cuts.

“In our view the Netherlands is not in a situation where it would have to go into panic retrenchment if growth were to disappoint,” said Xavier Debrun, deputy chief of the IMF’s fiscal policy division.

Although an election is now likely, the Netherlands sold bonds without a problem yesterday. Spain and Italy also raised debt as planned, but paid higher interest rates. The pressure on these two countries reflects concern about their financial position, with Spain a particular focus in recent days.

“Global financial markets took a turn for the worse going into the second quarter,” said the Institute of International Finance banking lobby, the group which negotiated the €100 billion Greek default in February.

“Notably, Spanish government bond spreads rose back towards their highs from last autumn. This reflects concerns that we may be in for another round of broad market turbulence.”