Threat to triple-A rating presents another danger for euro zone
ANALYSIS:THE POLITICAL crisis in the Netherlands presents yet another danger to Europe’s battle-weary leaders as they try to find a way out of the sovereign debt morass.
Although the French presidential election has dominated headlines for weeks, a steadily brewing crisis in The Hague burst into the open on Saturday when the coalition led by prime minister Mark Rutte failed to agree a budget.
The schism may lead to a general election, which would create a months-long political vacuum in an important euro zone country. This is significant for several reasons, the main one being that the debt crisis is already on the way back after a few weeks of relative calm.
Tension is mounting over Spain’s shaky finances and ailing banks. This is reflected in rapidly rising borrowing costs. Prime minister Mariano Rajoy and the EU authorities are finding it difficult to convince doubters that Madrid can survive without a bailout. In this volatile scene, anything that adds to the fragility cannot be welcome. The implosion of the Dutch government does just that.
Mr Rutte may yet seek opposition support after his far-right ally Geert Wilders refused to endorse a multibillion-euro package to trim the 2013 budget. He is obliged under EU rules to bring the deficit below 3 per cent next year and must produce a plan for the European Commission this day week showing how his government proposes to do that.
The way forward is far from clear. While Wilders’s opposition to bailouts means Rutte has had to rely on opposition votes to execute his European policy, opposition support for an annual budget is something else entirely.
The signals from the opposition Labour Party suggest it may be willing to co-operate on the budget but only if elections are held in September. It is clear, however, that a looming poll would make it very difficult to strike an ad hoc deal to cut an anticipated €9.5 billion from pensions and other sensitive lines of expenditure.
This sense of uncertainty is all the more glaring given growing threats to the Netherlands’s triple-A credit rating, one of only four remaining in the euro zone after the downgrading of France and Austria. This is a question with serious ramifications for the entire euro zone, for the power of the European Financial Stability Facility to fund bailouts at preferential interest rates rests on the high standing of the dwindling band of triple-A countries.
Although the Dutch government is not averse to tough talk when it comes to bailout recipients and other fiscally weak member states, the irony is that Rutte’s failure to strike a budget deal is weighing heavily on his country’s top rating.
Last week, the rating agency Fitch warned that it will review its rating on the Netherlands in June in light of its rising national debt.
“The Dutch are on the edge of a negative rating action,” Fitch analyst Chris Pryce told the Daily Telegraph. “They run risks if they keep letting debt rise: a cautious approach would be advisable.”
This alert came on top of a warning from rival agency Standard Poor’s, which declared in January that the Netherlands could lose its top rating this year or next if the public finances waver from established deficit-cutting targets.
The country is a keen ally of Germany in the battle to assert control over the debt emergency via fiscal rectitude and was in the vanguard of those seeking a strident approach with Greece. That Rutte cannot keep his own house in order speaks volumes about the pressures weighing on the European powers.