Geert Wilders maintains lead ahead of Dutch Parliamentary Election
2017 looks set to be a year fraught with political event risks. Euroscepticism and populism are on the rise following Britain’s Brexit vote and Donald Trump’s Presidential election victory last year. A surge in support for anti-establishment political parties across Europe has unnerved investors and caused jitters about the sustainability of the European common market and the Euro. The common currency has already fallen to its weakest position against the US Dollar in 14 years in 2017 (Figure 1). Political risks, combined with the widening divergence in monetary policies across both sides of the Atlantic, mean further downside clearly remains possible.
Figure 1: EUR/USD (March ’16 - March ’17)
Source: Thomson Reuters Datastream Date: 03/03/2017
Far-right National Front leader Marine Le Pen is dominating the headlines over in France ahead of the Presidential Election in May. Le Pen, who has pledged to follow Britain’s lead and hold a referendum on the country’s future within the European Union, is certain to be one of the two contenders in the second round of voting. Germany will have an election of its own in September, while the defeat for Italian Prime Minister Matteo Renzi at December’s constitutional referendum may also pave the way for early elections in Italy this year.
First up, however, we have the Parliamentary Election in the Netherlands on 15 March. Geert Wilder’s far-right Party for Freedom is (PVV) currently the frontrunner in the polls. We think financial markets are underestimating this election in terms of its importance and, with attention firmly fixed on developments in France, investor's risk being caught wrong footed by the outcome.
PVV leader Geert Wilders is currently marginally ahead in the latest opinion polls. Wilders’ policies are fairly vague, although he has pledged to close the country’s borders, implement fiscal austerity and withdraw the Netherlands from the European Union.
Support for his party has waned somewhat since the beginning of last year, although the PVV still looks likely to garner the most votes in March. A poll of polls since the start of February currently has the PVV Party on course to win the equivalent of four seats more than Mark Rutte’s People’s Party for Freedom and Democracy (VVD) at 28 seats to 24 (Figure 2). Online prediction website PredictIt is, at present, giving Wilders around a 65% probability of winning the most seats, largely in line with the majority of bookmaker odds.
Figure 2: Dutch Election Monthly Poll of Polls (January ’16 - February ’17)
Source: Peilingwijzer Date: 06/03/2017
While this evidence suggests the PVV are set to approximately double the 15% share of the vote they achieved five years ago, this would not necessarily be enough to guarantee their participation in the Government. The Dutch proportional representation system means Wilders currently has nowhere near enough support to achieve the 76 of the 150 seats available needed to form a majority.
A breakdown of the latest polls from February (Figure 3) shows that both the PVV and VVD are almost certain to need the backing of a number of smaller parties in order to reach the magic number of 76 seats required to form a coalition. This is a very familiar prospect for a country accustomed to coalition rule, once nicknamed the ‘land of the compromise’. Since World War II there hasn’t been a single party majority in parliament.
Figure 3: Dutch Election Poll of Polls [February]
Source: Peilingwijzer Date: 06/03/2017
What are the likely outcomes of the election?
Whichever party wins the most seats in March, a fragmented parliament and a complicated coalition formation process are highly likely. A massive 28 parties will be on the ballot paper contesting the election, nearly half of which have only been in existence since 2014, with five parties expected to win between 10 and 16 seats.
If current polling is to be believed, the most likely scenario would be for the PVV to emerge as the leading party and begin seeking a number of coalition partners. However, it looks increasingly likely that this will be hard, as most other parties, including Rutte’s VVD, have dismissed the possibility of cooperating with the radical far-right leader. The more probable scenario would be one where we see a three or more party coalition excluding the PVV, led by Rutte’s People’s Party for Freedom and Democracy.
Conversely, we think the most volatile outcome for European financial markets and the Euro would be a scenario where a coalition would not be able to form without the inclusion of Wilders’ PVV. While this currently remains the least likely of options, a failure of the other parties to successfully negotiate a coalition agreement could cause the leaders of the smaller parties to backtrack on their pledge not to work with Wilders. There have actually only been a handful of examples since the Second World War where the party with the most votes hasn’t gone on to govern.
A long and protracted period of coalition discussions would also increase uncertainty and could somewhat dampen sentiment towards the Euro in the short term. The average number of days to form a coalition in the Netherlands is a little of two months, although it could, of course, take a lot longer.
How have the markets reacted?
So far we’ve seen very little reaction in the Euro to the Dutch election uncertainty. Investors instead remain firmly fixated on the chances of a Marine Le Pen victory in France - the more volatile of the two scenarios given France’s much larger contribution to the Eurozone’s overall GDP (21% compared to 6.5%). The three month risk reversal in EUR/USD, which has emerged as a good gauge of political uncertainty in Europe, is currently at its lowest level since 2012 in anticipation of the busy election period (Figure 3). A negative risk reversal suggests that more investors are expecting a depreciation in the currency than an appreciation.
Figure 3: EUR/USD 3 Month Risk Reversal (2011 - 2017)
Source: Thomson Reuters Datastream Date: 06/03/2017
We think currency markets are currently underestimating the potential impact of the Dutch elections. In France, a Le Pen victory remains very remote according to the polls, which predict she will lose by double digit margins to any of the likely opponents. In the Netherlands, by contrast, the situation is far more murky and two Euro-negative scenarios are perfectly possible. First, the far right leader may emerge with a clear lead among the other parties. Second, the parliamentary arithmetic makes it impossible to form a Government without his participation.
We expect to see a significant increase in currency volatility in the days leading up to and around the election and see a distinct possibility that the common currency will break down below its recent lows against the US Dollar as a result.