Netherlands political crisis casts cloud on euro zone

AMSTERDAM Sun Apr 22, 2012 1:36pm EDT

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AMSTERDAM (Reuters) - The Netherlands, a core euro zone member, was drawn into Europe's debt crisis at the weekend when the government failed to agree on budget cuts, making elections almost unavoidable and casting doubt on its support for future euro zone measures.

Prime Minister Mark Rutte, whose centre-right coalition has been in power since October 2010, said on Saturday that crucial talks on budget cuts had collapsed after his ally Geert Wilders refused to do a deal, and that new elections were inevitable.

In the short term, the government must seek support for budget cuts from the opposition parties.

But uncertainty over the makeup of a new government, and waning voter support for bailouts and austerity measures, raised questions over Dutch backing for a fiscal responsibility pact seen as crucial to helping Europe cope with its debt crisis.

The catalyst for the crisis was Wilders, who refused to agree to 14-to-16 billion euros ($18.5-$21.1 billion) of budget cuts needed to bring a bloated budget deficit under control.

Now the euro-skeptic, anti-immigration politician has threatened to fight his campaign on a European battleground.

"The Freedom Party benches are unanimously against Brussels diktats and the attack on our elderly," Wilders tweeted on Sunday, later telling Dutch news agency ANP that Europe would be in "sharp focus" during any coming election campaign.

Wilders most recently has lobbied to jettison the euro and return to the guilder, the old Dutch currency, and he is against immigration not only of Muslims but also of Poles and other central and eastern European members of the EU - views that strike a chord with his supporters.

His Freedom Party had a pact to support Rutte's minority government in parliament, giving it the majority to pass legislation, but after seven weeks of budget talks, Wilders suddenly backed out just when a deal appeared close.

His supporters are against budget cuts, particularly cuts in welfare, health and unemployment benefits.

"This was a package that would damage our economy over coming years and increase unemployment. And all that to meet a demand made by Brussels, accepted by the Liberals, of reaching a 3 percent deficit in 2013," he said on Saturday.

FRAGMENTED POLITICAL FIELD

An opinion poll published on Sunday showed the Netherlands remains highly fragmented politically, suggesting that it could prove difficult to form a new coalition quickly and that Wilders's chances of forming a new government were slim.

The Maurice de Hond poll, conducted after the budget talks collapsed, showed that no single party would have a majority if elections were held now, though Rutte's Liberal Party has strengthened its lead, followed closely by two leftist parties.

The poll also showed that a majority favor smaller budget cuts than those stipulated by the European Union, a further sign that the notoriously frugal Dutch are suffering from "bailout fatigue" and resent the high cost of rescuing profligate peripheral euro zone countries.

"Voters from different parties share the same view - disgust or disappointment over the political action and the political parties," De Hond said in a statement, adding that two thirds of those polled agreed with the statement: "I'm tired of all the party politics".

Asked whether the Netherlands should cut less than the European Union wants, 57 percent of respondents agreed. Supporters of the populist Freedom Party and of the leftist Socialist Party were particularly set against cuts.

The poll showed the Dutch were most strongly opposed to spending cuts that would have a direct impact on standards of living, 56 percent of respondents opposing the introduction of a new, modest prescription charge, and 47 percent opposing an increase in value added tax.

The cabinet is set to meet on Monday to discuss what it should do next to agree a budget and whether to resign. The Queen could accept its resignation, paving the way for elections, or ask the prime minister to form a new coalition.

If elections are called, Rutte's Liberals would win 33 seats in the 150-seat parliament, up from 31 now, the poll showed, followed by the eurosceptic Socialist Party with 30 seats and the pro-Europe Labour Party with 24 seats.

Rutte's coalition partner, the Christian Democrats, and the Freedom Party, until Saturday his main ally, have both slipped in the polls and would win 11 and 19 seats respectively.

BUDGET SINNERS

Rutte and Finance Minister Jan Kees de Jager - who flew back from IMF talks in Washington when the crisis broke - are among the euro zone's harshest critics of "budget sinners" like Greece and Portugal, and the Netherlands is seen as close to Germany in calling for tough austerity measures.

That is about to change.

"The Netherlands can no longer be a role model to others. There may be a reaction in other countries: 'If they don't do it, why should we?' This risk exists, which is unpleasant," said Jaap Koelewijn, an economist and professor of corporate finance.

The annual budget cuts Wilders has balked at are needed for the Netherlands to meet European Commission targets. Without them, its public deficit is forecast to hit 4.6 percent of GDP in 2013, well above the 3 percent agreed with the Commission.

If the Netherlands does not cut spending and breaks EU budget rules, it is likely to lose its coveted triple-A credit rating, leading to higher borrowing costs.

The level of state debt rose to 65.2 percent of GDP at the end of 2011 from 62.9 percent in 2010, Statistics Netherlands said last month.

Ratings agency Fitch recently warned the Netherlands it must get its finances in order or risk a ratings downgrade, while in a report last month, Citibank went as far as to say it no longer deserved to be considered a core member of the euro zone because of its fiscal woes.

The uncertainty over budget cuts and reforms, and the time it takes to organize elections, will probably lead to higher interest rates and higher yields on Dutch government bonds.

"The cost of finance for the Netherlands will go up slightly compared to Germany, but our debt is mostly long-term. The Netherlands doesn't have high refinancing needs in the next few years," said economist Sweder van Wijnbergen.

($1 = 0.7571 euros)

(Additional reporting by Gilbert Kreijger and Anthony Deutsch; Editing by Michael Roddy)

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