AMSTERDAM The Netherlands has called an election for September 12, leaving the country open to months of political and economic turbulence after the government collapsed in a row over budget cuts that are needed to meet strict EU limits.
The euro zone's fifth-largest economy has been one of its most stable but the government became the latest victim of resistance to EU-imposed austerity on Monday when it lost the support of its main ally, bringing political chaos.
Financial markets have been unsettled by the inability of one of Europe's few triple A-rated countries to agree the deficit-cutting it wants from others, because it signals the euro zone will struggle to deal with its problems as a whole.
Dutch bonds fell sharply on Monday but have since rallied as investors say the economy is fundamentally sound even though it has been in recession since July 2011.
The outgoing government has less than a week to win opposition support for a savings package before presenting it to the European Commission. Prime Minister Mark Rutte will send his latest plan to parliament for a debate on Thursday.
"If the parties manage to agree on a sufficient number of measures, bond markets will receive this positively," Walter Leering, fixed income analyst at Dutch private bank Theodoor Gilissen said in a note.
"If not, and the country is in a vacuum until elections, the pressure on interest rates and the AAA rating will probably increase again."
The Queen approved parliament's dissolution, paving the way for the election. However, all parties will keep their seats in parliament until after the election is held.
An opinion poll published on Sunday showed no single party would have a majority if elections were held now but Rutte's Liberal Party had strengthened its lead, followed closely by two leftist parties.
The largest opposition parties have refused to back Rutte's 14 to 16 billion euro package of cuts, with many saying meeting the EU's target of 3 percent of gross domestic product would lead to economic misery.
Europe's politicians are facing a wave of protest over austerity that some economists say is necessary to solve a debt crisis that has led to Greece, Ireland and Portugal seeking outside financial aid.
Others, including the International Monetary Fund, have cautioned Europe against cutting spending too far and too fast at the expense of restarting economic growth.
The Dutch political crisis comes as French voters seem poised to chose economic growth over austerity by voting for Socialist presidential candidate Francois Hollande over conservative President Nicolas Sarkozy on May 6.
"I wouldn't be rushing into buying here, whether you're looking at France of the Netherlands, I very much doubt we're finished," said Padhraic Garvey, head of investment grade strategy at ING.
The Netherlands is one of the euro zone's most fiscally conservative members and the government has been critical of the region's "budget sinners", the countries struggling to bring down their deficits.
All ten parties in parliament are broadly supportive of budget cuts but not all to the extent needed to reach the EU limit.
"When one of the stronger, or arguably the strongest, proponent of fiscal rules in the European Union, struggles to adhere to those rules itself that means that those rules could themselves become weaker," Sarah Carlson, senior analyst at the Moody's ratings agency told Reuters.
Rutte, who will stay in place until the elections, is hoping to push his plans through the 150-seat parliament on Thursday with the help of small opposition groups.
His Liberal Party has 31 seats and his coalition partner has 21 seats. Finance Minister Jan Kees de Jager has started talks about a revised budget plan with the opposition parties including a bloc of three smaller groups which have indicated they may be willing to do a deal that would provide a majority.
The smaller opposition parties which appear to be supportive of getting the budget deficit down to 3 pct of GDP are the Democrats 66, with 10 seats, the GreenLeft, with 10 seats, and Christian Union, with 5 seats.
The Reformed Party (SGP), with 2 seats, has also shown its willingness, which would bring the total in favor to 79 out of 150 seats.
"I am full of energy because something needs to happen in this country. We want to take responsibility for this and we are doing this together with Democrats 66 and Green Left," Christian Union leader Arie Slob told reporters.
The plan Rutte is sending to parliament is expected to be similar to the one he negotiated with Geert Wilders' euro skeptic Freedom Party.
That deal would have cut the budget by 14.4 billion euros in 2013, bringing the deficit for that year to 2.8 percent of GDP. It included an increase in value added tax that would have raised 4.8 billion euros.
Another proposed measure, to charge a fee of 9 euros for prescription drugs, would raise 1 billion euros.
An opinion poll published on Sunday showed that such measures would be very unpopular.
Wilders had supported the government for 18 months before abruptly withdrawing his backing over the weekend after seven weeks of talks. Without the savings, the deficit is forecast to reach 4.6 percent of GDP next year.
He said he had enough of being dictated to by Brussels but Dutch media say the government's collapse may mean that many of his policies, such as a ban on face veils, primarily aimed at Muslim women, may not be turned into law.
Dutch bonds have held up reasonably well despite the political turmoil.
The spread on Dutch 10-year government bonds compared with the German equivalent, Europe's benchmark, leapt to its widest in three years on Monday.
But it has since fallen back, while the Dutch 10-year bond yield fell to around 2.335 percent on Wednesday from around 2.348 percent late on Tuesday.
Investors said they were focused on the strong economy, relative to other members of the euro zone. Unemployment and debt levels are low and the country is running a trade surplus.
"There are obviously some challenges at the moment but it is important to keep them in perspective and not forget the very significant sources of strength that exist in this country," said Carlson from Moody's.
Fitch ratings agency said on Wednesday it was assuming the Dutch would meet the EU target in 2013.
"However, domestic policy uncertainty has increased, while financial and economic risks from the euro zone crisis remain significant. If it becomes clear that our base-case is unlikely to materialize, pressure on the rating will increase," it said in a statement.
(Additional reporting by Robert-Jan Bartunek, Ana da Costa and Marius Zaharia; Editing by Anna Willard)