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No ‘Nexit’: Why We Expect a Pro-EU Dutch Government

16/03/2017
Dutch Parliment - Hague

Summary

Now that the VVD party has emerged victorious in the Netherlands’ parliamentary elections, we expect the current administration to continue more or less in its current form – and possibly become even more aligned with Brussels.

Key takeaways

  • The defeat of Geert Wilders and the PVV leads us to believe another coalition of pro-EU parties will be formed
  • As a result, the Netherlands should not be the next Brexit-style domino to fall in Europe
  • With the Dutch economy in good shape, we do not expect the new government to implement any dramatic changes to its economic policies
  • The Netherlands benefits from global free trade and a weak euro, to the extent that its investment prospects are less like its European neighbours’ and more like its global counterparts’
  • The Netherlands is a strong EU member with attractive credit fundamentals and a triple-A rating; the markets’ attention will now turn to elections in France, Germany and possibly Italy

In the Netherlands, coalitions are critical

On 15 March, millions of Dutch voters went to the polls to elect 150 members of the Tweede Kamer (House of Representatives), which will use proportional representation to divide its 150 seats according to the number of votes won by each political party represented in the election.

Unlike in other countries, in the Netherlands it is virtually unthinkable to see one political party win a majority vote and lead the country; instead, governments run by coalitions are the norm because it takes 75 seats to form a government, and winning that many seats is extremely difficult. At the same time, forming a coalition is also very challenging: In 2010, coalition negotiations lasted 127 days – a relatively quick turnaround compared to 1977’s negotiations, which took a record 207 days.

These are some of the reasons why the last party that held an outright majority in the Netherlands was the Liberal Union party in the early 20th century. And they make the accomplishments of the current government, led by Prime Minister Mark Rutte of the centre-right VVD party, even more impressive. Mr Rutte’s government was formed by a coalition with the centre-left PvdA party, and it is the first one since 2002 that has managed to serve its full term. His government’s staying power has provided the Dutch people with some generally much-appreciated continuity and added a new consideration for voters contemplating making a wholesale change.

What the post-election government will look like

Now that the election results are known, and the VVD party has emerged victorious, we expect the current administration to continue more or less in its current form, with possibly a few more members added to its ranks.

The coalition’s current members and prospective ones all seem to be united around the issue of education, and they are all pro-European Union. Of course, there are clearly big differences between these parties, so there will likely be protracted negotiations about the composition and objectives of the coalition. However, we do not believe this will prevent them from forming a pro-EU government – and possibly an even stronger one. As a result, we believe the Netherlands will not leave the EU any time soon.

Three core issues at stake

In the run-up to this election, security, migration and sovereignty were three of the biggest issues for Dutch voters.

The first two, security and migration, blurred together into one when terrorist attacks and Europe’s migrant crisis undermined the Dutch government’s credibility. Obviously, migration is a powerful issue throughout Europe, given German Chancellor Angela Merkel’s stance on refugees and Germany’s open-door policy. But in the Netherlands in particular, the anti-Islam, euro-sceptic PVV party found surprising support for its calls to limit migration, close mosques and ban the Koran from public buildings.

The other core issue for Dutch voters, sovereignty, was kept at the fore of the public’s consciousness thanks to the EU’s “freedom of movement” principle and Germany’s response to the migrant crisis. Dutch voters had to grapple with the idea that being a member of the EU meant giving up sovereignty, and the populists’ agenda gained some undeniable strength in this area. The Dutch system of proportional representation means that undeniably populist issues such as the freedom of movement and the future of migration will continue to influence both the domestic political agenda and the debate over the future of Europe.

A strong domestic economy

Overall, the Netherlands is in good shape economically and forms a strong member at the core of Europe. The gross domestic product of the Netherlands has returned to levels last seen before the Great Financial Crisis, with growth of approximately 2.1 per cent projected for 2017; meanwhile, its debt burden of around 64 per cent of GDP is even lower than Germany’s. In addition, the Netherlands’ ratio of sovereign debt to GDP is declining, thanks in part to higher-than-expected tax revenue last year, and thanks also to the re-privatization proceeds from banks nationalized after the crisis.

The monetary policies of the European Central Bank are cause for some concern for the Netherlands; the Dutch and Germans have seen their own central banks “lend” huge sums to the ECB's central-payment system, known as Target 2 – actions that effectively bailed out the weaker euro-zone members. Yet since September 2016, the Netherlands has seen their surplus Target 2 balance deteriorate. This suggests that the EU is more sensitive to political developments than previously thought, and that the markets are trying to protect themselves from a populist surprise in the Netherlands’ elections.

In terms of the Netherlands’ tax system, we do not expect significant changes to be implemented; however, if anti-EU parties were to gain traction in a coalition, their anti-free-trade stance could cause corporate taxes to rise.

Markets must become less narrow-minded

The uproar over a proposed merger of two major postal services in the region suggests there may be underlying hostility toward other kinds of regional consolidation, which the Dutch marketplace has benefitted from in the past. As a result, some corporations in the Netherlands have sought to unwind their interests in other countries as they encounter an unwelcoming environment at home, which could make the Dutch equity market less dynamic.

Overall, the journey to the “United States of Europe” requires local or national sentiment to become less narrow-minded so that European consumers can access better services at better prices, and so corporations can benefit from the economies of scale that Europe offers.

Fixed-income investors should find that the Dutch government’s prudence is successfully keeping sovereign-bond supplies low, which should suppress yields and keep prices high. At the same time, investors in the Netherlands’ equity and credit markets will find that issues are driven more by strong international exposure than by the local economy – which, again, is doing well.

Key considerations for investors

Anti-EU sentiment in the Netherlands did not significantly increase during the campaign, though anti-Islam feelings certainly grew. Yet despite rising support for populism, we believe there is little chance the Netherlands will leave the EU or the euro, since the Dutch are well aware that their strong economy is dependent on trade.

If we consider the European Commission’s most recent Eurobarometer, which monitors changes in public opinion in the EU’s member states, the Netherlands is not the most euro-sceptic country. As the accompanying chart shows, the Netherlands is less sceptical of the EU than France, Italy and the UK, but more sceptical than Germany and Spain.

The Netherlands isn't the most euro-sceptic EU country

Netherlands election

Source: Eurobarometer as at November 2016.

All told, although investors globally seem to have shaken off the political surprises of 2016 with incredible nonchalance, European elections have the potential to deliver more market shocks this year. However, the Netherlands’ markets have remained sanguine, which is probably due to the fact that they are underpinned by attractive credit fundamentals that have helped the country maintain its triple-A credit rating.

Globally, equity markets should now turn their attention to elections in France, Germany and possibly Italy, looking for any notable swings in sentiment. Investors should also watch closely for any resolution of the ongoing Greek debt problem, and for issues arising over the ECB’s Target 2 balances; either one would have political ramifications for the Netherlands given that its central bank has lent a significant amount of money to the peripheral countries.

Overall, the Netherlands will be one of the key parties involved in the debate over the future of Europe, helping to determine whether there will be more muddling-through, whether Europe will build a “coalition of the willing” or if we will eventually see the creation of a European super-state.

Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. Investments in commodities may be affected by overall market movements, changes in interest rates, and other factors such as weather, disease, embargoes and international economic and political developments. Investments in smaller companies may be more volatile and less liquid than investments in larger companies. Investments in emerging markets may be more volatile than investments in more developed markets. Dividends are not guaranteed. Bonds are subject to interest rate risk and the credit risk of the issuer. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.

The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.

This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations.

This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424, Member of Japan Investment Advisers Association]; Allianz Global Investors Korea Ltd., licensed by the Korea Financial Services Commission; and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.

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Europe Is in a Critical 'Super Cycle' of Elections

Ingo Mainert | 16/03/2017
European Union Parliament Buidling

Summary

As the Netherlands sorts out its new parliament and Article 50 looms, France and Germany will be the next to head to the polls. Will growing populism and anti-Europe sentiment move the EU away from integration toward dis-integration?

Key takeaways
  • The PVV’s defeat in the Netherlands should pave the way for a new governing coalition of pro-EU parties, preventing a “Nexit” in Europe
  • A Macron win in France would help pro-reform forces in Europe and boost hopes for a new beginning for the EU
  • If Germany heads toward a “red-red-green” coalition of left-leaning democrats and environmentalists, capital markets would need to take a close look
  • Italy is the elephant in the room, with a lack of reforms and serious banking issues presenting critical problems

As the Brexit drama plays out in the UK, 2017 is shaping up to be an election year like no other for the rest of Europe. In this “super cycle”, the Netherlands wrapped up parliamentary elections on 15 March, French voters will head to the polls on 23 April and 7 May, and Germany voters will have their say on 24 September. In addition, early elections in Italy are still a possibility.

In the Netherlands, the euro-sceptic Party for Freedom (PVV), led by Geert Wilders, attracted a great deal of attention in the run-up to the country’s 15 March parliamentary elections. Now that the PVV has lost out to Prime Minister Mark Rutte’s centre-right VVD party, we expect that the next government coalition will be pro-European Union. This should prevent the Netherlands from leaving the EU anytime soon. However, not only has Mr Wilders already made his mark on the public debate, but the Dutch system of proportional representation means that undeniably populist issues such as the freedom of movement and the future of migration will continue to influence both the domestic political agenda and the debate over the future of Europe.

The presidential election in France is also becoming an increasingly important and intense affair. At the time of this writing, there are three leading candidates, with the far-right Marine Le Pen gaining ground on the centre-right Francois Fillon, but with the social liberal Emmanuel Macron holding on to his favoured status. While a victory by Ms Le Pen in the first round is possible, Mr Macron currently appears to have the best chances in the final ballot. This would be a clear victory for pro-reform forces in Europe, and a chance for a new beginning for the European Union.

In Germany, the mood is shifting quickly at the expense of Chancellor Angela Merkel. The new candidate of the socialists – Martin Schulz, the former president of the European Parliament – has got off to a brilliant start since his nomination. He and his Social Democrats have pulled close to Mrs Merkel’s Christian Democrats, though the sustainability of his momentum remains to be seen. It is possible that Germany could eventually see a “red-red-green” coalition of left-leaning democrats and environmentalists – a development that would need to be more strongly analysed by the capital markets in the coming months. Another interesting twist would be victories by Mr Schulz in Germany and Mr Macron in France, as this would increase the potential for a stronger political union for Europe.

Finally, new elections in Italy are possible, yet this is the elephant in the room that few are talking about. Italy has made little to no progress on reforms, and it still suffers from serious unresolved banking issues – both critical problems that could dampen some of the enthusiasm of pro-Europe advocates.

Clearly, Europe is at a crossroads, and muddling through is no longer an option. After these elections have wrapped up, Europe will need a new vision to carry it forward, but right now it is facing a Shakespearean moment: To be, or not to be? That is indeed the question.

Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. Investments in commodities may be affected by overall market movements, changes in interest rates, and other factors such as weather, disease, embargoes and international economic and political developments. Investments in smaller companies may be more volatile and less liquid than investments in larger companies. Investments in emerging markets may be more volatile than investments in more developed markets. Dividends are not guaranteed. Bonds are subject to interest rate risk and the credit risk of the issuer. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.

The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.

This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations.

This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424, Member of Japan Investment Advisers Association]; Allianz Global Investors Korea Ltd., licensed by the Korea Financial Services Commission; and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.

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Expert-Image

Ingo Mainert

CIO Multi Asset Europe
Ingo R Mainert is Chief Investment Officer (CIO) Multi Asset Europe with Allianz Global Investors. He is also a member of the European Executive Committee and the Global Policy Council. Ingo Mainert joined Allianz Global Investors following the merger between Cominvest Asset Management GmbH and Allianz Global Investors in 2009. He has worked in the asset management industry since 1994. He held various managerial positions at Cominvest Asset Management GmbH since 2001, latterly spending four years as Managing Director and Chief Investment Officer. He worked for Commerzbank AG since 1988 in various roles including: Head of Asset Management Private Banking, Head of Fixed Income/Currencies and Head of Equity Strategy Germany. Ingo Mainert obtained his diploma in business administration from Johann Wolfgang Goethe- University, Frankfurt/Main, and completed his Certified Investment Analysis/DVFA qualification.
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