By Delusional Economics, who is determined to cleanse the daily flow of vested interests propaganda to produce a balanced counterpoint. Cross posted from MacroBusiness.
It’s going to be one of those high volume news weeks for Europe. Obviously the most watched event of the week will be the German constitutional court decision on the legality of the ESM but there is also some other notable events.
Mario Draghi’s ECB action plan of last week has opened a new political semester in Europe as the mantle has been passed back to the politicians to sort out exactly what the next steps are for Europe under the umbrella of “unlimited” conditional support. My sense is that this is the limit of Mr Draghi’s mandate, possibly over it, but he has kicked the burning can far enough back into the politician’s court that it cannot be claimed that he did not do enough.
Over the weekend Angela Merkel has come out in defence of the ECB, but there are rumblings from within Germany about Mr Draghi’s plan and over the weekend Mariano Rajoy demonstrated, once again, he wasn’t in any rush to push Spain towards a bailout.
All along, while the politicians and bureaucrats politick and jawbone each other, the real economy of the Eurozone continues to deteriorate which is now where the risks lie. As fiscal austerity further bites into economic growth and Europe enters recession these risks are sure to grow. The taxpayers of the northern creditors are already questioning why they should continue to fund the zone, while the citizen’s of the southern debtors question just why they should suffer it. The on-going rise of Golden Dawn in Greece should be a reminder to all of the dangerous political fragmentation that is occurring and it is becoming increasingly apparent that southern Europe is struggling with its own ‘lost decade’. I am doubtful, however, they will take it as well as the Japanese.
As I have continued to talk about over this year, without a massive change in direction, the economic outcomes of Europe have already been decided. Attempts at supra-Eurozone fiscal consolidation all but guarantee a fall in economic output for the EZ, and the recession has really only just begun. In that regard it is the politics that will become increasingly important over the next 12 months as the economic fallout opens new fractures in the political systems of participating nations. I have previously mentioned that Italy in particular poses a significant risk and its economy is slowing rapidly. If Mario Monti steps aside the existing Italian politicians will have no problems reminding their constitutes that German and French banks are the true beneficiaries of the current strategy. It is little wonder Mr Monti is asking for new EU rules to shut people up.
While the German constitutional court is delivering its initial verdict it will also be time for citizens of The Netherlands to take to the polls for national elections. There has been a limited amount of coverage of the event in the English-speaking media given the economic world has been focussed in other places, but the event is of significance.
The Dutch economy is relatively strong but domestic consumption has been slowing over the last few years and there is a real risk that the European crisis has the potential to slow the economy further. One of the major points of concern is the housing market which, like Australia, is backed by large private sector debt. Dutch housing had deflated 15% since 2008 but the downtrend appears to have picked up pace in recent months.
Dutch housing- % change in value YoY
With all this in mind I thought I would ask one of our readers, AnonNL, to give his opinion on the likely outcome of this week’s election and what it could mean for the country and rest of Europe. AnonNL now lives in Adelaide but was born in The Netherlands, has a Masters degree in public administration and is an avid follower of Dutch politics. I’m sure you’ll enjoy his insight.
Up until now The Netherlands, together with Germany, Finland and Austria formed a block advocating austerity as the way for the eurozone to solve the current crisis. The Netherlands however is starting to feel the pinch of the crisis and calls for government to push back on austerity are gathering strength. It is no wonder that The European Union and the Economy are issues which dominate the campaigns for the upcoming elections.
A shift in government is likely so it will be interesting to see how the results of the upcoming Dutch elections, on 12 September, will influence how Europe deals with the crisis. One thing is already clear, the EU need not fear The Netherlands pulling out.
Most of you probably know that continental Europe is dominated by multi-party democracies and The Netherlands is no different. As I write I am looking at a paper ballot offering me the option of selecting one of many representatives of a whopping 20 parties. About half of these parties will make it into Parliament and about 6 to 8 parties can potentially get enough seats to become a viable candidate for coalition forming.
Due to proportional voting, who wins the elections is not as important as which parties will be in the best position to form a coalition. This makes it quite hard to offer a clear prognosis and as such this post probably offers more shades of grey than women’s arousing literature.
The Dutch House of Representatives[1] consists of 150 seats which means that in order to form Government a coalition of at least 76 seats needs to be formed (excluding the possibility of a minority Government). Coalition forming will probably be a difficult and potentially lengthy process due to a splintered vote, not ideal with European leaders discussing some major decisions in the coming months.Polling results
The table below shows the latest sample based polling results for the 6 largest parties[2].
Interestingly, the only party which could be classified as anti-EU, the populist PVV, has lost 25% of its seats. In addition the PVV is now considered to be an untrustworthy partner after some erratic behaviour earlier this year, meaning none of the other parties will want to form a coalition with them for a significant time to come unless there is absolutely no way around it. It is therefore doubtful that PVV’s anti-EU retoric will become more than just that.
Another intersting polling result highlighted by the table is that the top three candidates populate opposite sides of the political spectrum. The Libs have always had a quite significant foothold in Parliament and are likely to again become the largest party. The Socialist Party however were always considered to be a fringe party of borderline communist activists and the only reason why they have gained so much in popularity lately is that the Dutch people have become less supportive of Libs’ advocated austerity. The same reason explains the resurrection of Labour after a significant dip in popularity up until only a couple of weeks ago. This is a perfect example of how the winner may not end up in Government as the second and third party seem to be much more compatible in regards to forming a coalition.
The above is also why I am expecting a shift to the left, although once again due to coalition forming, not as dramatic as one might expect. While the Calvinistic Dutch generally still see the benefit of fiscal responsibility and financial sustainability, more and more people doubt that now is the best time to try to reign in the deficit as it is becoming clear that the cutbacks deepen the crisis rather than solving it.
Possible outcomes
If Dutch elections were held today two options seem possible of which a left-leaning government the most likely outcome[3]. This left-leaning government would probably consist of the Socialists (SP), Labour (PvdA), Social Liberals (D66) and Centre-Christian (CDA). None of these parties can be considered anti-EU with D66 even outright pro-EU, advocating Political Union as a way to solve the crisis. However, I doubt that the two largest parties, Socialists and Labour will entertain Political Union and are more likely to call for easing of the austerity measures to prevent exerting too much pressure on the Dutch economy. This of course would be a good outcome for the mediterranean memberstates as this would mean political pressure on them would decrease. Steps toward Political Union will probably be out of the question in this scenario.
The second possibility would be a coalition by Libs (VVD), Labour (PvdA), Social Liberals (D66) and Centre-Christian (CDA), a so-called “purple coalition”. For Australians Labor and Liberals forming a coalition seems like the equivalent of hell freezing over but The Netherlands has experienced a purple Government twice before, both of which were actually quite successful (gotta love balanced debate)! This coalition would again not be overly excited by the prospect of Political Union and is more likely to keep advocating austerity due to decreased power of left-wing parties in this coalition.
The third option would also be a “purple” coalition consisting of Libs, Socialists and Labour but because of the major differences between Libs and Socialists this seems unlikely to me.
Trying to forecast the outcome of coalition forming unfortunately is not unlike crystal ball gazing which means that by next week I may well be eating my words. Even the “likely” options that I have identified will pose many challenges as differences between parties are still quite significant. For example, Socialists will want to increase spending to stimulate the economy but Social Liberals will advocate austerity as much as they can. Whatever happens, I don’t expect a landslide change in the Dutch stance, although just a bit more breathing room for the mediteranean states is not an unlikely outcome.
[1] http://en.wikipedia.org/wiki/House_of_Representatives_of_the_Netherlands
[2] http://www.ipsos-nederland.nl/content.asp?targetid=674, for chart see: http://www.ipsos-nederland.nl/content.asp?targetid=621
[3] Try to form coalitions yourself: http://www.ipsos-nederland.nl/content.asp?targetid=1067
12 comments
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You missed a lot.
-Polls are moving all over the place. Huge differences between polls. Huge move going on between Socialists and Labour (towards labour) because the Socialists’ leader clearly is no PM material.
-PVV opsition. They usually have had a 5 seat or so ‘curtainmargin’, people that say they vote for another part (more acceptable ones) and in the election vote PVV.
Doubtful imho now. Wilders their leader held a poor campaign while usually he is an excellent campaigner. But another point of doubt.
-Most likely is a middle cabinet. Socialist are semi-pariahs in general. Anyway eg basically excluded by D66 as well as VVD and at least one but possibly both are required to have a majority cabinet.
-Purple is the colour (in Holland) of cabinets WITHOUT the CDA (which you put in).
-CDA an important factor especially as they are in the real centre (with D66) plus the fact that they have roughly all their electoral-side decisions wrong. They have lost 60% of their voters in a few years, are reduced to a marginal no of seats (while they had in average 40 the last 2 decades and often a majority before that. As said they are not lucky with their decisions and could make afew other ones.
-Anyway things are moving fast. By far most likely 2 weeks ago was a 4 (to get to a majority) party centre cabinet. Now a 3 party is possible. Possibly leaving the CDA out (as huge losers) or D66 out (probably preference from the majority of VVD voters). One of the other 2 unlikley as there won’t be a majority left.
Btw Dutch coalition talks usually take Belgian-style time (usually several months)>
You clearly did a lot of homework, but not enough for an A.
The more left the coalition gets the more they will abolish of the tax deduction for residential mortgages. Which is a hot topic and is simply on the agenda. But also a very bad idea market has a lot of hot air in it because of the usual bubble effect. But also 30% roughly of the price is tax deduction. And simply any cut will lower that percentage. Also with huge discussions going on people pricing a cut in. This is not a logical discussion at the moment.
Might be that the GCC decision is deferred a new case it brought to them by one of the CSU MPs. That everything has to be looked at a new in the light of the ECB decision. Which is pretty logical btw from a German pov. Germany simply joined the EZ assuming that these things could not happen and were excluded by the treaty.
See were the week will take us.
Thanks for the feedback, all valid points.
I’m not sure about PVV’s “curtainmargin” (for other readers: voters voting differently behind the curtain of the voting booth than they state in polls). I reckon it’s mostly Wilders trying to position his PVV as a still viable candidate. PVV will lose more votes if people consider a vote for that party to be wasted.
I based the likely outcomes mostly on this tool:
http://www.ipsos-nederland.nl/content.asp?targetid=1067
which when I wrote this piece (almost a week ago, there has been some delay in posting) was still showing what I wrote above. Personally I think it is a good thing the polls indicate that less parties will be sufficient. Four parties will only make coalition forming more complex.
Like you said: we’ll see where the week will take us. Polls are only polls. :)
“It is little wonder Mr Monti is asking for new EU rules to shut people up”
I think that this line gives a poor idea of the political dynamics inside Italy and, I think, the EU.
In Italy, all parties in government applied more or less “neoliberal” policies in the last 15 years. The reason they did so is that all parties, including center-left ones, have a neolib view of the economy, so they really believe that, for example, “flexibility” of worker is a good thing in economic terms. At best the center-left parties believe that this poses some ethical problems, and are willing to mitigate those policies, but their basic plan isn’t different.
When those policies were unpopular, they often said: “the EU is forcing us to do X”, but this was quite obvious hypocrisy.
More recently, when Berlusconi resigned and Monti was appointed head of government, some hypocrisy was also on display: Monti’s law proposals are mostly approved by the Italian parliament, which isn’t in any way under Monti’s control; those parties that control the parliament try to take praise for “responsibility” (supporting Monti) while at the same time lying all the blame for umpopular policies on Monti and on the EU.
Monti stigmatyzed this attitude, that is very evident in particular in those parties that are actually sustaining him, in a meeting of the Ppe (an organization of european center-right party).
You can be critical of the EU, but the problem of national parties that scapegoat the EU or other countries for the umpopular policies they themselves are pushing is a real problem, and could become tragic if the EU breaks down in an unfriendly manner.
As far as I know the SP still want out of the euro. Diederik Samsom of Labour has been winning the debates and may yet come out with the most seats.
The SP and PVV are the only ones not advocating the strict budget agreements coming out of Brussels. The Dutch economy is burdened by an incredible amount of mortgage debt and in that sense it diverges from Germany. There are some comparisons of total debt to GDP out there but it is something that is certainly going to drag performance down whichever way they approach it. I personally advocate trying to grow out of the debt, but that doesn’t seem likely because none of the politicians gets the alternative or is willing to say so publicly. I think the ‘threat’of Germany exiting the euro is ‘forcing’ the rest of the eurozone to talk tough. The solutions bank friendly in the short term – mortgage conditions have been loosening and people are being encouraged to borrow for everything. There’s even a fairly new credit company called Freo (for real). Doesn’t bode well for the youth who are still priced out of the housing market, have little job security and those lucky enough to qualify for private pensions will be paying higher premiums, working longer and getting fewer benefits because reform has been conveniently been delayed several years by bending the rules by saying that interest rates were abnormally low and bound to bounce back.
http://www.hypo.org/Content/default.asp?PageID=414
mortgage debt to GDP for nearly every country
That which is driving affairs in the political realm — be it elections or court decisions — is not going away, and pits an insolvent banking system against sovereign self-determination. Yet the question is not how much longer can the political realm play make believe the banking system can be “saved” at the expense of sovereign self-determination — this for the sake of phantom benefits of sustaining a euro system whose monetarist foundation is a rotten imperial swindle — but rather whether the cowards of the continent will break from this imperial system in the same manner as did the United States a couple centuries ago and implement the kinds of reforms as were put in effect via the U.S. Contitution — the likes of which Bismarck mimicked in late 19th century Germany — that the unity the continent seeks might be put on a sound, stable footing. This would involve rejoining finance to its ultimate role as facilitator in raising the productive capacity of labor via pursuit of ends tapping into that human creative capacity whose existence is both a blessing of nature and predisposed to an agapic sensibility. Truth is this aspect of our physical reality is entirely absent from monetarist notions, and unless the human condition is raised to its rightful supremacy in guiding political affairs, there will be nothing but chaos and suffering for Europe and the world at large (as a chain is only as strong as its weakest link).
If money were not a problem, or rather if debt weren’t a problem, then the EZ would probably come together quickly. But deprivation makes everybody tribal. Its the EZ-ECB catch 22. The best decision they could all come to would be to generously fund all the good ideas on the continent for achieving environmental cleanup locally and New Energy, Union wide. Clever environmental design for new products and recycling for old. I’m surprised this kind of thinking isn’t leading the way for new employment. Clearing the way for a political union. I don’t see how they are going to come together politically while they are all slashing and burning each other.
“Umbrella of ‘unlimited’ conditional support” is kabuki speak. If it is conditional, then it is limited by the conditions and so not unlimited. As I said a few days ago, the Draghi proposal is a poisoned chalice. Neither it nor the ESM addresses the fundamental problems of the eurozone. And this being the 20th or 30th solution put forward, isn’t it about time to recognize that Europe’s elites have no interest in solving Europe’s problems but are instead exploiting them both for their own benefit and the rich who own them?
You have hit the nail square on the head!
Those of you supporting the egregious, anti-democratic measures embraced by Draghi, I would hope that you never ever critize Bernanke/Geithner/Bush/Obama for “saving the system”.
In fact, if it comes down to Bernanke fashioning and imposing fiscal policy from the Fed, I would hope that for the sake of consistency, you applaud his efforts to “save the system.”
Many of you have determined that the Central Bank of something as nebulous as the Eurozone has the right to do s it pleases to “save the system”.
I’m not one of those people.
I still believe in the nation state.
As does the UK, which has now become the premier country in the continen of Europe.
Ci siano Draghi.