Seven weeks of government negotiations in the Netherlands to agree on new austerity measures failed on Saturday suggesting that the German-led program for Europe is about to take down another government. This is on the eve of the first round of the French elections, where polls consistently show the Socialist candidate Hollande poised to win the decisive second round in early May.
We have been following this story as it was first began here and then as it unfolded here. Our work has offered two levels of analysis. One the country-specific dynamics and the other the more systemic elements. To be sure, we are not arguing that the Netherlands is about to default, though given political and economic considerations, as well as the greater risk that it loses its triple-A rating warns it ought to pay a larger premium of German bunds.
The origins of the political instability in the Netherlands can be traced to the fall (Feb 2010) of the previous Christian Democrat Appeal-led government over its support for the mission in Afghanistan.
The government that it replaced is weak and had to rely on the extremist Freedom Party. It made concessions, for example, in the form of curbs on immigration and the prohibition of wearing the full Islamic veil in public.
In early March, the key government office, with the ominous name of the Central Planning Bureau, warned that without new action, the government would overshoot next year's deficit target. The coalition government has realized 18 billion euros in savings and now was told it needed another 9 billion.
To realize more savings, when the Dutch economy is contracting is, according to Geert Wilders, the head of the Freedom Party, to surrender to the "dictators in Brussels". He would not sanction cuts in domestic spending and walked out of talks. Ironically, Wilders is to be in the US in the coming days, promoting his new book "Marked for Death: Islam's War against the West and Me".
Wilder's political agenda does not appear to be representative of a majority of people in the Netherlands or more generally in Europe. Yet the nationalism he speak to and the antipathy toward the EU (Brussels) seems very real. Make no mistake, the EU is just a thin veneer covering Germany, which is understood to be setting the agenda.
To pursue fiscal austerity during a contraction and when the private sector is de-leveraging seems simply frightful. Germany wants to dismiss such misgivings by claiming they are shortsighted and that winning back investor confidence through fiscal prudence is the only way to create the conditions for future growth.
The political backlash to the Berlin Consensus (there is, after all, a Washington Consensus and a Beijing Consensus) may be beginning, but it is still to be determined.
In Amsterdam, the next step is for the government's cabinet to meet on Monday and 1) see if it can cobble together support for some smaller parties and 2) discuss the mandate for a care-taker government until elections can be held. The Dutch are to sell very long dated bonds in the week ahead. These have a key constituency, namely life insurance companies and pension funds, and will look past the current political instability.