Netherlands: March's election delivers tough road to government formation, a poor omen for economic reforms
March 24, 2017
Dutch voters decided to stand with the tried on 15 March. Prime Minister Mark Rutte’s liberal People's Party for Freedom and Democracy (VVD) won the general elections, although with reduced parliamentary representation, as far-right Geert Wilders’ Party for Freedom (PVV) lost by a significant margin and came in second. VVD won 33 seats, 8 seats less than the previous election result and far less than the absolute majority threshold of 76 seats. The election delivered a highly fragmented parliament with no clear majority, meaning that the process of government formation could take weeks—or months—and the large number of coalition partners needed will likely make governing activity difficult. This does not bode well for the implementation of a battery of economic reforms needed to liberalize the labor market, strengthen the sustainability of the pension system and reduce private indebtedness.
The government’s successful management of both the economy and public finances during the post-crisis years has credited the Prime Minister as a reliable option in the eyes of many Dutch voters and led to the result. The economy is experiencing relatively good momentum, as growth is being supported by solid private consumption and exports, and confidence among both consumers and businesses is at high levels. The most likely outcome for the liberal VVD will be to try and form a coalition government with at least three others parties, in order to count on an absolute majority in both houses of parliament. The most likely partners are the Christian Democratic Appeal (CDA) and Democrats 66. Both parties significantly increased their representation in parliament this vote. However, it remains uncertain who will be the fourth coalition partner, since the other eligible parties have largely diverging views from Rutte on a wide spectrum of issues—including security policy, taxation, the labor market and the pension system. Overall, the left performed poorly, as the Labour Party (PvdA) suffered a historic defeat—losing more than three-quarters of its seats.
After the elections, the outgoing health minister was asked to lead the first round of talks to form a coalition government, the outcome of which is expected in the coming week. The talks have been narrowed to four parties—VVD, CDA, D66 and GreenLeft (GL)—but it is uncertain if this round of negotiations will result in a government agreement.
The protracted period of talks ahead should not affect the current phase of healthy economic expansion. Private consumption will continue to benefit from both a solid labor market, low inflation and a recovering housing market. Moreover, exports should continue to grow robustly, irrespective of a rapid solution of the political impasse. In the longer run, the formation of a non-ideologically cohesive government could prevent the implementation of important reforms such as the liberalization of the labor legislation—needed to mitigate the duality of the labor market and spur productivity—and the strengthening of the individual saving schemes required in order to reinforce the sustainability of the pension system. Moreover, a cumbersome decision-making process will make it more difficult to deal with unforeseen economic shocks. The FocusEconomics Consensus Forecast panel expects GDP to expand 1.9% in 2017, which is unchanged from last month’s forecast. In 2018, panelists expect the economy to increase 1.7%.