AMSTERDAM // The cracks in the euro zone are widening after the collapse of the Dutch government over sweeping spending cuts and the aftershocks of the French presidential election campaign.
Markets have tumbled and business leaders and analysts have warned of dire consequences should the Netherlands and France fail to stick to tough European Union budget rules.
In the Netherlands, the centre-right government of the prime minister Mark Rutte fell on Monday after it lost the support in parliament of the far-right Geert Wilders and his supporters.
They objected to €14 billion (Dh67.72bn) in spending cuts needed to meet the EU budget deficit target of 3 per cent for next year.
Just a day earlier, the socialist candidate François Hollande beat the incumbent Nicolas Sarkozy into second place in the first round of the French presidential elections. Mr Hollande favours relaxing austerity measures.
Another factor in the French elections was the rise of the far-right, eurosceptic National Front, FN, which took almost one fifth of the vote. Mr Sarkozy will have to woo those voters if he wants to have a chance of winning the second round. But that might be difficult as the National Front is committed to ditching the euro and returning to the French franc.
Hardly surprising, then, that the Dutch and French developments risk undermining the credibility of the crisis-fighting measures that the EU has put in place.
Faced with the need to bail out Greece, Ireland and Portugal and set up a US$1 trillion (Dh3.67tn) rescue fund for other debt-ridden economies, the euro-zone club in February agreed to strict new rules.
“If you have two countries at the core of the euro zone arguing in favour of somewhat softer fiscal rules, this could undermine credibility of the new rules,” said Carsten Brzeski, a senior economist at the Dutch banking giant ING in Brussels.
“There will be market reactions, the widening of spreads, new turmoil, new uncertainties. In a way, we could be back at square one, namely that we have another, or somewhat new discussion on the entire crisis management.”
While France has the second-biggest economy in the 17-nation euro zone after Germany, the Dutch position in the single currency crisis has been pivotal.
The country’s economy is one of the strongest and the Dutch government has been one of the most vocal in its demands that Greece and others hit by the turmoil, such as Spain and Italy, stick to tough budget targets.
“If one of the core countries, actually the most outspoken country in telling others what to do and how to stick to more austerity now breaches the rules, it, of course, gives the wrong signal to other nations such as Greece, Spain, or Portugal,” said Mr Brzeski.
It is now unclear whether the outgoing cabinet will be able to push through parliament budget cuts and austerity measures before elections later this year. The deadline for notifying the EU about budget plans is next Monday.
Failure to meet those targets could cost the Netherlands its valued “AAA” rating, according to Moody’s. The ratings agency yesterday called the Dutch cabinet crisis a “credit negative” event, but it maintained its rating outlook.
Inside the Netherlands, the inability of the government to agree on spending cuts has brought sharp criticism.
“Europe and the world are watching the once so stable Netherlands and wondering what went wrong,” said Hans Wijers, the former economy minister.
At least there was one shaft of light to pierce the gloom.
Concerns that long-term borrowing costs would soar eased yesterday at a €2bn bond sale when the yield of 0.523 per cent was lower than expected.
“The longer-dated bond is a bit of a soft result but [not] a disaster,” Lyn Graham-Taylor at Rabobank in London, told Reuters.