A general election is scheduled for March 15, 2017, and with the far-right populist PVV running neck-and-neck with the Prime Minister Mark Rutte’s center-right VVD in recent polls, the run up to the vote figures to be a period of heightened uncertainty that contributes to market volatility. In addition to advocating draconian restrictions on immigration and the banning of outward religious displays by Muslims, the PVV has indicated that it will pursue enactment of legislation that would permit the holding of a referendum on the country’s membership in the EU if it is elected to power next year.

PVV leader Geert Wilders is about to stand trial on charges of inciting racial hatred during a speech he delivered back in 2014. The legal outcome is uncertain, given that he stopped short of explicitly advocating violence, but Wilders’ more liberal rivals fear that the publicity surrounding the trial will help the PVV to attract broader support among the sizeable minority of Dutch voters who feel that their cultural norms are threatened by an influx of non-European refugees, are fed up with the chronic economic weakness that they blame on the policies imposed by Brussels, and, more generally, resent the loss of national sovereignty that is part-and-parcel of participation in the EU.

Poll data suggests that neither PVV nor the VVD will win more than 30 seats, less than one-half of the total required to claim a majority in the 150-member Parliament. Assuming that holds true through the election, the unwillingness of most (if not all) of the other parties to team up with the PVV will deny Wilders any realistic chance of pulling together a majority coalition.

In that event, the task of forming a government will likely fall to Rutte, who will need to reach coalition agreements (or cut deals that enable him to govern without a majority) with as many as four other parties, including one or two from the left of the ideological spectrum. Any governing arrangement that results in the PVV’s marginalization will be greeted with relief by investors and officials in Brussels. However, an ideologically diverse and unwieldy coalition headed by the VVD will very likely be prone to internal disputes that impede policy implementation and contribute to doubts about the government’s ability to survive for a full term.

Moreover, any erosion of popular support for a government formed with the explicit aim of keeping the PVV out of power would almost certainly result in stronger support for Wilders’ party, creating a high probability that an early election would result in further seat gains for the PVV that improve its chances of forming a government. Such a development would result in a significant increase in political risk, and could trigger an existential crisis within the EU if the PVV pursues a Nexit vote. Recent poll data indicates that only a narrow majority of voters favors remaining in the EU, and it is not unreasonable to assume that pro-EU sentiment would weaken in a political climate that produced a government headed by the PVV.

Since 1979, The PRS Group Inc., has been a global leader in quant-based political and country risk ratings and forecasts. For more information on The PRS Group and its wide range of risk products, go to: www.prsgroup.com or contact Michael Burke, Director of Client Relations at (315) 431-0511, extension 311