Will the Netherlands follow Brexit with Nexit?

Geert Wilders, Dutch right-wing politician and leader of the Party for Freedom (PVV), speaks to the media during a break in negotiations with other party leaders to form a governing a coalition government following Wilders' victory. Photo: Carl Court/Getty Images

>> Brexit is a success or failure?

The UK underwent Brexit after the 2016 referendum on EU membership but, even before then, talk of “Grexit” arose during the 2010-12 euro zone debt crisis. And over the years we’ve seen other countries fall victim to the dreaded ‘exit’ characterisation, such as ‘Frexit’ when Le Pen was riding high in presidential opinion polls in France.

Now it seems to be the turn of “Nexit” given that Wilders favours a referendum on EU membership. But is this a real possibility? It seems unlikely. For a start, the far-right Freedom Party (PPV) that Wilders leads can’t govern alone and will, as usual in Dutch politics, be forced into a coalition with other parties. The difficulty for Wilders, as we have seen elsewhere in Europe, is that other parties have not always been keen to jump into bed with a party that is so far right of centre, even if it gives them a stab at government.

There is speculation that the main party in the last government, the conservative VVD might be prepared to join forces and a new party, the New Social Contract might be willing as well. If this happens it could create a majority for Wilders but whether he would be leader is open to question and the other parties could well demand the dropping of any referendum plan as a price for joining the coalition.

Given that the PVV’s main priority is to stop immigration; not leave the EU, it seems possible that such a compromise might be acceptable should it be required. Another thing to bear in mind is that it could take many months for a new coalition to come together. This being said, it is very possible that, in this time, markets start to take fright, particularly if Wilders steps up his anti-EU rhetoric and continues to press for a plebiscite on the issue. Perhaps fortunately, for the euro’s sake, opinion polls, which are very infrequent, do show that a strong majority favour remaining in the EU, but that was the case in the UK as well before the 2016 referendum!

So, should we just ignore this potential threat, or factor it into our calculations for the longer-term future of the euro? While we’re tempted to say the former we do think it is worth watching out to see if the market starts to show any nerves. This could come through euro weakness but, given that the Netherlands is only one small part of the euro zone, it seems more likely that tensions could develop at a local level first.

One rather novel way to look at this risk is to compare Dutch sovereign credit default swap (CDS) prices in dollars and euros. The theory here is that if investors believe that the risks of Nexit are so great that they need to own default insurance, they are likely to be fearful of euro weakness as well and hence pay a premium to own dollar CDS compared to euro CDS. We saw this spread widen out considerably during the euro zone debt crisis but it has been quite stable ever since. Should it start to widen again we’d be on notice that the market is more fearful that Nexit could happen, and that it could weigh heavily on the euro.

>> Some major headwinds for the UK economy

In fact, we’d go further and say that these CDS prices and spreads could be worthy of more attention in the euro zone for other reasons. In Germany, for instance, the government is in a huge mess over the ruling from the Constitutional Court that outlawed its use of unspent Covid funds for other government spending. For even if this does not put pressure on CDS prices it could be a big drag on growth and that, in turn, could weigh on the euro.

However, in the Standard Bank’s view, by the same token, if we are looking at sovereign CDS prices, it seems clear that the most notable moves are in the US, not the euro zone. And unlike the situation earlier in the year, when the debt ceiling clash lifted CDS prices sharply, the most recent rise is not related to any such pressure point and, in so doing, could actually reveal a deeper fallibility that helps balance out risks when it comes to euro/dollar.