18/09/2012 08:08 BST | Updated 18/11/2012 05:12 GMT

Dutch Elections: Emphatic Victory for Pro-Business Liberals

The electorate chose stability, budgetary discipline and a broadly pro-Europe course over the populist anti-austerity and anti-Europe rhetoric presented by both the right-wing Party for Freedom (PVV) and the left-wing Socialist Party (SP).

The pro-business Liberals (VVD) won a huge victory in the general election held on 12 Septemberw, just ahead of the centre-left Labour Party (PvdA). Both parties made major gains compared with the 2010 election. Dutch voters have therefore returned to the political centre and away from right-wing and left-wing parties that had threatened a fragmentation of the party landscape. The electorate chose stability, budgetary discipline and a broadly pro-Europe course over the populist anti-austerity and anti-Europe rhetoric presented by both the right-wing Party for Freedom (PVV) and the left-wing Socialist Party (SP).

With around 96% of votes counted, the VVD was on course to win 26.5% of the vote, giving the party 41 seats in the 150-seat Second Chamber (lower house of parliament). This was the VVD's best-ever election result, topping the 31 seats gained at the 2010 election, which had made party leader Mark Rutte the first ever VVD prime minister. Voters thus rewarded the VVD's focus on budgetary discipline and business-friendly structural reforms. Moreover, the generally pro-European VVD had toughened its rhetoric on highly indebted euro zone countries such as Greece. This may have helped the VVD to attract Eurosceptic voters that had previously backed the populist PVV.

By contrast, the PvdA had campaigned on a platform of less deep budget cuts in order to prevent weakening the economy and raising unemployment further. The PvdA managed to win 39 seats at the election (up from 30 in 2010). This result highlights the remarkable turnaround of the PvdA's fortunes. Only a couple of weeks ago the party was far behind its left-wing rival, the SP, as well as the VVD in opinion polls. But strong performances by its relatively young (at 41) and charismatic leader, Diederik Samsom, in high-profile TV debates with other party leaders lifted the PvdA at the expense of the more outspokenly anti-austerity (as well as Eurosceptic) SP.

Heavy defeats for far-right and far-left parties

The SP won 15 seats at the election, unchanged from 2010 and a far cry from the 33-37 seats it was on course to win only three weeks ago. Relatively subdued performances in the TV debates by the SP leader, Emile Roemer, were partly to blame for this result. The more moderate, Europhile PvdA was seen by many voters as a more credible left-leaning alternative to the right-leaning VVD than the relatively untested SP.

On the far right of the political spectrum, the PVV of populist leader Geert Wilders was the big loser of the election. Mr Wilders was punished in part for causing the snap election in the first place: his running away from the budget negotiations in late April had caused the collapse of the minority government coalition between the VVD and the centrist Christian Democrats (CDA) that had until then been supported by the PVV in parliament. Moreover, Mr Wilders wanted to turn the election into a referendum on the Netherlands' membership of the EU and euro zone. This strategy backfired badly for the Eurosceptic PVV as it lost more than a third of its seats in parliament (now 15, down from 24 in 2010).

No political fragmentation

A potentially destabilising rise in political fragmentation that was feared before the election did not occur. Eleven parties will enter the new parliament, only one more than in the current parliament (the 50Plus party that campaigns for pensioners' rights). Moreover, the smaller parties did not make major progress as the battle between the VVD and PvdA led to many voters casting their votes strategically, squeezing parties such as the GreenLeft party. The CDA also recorded major losses at the election due to its ill-fated involvement in the short-lived VVD-CDA minority government that collapsed in April 2012. The centrist Democrats 66 (D66) were one of the few winners among the smaller parties.

Centrist coalition likely

The election outcome reinforces our expectation that a centrist "grand coalition" between the VVD and PvdA will probably be formed. Such a coalition would have a narrow majority in parliament (80 out of 150 seats). But it is more likely that such a coalition would want to bring in one or two additional centrist and pro-European parties in order to boost the coalition's parliamentary majority. D66 is a candidate; a PvdA-VVD-D66 coalition (known as "Paars") ruled the Netherlands from 1994 to 2002. The CDA is another candidate, but the CDA's decline in recent elections may prompt the party to opt for the opposition benches. Both the far right (PVV) and the far left (SP) are likely to be shunned by a future coalition, which would mean that Eurosceptic and strong anti-austerity elements would dominate the parliamentary opposition, while relatively Europhile parties that favour budgetary responsibility would dominate the government.

Policy differences will have to be bridged

There is an historical precedent of successful VVD-PvdA cooperation, namely during the 1990s/early 2000s. However, the VVD and PvdA will have to bridge significant policy differences in order to make such a grand coalition work. Both parties agree on the need for bringing the public finances in order but disagree significantly on the depth and extent of budget cuts. The VVD proposes austerity measures worth more than €22bn over the next parliamentary term (until end-2016), mainly by cutting public spending on social welfare, healthcare, government and development aid. The PvdA wants to reduce the budget deficit, but not as urgently as the VVD. The PvdA's proposed austerity measures would amount to just above €15bn over the next parliamentary term.

On Europe, the VVD broadly favours German Chancellor Angela Merkel's approach to dealing with the euro zone debt crisis, with a focus on stronger European fiscal oversight, budgetary discipline and structural reforms, while the PvdA favours a less austerity-centred approach like that promoted by France's Socialist President François Hollande. But crucially, both parties are generally pro-Europe and have supported the euro zone rescue mechanisms and bail-outs for vulnerable countries. Nonetheless, given the painful austerity applied at home, the new Dutch government may be less inclined to support countries that miss their targets. Several days before the election Mr Rutte rejected the notion that Greece may get a third bail-out and instead called for stricter implementation of budget cuts and reforms in Greece. Moreover, fear among both the VVD and the PvdA of losing hard-won votes to their more Eurosceptic rivals on the right (PVV) and left (SP) respectively may also mean that tougher rhetoric on Greece and other indebted countries will be maintained, despite the generally pro-European course of such a grand coalition.