Dutch and Portuguese Political Uncertainty Lifts, Revealing Gridlock

Editors’ Note: MarketMinder Europe prefers no party nor any politician. We assess developments for their potential market impact only.

Two of Europe’s biggest political stalemates appear to be resolving. Portugal swore in a new government Tuesday, and the Netherlands may soon do the same.^[i] In both places, most conversation we have seen centres on right-wing populist groups, but in our view, the real winner is political gridlock. Love it or loathe it, our research finds gridlock keeps legislative risk low, largely freeing stocks from the risk of big legislation creating winners and losers. We see it as a bullish tailwind, and the eurozone has it in spades.

The Next Dutch Government Takes Shape

After Holland’s inconclusive election last November, Party for Freedom (PVV) leader Geert Wilders was trying to form a coalition that would enable him to serve as prime minister.^[ii] Math indicated he might have a fighting chance, as a number of natural coalition partners did well in the election. On top of the PVV’s 37 seats (out of 150), the centrist Party for Freedom and Democracy (VVD) took 24, the populist Farmer-Citizen Movement (BBB) won 7 and the upstart right-leaning New Social Contract (NSC) took 20.^[iii] Together, their combined 88 seats would form a solid working majority if they could overcome their differences.

That didn’t happen. Last week, Wilders conceded he isn’t the man to bridge the divides, and not just because he has often cut a controversial figure on sociological issues.^[iv] In bowing out as prime minister-elect, he said the four parties had irreconcilable policy differences and simply couldn’t agree on a policy agenda that would pass muster with his party’s voters.^[v] Thus, the talks and prospect of Wilders in government ended.

But they soon moved forward in a radically different shape. Absent Wilders, the four parties loosely agreed to form an “extra-parliamentary” government, which amounts to appointing political outsiders to cabinet posts and probably the premiership.^[vi] If it wins a confidence vote, this would be the Netherlands’ first technocratic administration in over 100 years. But this is about all we know right now, as the parties are presently hashing out the specifics (including cabinet appointments) with a mediator.^[vii]

Presuming this goes forward, we think gridlock seems all but certain. A technocratic cabinet might be able to unite enough support to get seated, but the interparty disagreements that foiled Wilders don’t appear to have have gone away. The mediator has indicated as much, signalling the coalition agreement will probably be light on policies. Instead of a formal agenda, she indicated legislation will be up to the individual Members of Parliament (MPs) to hash out, which seems to us like a recipe for squabbling and inaction.^[viii]

So, whilst the party makeup is changing, we think the status quo of gridlock looks set to exist. The outgoing administration was a multiparty coalition that agreed on little and did even less.^[ix] In our view, the incoming one looks set be the same, just with different faces, which will likely help keep uncertainty low and give businesses plenty of latitude to plan and invest.

Portugal Gets a Government … but for How Long?

As for Portugal, the government formation process went surprisingly quickly. After March’s election, when the centre-right alliance headed by Luís Montenegro barely edged out the incumbent centre-left Socialist Party with 80 seats to 78, it looked to us like a lengthy negotiation process was in store.^[x] To form a majority government in the 230-seat National Assembly, Montenegro would have had to partner with the upstart right-wing Chega, which won 50 seats.^[xi] But he ruled that out and stuck to his guns even as Chega signalled moderation on several of its more contentious proposals, and turned instead to the Socialist Party. They didn’t form a grand coalition or formal unity government, but the Socialists agreed not to block Montenegro’s minority government and to support legislation when it could find common ground.^[xii]

This government has already passed one initial test. Chega, which is still pushing for a full right-wing coalition, blocked Montenegro’s pick for speaker last week, seemingly in hopes of forcing its way in.^[xiii] But it instead cemented the alliance between Montenegro and Socialist Party leader Pedro Nuno Santos. To end the speaker impasse, they agreed to split the speaker position into two separate two-year terms, with each party’s preferred choice taking a turn. They elected the new speaker the next day, and Montenegro’s government was sworn in Tuesday.^[xiv]

The new cabinet has a technocratic flair, with several ministers from outside politics, including Finance Minister Joaquim Miranda Sarmento, an economist by trade.^[xv] Others are from the European Parliament. So it isn’t quite the fully outsider government the Netherlands is pursuing, but it has some of that flavour.

When things get down to brass tacks, though, we think gridlock seems likely—as we find is the norm for minority governments. Montenegro still rules out working with Chega on individual bills, so passing anything will likely depend on the Socialists’ support. Santos has said he will play ball where there is common ground, but the opportunities appear minimal. He is already signalling his party won’t support the 2025 budget proposal, calling it “practically impossible,” which sets it up as a potential breaking point.^[xvi] This isn’t guaranteed to collapse Montenegro’s government and trigger new elections, as they could break the budget into smaller pieces and pass those the Socialists are more on board with. But there is a chance this agreement could prove short-lived.

Here, too, we think gridlock is a fine outcome. Portugal passed a number of reforms a decade or so ago to improve its economic competitiveness during the eurozone’s debt crisis.^[xvii] When left-wing administrations took power years later, we saw many suggest those reforms would bite the dust. But gridlock prevented that then and likely does so now.