Dutch resignation does nothing to alleviate euro uncertainty

AFTER Queen Beatrice yesterday accepted the resignation of Dutch Prime Minister Mark Rutte’s cabinet, is Holland about to be booted from the club of “core” Eurozone nations? The successful auction of €1.995bn of two and 25-year debt signalled that the answer to this is probably no, but the fall of Holland’s ruling party following its inability to hold to austerity targets weighed on the euro nonetheless. This may not be a fiscal crisis for the Netherlands, but political instability anywhere in the Eurozone is less than welcome. As Michael van Dulken, head of research for Accendo Markets, points out, Holland is one of the few remaining AAA-rated Eurozone countries. And when this supposedly unaffected, fiscally-disciplined nation decides that it won’t be able to cut its bills enough to meet Europe’s new 3 per cent deficit-to-GDP ratio, then further questions will be asked as to whether the Eurozone can claw its way out of its crisis. “All eyes are on fiscal instability in the periphery – on Spanish and Italian bond auctions and yields – when maybe they need to concentrate on political instability within the core.”

HOLLAND AND HOLLANDE
On the other side of the Maginot line, Socialist Party leader Francois Hollande has done little to ensure stability at the Eurozone’s core. “I would expect that, given the fact that Hollande has pretty much promised to tear up the fiscal compact, this will not only impact the French borrowing rate, but more importantly that of the bund,” says Brenda Kelly, senior market strategist for CMC Markets. “Investors may well fear that under these new circumstances that Germany could end up monetising the debt of the problem-laden Eurozone countries.”

All of this uncertainty bodes well for euro-sterling. “It’s back to August 2010 levels for this currency pair, making it nineteen-month lows for the euro versus its British counterpart,” says Christopher Beauchamp, market analyst at IG Index. “With governments disappearing across the continent and even German manufacturing slowing, there might be more losses in store.”