Early Dutch and Spanish elections make EU fiscal reform more difficult 

The collapse of two governments that forged an unlikely alliance on EU spending rules reform has complicated already difficult negotiations, raising doubts over whether a deal can be clinched ahead of June’s European elections.

In a rare example of North-South cooperation on fiscal matters, the Netherlands and Spain worked together to overhaul the Stability and Growth Pact but with both countries facing snap general elections, officials fear the process could falter.

“The loss of [Dutch Prime Minister Mark] Rutte and probably [Spanish Prime Minister Pedro] Sánchez is a blow to the pro-reform coalition heading into the autumn,” said Mujtaba Rahman, Europe director at political risk analysis firm Eurasia Group. “Both were champions of more flexible fiscal rules.”

The rules, which are making a return in 2024 after being suspended to allow greater spending since the start of the Covid pandemic, restrict countries’ debt and deficit levels. Their re-introduction is being used as an opportunity to make them better tailored to each government’s needs but divisions remain over how strict they should be.

Dutch Finance Minister Sigrid Kaag told reporters things could become more complicated now her government has fallen, with the need for the interim administration to give parliament a greater say.

European Commission officials and EU diplomats privately expressed fears the Dutch caretaker government’s ability to compromise at EU level will now depend on the Dutch parliament’s views on the topic  — and these are likely to be more conservative than Kaag’s.

That, coupled with elections in Spain, which according to opinion polls are likely to unseat the socialist government, has thrown a spanner in the works. Traditionally, the Netherlands and Spain have been at opposite ends of the fiscal debate in Europe — a divide that splits the continent between North and South, and which has been the root of acrimony in the past.

The Netherlands is the standard-bearer for fiscal orthodoxy, embodied by Wopke Hoekstra, a former finance minister and now foreign minister, who openly criticized spendthrift southerners as he supported austerity during the eurozone debt crisis.  Conversely, Spain’s debt-to-GDP ratio has consistently breached the EU-mandated 60 percent threshold for over a decade, which up to 2019 resulted in an EU disciplinary process, known as the “excessive deficit procedure.”

So while that suggests they’re not the most likely bedfellows on the issue, their respective finance ministers, Kaag and Spain’s Nadia Calviño — women with international careers, both deputy prime ministers and heavyweights in their cabinets — joined forces last year, penning a joint paper calling for debt cuts that are “​​realistic, gradual but ambitious, as well as compatible with economic growth and job creation.”

By signaling appetite for change at both ends of the divide, the joint paper was seen as helping the Commission, which earlier this year proposed a reform that took on many elements proposed by the pair.   

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