Prime Minister Mark Rutte met the Dutch queen on Monday afternoon and tendered his government’s resignation after talks on austerity collapsed at the weekend.
The Dutch government’s failure to reach an agreement in talks to achieve tough spending cuts could see ratings agencies cut the country’s prized AAA-rating and nervous investors push up the country’s borrowing costs, and it will also have wider implications for the euro zone as a whole, analysts said on Monday.
Dutch Finance Minister Jan-Kees de Jager sought to reassure investors on Monday, telling CNBC in The Hague that the Netherlands had always displayed budget discipline and would continue to do so.
"The perception of financial markets is always important...and that's why I also have the message for financial markets that for decades the Netherlands have shown a solid fiscal budgetary policy and this will not change. In any government we have seen in the past we have seen solid policy and this will remain in the future," de Jager said.
The talks between the Dutch multi-party coalition government and the right-wing “Freedom Party,” or PVV, which supports it in parliament, dragged on for seven weeks.
On Saturday, Rutte announced the talks had collapsed and blamed PVV leader Geert Wilders for the failed negotiations.
The spread between Dutch and benchmark German government bonds — the premium investors demand in order to hold Dutch debt rather than German paper — widened to a 3-year high on Monday, and the cost of insuring Dutch government debt against default shot up, hitting a high not seen since January. The AEX index of blue chip stocks closed sharply lower on Monday.
“With Saturday’s decision, it looks likely that new elections will be announced shortly,” Carsten Brzeski, senior economist at ING, said on Monday.
The country has committed to bringing its budget deficit back to the 3 percent limit prescribed by the EU, from 4.7 percent in 2011, but Brzeski said there no longer appeared to be a political majority to bring the deficit to 3 percent next year.
"We have to talk to the parliament about the circumstances we are in now," de Jager said, stressing that the Netherlands had for decades shown a solid fiscal. "And we have shown also in difficult circumstances that we will enter a budget that is solid, that is sustainable and that is also for the long term a good budget," de Jager said.
Newton also pointed out that the main left-of-center opposition party, the PvdA, had already called for the Netherlands to seek a derogation, or partial revocation of a law, from the 3 percent target.
That, along with developments in France where President Sarkozy’s socialist challenger Francois Hollande has vowed to roll back certain deficit-cutting measures, could mark the beginning of a change in euro zone crisis management, he said.
“It should not be excluded that we could see a repetition of the 2002-2004 episode when the fiscal rules were changed after the biggest euro zone countries had breached them,” Brzeski said.