Dutch Discussions on Cuts Collapse

WSJ: AMSTERDAM—Talks over measures to slash the Dutch government's budget deficit collapsed over the weekend after seven weeks of negotiations, raising questions about the future commitment of one of the euro zone's foremost proponents of fiscal stringency to a German-led austerity agenda.

The Netherlands has been a key ally of Germany and one of the most vociferous supporters of austerity since Greece's debt problems initiated the euro zone's debt crisis more than two years ago. But its economy is performing poorly and is expected to shrink this year, widening its budget deficit and making it one of the worst-performing in the euro zone.

The talks collapsed after the right-wing Freedom Party pulled out of talks with the center-right liberal party of Prime Minister Mark Rutte. The negotiations had been aimed at cutting the budget deficit to 3% of gross domestic product next year, in line with European Union rules, from a forecast 4.6%.

Geert Wilders, the head of the anti-euro Freedom Party, called for elections "as soon as possible." He said agreeing to the budget cuts would have hampered economic growth and triggered unemployment.

Mr. Rutte told a news conference on Saturday that the Freedom Party "lacked political will, therefore we are standing here empty-handed." He added that "early elections are now obvious."

The move could herald a long period of uncertainty. It may take months before the Dutch go to the polls.

"It's clear that elections can't be held ahead of the holiday summer period," the government's spokesman said. The vote will most certainly be followed by prolonged negotiations to form a majority government.

Finance Minister Jan Kees de Jager indicated the government will try to push through with its planned budget cuts soon, even without parliamentary majority. "The Netherlands will be up to its responsibilities, even in this difficult political situation," he said.

Opposition parties, which are also calling for early elections, haven't indicated so far if they would support the government's austerity package.

European Commission economics chief Olli Rehn on Sunday said he expected the government would continue to seek an appropriate solution to its budget problems.

"We trust that the Dutch government will continue to seek budgetary solutions that are important for the financial stability of the country and for the welfare of Dutch citizens," he said.

A public-opinion poll conducted by polling institute Maurice de Hond among 4,500 people after the center-right minority government lost the Freedom Party's support shows Mr. Rutte's liberal party would emerge slightly stronger if elections were to be held now. But he would still need support from at least three other parties to form a majority government, in which analysts say left-wing parties could play an important role.

Without extra measures, the Netherlands will breach the budget rules it has been fiercely advocating as one of the euro's founding nations. This has fueled a debate on whether the country still belongs to the group of "core" euro-zone states with solid public finances.

Last week, Fitch Ratings threatened to strip the Netherlands of its cherished triple-A credit rating if it failed to take action to cut its budget deficit and stop its debt from rising.

The ratings firm will consider its rating of the Netherlands in June, and placing it on negative outlook is a possible first step toward a downgrade, it said.

The Netherlands is one of the four remaining triple-A-rated countries in the euro zone, along with Germany, Finland and Luxembourg.

Klaas Knot, Dutch central bank chief and ECB governing council member, has said the government's borrowing costs could rise significantly if it were to lose its top rating.

One of the main problems is a housing-market slump, which also threatens the country's banks. They could now face rising losses and tighter funding conditions.

In addition to tax increases and spending cuts on welfare and health care, the government is expected to take a first step in addressing the Netherlands' huge mortgage debt. This debt pile, which stands well over 100% of GDP and is among the highest in the EU, has become a bigger concern since housing prices started falling in 2008.

—Maarten van Tartwijk, Frances Robinson and Matina Stevis contributed to this article.

Write to Archibald Preuschat