Netherlands: Higher Need for Defence Spending Could Test Government Coalition Cohesion

Among the largest Euro area countries, the Netherlands is one of the few to be on track to broadly reach NATO's 2% of GDP defence expenditure target, along with Germany and France. Going forward, while the government has already increased defence expenditure in its budget plans to largely meet the 2% of GDP expenditure level, like European peers, it is facing pressure to further raise spending. While the Netherlands has ample fiscal space to accommodate a moderate deterioration in fiscal balances over the medium-term, we expect the need to find an agreement on budgetary priorities to weigh on the coalition. Proposals from the European Union (EU) to extend loans for defence and to loosen fiscal rules could thereby further exacerbate divisions among coalition partners.

Key highlights
-- The Netherlands is largely on track to spend 2% of GDP on defence.
-- Moderate government debt levels give Netherlands ample fiscal space to further increase military expenditure.
-- Tensions within four-party coalition could increase as result of budgetary choices ahead as well as EU plans for joint borrowing.

"The four-coalition party will have to find an agreement on budgetary priorities in light of higher needs for defence spending," said Max Dietz, Assistant Vice President in the Global Sovereign Ratings Group. "But the Netherlands has fiscal space to expand military spending."