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Merkel's Dutch ally feels impact of backlash

WASHINGTON (MarketWatch) -- The political backlash in Europe against unrelenting austerity measures to resolve the euro crisis continues to gather momentum, with even stodgy Netherlands turning to a charismatic left-wing politician on the eve of new elections.

The Netherlands under conservative Prime Minister Mark Rutte has been a staunch ally of German Chancellor Angela Merkel in presenting a united north European front of fiscal rectitude against the euro zone's recalcitrant southern periphery. The Dutch are always counted among the core euro countries.

But embarrassingly, Rutte's government fell in April when the far-right party of Geert Wilders refused to go along with an austerity budget, and now Dutch Socialist Party leader Emile Roemer is surging in the polls ahead of September's vote for a new Parliament.

Roemer is espousing "neo-Keynesian" stimulus measures to clean up what he calls the "mess" created by Rutte, whose government is still there in a caretaker capacity. He opposes the strict 3% limit on budget deficits under current euro rules, let alone the stricter rules of the new fiscal pact.

The Socialist Party is generally described as the farthest left of the 10 parties currently represented in the Dutch Parliament. The latest polls show it becoming the largest party in the lower house, with 32 of 150 seats.

Roemer's surge comes after the rise of Alexis Tsipras and his Coalition of the Radical Left in recent Greek elections, where a second-place finish leaves the young Greek politician poised to pick up the pieces if -- many would say when -- the winning coalition fails to meet European bailout terms.

And of course it follows the recent electoral victories of the French Socialist Party in capturing the presidency and a parliamentary majority in what was widely perceived as a rejection of austerity policies championed by Germany and its allies.

In Germany itself, Merkel is facing attacks from both the left and the right, especially in the wake of her apparent concessions at last week's European Union summit to permit direct bailouts of European banks and to create a single European bank regulator.

The more conservative Bavarian wing of her Christian Democratic party immediately warned it might not be ready to go along with these measures and would leave the coalition and bring down the government if there were any further financial commitments to countries in crisis.

Growing unease with Merkel's rigid policies has also propelled a possible Social Democratic challenger to Merkel in next year's national elections to the forefront.

Hannelore Kraft, who won a new majority for the Social Democrats in North Rhine-Westphalia's May elections, surged to third place in popularity among German politicians in a recent poll, right after Merkel and the new federal president, Joachim Gauck, and ahead of any other politician in her party.

That same poll showed the Social Democrats winning 32% of the vote in a national election, nine points better than their actual showing in 2009, and only three points short of the Christian Democrats' current level of 35% (in a poll taken before last week's summit).

Combined with the fact that the Greens, the likely coalition partner for the Social Democrats, are polling 13% and Merkel's junior partner, the Free Democrats, are below the 5% threshold for parliamentary representation, the next chancellor of Germany would be a Social Democrat if the election were held this week.

After the colorless Frank-Walter Steinmeier lost to Merkel in 2009 with that abysmally low score, the Social Democrats might well be tempted to bypass the equally colorless current party chairman, Sigmar Gabriel, and put the energetic 51-year-old Kraft forward as chancellor candidate next year.

Whether a shift to the left or simply an anti-incumbent swing, the current trend is indisputably against further austerity and increasingly against greater European integration.

As such, it is pulling even pro-Europe parties like Rutte's away from the "more Europe" that Merkel is insisting on as a condition for future stability in the euro (EURUSD) .

With an increasingly polarized Dutch electorate, analysts see little chance of a stable coalition emerging on the left, right, or center from September's election.

One thing that is already clear, though, is that the political backlash to the current EU policies is growing and creating instability, even in countries like the Netherlands thought of as rock-solid.

Equally clear is that Merkel's isolation, both within and outside Germany, is growing. Hedge fund manager George Soros recently suggested that Merkel had until the fall to resolve the euro crisis before her domestic political position weakened to the point she could no longer act.

After last week's half-hearted euro compromise, Merkel may have reached that point already.