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On the same day that the German constitutional court makes its ruling (September 12th), one of Germany’s closest allies will also face a critical decision. Citizens in the Netherlands will go to the polls in general elections after the current government collapsed on proposed austerity measures.

Sentiment against the European Union and its rules is growing in Holland, which has preached Greek austerity in the past. The fiscal compact which consists of automatic penalties to countries who miss targets isn’t favored. The country usually stood by Germany in its past austerity drive.

The most anti-euro figure, Geert Wilders, brought the government down, but isn’t expected to make the biggest gains. His anti-Islam sentiment limits his party’s traction. A more moderate candidate on the other side of the political map is likely to make gains: Emile Roemer. The charismatic leader of the Socialist Party (SP), isn’t anti euro, but rejects the fiscal compact.

He manages to gain votes from Wilders’s Freedom Party and also from the mainstream left leaning Labor Party. It is currently head to head with the party of the current Prime Minister Mark Rutte of the mainstream right leaning VVD party.

The new parliament is expected to be fragmented like the current one, and negotiations for a coalition will likely last for a long time. If Eurosceptic parties make gains, the next government will likely be a less reliant ally of Germany. Similar to the election of François Hollande in France, it will not be a total change, but rather a change in sentiment across the continent.

Hollande’s victory enabled Mario Monti of Italy to demand more, and indirectly helped the ECB become “less German”. A “less German” political landscape in the Netherlands will impact Germany.

Finnish Discontent

The small northern country is also an ally of Germany, but has its own reservations about bailouts. Finland demanded collateral from Greece and Spain and some of its leaders already flirted with the idea of leaving the euro.

Finland has significant trade with other Scandinavian countries and with Russia, so trading with the euro isn’t that important. On the other hand, the relatively weak euro (in comparison with the currencies of Sweden, Norway and Denmark) makes Finnish exports more attractive.

And regarding Russia, also here there is a geopolitical aspect: fear of Russian dominance in the Putin era helps Finland cling to the euro despite the skepticism. Finland does enjoy the European political back, even if this sometimes means paying others’ debt.

Euro skepticism has grown in Finland recently, but is certainly in control: a recent poll shows that support for the euro remains relatively strong.

However, it is important to note that the Finnish skepticism could still grow and reach a level where the country may leave. A possible trigger would be the seniority of ESM funds. If there is no full guarantee that money in the ESM bailout fund is safe, Finland could leave. The parliament in Helsinki passed a law on this, and changing this law in the current atmosphere seems impossible at the moment. A lack of seniority could break Finland’s back, according to some politicians.

With the Greek bond restructuring, private bondholders paid the full price, while bonds bought by the ECB were made exempt from losses. While “public” ECB money was guarded, the move angered many market participants, who lost trust in European bonds. This seniority means the subordination of private bondholders.

ECB President Mario Draghi promised that the issue of seniority will be addressed. Perhaps the aforementioned T-bills will provide implicit seniority without scaring private bondholders – a compromise that will also make Finland happy, but this topic is still very sensitive.

A Finnish exit will weaken the single currency, as Finland is a rich country. In addition, it could accelerate moves by other European countries to leave, notably Germany. There are low chances for this to happen in September, but it’s important to note the implication of ESM seniority for Finland.

This is an adapted version of this topic from the forex monthly outlook. You can download the full report by joining the mailing list below.