The Dutch Labor and liberal parties will try to form a coalition after a hotly contested election in which the two vied for the prime ministership. Neither party secured an absolute majority.

Labor fell three seats short of a plurality in Wednesday’s election, allowing incumbent premier Mark Rutte to initiate talks to form a new government. Both parties gained some ten seats compared to their previous delegations in parliament. For the liberals, it was their best election result ever.

Rutte’s previous coalition with the Christian Democrats, which was backed in parliament by the nationalist Freedom Party, no longer commands a majority. Right voters threw in their lot with his fiscally conservative party to prevent Labor leader Diederik Samsom from claiming the prime ministership. His recovery came largely at the expense of the far-left Socialists who had rivaled Rutte’s party in preelection polls mere weeks ago but ultimately didn’t pick up any additional seats.

While Labor is Rutte’s obvious partner, he would lose his trusted finance minister Jan Kees de Jager in a two party coalition. His Christian Democrats were decimated for the second election in a row, posting their worst result since the party was founded in 1980. The participation of either the Christian Democrats or the pro-European liberal Democrats, who won twelve seats, is nevertheless likely to bridge the differences between the two main parties and secure a majority in the upper chamber of parliament which was elected in June.

The main hurdles to a centrist coalition are economic, energy and health-care policy. Labor seeks room for stimulus while the liberals insist that spending should be cut to keep the deficit under 3 percent of gross domestic product in line with European fiscal treaty. Labor proposed an energy tax in its platform while the liberals would rather lift the regulatory and tax burden on businesses.

Samsom is critical of health-care liberalization policies initiated by the Christian Democrats, Rutte’s liberals and the third party liberal Democrats in previous cabinets. He seeks to prohibit competition between hospitals and would thwart competition between private health insurers by linking premiums to incomes. If he concedes on these issues, disillusioned left-wing voters could again defect to the Socialist Party which campaigned heavily against health-care market reform.

Rutte’s main challenge will be to continue his hardline European policy. Before the election, he warned that Labor would sever the Netherlands’ traditional alliance with Berlin in favor of an “axis” with Paris where Socialist president François Hollande also rallied against austerity.

If the Christian Democrats join the coalition and De Jager stays on as finance minister, it will be easier for Rutte to persuade right-wing voters that little has changed. He knows that Dutch taxpayers are frustrated at austerity measures, which have consisted of tax increases besides budget cuts, while having to rescue what they see as profligate budget sinners in the south of Europe. His party’s rise in the polls came largely at the expense of Euroskeptic Freedom Party which advocates withdrawal from the European Union altogether and will try to recover from collapsing the previous government in opposition to what it will inevitably denounce as a “Europhile” foreign policy.

Other sticking points include the home mortgage interest deduction which the liberals have vowed to defend and Labor’s proposed tax increase for high-income earners.

Labor would also like to cut defense spending by another €1 billion which could force the navy to give up its four submarines and prevent the air force from acquiring F-35 Joint Strike Fighters to replace the Netherlands’ fleet of aging F-16s.