Belgium: Growth and austerity measures

Inspired by an interesting article from Financial Times: Belgian growth boosted by political paralysis.

Question:

Do you agree with the suggestion from the article or not, and why?

Answer:

Eric de Keuleneer, Economics Professor, Solvay Business School

There is some limited truth in that, inasmuch Belgium has not implemented austerity measures because of the lack of a full-fledged government, but on the other hand, not much austerity is needed, since the budget deficit is one of the smallest in the Euro- zone. Moreover the Belgian economy rather relies on exports for its GDP, and thus austerity measures would not bite so much on growth. In fact the Belgian economy is very dependent on Germany, of which it is a large subcontractor, and that is a nice situation to be in at the moment. Moreover Foreign Direct Investment has been pretty high the last years, and that has helped as well.

Roger Vickerman, Professor, Dean, University of Kent, Brussels

Whilst I have not undertaken any direct analysis of the question, there is an element of truth that the absence of a Federal Government in Belgium has prevented agreement on an austerity programme similar to those in other Eurozone countries. The odd thing is that Belgian debt has not risen significantly during the crisis – it has historically been one of the highest (as a % of GDP) in the EU. This has not in general proved to be a major difficulty, partly because Belgian economic performance has been superior to that of the other highly indebted countries and partly because a rather lower proportion of the public debt is held outside Belgium. There has been some commentary that Belgium may become the object of speculation, but although yield margins have risen, so far not disastrously so and I think the speculators have other targets first. I suspect that there may be issues surrounding the impact of Belgium’s hosting of the EU institutions. The lack of a Federal Government also does not affect much daily life in the country as most services are delivered at the various local levels of the region, province, commune or language community. As the FT article also points out there are also issues surrounding indexation which is built into many employment contracts in Belgium. Currently each part of the Federal Government is operating month to month on one-twelfth of the previous year’s budget. Ultimately the problem which will emerge from this is that inflation will begin to erode this.

These are a few random thoughts which broadly support the FT analysis. What is perhaps more interesting to speculate is that the longer the stalemate continues the less the pressure may be to solve it as so far it is difficult to identify serious consequences for the average Belgian resident.

Jean-Luc De Meulemeester, Professor, Solvay Brussels School of Economics & Science Po Bruxelles, ULB Université Libre de Bruxelles

Belgium is a small open economy, and politically speaking very decentralized.  It is quite different from France and organized in a more “bottom-up” way.  My university depends for example on a regional ministry of higher education – and all regional governments are in place.  Only a limited (but of course central) set of issue are managed at the federal level (defence, justice, economic affairs, international relations, finance, social security, health among the most important ones) – and all the debates around the reform of the State turn around a further decentralization.  The French-speaking part of the country (especially Walloonia) is confronted with severe economic problems (reconversion of industrial areas, unemployment problems) – even if Brussels (officially bilingual but mainly french-speaking) remains the center of economic activities in this country.  In terms of GDP, Brussels and Walloonia are on par with Flanders.  But the French-speakers fear a further decentralization as it might mean in the near-future an independent Flanders (with Brussels surrounded by it – and in the long run maybe annexed to Flanders), and perhaps more importantly, less social security transfers from North to the South (even if in that matter there are also debates around the right amount of transfers – it seems that Brussels, making 20% of Belgian GDP – transfers also a lot of its wealth to the 2 other regions).  The divide is also political: Flanders is more nationalist, conservative and pro free-market solutions.  The South of Belgium is more “centre-left” and wants to keep the traditional “social model” of Belgium.  It is also partly linked to the objective situation of both parts of the country (Walloonia has 35% of its workforce working for the public sector largely defined, and Flanders only 25%).  Flanders, the economic powerhouse of Belgium, fears the future and tends to think that a right-wing shift is needed to keep its competitiveness.  The 2 parts of the country have therefore 2 radical different views of the future optimal economic policy.  That counts as well.

Concerning the Belgian economic performance, it used to be among the best in the Euro-zone all along the years 2000.  The country is a small open economy, and benefitted a lot from the German economic recovery (slowing down the last quarter, unfortunaltely).  The economic measures of the neighboring countries (as expansionary plans before the sovereign debt crisis) exert their impact in Belgium as well.  The absence of a government during the last year probably benefits Belgium in the short run as it allows it to escape the harsh budgetary cuts and austerity measures of the other European countries.  In a sense, it is an interesting laboratory on the pertinence of another economic policy.  Belgium remains (comparative to other European countries) more or less a social-market economy, with an important tax rate on labour, lifelong unemployment benefits, automatic wage-indexation, reduced inequalities…  It did not implement a radical shift from the Keynesian philosophy of supporting internal demand (even if changes have been operated since the 80s – and especially during the 90s the ratio debt/GDP has been decreased from 135 to under 90% before 2007).  An important part of the active classes of the North (and the South as well) would like to implement a more anglo-saxon, free-market policy – and this is resisted by the South (poorer), but also the trade unions (in both Flanders and Waloonia).  The Belgian divide is therefore also a political one.

However, the dangers both in the short run (the debt-GDP ratio of Belgium is about 100% and without a proper government it might attract the attention of speculators) and the long run (the ageing population, the sustainability of social security mechanisms) should lead to the formation of a proper federal government soon.  The pressure of the EU and other partners will also surely induce the country to adopt severe austerity measures that may jeopardize the growth performance.  It is not sure that too extreme austeruty measures and public expenditures cut will benefit Europe at this stage (growth and economic revival could be impeded) but the room for choice is limited.

Belgium is just a small open economy and if a worldwide recession occurs, it will not escape thougher times.