NEW YORK - There is nothing attractive about a country going down into an
economic crisis. It usually includes panicked investors, angry citizens, and,
in some cases, riots and demonstrations. In 2010, we have watched Greece tumble
into an International Monetary Fund/European Union bailout and later in the
The second case should be of particular alarm to global policymakers and
investors as the Irish government made a very strong effort to avert a bailout,
imposing tough austerity on the country for two years running. Now there is
more pain coming in the form of the 2011 budget and an IMF/EU support package,
a situation complicated by elections in January 2011.
Despite the horror of the situation, Ireland is still going to exist as
a country. Yes, its sovereignty is dented, but nobody is questioning its future
existence. If that were the case, the financial panic would no doubt be
greater. That is why the case of Belgium, one of Europe's largest debtors,
remains so intriguing.
Greece, Ireland, Portugal and Spain have all been in investor crosshairs since
2009. The issues of too much debt, the imposition of tough-nosed austerity, and
ongoing concerns over access to capital - the critical lifeblood of national
finances - have rearranged the political and economic landscape in Europe.
The EU now has a European Financial Stability Fund (EFSF), Germany is emerging
as the regional bloc's heavy with France following behind, and small countries
are being warned to get their fiscal houses in order.
Yet, Belgium's political drama has largely sailed under investor radar screens.
But this fractious country of 10.8 million known for its Flemish painters,
waffles, French fries and beer, potentially faces a profound political crisis
that could see an end to the unified state, something which has substantial
implications for the management of its debt. It tends to be forgotten, but
Belgium has one of the higher levels of debt to gross domestic product in the
EU with French banks having the largest exposure.
Belgium was established in 1830, following a revolution that pulled the
predominately Catholic Southern Law Lands out of the United Kingdom of the
Netherlands. The country was, and continues to be, divided between two major
linguistic groups, the Dutch-speakers, mostly Flemish, and the French-speakers,
overwhelmingly Walloons. Hence, Belgium has two political-cultural poles,
Flanders in the north and Wallonia in the South. There is also a small
To accommodate this often culturally-at-odds mix, Belgium's constitutional
monarchy presides over a complicated political system that has devolved
considerable authority into regional governments at the expense of the center.
This leaves a state headed by the king and a government led by a prime
minister, but with a federal cabinet that seeks to equally balance Dutch and
French-speaking ministers as prescribed by the constitution.
Adding to the cultural-regional mix, the parliament's upper house, the senate,
consists of 40 directly elected members and 21 representatives appointed by
three community parliaments, 10 co-opted senators and the children of the king
(as senators by right who in practice do not cast their vote). The lower
chamber has 150 representatives who are elected under a proportional voting
system from 11 electoral districts.
The Belgian political system worked relatively well from 1958 to 1999, with a
chain of largely Christian Democrats running the country. In 1999, a major
scandal over contaminated food was the catalyst to an unwinding of the
Christian Democrat's hegemony and a shift to more regionally driven political
parties. Although the regional polarization factor loomed large over Belgium's
political landscape, the country benefited from the governments of prime
minister Guy Verhofstadt (1999-2008), during which attention was given to
improving the country's fiscal situation, containing the growth of national
debt, and making some tax reforms.
With the end of the Verhofstadt government, Belgian politics entered a period
of instability from which it has yet to find an exit. The latest failure in
forming a government came in October when the winner of the June elections, Bar
De Wever, head of the separatist N-VA (Flemish) party, proposed greater fiscal
autonomy for the regional governments, ie more control over tax revenues in
regions at the expense of the federal government, a move which would no doubt
favor the more affluent Flemish areas.
As one journalist noted: "It would leave Flanders, the country's most popular
but also wealthiest region, to grab the lion's share of 45% of tax revenue no
longer in the hands of the federal government." The French-speaking parties
were opposed to De Wever's proposal as it could lead to tax competition (ie the
Flemish areas could lower taxes to attract business).
The thing that most investors are not focused on is that one exit from the
situation of June's inconclusive 2010 election from which a government has yet
to emerge is the end of Belgium as a unified country. Simply stated, Belgium
could split into two separate countries, much like Czechoslovakia's "Velvet
Divorce" in 1992. While the birth of the Czech and Slovak republics was handled
without a major sovereign debt crisis, the current environment in Europe and
international capital markets is not as open to the birthing process,
especially considering that Belgium's debt burden (in terms of debt to gross
domestic product - GDP) is the third highest.
Are we overstating our concerns? While we hope our perception of Belgium's
sovereign risk is overstated, The Economist Intelligence Unit (EIU) observed in
October that "Belgium is the least stable country in the EU, in that there is
no consensus about what form the state should take or whether it should
continue to exist at all".
Although the EIU went on to emphasize that its central forecast was that
Belgium will still exist in 2014, it also stated "there will be no long-term
resolution of the divisions between the Flemish and francophones. There is
indeed a possibility that majorities on both sides will decide their future is
as separate countries."
Just to add a little more flavor, the Financial Times' Stanley Pignal on
November 15 stated: "The budget questions Belgium faces are the same ones that
many other countries in Europe and beyond are asking themselves. But, at the
moment, there is no government in office to provide answers."
As of October 2010, Belgium was presided over by interim Prime Minister Yves
Leterme, a Flemish Christian Democrat who led the last official government that
folded earlier in 2010. A Flemish separatist party was the winner of the June
elections and is trying to form a government with a collection of both
federalist and separatist parties, not a very promising landscape. This leaves
the door open to new elections, a costly yet potentially inconclusive exercise.
It is very likely that a new election will only return the same cast of
characters - De Wever was recently given 70% support by potential Flemish
voters. This situation has hit Belgian society, leaving the daily De Standard
to comment: "There is practically no solution but new elections. Chaos is just
around the corner."
Belgium's economy has its own set of problems. Real GDP contracted 2.7% in
2009, but headed back into positive territory in 2010 (with the IMF forecasting
1.6%). Like so many countries in the euro area, Belgium has been forced to
adopt austerity with an eye to reducing the budget deficit and public debt to
meet targets set with the 2010-2013 Stability and Growth Program agreed upon
with the European Commission. This situation is not helped by efforts of the
regions to increasingly take a larger share of federal tax authority,
The challenge on the economic side is that Belgium is likely to share in the
larger slowdown, which is expected to hit the domestic economy hard as the
situation is likely to be complicated by ongoing political uncertainty, leaving
the export sector one of the few areas of modest expansion. If growth dips
lower than expected, it could add to social discontent, considering that
unemployment is set to remain above 8% for the foreseeable future.
Bearing in mind the international environment - with Ireland having crashed and
pressure now on Portugal - domestic political risk and the less-than-robust
economic landscape, we expect that at some point questions could be raised over
Belgium's ability to pay, especially if there is ongoing uncertainty over
whether the country remains as a unified entity or splits into two new units.
Belgium has remained a unified polity since 1830 and a velvet divorce is most
likely not a short-term outcome. The EU, with its headquarters in Brussels,
would also have a stake in engineering an optimal outcome if tensions were to
increase. However, the political squabbling and entrenchment of regionalism
among voters pushes a possible day of separation that much closer.
For a country with debt forecast toward 100% of GDP and an uncertain political
future, Belgian debt trades too tight for the risk. One also has to question
the strength of the country's Aa1/AA+ ratings. At some point, investors are
going to recognize the gravity of the situation.
Hopefully we do not have another Greece or Ireland-like situation on our hands.
Scott B MacDonald is a senior consultant at
KWR International Advisor, a consulting firm specializing in the
delivery of Asia-focused trade, business and investment development, research
and public relations/public affairs services for corporate and government
clients. For more information, please visit http://www.kwrintl.com
(Copyright 2010 KWR International. Run with permission.)