Belgium’s elections raise the risk of policymaking inertia

Awaiting new faces to fill Belgium's federal and regional parliaments

Although attention will be focused invariably on the fallout from the European elections on May 26, Belgium is facing the prospect of another political deadlock at the same time as its economic fortunes are underwhelming.

GDP growth has been relatively anaemic, averaging 1.5% in real terms for the past five years, and slower than the eurozone average of 1.9%.

Last year the expansion slowed to 1.4% thanks to weak private consumption, and forecasters expect further slowdown this year.

The burden of public debt is uncomfortably high, with Belgium one of only five countries (alongside Greece, Italy, Portugal and Cyprus) possessing a general government gross debt exceeding 100% of GDP urging more austerity, and reforms, to avoid relying on cyclical economic improvement.

It is also making the country vulnerable to any future economic or financial sector shocks, and demonstrating a lack of preparedness for population ageing.

Structural risk indicators, including a low score for demographics, have altered very little in recent years.

Naturally scores for government stability are also marked down this year as the polls near following the government’s collapse in December, leaving prime minister Charles Michel in charge of a minority caretaker government.

Risk experts believe the possibility of reforming the previous coalition is weak, which will likely lead to long discussions to form a coalition (as is often the case in Belgium) and to a possible shift in economic policy – hence why analysts have also lowered their scores for the regulatory and policymaking environment.

Belgium’s total risk score has fallen almost a point so far this year.

It remains 17th in the global rankings, sandwiched between the United States and Slovakia, but with little hope of climbing into the first of the five tiered groups into which all 186 countries are distributed according to their risk scores.

With Czech Republic hot on its heels – improving in the survey, over time, along with Slovakia – Belgium could see its risk ranking undermined.

Belgium is a tier 2 sovereign borrower with a stable AA rating from Standard & Poor’s, but lower AA-/Aa3 equivalent ratings from Fitch and Moody’s, which may eventually necessitate a downgrade.

Belgium’s risk score is almost 18 points lower since the global financial crisis, a decline worse than Luxembourg, Germany and the Netherlands – albeit not quite as much as France, with its higher unemployment, or the United Kingdom, addressing Brexit, two other countries with fiscal challenges.

But Belgium should be doing better. Unemployment has fallen and borrowing rates remain at record lows.

ING senior economist Philippe Ledent, a contributor to Euromoney’s risk survey, is not overly hopeful for an upturn in the economy despite anticipating positive household consumption growth supported by lower energy prices, job creation and the recent indexation of wages and social benefits.

“Belgian foreign trade, which contributed significantly to economic growth in 2018, risks being affected this year by the weakening of economic growth in the eurozone, by the tensions in international trade (including between the US and the eurozone) and Brexit,” he says.

“Taking these elements into account, we expect GDP growth to be limited to 1.3% this year and in 2020. It should also be noted that this scenario takes the Belgian political context into account and, in particular, the fact that new economic policy initiatives will be rare in 2019.”

ING forecasts also see the budget deficit widening to 1.6% of GDP in 2019, from 0.8% last year, government debt easing slightly but remaining high at 101% of GDP, and investment growth slowing.

Complicated

Moreover, Belgium is a complicated political system given its linguistic divide and overlapping framework of governance.

The country was left without a government for more than 500 days in 2010, and the 2014 elections were far from smooth, producing more than four months of wrangling.

Fragmentation of the political system and the powers conferred on regional parliaments have seen Wallonia exercise its authority by temporarily blocking the EU-Canada free trade agreement, and more recently joining with France to oppose EU-US trade negotiations.

Climate protests and immigration are key issues providing succour, respectively, to the Flemish separatists and Greens.

However, as Ledent notes: “The only coalition that could win a majority in both the federal parliament and the Flemish and Walloon parliaments would be the N-VA (New Flemish Alliance), the liberals and the socialists.”

“That said, after previous federal and regional elections, the N-VA and the French-speaking socialist party have refused to work in the same government.”

This suggests asymmetric majorities at the federal and regional levels of government.

But given the time it will take to settle all of this, there will be little effective policymaking, and delays to budget savings measures.