Battered Benelux is facing up to the risks

The risks of investing in Europe increased in 2020 as the region struggled to manage the coronavirus pandemic, with the Benelux countries dragged down in its wake, according to Euromoney’s crowd-sourcing country risk survey.

Scores for the Netherlands, ranking eighth globally, Belgium (16th) and Luxembourg (25th) deteriorated, with the grand duchy taking a particularly big hit towards the end of the year.

Belgium has struggled to control the spread, with more than 741,000 officially recorded cases of Covid-19 and 21,750 deaths – at the time of writing – among a population of 11.5 million, making it the worst country worldwide in terms of deaths per capita, ahead of Slovenia, the UK and Czechia.

This is clearly putting the healthcare system under pressure, as well as its leading politicians.

In the Netherlands, there have been more than a million cases and almost 15,000 deaths, among a population of 17.3 million, while in Luxembourg – with just a population of 614,000 and its porous borders – some 53,000 cases and more than 610 deaths have been recorded.

With reduced global trade, the collapse in tourism and Covid-19 restrictions ongoing, the macroeconomic effects have proved severe.

Even star pupils like Luxembourg [and the Netherlands] will feel the pinch 

 - M Nicolas Firzli, SEF

In Belgium, GDP increased in real terms by 0.2% quarter-on-quarter in Q4 2020, but declined by 4.8% year-on-year, as well as by 6.8% for 2020 as a whole. In the Netherlands, GDP was down by 0.1% q/q, 3% y/y and 3.8% respectively, with Luxembourg’s Q4 data still to be released, but the economy also weakened, according to high-frequency data.

Several of the survey’s economic risk indicators were downgraded last year in all three countries, including the GNP-economic outlook, employment/unemployment and government finances indicators.

Government support schemes have helped to limit the fallout in the labour market, but with redundancies likely to lag the recovery as government support is withdrawn, employment prospects are unlikely to improve for some time.

Fiscal metrics have, of course, also deteriorated alarmingly.

In Belgium, the general government deficit widened to an estimated 11% of GDP last year, according to the OECD, while the expected multi-year gradual improvement will still see the Maastricht-defined gross debt burden climbing to 120% of GDP by the end of 2022.

The Netherlands is comparatively better off, but is still expected to see its deficit reach 8% of GDP this year, with the debt pile climbing above the EU’s 60% of GDP limit. Luxembourg is also in a considerably worse situation than is usually the case, with a fiscal budget that tends to be in surplus now in deficit, and with debt rising.

Borrowing rates are at record low levels, but quite whether the Benelux offers suitable risk-return trade-offs must now be questionable, not least when also factoring in the potential for social tensions increasing in Europe and political instability, with multi-party coalitions in all three countries and elections due in March in the Netherlands.

All three countries are on marked downward score trends in the survey, with Belgium and Luxembourg declining more than the EU average on a 10-year trend basis, despite often going under the radar, given the focus on the more indebted countries in Europe.

One of the survey contributors with a broad interest and extensive experience in geopolitical global risk is M Nicolas Firzli, director-general of the Singapore Economic Forum (SEF) and advisory board member at the World Bank Global Infrastructure Facility (GIF).

Although he would readily admit to the fact the Netherlands is still a low-risk option, and that Belgium and Luxembourg are hardly unsafe, he notes a number of peculiar risks affecting the Benelux group for investors to digest.

“In the months leading up to the signing of the EU–UK Trade and Cooperation Agreement (TCA) on December 30, 2020, most experts believed, wrongly, the UK government would yield to pressure from Brussels in all sectors, including financial services, and that the fear of losing pan-European passporting rights would push droves of UK investing bankers and asset managers to Luxembourg or Amsterdam as the ideal alternatives to the City of London.

“Very little of that has happened and many experts, including EU Commission economists, now have to adjust downwards their assessments re-the grand duchy’s ‘massive benefits from Brexit’ or the ‘triumph of Euronext Amsterdam’, in spite of a rise in daily share volumes transacted in the latter in January and early February of this year [trading in German and French blue chips].”

Firzli says Luxembourg has long been the “bon élève”, or star pupil, of the EU, lauded by institutional investors, rating agencies and EU Commission bureaucrats alike for its economic efficiency, fiscal discipline, political stability and financial innovation.

That has been rewarded with an extremely low-risk profile, with Luxembourg until recently always viewed as an ultra-safe option.

“The modern mutual funds industry (SICAV) was established in Luxembourg by French and Belgian bankers seeking an ideal jurisdiction for their funds and, in the past 10 years, the grand duchy has attracted UK and European private equity and venture capital lawyers, structurers, specialized accountants and other high-value-added professionals,” he says.

The Netherlands’ long-term economic competitiveness is clearly wearing out 

 - M Nicolas Firzli

However, things could be changing, argues Firzli, as large “EU core” nations such as France, Germany and Italy enter a protractedly low growth trajectory, which would be sub-par compared with North America, China, Israel and Asean countries.

“Even star pupils like Luxembourg [and the Netherlands] will feel the pinch: a high correlation to the German economy and an overvalued euro will take an increasingly damaging toll on the nation’s industrial activities – iron and steel, machine tools, breweries, etc – and financial sector, including its over-bloated and rather inefficient private banking business,” he says.

Other problematic issues in the medium term for Luxembourg, Firzli points out, include the high cost of living, mediocre transport infrastructure, low birth-rate – threatening the nation’s pension equilibria – and an oversized government across most ministries and municipalities, with no easy fix for any of them.

No wonder all of Luxembourg’s structural risk indicators have been downgraded.

As for the Netherlands and Belgium, their economic bases are more diversified than Luxembourg’s, but they may also suffer to varying degrees from the secular decline of Germany and the EU core, Firzli believes.

“Nearly 60% of Holland’s overall trade surplus comes from Germany, Belgium and Luxembourg, which may make it particularly vulnerable going forward in spite of its still enviable overall ECR ranking, a reflection of the fact other OECD countries, including Luxembourg, France and Italy, have declined even more in the past quarters,” he says.

“To put it simply, the Dutch can still compete with Picardy dairy farmers or Hanseatic bankers, but that’s not where the economic growth of the future will come from: the Netherlands’ long-term economic competitiveness is clearly wearing out”.

As for Belgium, it is poorer than its neighbours, especially in the de-industrialized French Walloon districts, but its economic base is more diversified and the cost of doing business there is substantially lower than in the Netherlands or Luxembourg, Firzli points out on a more optimistic note.

The centrist coalition government is led by Alexander De Croo, a US-educated corporate strategy expert and tech entrepreneur.

“His priorities can be summed up in three words: foreign direct investment, ie luring large US, Canadian, Chinese, Australian, Japanese and UK asset owners, including pension investors and tech giants, to Antwerp, Ghent and Liège," says Firzli.

“I, personally, believe this is a winning strategy.”