The leading American financial news agency Bloomberg raises the alarm about Belgian public finances in a remarkably sharp analysis. “As bad as the US, but without the impunity of the dollar,” it says. Five questions for Trends’ chief economist, Daan Killemaes.
The authors of the article on Bloomberg do not shy away from big words. Our country is plagued by a “dysfunctional political system,” its public finances by a “lack of restraint.” And also: “The seemingly unstoppable path to higher debt in Belgium is the product of political stagnation in a divided country.”
A sharp analysis, but not a new one. It is well known on the financial markets that Belgium is far from the best student in the European budget class. International institutions such as the European Commission, the International Monetary Fund, the OECD, and in Belgium the National Bank, have been warning for some time now that the Belgian budget is on an unsustainable trajectory if policy remains unchanged.
‘Our country even has a strong positive investment position compared to abroad’
Bloomberg also signals the impending political blockage in our country after the elections. “It is also no secret that the fragmented political landscape and the difference in policy vision between the north and south of the country make sustainable budget restructuring extremely difficult,” says Daan Killemaes, chief economist at Trends.
Killemaes sees a nuance that Bloomberg does not notice. “The article does not mention that Belgium can finance its budget deficits internally. Compared to other countries, our country even has a strong positive investment position, built up with trade surpluses in the past. Thanks to the large savings reserves, families can finance the government at affordable interest rates if necessary. That is a huge asset, especially in times of crisis.”
Bloomberg compares our country with the United States, which is also burdened by a sky-high debt, but according to the agency that country benefits from the impunity that comes with printing the dollar. What does that mean?
DAAN KILLEMAES. “The United States, in addition to having a strong economy and a deep capital market, still has the privilege of the dollar being the world’s dominant reserve currency. This obliges other countries to keep sufficient dollars as a piggy bank for difficult times. The United States can therefore borrow more cheaply on international markets, even if the budget deficit and government debt rise.
“The United States, through its central bank (the Federal Reserve or Fed, ed) thus printing dollars that are accepted worldwide. Belgium, on the other hand, no longer has its own central bank and must take into account the monetary policy as outlined by the European Central Bank (ECB). Debts must be paid with euros that must first be earned, although the ECB is also prepared to print euros if euro countries get into financial problems.”
That privilege of the United States is not unlimited, Killemaes notes. “At some point, investors will demand higher interest rates if the United States allows its budget deficits to rise too far and if the Fed implements monetary policy too loosely. With a combined budget deficit of 7 percent and a government debt of more than 100 percent of gross domestic product (GDP), the United States is even doing worse than Belgium on the budget. The United States today pays higher interest rates on its debt than Belgium. The Fed has little room to lower the policy rate, partly because the expansionary fiscal policy leads to persistent inflation pressure. The United States has more budget freedom than Belgium, but printing too many dollars cannot be done with impunity.”
The analysis also states that “during the election campaign, no party really talks about how it wants to get its finances in order.” The Planning Bureau’s calculations show that no party will achieve the budget target by the end of the next legislature. Is there a sense of urgency missing?
KILLEMAES. “Shortly before the elections, of course, no party dares to say bluntly that the money has run out. On June 10, the tone will change. And if the next government does not demonstrate a sense of urgency, or if a government is not formed, then the European Commission, the financial markets and the credit agencies will develop pressure to adjust the budget. In particular, a rise in interest rates would tighten the vices and oblige the parties to draw up a credible long-term budget path. After a long political stalemate, the Di Rupo government was forged at the end of 2011 by the fire of the financial markets, which had targeted Belgium. The Di Rupo government then made a remarkable effort to keep the budget on track.”
‘Everyone feels it when a housemate is cutting corners.’
Europe requires a national debt of up to 60 percent of GDP and a budget deficit of up to 3 percent of GDP. Why is that so important?
KILLEMAES. “These are quite logical house rules that you have to apply if you live under the same roof. Everyone feels it when a housemate is cutting corners. This is also the case within the house of the European Union, and certainly within the house of the Eurosystem. Suppose Belgium’s creditworthiness comes under pressure, then the value of Belgian government paper will fall, and almost all European banks will feel this. Doubts about the creditworthiness of Greece and later also the other southern euro countries brought the euro to the brink of collapse in 2012 and pushed the euro area into a long-term recession. The figures of 60 percent and 3 percent are somewhat arbitrary, but house rules are a must. However, not all political parties seem to understand that discipline is needed if you want to be part of the euro or the European Union.”
‘Not all political parties seem to understand that discipline is needed if you want to be part of the euro or the European Union’
France and Italy are in the same boat, but the forecasts are that the budget deficit there will decrease in the coming years. For us, if policy remains unchanged, it will become bigger. What are we doing wrong?
KILLEMAES. “Belgium cannot get the rising aging costs under control. Government expenditure is still rising faster than GDP, as it has been for the past twenty years, mainly driven by higher expenditure on pensions and health care. Government expenditure on interest charges has risen to 53 percent of GDP, which is 6 percentage points higher than the average in the European Union. At 61.5 years, the effective retirement age is still far too low and a growth standard of 2.5 percent (on top of inflation) in healthcare is not sustainable. To reduce the debt ratio to 60 percent of GDP by 2070, a budget effort worth 6 percent of GDP is needed, the European Commission calculated. Belgium is doing worse than all southern euro countries.”
‘The next government does not have to take out the blunt austerity ax, but it must take measures to raise the retirement age, boost the employment rate and work more efficiently’
What do you think should be the top priority after June 9?
KILLEMAES. “Reform, reform and reform again. The next government does not have to take out the blunt austerity ax, but it must take measures to raise the effective retirement age, boost the employment rate, work more efficiently, especially in healthcare, and boost economic growth. Such a policy would put the budget on track fairly quickly. However, Belgian performance on the reform front has been poor in recent decades. If there is enough pressure from Europe or the financial markets, better patchwork is possible. But as soon as that external pressure diminishes, Belgium quickly loosens the reins. In the context of rising aging costs and rising interest costs, this structural status quo and indecision are becoming increasingly difficult to afford.”
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