Monday, October 3, 2011

Belgium - The Eurozone's Small and Silent Debtor

I've posted articles on four of the PIIGS nations so far and with the ECB being forced to buy the bonds of both Greece and Italy in recent days in an attempt to keep the Eurozone afloat, I thought I'd take a look at one of Western Europe's very quiet debtor nations - Belgium.

Belgium is a rather small European nation located along the coast of the North Sea snuggled between France, the Netherlands and Germany.  It is a member of the EU, the OECD and NATO and was part of the Netherlands until it achieved independence in 1830.  In fact, Belgium is the home of the headquarters of the European Union.  There has been longstanding domestic tensions between the 6.6 million Flemish who speak Dutch and live in the north part of Belgium and the 4.1 million Walloons who speak French and live in the southern part of Belgium which has led to the granting of political autonomy to the Flanders and Wallonia regions.  Here is a map showing the division of the country into its autonomous regions:

Belgium has a population of 10,839,000 and has an area of 30,500 square kilometres, roughly the size of the state of Maryland.  As a result, Belgium has the second highest population density in Europe after the Netherlands.  Per capita income for 2010 was estimated to be approximately $43,220, among the highest in the world.  Despite that, the northern Flanders portion of the country is better off economically with half the unemployment rate of its poorer Wallonia neighbour.

Right now, one of the most interesting issues facing Belgium is their lack of a government, a libertarian's dream come true.  That's right, since the election on June 13th, 2010, Belgium has been without a government and yet, despite the ongoing issues facing the Eurozone, its economy is still moving along.  There have been intractable divisions between Belgium's Dutch and French speaking populations (as noted above) and this division has lead to 45 different governments in the past 67 years.  Negotiations to form a coalition government have failed at every turn; a caretaker government is in the process of drawing up a budget which has been delayed at least once.  Lacking a government, however, has meant that Belgium's population has not yet had to face the austerity measures that many of its fellow Member States have been wrestling with, measures that have led to social unrest in several Eurozone nations.    

Belgium is a highly industrialized nation that depends heavily on trade with the rest of the world for its economic growth.  It has a highly trained workforce that is active in the steel, textile, food processing, pharmaceutical, automotive, electronic, textile and refining industries.  As a nation that has only a very modest amount of coal as a natural resource, it relies heavily on imported sources of energy making its economy vulnerable to energy price shocks.

According to the Belgian government's Debt Agency website, Belgium's Federal Government Debt amounted to €347 billion at the end of June 2011.  In comparison, Spain's debt is €566 billion and Germany's is €1131 billion.  While a debt of this size seems small compared to the nominal debt of the United States, Japan and its Eurozone partners, one must keep in mind that Belgium's economy is tiny when compared to that of Germany, the U.K. and Italy.  Belgium's debt-to-GDP has varied widely over the past two decades.     Here is a graph showing the ratio since 1993:

The debt-to-GDP reached its highest point in 1993 when it hit 134.1 percent; this was accompanied by a 1992 budget deficit that reached 7.1 percent of GDP.  The growth in debt was in large part due to mismanagement by the Belgian government which reacted to the oil price shocks of the 1970s by expanding the public sector and subsidizing inefficient and uncompetitive domestic industries.  Fortunately, at that time the government was able to tap domestic savings of its citizens which mitigated the negative effects of the high debt on the economy.  As you can see on the graph, between 1993 and 2007, the Belgian government managed to rein in its deficit spending, reducing it to 0.2 percent of GDP in 2001, well below the EU target of 3 percent.  Things started to go off the track with the advent of the Great Recession in 2008.  Since then, Belgium's debt-to-GDP has risen from a low of 84.2 percent in 2007 to 96.6 percent in 2010.  Should the world's economy contract this year and next, Belgium's debt-to-GDP ratio is likely to rise above 100 percent once again and may rise into the danger zone.  Using my favourite metric, debt per capita, Belgium comes in at €32,014.  By comparison, Germany's debt rings in at €13,800, Spain's at €12,004 and Italy's at €30,201.  While most economists use a debt-to-GDP metric as a measure of fiscal health, I find the per capita debt to be a more relatable number.  In any case, Belgium does not come off particularly well with either metric.

The Debt Agency's Review 2010 Outlook 2011 publication projects that that Belgium's Treasury will borrow an additional €41.12 billion in 2011, down €2.37 billion from 2010.

Unemployment in Belgium is below the average of the EU-27 member countries.  For the most recent month of June 2011, the EU-27 average unemployment rate was 9.4 percent whereas Belgium was experiencing only 7.4 percent unemployment.  This is actually slightly lower than its average rate of 7.5 percent in 2007 before the onset of the Great Recession.  Here is a chart showing how Belgium's unemployment rate compares to that of its PIIGS neighbours and other EU nations:

Here's an interesting screen capture showing the same data in bar graph form:

If we go back to 1990, we can see how unemployment was rather high during the period while Belgium was wrestling with its high debt issues:

Belgium, like many other nations, has (and still is) experiencing increasing housing prices.  Unlike Ireland, Spain, the United Kingdom and the United States which have experienced at least some form of a bursting housing bubble, housing prices in Belgium continue to rise as shown on this graph from the Economist:

Despite the lack of a government, Belgium's economy is growing faster than many of its Eurozone partners.  Second quarter growth reached 0.7 percent compared to the United Kingdom's tepid 0.2 percent and Germany's feeble 0.1 percent.  Here is a bar graph showing the projected GDP growth rate for all countries in the European Union plus several others including Japan and the United States for 2011:

Here is a bar graph showing the projected GDP growth rate for all countries in the European Union plus several others as above for 2012:

Note that Belgium's projected growth is above the Eurozone average in both 2011 and 2012 but well below many of its fellow Member States.

While Belgium’s nominal debt and debt-to-GDP levels appear to be manageable should Europe's economy not contract, its debt level is rather large when looked at on a per capita and debt-to-GDP framework.  Belgium's debt-to-GDP level is already very close to 100 percent, well above the median in the Eurozone, and shows only the faintest signs of slowing growth.  Belgium’s lack of a government has meant that it has not yet enacted the austerity measures necessary to control future debt growth and deficit spending, a task that will have to be undertaken very soon, especially if the world slips into yet another economic contraction and Belgium wishes to retain its creditworthiness in the eyes of the world's bond traders.  As well, should Belgium's housing market experience a correction as has been experienced in many of its Eurozone neighbours, economic projections for fiscal balance will be tossed out the window.


  1. another junkie@home.netOctober 3, 2011 at 1:36 PM

    Useful. Thank you

  2. Yeah - it's always the quiet silent type. Dexia is believed to be in trouble and meanwhile the Qatari Investment Fund is looking to buy up 10billion (pounds) worth of physical Gold - guess they are hedging

  3. I had understood Luxemburg was the real center of the European financial world. This can't end well.

  4. You're interesting piece has one little gem buried in amongst the data. It is this:

    "Despite the lack of a government, Belgium's economy is growing faster than many of its Eurozone partners. "

    In short, there is no government that can be pushed into applying austerity measures. This means that people are still in work and still paying taxes.

    I do not know Belgium's adminitstrative system as well as I do those of Germany, the Netherlands or Denmark, but given EU legislation and the fact that Belgium is one of the Benelux countries, I am pretty sure that the following will be the case: In the neighbouring Netherlands, worker's rights are very strict. It is all but impossible to sack anyone. Whilst this has disadvantages, it means that bank loans are pretty solidly guaranteed.

    Imagine if this was the case in the US? Can you imagine the delight of a US bank knowing that if a worker has a contract, their loan will be repaid in full?

    It is a big mistake to think that because there is a housing bubble in Belgium that it necessarily implies that it is unsustainable.

    You may have mentioned it elsewhere, but some of the money that flooded the US in the form of TARP went to European banks that had invested in the US market. All that came home to roost in Europe ... what do you do with all that money in a tightly regulated country like Belgium? Answer: lend it outside your country. Lend it to whoever will take it, and given the ECB was leading the charge, they lent to Greece.

    Why? Because Greece was there and there was nothing to stop them. Well. Apart from common sense that is.

  5. "Despite the lack of a government, Belgium's economy is growing faster than many of its Eurozone partners."

    Do you really not understand?