Belgium’s budget situation has been in poor health for a while. But now that it’s infected by the coronavirus, things are rapidly going from bad to worse.
The country already was struggling with one of the highest government debt loads in the EU before the pandemic struck. It also had the added handicap of being without a permanent government for almost two years — the new administration came together only in October.
Now, the new Belgian government faces a dilemma in handling the recovery from the economic shock of the health crisis. It needs to spend to get the economy to recover from the pandemic impact, but how can it do that without ballooning its already-high debt level?
Belgium is not the only EU country struggling with this predicament. In a first response to the pandemic, all EU governments turned Keynesian and loosened their purse strings to stanch the economic bleeding, encouraged by the European Commission waiving debt limits and state-aid prohibitions.
For Thomas Dermine, the 34-year-old Belgian secretary of state in charge of the country’s recovery plan, Europe is in the Keynesian moment par excellence. All indicators justify revitalizing the economy by investing, he said, “as long as we don’t spend willy-nilly on just about anything, but concentrate investments on projects that have a maximum stimulus effect.”
But in Belgium, this road could turn out to be more dangerous than for others. With a ratio of public debt to GDP of 115 percent, Belgium is among the most indebted countries in Europe, along with Greece (187 percent), Italy (149 percent) and Portugal (126 percent), according to second-quarter Eurostat figures. Luxembourg and Sweden, by contrast, rank among the best students with debt-to-GDP ratios below 40 percent.
The first problem for Belgium is that the country’s budget was already sliding off the rails before the pandemic hit. The government’s deficit in the first quarter of 2020 increased more than any other EU country apart from Malta.
When the pandemic hit the country, Belgium was in a political impasse with no one feeling responsible for who was going to pay the bills in the longer term, leading to a wide array of spending measures to prop up the economy in the first wave, such as handing out free train rides.
And the newly installed Belgian government, a fragile coalition of seven parties formed in October, will not take any drastic measures to get the budget back on track, as first priority goes to fighting the pandemic and the need for economic recovery.
In addition to that, the different Belgian governments — at federal and regional levels — still seem to be in a race to hand out budgetary treats.
In a country where nine separate ministers are responsible for health, alignment is often a headache. When Belgian federal Health Minister Frank Vandenbroucke announced a bonus for medical staff working in hospitals (which are a federal competence), that increased pressure on regional governments to do something similar for medical staff working in nursing homes (which are a regional competence). Last month, the Flemish government decided to pay its health personnel more as well.
That internal competition led to an increase in the country’s debt ratio to 116.5 percent of GDP in November, and economists are ringing the alarm bells. Belgium’s National Bank flagged the dangerously high debt level, and the European Commission issued a similar warning, referring to the country’s bulging debt even before the crisis. It was the same call for caution as conveyed to southern countries such as France, Greece, Italy, Portugal and Spain — much to the frustration of Flemish nationalists, who are not a part of the new federal government.
“We should strive to be more like the Northern European countries when it comes to budgetary orthodoxy,” said Sander Loones, an MP for the Flemish nationalists. “To make matters worse, the current calculations from the government are too optimistic, as they don’t take into account the economic fallout from Brexit or the inevitable costs for coronavirus vaccines. The budgetary situation next year will be even worse than the Commission suspects.”
Counting on EU money
Because of that delicate budgetary situation, the government has less leeway to go all-in on spending to boost the recovery.
“We can’t just let the budget go off the rails,” said Pieter Timmermans, head of the federation of Belgian businesses. “Instead of relying too much on public loans, Belgium should consider activating private savings and convince citizens to invest more in the economy to support the recovery.”
While increasing the country’s debt level might not be ideal, the alternative of structural economic damage is worse, said Gert Peersman, an economics professor at the Ghent University.
“We should focus less on the debt level and more about what we’re borrowing money for,” said Peersman. “One-off expenses to help the economy bridge this difficult period are fine. Smart investments to improve productivity are necessary. But using these extraordinary circumstances to borrow more for recurring expenses, such as increasing pensions or higher wages for medical staff, leads to structural budgetary issues in the long term.”
On the other hand, Chantal Kegels, an expert working on the Belgian recovery plan, thinks that since the major part of the financing of this plan will be in the form of European grants and not loans, it should therefore “not increase the public debt.” The EU money “will also allow a rapid return to growth and should therefore lead to a stabilization then a decrease in the debt ratio,” she added.
But finding that balance rests on the shoulders of Dermine, a young, promising politician from the French-speaking socialists.
Dermine has to get each of the seven parties in the coalition government on the same recovery page, from the Flemish-speaking liberals to his own party, which feel the pressure from the communists, popular in the southern part of Belgium.
On top of that, he also has to get the other governments of Belgium in line, as the European Commission expects just one national proposal from Belgium. That means he also has to work together with Flemish nationalists, who lead the government of Flanders, and whose economic recipes are the exact opposite of his own party.
But so far, the process has been very “constructive,” he said. The upcoming deadline of April 2021 puts pressure on the negotiating partners, as there is no time to waste.
“The EU is helping us by putting a very tight timing and by being very explicit on the process. The deadline serves to pace the work and avoid blockages that would last for too long,” said Dermine. “After all, the whole point of the recovery is … to modify the engine so that it performs better.”
Belgium hopes to receive up to €5.15 billion from the EU’s recovery fund, out of which Flanders has already claimed €3 billion. But in order to get that money, the country has to make sure its national recovery plan is green enough to align with the Commission’s climate goals. Not an easy job, as Flemish nationalists are skeptical toward the EU’s climate ambitions.
Claiming the European money is extra important for Belgium given its sticky budgetary position. “We are definitely counting on the EU money,” a government official said. “At the same time, we’re bracing ourselves for the internal Belgian discussion, especially on climate.”
The discussion will become very political at times, Dermine acknowledged. But he’s confident they’ll find a solution. “We have a more concerted approach, so it takes more time, but I am also convinced that the recovery plan will be better thanks to the inputs from the different regions.”
In a country with very different realities in its regions, he argues that Belgium’s method will allow for a more “bottom-up approach … rather than having a very centralized vision,” like in France.