As the EU faces a looming reform over the bloc’s fiscal rules, Belgium’s own regions are lining up along familiar fault lines over spending and debt.
Flemish nationalists are pushing back against any attempts to let governments keep purse strings loose. And Belgium could see this debate — playing out across the bloc between the “frugals” and the heavily indebted countries — open up another divide within its messy, polyglot politics.
At issue is the so-called Stability and Growth Pact, which makes EU countries coordinate their fiscal policies. It was put on ice at the start of the pandemic to ensure governments could spend enough to battle the coronavirus without fearing punishment from the European Commission.
The catch: The EU is preparing to reintroduce the rules from the start of 2023. Absent changes, it will cap governments’ budget deficits at 3 percent of economic output and require them to reduce public debt to 60 percent of GDP.
Some policymakers, especially those from Southern Europe, fear that debt threshold is unrealistic given the depth of the pandemic recession and the acute need to finance the green transition. Keeping the fiscal framework’s limits on debt could trigger austerity measures, stifling the economic rebound, this camp warns.
These capitals are pushing the EU to ease the rate at which countries have to reduce their debt piles. Otherwise, the bloc’s rules could make it nearly impossible for the most indebted countries — like Italy, Spain and Greece — to service debt while funding an expensive war against climate change.
Bu many Northern European countries are skeptical, amid concerns that any changes will weaken the bloc’s overall finances and leave the EU exposed to the next crisis.
While most countries take one or the other approach, Belgium is getting heat from both sides. The Dutch-speaking north shares the concerns of “frugals” in Northern Europe while the French-speaking south leans toward the Mediterranean approach.
Sander Loones, a Belgian MP from the Flemish nationalists, described the split as a real “fault line” along the country’s language divide between Flemish and French.
One of the most vocal advocates for loosening the purse strings is Belgium’s state secretary for economic recovery and strategic investment, Thomas Dermine, dubbed the wonder boy of the French-speaking socialists. Along with supporting a move to loosen the EU’s fiscal rules, he told POLITICO last fall he wants a new EU fund that can finance Europe’s transition to a green economy — a comment that raised eyebrows within the Belgian government.
That said, Belgium itself has yet to determine its official stance. EU governments had until December 31 to send in their comments to the Commission on how best to reform the fiscal framework. Belgium didn’t send anything in, according to two Belgian officials. The federal government first wants to see where the EU debate is heading, one of them said. At the same time, it buys some more time to coordinate the internal position.
Meanwhile, finance ministers began the contentious debate of reform Monday in Brussels, where they flew in for their monthly Ecofin gathering. They’ll next pick up the discussion in late February, when the French EU presidency will host ministers for informal talks behind closed doors. Leaders will consider their policy options in March.
Once a consensus is found, the Commission will propose tweaks to the fiscal framework — tentatively earmarked for this summer.
North vs. South
It’s now up to Belgian Finance Minister Vincent Van Peteghem, a Flemish Christian Democrat, to extract a position from the seven parties in the coalition running the federal government, which spans the Greens to the Liberals.
On top of that, he needs to harmonize the positions of the country’s regional governments. In Brussels and the southern region of Wallonia, those are led by the French-speaking socialists. In the northern region of Flanders, the Flemish nationalists are in charge.
“Flanders supports a strict European budgetary policy,” said Flemish Budget Minister Matthias Diependaele. “Unfortunately, there are still too many EU countries who don’t take their responsibility.”
“We’re bound by our common currency, so countries that allow their debt ratio to get derailed risk dragging others down with them,” he warned.
Egbert Lachaert, party president of the Flemish Liberals — the party of Prime Minister Alexander De Croo — agrees. “The current debt thresholds should be kept,” Lachaert said. “I think our finance minister will go into the same direction.”
To Lachaert, the eurozone crisis that led to the bailout of Greece is instructional. “If we want to have one currency, we need to have rules,” he said. He also strongly rejected Dermine’s idea of a European climate cash pot, calling it a slippery slope.
“We should be cautious so that in the end we don’t have something that’s un-fundable and could be an existential threat to the future of the euro,” he warned.
Belgium’s red ink
The challenge for the frugal-leaning Flemish parties is that Belgium has the very “Southern” problem of crushing debt.
Belgium has long been in poor fiscal health, but since the pandemic, it has rapidly gone from bad to worse. The country’s now facing a debt burden of around 114 percent of its GDP, compared with the eurozone average of 98 percent, according to the EU statistics agency.
Johan Van Gompel, senior economist at the Belgian bank KBC, calls the budget situation “worrying.” Without government action against deficit spending, the debt ratio could increase to 128 percent of the Belgian GDP by 2030 and possibly up to 231 percent by 2050, according to a simulation by Van Gompel. (The simulation assumes a fairly robust rate of GDP growth of 3.3 percent.)
The situation is especially dire in Brussels, which has spent heavily on investments such as public transportation, and Wallonia, which has long been the poorer region. In 2020, the debt ratio of Flanders was only 51 percent, compared to 111 percent in Wallonia and 180 percent in Brussels. “It’s no coincidence Dermine is the most vocal about this subject,” said Loones. “Wallonia has a huge debt problem.”
An especially hot topic are the budget transfers from Flanders to Brussels and Wallonia — long the target of Flemish nationalist parties such as N-VA and the right-wing Vlaams Belang (Flemish Interest). The current president of the N-VA, Bart De Wever, once drove a caravan with a dozen trucks full of fake money from Flanders to Wallonia to denounce the yearly transfers going in the same direction.
Belgium’s frugal camp is now looking to a reform of EU fiscal rules to push their southern counterparts to tighten spending.
“We’re not always able to force our French-speaking friends into [taking] more drastic measures,” said one Belgian politician, speaking on the condition of anonymity. “But if ‘Europe’ doesn’t leave them any other choice, that makes our lives easier.”
Eyeing loopholes
A compromise between the North and the South — within both Belgium and the EU — could involve tweaking the current thresholds that allow some flexibility around the fiscal rules. Some argue this approach should apply to the green transition, while others, such as the Flemish nationalists and liberals, call for exceptions with big infrastructure projects.
Lachaert sees infrastructure or “big digital projects” as “something we could maybe keep out of the budget deficit.”
“But every member state should prove that there is indeed a return of investment,” he added.
Van Peteghem take a similar view, having already hinted before a meeting of eurozone finance ministers in November that Belgium will ask for stimulus spending on green investments.
But the devil will be in the details, Loones cautions.
“We want to see more room for investments, especially in countries with a smaller GDP such as ours, but how do you define a positive investment?” he asked.
The European Commission’s ongoing debate over taxonomy — which is setting out rules on which energy sources count as “green” — is a good example of how political these supposedly technical discussions can get, said Loones.
“The same goes for the fiscal rules in the past.” he said. “The Commission hasn’t exactly been a reliable partner in enforcing the rules.”
Bjarke Smith-Meyer and Paola Tamma contributed reporting.
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