HQ of the EU in Brussels.
The Euro crisis ceases to go away, after protests erupted last week in Spain and Greece over tough austerity measures. This followed a relatively calm period in the storm; as Germany’s constitutional court ratified the ESM bailout fund, Holland elected pro-euro parties and Mario Draghi announced that the ECB would buy unlimited bonds from weak euro economies. But despite this the EU is continuing to do badly, with an estimated decline of 0.5% of GDP across the region and unemployment averaging at 11.3% of the population.
In the middle of all this stands Belgium, at the centre of the EU. The country shares its capital city, Brussels, with the rest of the European Union and is the location to many of Europe’s governing bodies. The country understandably supports the EU strongly, with calls for deeper integration and more centralized power. But is the country setting the right example for the other periphery economies?
Mario Draghi’s promises won’t keep the peace for long.
This year GDP is only expected to rise by a miniscule 0.1%, hardly an improvement for a country that was expecting to be in the middle of a recovery by now. The country also boasts a budget deficit of 3.4% of GDP, not as high as the likes of Spain or Britain (6.8% and 8.4% respectively) but not quite as low as the likes of Germany (0.3%) or even Italy (2.8%). Alongside this the countries debt to GDP ratio is near 100%, a statistic more representing of the unstable southern economies than the prudent northern economies. For a country that sits in the heart of the EU, it would be expected that they would have better finances than that, especially if they are calling for fiscal decisions to be made by a more centralised EU. The interest rates on the 10-year bond yields of a country are always a good way to measure how confident the international markets are with that nation, Belgium’s are at 2.58%, roughly in between the low rates of Germany and Britain (under 2%) and the high rates of Spain and Italy (above 5%). This paints the picture of an economy that is distinctly average, not in danger of being pulled into the current crisis’s of Spain and Italy, but behind the leading economies like Germany and Poland. More importantly, the volume of exports has decreased this year, with the current account swinging from a surplus into a deficit of 0.2% of GDP. This is a bad sign for an open economy that has famously relied on trade in the recent past, with rising production costs and more of an emphasis towards the service sector helping to lower the exports of the country.
A graph at The Economist shows the forecast current account for Belgium swinging into a deficit.
But there are mitigating circumstances and Belgium as a whole is not doing too badly. When you consider that Belgium is a country reliant on trade to the rest of Europe, then small growth is to be expected when other euro economies are implementing austerity measures. The budget deficit is also only just above the agreed limit for eurozone economies and the government is clearly implementing austerity measures itself so as not to ensure it loses control of its finances. They approved a €11.3 billion package of cuts at the end of last year, rose the retirement age of its people and have already dropped the deficit from the 3.8% level it was at in 2011. The country boasts a lot of positives as well; an excellent infrastructure, strong trade links and high skilled workers. In fact, Belgium is one of the few countries to have higher economic activity than they did back in 2008 at the height of the crisis.
This graph shows that Belgium were ranked 20th in the world for infrastructure in 2011.
The real problem lies in the future of Belgium. As long as the eurozone crisis rattles on, Belgium cannot legitimately expect to recover from its deep recession years. Were the likes of Greece to default on their debts, Belgium would be highly susceptible to a possible domino effect as markets got spooked and banks runs started occurring in the weaker economies. The country was already downgraded last year by the much feared credit agencies and the estimated growth in the next few years does not generate much enthusiasm with just 0.8% growth next year and 1.3% the following year, notwithstanding any setbacks in the global economy. The downgrade occurred largely because of the forced bailout of Dexia (a Belgium bank), where the Belgium government had to buy their division of the bank for €4 billion and help secure 60.5% of their state guarantees, this following a previous bailout of the bank back in 2008. This was a drain on the states resources and shone a light on the countries worryingly fragile banking system, where another large bank Fortis (the 20th largest business in the world according to revenues in 2007) fell apart after the financial crisis and was sold off in parts. The weakness in the banking sector is systematic of the rest of Europe, as weak banks now have to be re-capitalised by their governments, in deep contrast to their American counter parts who had to go through strict stress tests to ensure they were strong enough to compete in the market. This could be an expensive problem for Belgium to fix and set back their recovery even more. In fact, a survey carried out by Deloitte found that the percentage of CFO’s that believed the economy would recover by the end of the year fell from 60% in March to 20% in June, while 25% believed it wouldn’t recover until after 2014.
The above table found in the Wall Street Journal shows Dexia’s exposure to the fragile economies of the EU, a worrying trend in Belgium banks.
So while other struggling euro economies are trying to build back up lost competitiveness or pay back uncontrollable debts, Belgium is waiting for these countries to pick up and consequently for trade to begin flowing again at pre-crisis levels (as three quarters of its trade is with Europe). With its fortunes so closely tied to the rest of Europe, Belgium will hope its calls for tighter integration start to pick up momentum.