Less Government, More Growth? Belgium Gets Ahead
More than 500 days of talks to form a government have seen Belgium take from Iraq the dubious honor of taking the longest time ever to form a government, prompting attacks by bond vigilantes as well as international ridicule.
But with economic growth in the country now surpassing that of many of its euro zone peers, are Belgians having the last laugh? The Belgian economy grew 0.7 percent in the second quarter, outpacing growth in the euro zone as a wholeand significantly better than Germany, traditionally Europe’s growth engine, which recorded a meager 0.1 percent growth in the second quarter.
Some have suggested that the country’s above-average performance was helped by the absence of austerity measures.
Belgium’s caretaker government has remained in the saddle following elections on June 13 2010 as coalition talks stalled time and again due to disagreements over how to devolve more powers to the Dutch-speaking North and the French-speaking southern regions.
It does not have the power to push through harsh austerity measures and hike taxes in the way other euro zone countries have done.
“It’s part of the answer,” ING Belgium economist Philippe Ledent told CNBC.com. “The fact that there were no austerity measures was a good thing for the Belgian economy when there was a recovery and allowed it to benefit from the strong growth of Germany.”
The government's forecasting agency believes the Belgian economy will expand by 2.4 percent in 2011 and 1.6 percent in 2011.
ING’s estimate for 2012 is somewhat more conservative at 1.1 percent, given that we are now seeing a global economic slowdown.
“There are other elements (as well),” he said. “We are a satellite of Germany. The fact that Germany had such strong growth helps explain it.” According to Ledent, the main driver of the strong recovery in Belgium between the second half of 2009 and the first half of 2011 was the recovery in Germany.
The Belgian economy relies heavily on its European trade partners, and Germany in particular.
Belgium’s system of automatic wage indexation — under which wages are increased in line with a rise in prices — also helped to explain the country’s stronger GDP growth.
“The automatic wage indexation, with wages indexed on inflation, can make private consumption more resilient to a shock on inflation,” Ledent said.
He cautioned however that with a slowdown now underway in Germany, austerity would be necessary.
“It is not possible for the Belgian economy to have stronger growth than the euro zone for a long time,” he said.
As long as such measures were supported by a majority in parliament, it would be possible to implement them, he said, conceding however that this would not be an easy task.