BELGIUM

Belgium is a small, liberal country that enjoys a multicultural, highly productive citizen base, a well-developed economy and solid social net, all which has resulted in a high quality of life for its population. Yet Belgium now faces a number of important challenges that have been insufficiently addressed in recent years. The global economic crisis has left the government with little room to maneuver, forcing it to address a large number of issues with fewer resources while wrestling with policies designed and implemented at the regional level. The effects of the global economic crisis have only magnified the political tensions between Belgium’s northern Dutch-speaking and southern French-speaking parties, which have limited the country’s capacity to take up economic issues in an efficient or rational manner. This strategic outlook first describes some of the economic problems Belgium must grapple with in the aftermath of the economic crisis, and then turns to the country’s longer-term challenges.

A. Short-term concerns

The economic crisis had severe effects on several important sectors of Belgium’s economy, including its banking and automobile industries. Among the major victims in these industries were Fortis, a major financial institution which had to be quickly dismantled and sold to BNP Paribas, and the Opel (GM) plant in Antwerp, which was closed. Such institutional shocks are likely to have long-lasting effects on employment. The country’s social safety net may also have indirect negative consequences in the medium-term, for example by reducing the labor market response in terms of wage flexibility and by increasing early retirement, thereby permanently reducing the overall labor supply.

Belgian economic growth has remained modest in recent years (the average growth of real GDP was 1.8% between 2000 and 2008), despite several factors inflating official GDP:
• wages grew faster than, for example, in Germany, boosting internal demand;
• measures to reduce shadow employment succeeded in bringing a large number of jobs back into the official economy, at the cost of heavy subsidies;
• the government deficit increased, and
• the savings rate decreased.

This leaves Belgium in 2010 with a number of problems that may have direct, adverse effects on its growth potential. First, the debt-to-GDP ratio is fast approaching 100%. Second, the sustainability of the country’s pension scheme is still largely unaddressed. The pensions minister published a green book in 2010 that named investment in the pension system as a problem but refrained from making any concrete policy proposals. Third, Belgium’s gross rate of investment in R&D is 1.9% of GDP, according to the OECD, which is well below the government’s 3% target. The government however has taken a proactive stance by offering tax cuts to companies that invest in R&D and by developing R&D stimulation policies (through regional governments). Belgium still is among the top 10 countries in the European Union in terms of private R&D investment, according to the European Commission (2009). Fourth, the country’s education system is ineffective. French-speaking schools especially are plagued with poor Program for International Student Assessment (PISA) scores. The government is developing policies to address these problems, but outcomes are uncertain, given the absence of assessment procedures, a predilection for purely politically motivated reforms, and the legacy of segmented educational networks (“Christian” vs. “official”), from kindergarten to university as well as other upper-level educational institutions. Universities are substantially underfunded, in particular in the French-speaking south. There are no additional resources for “centers of excellence” such as there are in the United States or in other European Union countries. Overall funding has been kept constant, which means that resources per student and per professor have dwindled. Belgium provides universal access to education for €800 in fees per year, while the cost per student in the humanities and law is about €5,000, and higher in hard sciences and medicine. Belgium is quite attractive for students from France and the Netherlands, but their education is thus largely financed by Belgian universities and communities.


B. Medium- and long-term concerns

Belgium must stimulate GDP growth and employment rate, and the government deficit must be reduced. It is necessary to further increase productivity and government service provisions. In addition, environmental challenges must be addressed. In particular the country’s transportation policy must be improved, given density and urbanization concerns. Belgium must produce more human capital, which may require more investment.

Other issues include the state’s capacity to reform, which is limited by political tensions and an overly complex system of governmental institutions. While Belgium has three official languages, Dutch, French and German, the current political quagmire is due to conflicts between its two main linguistic groups, the Dutch-speaking and French-speaking communities. When Belgium was founded, its bourgeoisie spoke French, while Dutch was considered a “secondary language.” This division disenfranchised a large proportion of the population as well as created political tension. Through political action, Flemish communities gradually established their language on equal footing with French. After WWII, Flanders became more powerful economically, and Flemish parties (which represent a majority of the Belgian population) dominated the political scene. Since April 25, 1974, excluding a four-month hiatus, the country’s prime minister has been Flemish.

In 1995 Belgium became a federal state with three regions: Flanders, Wallonia and Brussels. The Brussels region is central to the Belgian economy but politically weak, given the much larger populations in Flanders and Wallonia. Brussels is officially bilingual, but in practice 90% of its population is either French-speaking or hails from a foreign country. It is entirely located within the Flanders region. The main Brussels suburbs (some very wealthy) thus “belong” to Flanders; raising an interesting conflict that a majority of the population in several Flemish municipalities around Brussels speaks French. Yet despite this majority, the use of French is increasingly banned in these municipalities and many hurdles have been introduced to prevent French-speaking people from buying houses in the region. This is because, in line with the long-term fight to defend their language, some Flemish people (and their position is predominant in Belgian politics) want to ensure that Dutch is the only language used in Flanders. A more cynical interpretation is that forcing these municipalities to adhere to Dutch language rules and thus preventing them from being integrated in the larger Brussels region keeps the region in a state of financial dependence to Flanders.

These affluent suburbs, being located in Flanders, magnify economic disparities between Flanders and Wallonia. Flanders has lower unemployment and higher wages, while Wallonia has higher unemployment and lower wages. In turn, Brussels is the most important provider of jobs (it has the highest GDP per capita in Europe), but residents of Brussels are on average poorer and less educated; and a large fraction are also foreigners (who also are less educated and are often unemployed).

The twin conflicts of a poor Brussels and its affluent suburbs and affluent Flanders and poor Wallonia has created a politically explosive situation. Reforms are extremely challenging, because attempts are always perceived to threaten some dimension of a linguistic group’s sovereignty. Thus parties can no longer agree on sound institutional reforms. The formation of the last government took an extremely long time and led to an unstable coalition (three times in the last two years Prime Minister Yves Leterme had to offer his resignation; at the time of writing, Belgium had no government). But such problems have existed since the 1970s and the current institutional structure, with shared and often unclear responsibilities among the federal government, regional governments and linguistic communities, has proven unable to structurally address the country’s problems.

Above all, Belgium’s economic attractiveness must be improved, if only to increase the country’s employment rate. Belgium offers valuable tax cuts to some enterprises (taxes largely remain a responsibility of the central government), but more must be done to stimulate self-employment and entrepreneurship. Improving administrative performance is a long-term challenge with which Belgium has not yet succeeded.

Economic attractiveness also requires having a sound, innovative transportation policy that would ideally connect Belgium to the rest of Europe, and Brussels to the other federal regions (the capital is the country’s main source of employment). Instead, Brussels was recently reported to be the city with the worst traffic in Europe, followed by two cities in Poland. Public trains are relatively inexpensive but plagued by delays and strikes, and have poor connections with city public transportation. Roads and highways are financed by a lump-sum tax, which favors commuting by automobile. Belgium also sees heavy international traffic, which benefits from accessibility but does not help finance the system. Roads, and especially highways, are therefore deteriorating from excessive use and maintenance costs are very high. There have been suggestions to introduce a pay-per-use toll for roads, which would have also taxed international truck traffic, but this was, again, blocked by disagreements between the regions.

Many of the country’s profound socioeconomic challenges have to be addressed in a difficult context of ethnolinguistic tensions. At the time of writing, the main winner of preference votes in the June 2010 general elections was Bart De Wever, leader of the New Flemish Alliance (N-VA). The N-VA is a Flemish nationalist party that strives to achieve independence for Flanders as a nation-state and as a republic (Belgium is a constitutional monarchy). This illustrates the polarized nature of the Belgian political system, at a time when strong, concerted action is needed on several policy issues.