Executive Summary

Stable performer over recent years
Belgium, located at the heart of northwestern Europe, is a small, densely populated country of 11.4 million inhabitants. Its economy is generally healthy despite strong and enduring regional disparities. In comparative terms, Belgium has been one of the euro zone’s most stable performers in recent years. At the time of writing, the country’s 2017 gross domestic product (GDP) was projected to reach €436 billion (at current prices, equivalent to $492 billion). In real terms, this represents a 8.5% increase over 2008. As contrast, France and the Netherlands each registered cumulative GDP growth rates of 6.7% over the same period, while Germany’s economy grew by 10.9%.
Open economy vulnerable to trade shifts
Belgium has an extremely open economy, with imports and exports totaling 170% of GDP. This renders the country very vulnerable to international trade fluctuations. This openness has also led to employment losses as a result of the country’s tendency toward inflation rates higher than those of its neighbors. In part due to a vigorous tightening of unemployment-benefit conditions imposed by the government, official unemployment rates have remained consistently below the euro area average. However, employment rates have also fallen consistently below targets, and have shown little growth.
Strong underlying economic conditions
The country boasts a well-educated population, attracts substantial foreign direct investment, maintains high-quality hospitals and R&D facilities, and hosts the seats of multiple supranational institutions (prominently including the European Union) as well as the European headquarters of numerous multinational companies. Global macroeconomic conditions affecting the country are generally favorable and should keep improving given accelerating growth across the EU. With its comprehensive road, rail, water and information-technology networks, as well as its world-class harbors, Belgium provides direct access between Europe and the rest of the world. Its openness in terms of trade and high reliance on exports forces Belgian companies to maintain competitiveness or lose their market position.
External shocks have harmed performance
Yet despite its economic strength, Belgium has recently found it difficult to maintain its international standing. This is in part due to a succession of external shocks. Like all euro area nations, the country suffered from the global financial and economic crisis and was forced to bail out some of its banks. In combination with these economic shocks, a series of terror attacks on the country had a non-negligible impact on the economy. This reinforced the country’s preexisting public-debt problem and required significant budgetary adjustment, with the result that public investments in infrastructure and in education have declined below a healthy level, with the consequences already visible. From a structural perspective, Belgium is also home to one of the most significant separatist movements in Europe, a fact that has produced public institutions that are both complex and fragile, undermining efficiency.
Summarizing these strengths and weaknesses, the International Institute for Management Development (IMD) ranks Belgium as the 23nd most competitive economy in the world (a five-position improvement over 2014, but one place below its level a year ago), and the World Economic Forum (WEF) ranks the country 20th out of 137 (17th in 2014) in terms of global competitiveness.
Focusing on reform, avoiding infighting
The Charles Michel government, which took power in October 2014, committed to avoiding institutional infighting, resolving to focus instead on structural and socioeconomic reforms. It has had some success in this regard. Belgium’s main policy challenge is that of successfully balancing economic growth with social inclusion, both among economically weak native Belgians and within its foreign-origin population. It must accomplish this while capping government outlays, particularly with regard to social expenditures, and reinforcing the long-term sustainability of its public finances. Future public pension liabilities, which represented close to 180% of GDP in 2002 (Flawinne et al. 2013), are a critical concern here. This general financial challenge has become increasingly complex in the wake of the refugee crisis and in the context of the slow-growth environment that plagued much of Europe through early 2017.
Improved conditions spurring growth
However, a restoration of economic growth was evident last year thanks to a positive global environment, increasingly restrictive immigration policies (with some decisions testing both moral limits and the limits of the Geneva conventions, though stopping short of outright abuses). Moreover, a series of political scandals involving abuses of office by mid-level public officials (not ministers nor party leaders) triggered a fall of the subnational Walloon government, which was followed by majorities that were de facto more homogeneous across the various levels of government, potentially improving government efficiency.
Mixed record on
key objectives
As noted, the federal government did manage to achieve some of its objectives. However, distinct failures were also evident, such as its botched attempt to tax capital gains, which it had to reverse after only a single year. A more significant corporate-tax reform seems on track. Planned pension reforms are progressing as well, albeit slowly. Other “structural” reforms aimed at improving labor-market competitiveness have had some limited impact. However, there has been little effort to engage in structural reform of the goods and services markets, and progress with regard to limiting corruption and abuse of office has been slow. Among its other ambitious goals, the government has set its sights on improving government efficiency, restoring the sustainability of social security and strengthening the judiciary. To date, limited progress has been made in any of these areas.
Future challenges demand better collaboration
The long-term challenges for the current and for future governments will be fourfold: They must increase investment and jobs in ways that benefit all Belgian regions and socioeconomic groups; they must maintain fair intra- and intergenerational transfers; they must promote knowledge creation and innovation in the private sector without impairing access to the public goods and services necessary for social cohesion; and they must better integrate the second- and third-generation immigrants who are now Belgian citizens, both socioeconomically and culturally. These challenges will require better concertation and more fluid collaboration between the political authorities at the national (federal) and subnational levels.
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