Belgium

   
 

Executive Summary

Stable performer over recent years
Belgium, located in northwestern Europe, is a densely populated country of 11.4 million inhabitants. It hosts the headquarters of several supranational institutions (e.g., the European Commission, the European Council, the European Economic and Social Committee, and NATO) as well as that of numerous multinational enterprises. Its economy is generally healthy. Belgium has been one of the euro zone’s most stable performers in recent years. 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. At the time of writing, the country’s GDP was projected to reach €452 billion in 2018 (at current prices). In real terms, this represents a 10.5% increase over 2008. In contrast, France and the Netherlands each registered cumulative GDP growth rates of 9.5% over the same period, while Germany’s economy grew by 14%.
Good economic performance, with caveats
The country displays a good economic performance, even if some challenges persist. The EU-SILC Quality-of-Life indicator ranked Belgium 10 out of the 28 EU member states, on par with Germany and France. The International Institute for Management Development (IMD) ranked Belgium 26 out of 63 economies in its World Competitiveness Ranking 2018 (down from a peak position of 22 in 2016). Meanwhile, the World Economic Forum ranked Belgium 21 out of 137 countries in its Global Competitiveness Report 2018 (compared to 17 in 2014). Similar global comparisons apply to education, health care, inequality and technological development. In other words, Belgium is performing very well comparatively, but could still do better.
Open economy vulnerable to shocks
One of the key reasons why Belgium is and will remain competitive is that it supports an extremely open economy, with imports and exports totaling 170% of GDP. Its openness in terms of trade and high reliance on exports forces Belgian companies to maintain competitiveness or lose their market position. While this is a display of economic dynamism, it also exposes the country to the current wave of global protectionism and the uncertainty surrounding Brexit. Over the last decade, this openness has led to employment losses as a result of the country’s slightly higher inflation rates compared to its neighbors. However, openness also means that neither the government nor trade unions can let the situation degrade.
Focus on damage control, not progress
The main problem for the country is that it is at pains to maintain this global position. Institutional complexities and a lack of entrepreneurial activity (whether in the for-profit or not-for-profit sectors) imply that the country tends to be in damage-control mode, rather than pacing ahead of its competitors. This translates, for instance, into excessively high labor costs, limited environmental policy improvements, slow productivity gains and an education system that is progressively falling behind.
Unemployment low, but employment lags
The Michel government, which took power in October 2014 and will face elections in May 2019, campaigned under the slogan “jobs, jobs, jobs.” The government has vigorously tightened unemployment-benefit conditions and decreased overall taxes on labor, which likely contributed to ensuring official unemployment rates remained below the euro zone average. However, employment rates have displayed little growth, consistently falling short of the government’s targets. As a result, the gap between Belgium and the rest of the euro zone has widened over the last five years. This is because exclusion from unemployment benefits often translates into a slide into welfare programs.
Debt hangover undermining public investment
Like all euro zone countries, Belgium suffered from the global financial and economic crisis, and was forced to bail out some of its banks. In combination with these economic shocks, the 2015 European migration crisis and the 2016 terror attacks on the country had a non-negligible influence on political and economic developments. These shocks reinforced the country’s pre-existing public-debt problem, which still requires politically difficult fiscal adjustments. One visible result is that public investments in infrastructure and education have declined below a healthy level, with consequences already visible.
Entrenched political tensions persist
Such inefficiencies in public management are not only the result of public debt inherited from the 1970s. They are also the result of entrenched political tensions between Flemings and Francophones, which translates, in Flanders, into one of the most entrenched separatist movements in Europe. This has also led to successive state reforms over the last four decades, which have created a cumbersome institutional structure, with some competences fully devolved to the federated entities (regions and communities), and some competences split between the federal and federated levels. Tensions and a lack of mutual trust have spawned public institutions that are both complex and fragile, undermining coherence and efficiency not only for socioeconomic policies but perhaps even more so for other systemic policies such as climate, public transportation, large public infrastructure projects and spatial planning. These tensions are further fueled by asymmetric majorities in the four main executives (i.e., the federal executive, and the Brussels, Wallonia and Flanders regional executives).
Focusing on reform, avoiding infighting
The government has 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-born population. Belgium must manage this while capping government spending, particularly with regard to social expenditures, and reinforcing the long-term sustainability of public finances. Future public pension liabilities, which represented close to 180% of GDP in 2002 (Flawinne et al. 2013), are a critical concern here. Planned pension reforms are progressing.
Structural reforms bringing limited return
Other “structural” reforms aimed at improving labor-market competitiveness have had some limited impact. Underinvestment in education, which is leading to a widening skills gap between labor market demand and supply, continues to be a key challenge. There is no government strategy for strengthening lifelong education and tackling underinvestment in universities due to the lack of a skill premium resulting from high marginal rates of effective taxation (after social security contributions are included). There has also 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 ambitions, the government has set its sights on improving government efficiency, restoring the sustainability of social security and strengthening the judiciary, also with very limited visible results.
Future challenges demand better collaboration
The long-term challenges for the current and for future governments will be fourfold: to increase investment and jobs in ways that benefit all regions and socioeconomic groups in Belgium; to maintain fair intra- and intergenerational transfers; to promote knowledge creation and innovation in the private sector without impairing access to the public goods and services necessary for social cohesion; and to 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.
 
Citation
 
https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Quality_of_life_indicators_-_overall_experience_of_life
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