Will Belgium clear the final hurdle? Belgium's leap of faith
"Nineteen ninety-six will be a special year for Belgium," prime minister Jean-Luc Dehaene told international investors recently. "Our country will reach the 3% target for the budget deficit. This will end our 15-year journey through the fiscal desert."
Talk of Emu has scarcely been off premier Dehaene's lips since his centre-left coalition returned to power in the May 1995 elections. Compliance with the Maastricht criteria is more important to the Belgian government than any other objective during this four-year term of office. Dehaene is passionately keen to ensure that Belgium is included in the first group of countries to adopt a single currency - perhaps as early as 1999.
Belgium's achievements on three standards - price stability, interest rates and stable exchange rates - are so solid they are dull. Consumer prices rose by just 1.5% last year, and the Belgian franc is so closely aligned with the Deutschmark that the Belgian National Bank is in danger of losing its credibility as an independent entity. The National Bank has scarcely broken step with the Bundesbank over the past year as the Germans have eased their repo rate downwards in many tiny steps. The Belgian franc moves within a band of plus or minus 0.5% against a central rate of Bfr20.6255 to the Deutschmark.
Because their currency has been pegged to the Deutschmark for the past six years, the Belgians' room for manoeuvre is in fiscal planning and not in monetary policy. In frequent statements about steadfastness, credibility of policy and limiting inflation risks, National Bank governor Alfons Verplaetse speaks the language of the Bundesbank with fluency.
The Belgian authorities' greatest fear is over the exchange rate - an unstable franc would leave Belgian government debt open to speculative attacks. The National Bank and finance ministry are already dreaming of the third stage of Emu, which will "make this country part of the monetary area from which all exchange rate risks will be permanently banished," in the words of Verplaetse.
Furthermore, the government has cut state spending so dramatically that it is confident it can reduce the budget deficit to 3% of gross domestic product (GDP) by the end of this year - "barring excessive cyclical or interest rate setbacks", says finance minister Philippe Maystadt. This is remarkable given that the budget deficit amounted to 13.5% of GDP in 1981, and was still 7.4% as recently as 1993.
"Our economy is based on solid fundamentals," says Dehaene. "It fulfils the basic requirements to benefit from any international recovery. What is lacking is a revival in consumer confidence." To restore this confidence the government has set three objectives: to moderate wages and incomes so as to create jobs and remain competitive, to stimulate employment (the jobless rate is 14.5%) and to make the social security system affordable.
But the Belgian people are already seething at the pace and ruthlessness of spending cuts. Strikes and demonstrations have become commonplace. Yet Maystadt draws encouragement from this: "Foreign investors should take comfort from the resilience of the Belgians."
The authorities recently used water cannon to shift demonstrators against the latest cuts. But it will be far less straightforward to budge the government's debt burden, which is nowhere near the Maastricht level of 60% of GDP.
The overall public-sector debt burden in Belgium is colossal: it has topped 130% of GDP for the past eight years. It peaked at 137.9% of GDP in 1993, caused by years of sluggish economic growth and excessive government debt. The estimated debt figure for 1995 is 133.8% of GDP.
The finance ministry tries to paint a brighter picture by pointing out that Belgium's debt is expanding less rapidly every year. Nevertheless last year's increase of 3.6% was substantial. And total debt at the end of 1995 amounted to Bfr9.5 trillion ($302 billion) compared with Bfr7.6 trillion four years earlier.
But investors remember that the government's commitment to cut spending and debt has been half-hearted in the past. As the National Bank itself says: "Over the past 15 years, periods of successful rehabilitation alternated with periods when budget correction faltered, mainly because short-term political and economic considerations gained the upper hand."
The government argues that it has adopted a new policy of discipline since 1993 (even though the same finance minister, Maystadt, has been in power since 1988). This time, Dehaene's government has made Emu its number one political objective. The 1996 budget includes cuts in spending and increases in tax amounting to Bfr112 billion, or 1.5% of GDP. The extra charges include a 0.5% rise in value-added tax to 21%, a tax on energy consumption and petroleum products, and an increase from 13.39% to 15% in withholding tax .
All these austerity measures are sure to have an effect. Economists believe Maystadt will succeed in reducing overall indebtedness by 10 percentage points by 1998, as promised. Moreover, the government also promises it will spend any windfall income from improved economic conditions to reduce the debt burden. But Belgium is unlikely to reach the 60% debt-to-GDP target required for union under Maastricht's terms; certainly not by the beginning of 1998.
After tough talk on the economy Dehaene has revealed a more pliant approach to getting over the last hurdle. He points out that Maastricht does not insist on a ceiling of 60%, merely that "the ratio is diminishing sufficiently and approaching the reference value at a satisfactory pace". In fact, Brussels' plan is to reduce debt gradually until the 60% level is finally reached in 25 years' time.
Konrad Aigner, an analyst at Deutsche Bank Research in Frankfurt, believes EU heads of government will need "extended discussions on whether the reduction of Belgium's debt ratio can be regarded as satisfactory in Maastricht terms".
Maystadt and Dehaene are confident that EU partner countries will allow Belgium to join Emu immediately. "We accepted the text [of the Maastricht treaty] because it's formulated in such a way that we have a good chance of joining the union. I wouldn't have signed it otherwise," Maystadt says. "The evaluation [of national economic performance] in 1998 involves a degree of latitude."
Suddenly, it becomes clear that Dehaene and Maystadt are talking politics. "I always make the comparison with German monetary union," the prime minister says. "On the technical advice [the Germans] shouldn't have had reunification and monetary union in Germany, but on political criteria there was a decision to pursue a monetary union."
In the end Belgium may rely on the argument that Emu will be viable only if a core group of countries qualifies for membership. Those countries, in Dehaene's view, include not only Germany and France, but Benelux too. No wonder the Belgian government is keen to follow the precedent of German unification. It is the ultimate political solution to an economic problem.
| The Belgian economy at a glance |
|
1993 |
1994 |
1995e |
1996f |
1997f |
1998f |
| GDP growth (%) |
|
-1.4 |
|
2.2 |
|
2.0 |
|
1.6 |
|
1.9 |
|
2.3 |
| Unemployment (%) |
|
13.0 |
|
13.9 |
|
14.1 |
|
14.3 |
|
14.0 |
|
13.5 |
| Inflation (%) |
|
2.8 |
|
2.4 |
|
1.5 |
|
1.9 |
|
2.5 |
|
2.9 |
| Budget deficit / GDP (%) |
|
6.7 |
|
5.3 |
|
4.5 |
|
3.6 |
|
2.8 |
|
3.0 |
| Source: SBC Warburg |
