As it stands, the political system in the capital of a global power is currently grappling with dysfunction, all while an election looms on the horizon. This has led the nation to continue spending beyond its means, resulting in a path of growing debt. Surprisingly, this nation isn’t the United States, but Belgium, a country whose main city, Brussels, is the host of key European Union institutions, such as its parliament and the European Commission.
Despite having a population the size of Ohio’s and a slightly smaller gross domestic product, the lack of restraint casting a shadow over the country’s public finances increasingly mirrors that of the world’s largest economy. However, unlike the US, Belgium doesn’t have the luxury of printing the dollar.
Investors Unfazed by Rising Debt
Similar to the US, investors don’t seem to be concerned about Belgium’s borrowing binge. Yet, Belgium is heading towards running the worst deficits in western Europe for the foreseeable future, a status that may test the resolve of the European Union’s commitment to reinstating fiscal discipline.
According to Peter Vanden Houte, an economist at ING in Brussels, “For sure, the current state of affairs cannot continue. It might take a very long time to have a new government. All of this means that Belgium indeed might be vulnerable to unrest on financial markets.”
Political Stasis Leads to High Debt
Belgium’s seemingly unstoppable path to higher debt is the result of a political stalemate in a divided country led by Premier Alexander De Croo and his seven-party coalition. While it shares issues with other wealthy economies such as higher borrowing costs, an aging population, weak productivity growth, and pressing defense and climate commitments, the nation is finding governance increasingly challenging. And the upcoming elections on June 9 are unlikely to bring about any significant change.
Like the US, Belgium’s debt as a percentage of GDP is already over 100%, and this ratio is predicted to rise by 10 percentage points in both countries by 2029, according to the International Monetary Fund.
Addressing Public Finances
Any ambitions to fix its public finances have dissipated as part of trade-offs inherent in a fragile political setup. The country took almost 500 days to form the current government after the 2019 elections, and ongoing tensions derailed reforms, including tax plans abandoned last year.
While polarization between the Dutch-speaking north and the French-speaking south has long been a problem in the country of nearly 12 million people, the aftermath of June’s election could be even more challenging.
Populist Party Support Could Complicate Things
The far-right, anti-immigrant group, Vlaams Belang, which has long advocated for the secession of the northern Flanders region, is polling above 25% there. This could further complicate the formation of a functioning coalition, potentially leaving a caretaker administration in place for a longer period, with little authority to tackle Belgium’s debt issues.
Despite the public finances featuring in the election, the nationalist New Flemish Alliance party, which boasts the largest number of members in the federal parliament, aims to form a downsized provisional government to address the issue post-election.
“We need a lot of efficiency, hard decisions, political leadership, and that is exactly what this country has been lacking,” said Antwerp Mayor Bart de Wever, who leads the party known as N-VA.
However, Peter Vanden Houte isn’t convinced. “If you look now at the election programs of the different political parties, no one is really talking about how to bring the budget down,” he said.
Belgium’s Wealth and Debt Maturity
What has supported Belgium’s high-quality credit status — only three steps away from the top grades awarded by credit assessment companies, is its wealth. Belgium’s GDP per capita, adjusted for purchasing power, was the sixth-highest in the EU last year. The average maturity of its debt exceeding a decade is another buffer.
As with other euro-area peers, the country’s bonds have enjoyed benign financial markets recently. The benchmark 10-year yield is hovering around 3%, close to the year-to-date average, leaving the premium over German peers — a common measure of risk — near a two-year low at 54 basis points.
EU to Nudge Members to Fix Public Finances
With investors currently unbothered, it falls to the EU to nudge members to fix their public finances. While its debt and deficit regime was suspended during the pandemic, the rules now apply again, albeit with more leeway granted to countries after they ratify a recent reform.
“We need to avoid that someone else is going to say what we need to do — and that is important,” Finance Minister Vincent Van Peteghem said in an interview last month. “We need to do these reforms.”
With all these factors in play, whether Belgium’s political system can turn around the trajectory of its public finances will be a key test for the EU’s new rules in years to come. Otherwise, just like the US, scrutiny of its rising debt load will only continue to increase.
