Economy and Trade
After two millennia of being invaded by various outsiders, from the Romans in the first century BC to the German Reich in 1940, Belgium is very much at the heart of European efforts to ensure a stable, prosperous, and secure European Community (EC). The country has one of the world’s highest per capita GDP (ranked consistently in the top 30), and borders the Netherlands, Germany, Luxembourg, and France. Capitalizing on its central geographic location, Belgium has built a highly developed transport network, and established a well-diversified industrial and commercial base. With few natural resources, Belgium must import substantial quantities of raw materials and export a large volume of manufactures, making its economy unusually dependent on the state of world markets. Roughly three-quarters of its trade is with other EU countries. Belgium regularly outperforms the eurozone average in terms of growth and economic indicators. The fact that Brussels, the capital of Belgium, is also home to the headquarters of the European Union has attracted a large number of multinationals to establish their European headquarters in Belgium.
Economic Policy over 12 Months
Belgium is fully committed to the Lisbon Strategy of focusing on growth and employment, and seeking to make the European Union the world’s most competitive, knowledge-based economy. However, the country has been particularly hard hit by the global recession, and the government has had to adopt an interventionist stance, bailing out several major financial institutions, including Fortis and Dexia in late 2008.
The new prime minister, Yves Leterme, who took office in November 2009, has pledged to continue the fiscal stimulus measures adopted by his predecessor, including support for small and medium-sized enterprises, as well as the provision of work subsidies for the unemployed. Indeed, increasing employment levels will be the government’s key priority in 2010.
However, the government’s fiscal support will be constrained by its membership of the eurozone. The European Commission has asked Belgium to reduce its budget deficit to below the 3% of GDP ceiling established by the EU Stability and Growth pact by 2011, from around 6% in 2009. Belgium’s public debt levels reached around 100% to 105% of GDP in 2009. There is evidence that a public debt/GDP ratio of 90% and above has an impact on economic growth.
Since joining the eurozone on January 1, 2002, Belgium has ceded control of its monetary policy to the European Central Bank (ECB). As one of the smaller economies in the eurozone, Belgium is unlikely to have much, if any, influence over the ECB’s policy decisions. Thus, fiscal policy has assumed greater importance, since Belgium no longer has the option of devaluing its currency to boost competitiveness.
Even before the downturn, Belgium faced difficult long-term challenges to solve, including meeting the future costs associated with an ageing population. The country’s dilemma in the existing downturn is to fine-tune policy in such a way as both to stimulate the economy, and to create the minimum possible deficit while so doing. The bigger the deficit, the less scope the country will have to put money aside to pay pensions and healthcare for its ageing population.
The country’s existing fiscal federalism arrangements have been exacerbating imbalances internally. Divided on linguistic lines, the country has had a devolved structure since August 1980, with Flanders managing its affairs, and the Walloon Regional Parliament managing affairs in Wallonia. Further constitutional reform established a separate parliament and government for the German-speaking cantons in 1983, with yet another regional parliament and government for the Brussels Capital Region in 1989. Structural rigidities in the economy, including mandatory wage indexation, are dampening growth and impeding job creation.
Economic Performance over 12 Months
With exports equivalent to more than two-thirds of GDP, Belgium is highly sensitive to fluctuations in international trade. Indeed, it is often regarded as a bellwether of the global economic cycle. Thus the global downturn has had a significant impact on the country, with the fall-off in demand, caused by a deepening recession in the economies of many of the country’s major trading partners, including the eurozone, the United Kingdom, and the United States, affecting manufacturing and related service industries hard.
An International Monetary Fund (IMF) report on the economy, published in March 2010, described the near-term outlook as challenging, and said that real GDP fell by around 3% in 2009. It projected a gradual recovery for 2010. The IMF anticipates that the unemployment rate, which stood at 8% in 2009, up from 7% in 2008, will continue to rise in 2010. However, the downturn has had a positive impact on inflation, which fell to a negative rate of –0.2% in 2009, down from 4.5% in the previous year.
The economic and financial crisis and public bailouts have led to a significant deterioration in the public finances. The overall deficit increased to 5.8% of GDP in 2009 with the public debt rising to close to 100% of GDP. The 2010 budget aims at streamlining spending and boosting revenue to reduce the overall deficit to 5.1% of GDP.
The IMF says that the banking sector has stabilized after massive public intervention, but its financial situation remains fragile and it is vulnerable to potential spillovers from mature markets and emerging Europe. An uncertain profitability outlook, according to the IMF, also constrains the banks’ capacity to rebuild a high-quality capital base through internal capital generation. The authorities plan to withdraw emergency support from the financial sector gradually to avoid market disruptions and a credit squeeze.
The government remains strongly committed to supporting a diversified economy. Belgium’s industrial and service sectors have to work particularly hard to overcome the disadvantages associated with the country having almost no natural resources. The country’s industrial base includes engineering and metal products, motor vehicle assembly, transportation equipment, scientific instruments, processed food and beverages, chemicals, basic metals, textiles, glass, and petroleum. Industry is concentrated mainly in the populous Flemish area in the north. The services sector is even more important to the country, accounting for some 74.6% of GDP (source: US Department of State). About 78% of Belgium’s trade is with fellow EU member states. Given this high percentage, Belgium continues to seek to diversify, and expand trade opportunities with non-EU countries.
Support for Inward Investment and Imports
Invest in Belgium is the first port of call for potential investors in the country. The Fiscal Department for Foreign Investments (FDFI) provides free, confidential advice.
There is a tax shelter program offering fiscal incentives for investors in Belgian or European audiovisual and film works. There are other pro-business tax incentives. Details can be obtained from the FDFI (tel: +32 (0) 257 938 66).
GDP growth: −3.1% (2009 est.)
GDP per capita: US$36,600 (2009 est.)
CPI: 0% (2009 est.)
Key interest rate: 3% (December 31, 2008)
Exchange rate versus US dollar: €0.7338 (2009)
Unemployment: 8.3% (2009 est.)
FDI: US$848.5 billion (December 31, 2009 est.)
Current account deficit/surplus: −US$18.92 billion (2009 est.)
Population: 10,423,493 (July 2010 est.)
Source: CIA World Factbook except where stated