(Bloomberg) — In the capital of a global power, a political system plagued by dysfunction and soon facing an election is keeping a country spending beyond its means — and on a path of ever-increasing debt.
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That nation might sound like the US but it’s actually Belgium, whose main city, Brussels, hosts key European Union institutions from its parliament to the European Commission.
With a population the size of Ohio’s and a slightly smaller gross domestic product, the lack of restraint overshadowing the country’s public finances increasingly resembles that of the world’s biggest economy, but without the impunity that comes with printing the dollar.
As with the US, investors appear unfazed by its borrowing binge. But Belgium is on track to run western Europe’s worst deficits for years to come, a standout status that may become a test of the bloc’s resolve to reimpose fiscal discipline.
“For sure, the current state of affairs cannot continue,” said Peter Vanden Houte, an economist at ING in Brussels. “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.”
The seemingly unstoppable path to higher debt there is the product of political stasis in a divided country led by Premier Alexander De Croo and his seven-party coalition.
While it shares troubles with other rich economies such as higher borrowing costs, an aging population, weak productivity growth and pressing defense and climate commitments, the nation has also become increasingly difficult to govern — and elections on June 9 probably won’t change that.
Like the US, Belgium’s debt as a percentage of GDP already exceeds 100%, and that ratio will rise by 10 percentage points in both countries by 2029, according to the International Monetary Fund.
It will soon have the euro area’s third-biggest debt ratio after Greece and Italy. Stoking that total are annual budget deficits projected by the IMF of around 4% to 5% — just a percentage point or so less than the US.
While bigger peers such as France and Italy have recently started borrowing more, they at least aim for shortfalls closer to the 3% level the Commission is supposed to enforce. Such countries will soon earn reprimands from the EU, with Belgium likely to draw notable scrutiny for its lack of budget discipline.
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Any aspirations to fix its public finances have dissipated as part of trade-offs inherent in a fragile political setup. It took a standoff lasting almost 500 days to form the current government after elections in 2019, and persisting tensions torpedoed reforms including plans on taxation abandoned last year.
While polarization festering between the Dutch-speaking north and the French-speaking south has long been a problem in the country of almost 12 million people, the aftermath of June’s election could be even trickier.
Increasing support for a populist party could complicate things. The far-right, anti-immigrant Vlaams Belang group, which has long called for the northern Flanders region to secede, is polling above 25% there.
It’s not likely to win a role in the federal government, but its gains could leave other winning parties with even less margin to form a functioning coalition. Such a scenario could leave a caretaker administration in place for longer, with little authority to tackle Belgium’s debt woes.
The public finances do feature in the election. The nationalist New Flemish Alliance party, which has the largest number of members in the federal parliament, wants to form a downsized provisional government to address the matter after the vote.
“We need a lot of efficiency, hard decisions, political leadership, and that is exactly what this country has been lacking,” Antwerp Mayor Bart de Wever, who leads the party known as N-VA, told reporters this week.
ING’s 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.
But even if such policies were to prevail, a diffused administrative structure poses another hurdle recently highlighted by the central bank. Meanwhile increasing budget pressures don’t help either: Despite hosting NATO’s headquarters, Belgium spent only 1.1% of GDP on defense in 2023, the second-lowest tally in the alliance — and far from the 2% level members target.
Credit assessment companies are watching closely, with both Fitch Ratings and Scope Ratings having negative outlooks.
“It looks like there is certainly the risk of a downgrade in the medium term,” said Dario Messi, a fixed-income strategist at Julius Baer. “This could result in a spread coming closer to countries like Spain and Portugal.”
What has supported the country’s high-quality credit status — no more than three steps away from the top grades awarded by such companies — is its wealth. Belgium’s GDP per capita, adjusted for purchasing power, was the sixth-highest in the EU last year. 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 — close to a two-year low at 54 basis points.
With investors unbothered for now, 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.
Eleven economies violated the deficit threshold of 3% last year, but a couple of borderline cases might be forgiven due to mitigating factors, according to people familiar with the matter.
Belgium is likely to be among those reprimanded again by the Commission once it receives final data from Eurostat this month. Given the country’s likely inability to fix that situation and the contrast with its peers, it may be a candidate for escalation such as fines, and increasing pressure to act.
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 as with the US — scrutiny of its rising debt load will just keep mounting too.
“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 assistance from Alice Gledhill, James Hirai, Kevin Whitelaw and Jorge Valero.
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