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The following OECD assessment and recommendations summarise chapter 1 of the Economic Survey of Belgium published on 8 July 2009.
The economy has entered a severe economic recession
During the second half of 2008, following four years of strong growth, the economy was hit in earnest by the international crisis. By the end of the year, the economy was going through a historically severe contraction under the impact of the financial crisis and the retrenchment in world trade. As a result, bank lending to non-financial firms and to households slowed down. The economy’s contraction is expected to continue through most of 2009. Thereafter, a slow recovery is expected as a result of looser monetary policy, the easing of financial sector distress, fiscal stimulus and a pick-up in world trade. The fiscal deficit will remain high over the next years. Consequently, policies to counter the economic downturn should avoid endangering long-term economic prospects, and there should be no delay in implementing structural reforms to improve the economy’s potential growth.
The economy has entered a deep recession
Source: OECD, Economic Outlook database.
The government responded swiftly to the financial crisis
The Belgian financial sector was initially hit by the global liquidity crisis. During autumn 2008 there was a tightening of credit conditions on the interbank market as observed in other euro-area countries. The slowing of credit to non-financial firms and households corresponds broadly to developments in other euro-area countries. The first financial institution to be affected was the financial conglomerate Fortis, which turned out to be financially overstretched by the previous year’s acquisition of the Dutch bank ABN¬AMRO, leading the government to recapitalise the Belgian part of Fortis. Other financial groups have since been supported through further recapitalisation, and the government has offered inter-bank loan guarantees. The total cost of recapitalisation and direct government loans amounted to about 7% of GDP, which has mostly been financed through an increase in public gross debt. As in other OECD countries, the situation for the financial institutions, however, remains fragile. The swift reaction of the authorities was appropriate. Divestment strategies to avoid ending up with a long-term public ownership position in the sector should be further developed and implemented.
The fiscal manoeuvre room is constrained by the growing fiscal sustainability problems
The government added a fiscal package to support the economy to the already expansionary 2009 budget as other EU countries were undertaking similar fiscal stimulus packages. The total 2009-10 discretionary fiscal stimuli amount to almost 1½ per cent of GDP and are expected to boost GDP by about ¼ per cent over the period. Including the impact of the automatic stabilisers, the general government deficit will widen and could reach as much as 6% of GDP in 2010. The modest size of the fiscal stimulus to counter the worst effects of the crisis is broadly appropriate. The fiscal stimulus measures focus mainly on sustaining purchasing power and employment as well as supporting enterprises. Some of the measures tend to be permanent in nature. The employment sustaining measures are centred on stimulating investments, reduced work time arrangements and enhanced guidance for workers subject to restructuring. Hence, not all measures may take effect early enough to counter the rising unemployment due to the crisis. The enterprise supporting measures aim at easing liquidity constraints and lowering taxation to neutralise the effect of the wage agreements on total labour costs. A number of the measures are not timely, temporary or targeted. At this stage, the government should aim at ensuring that such measures, insofar as they do not contribute to potential growth, are withdrawn as the economy recovers. The room for fiscal manoeuvre is restricted by the large public debt-to-GDP ratio and the wider long-term interest differential vis-à-vis Germany, although the latter has narrowed recently. Current projections indicate that the debt-to-GDP ratio could reach 100% by the time the economy recovers. Empirical evidence indicates that in countries where the public debt-to-GDP ratio exceeds around 75%, the effectiveness of fiscal policy is severely reduced by higher private savings. Thus, additional discretionary fiscal stimulus should be avoided since it would have limited effects on economic growth but add to the growing fiscal sustainability problems. Moreover, if additional fiscal stimulus were deemed necessary, then it should be accompanied by structural reform and measures that will eventually improve the cyclically adjusted budget balance.
How to obtain this publication
The complete edition of the Economic Survey of Belgium is available from:
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.
For further information please contact the Belgium Desk at the OECD Economics Department at email@example.com.
The OECD Secretariat's report was prepared by Jens Hoj and Tomasz Kozluk under the supervision of Pierre Beynet. Research assistance was provided by Sylvie Foucher.