What’s the deal with Belgium?

Suppose we told you to think of a country in the euro area with chronically dysfunctional politics, anaemic productivity growth, excessive unit labour costs, and a staggeringly high — and rapidly rising — public debt burden. Oh, and most people retire before the age of 60. Perhaps you think of Italy or Greece.

Then we tell you to think of a country in the euro area that, before 2008, grew faster than average for the bloc, had a huge increase in house prices, an uptick in domestic investment, banks engorging themselves with cheap debt, and a deterioration in its external balance. Maybe you think of Spain or Ireland.

We’re actually describing Belgium, a rump of the former Hapsburg empire stuck between the Netherlands and France.

It’s easy to forget now, but there was a time when it seemed as if the land of waffles and Trappist ales (and Euroclear ) would end up enduring the sort of currency / sovereign / banking crisis that afflicted Spain and Italy. Just look at how the Kingdom of Belgium’s sovereign CDS tracked its southern counterparts until the end of 2011:

(Some highlights of FT Alphaville’s Belgium crisis coverage can be found here , here , here , here , and here .)

Traders weren’t obviously wrong to link Belgium with Spain and Italy.

Belgium is the democracy with the world record for the longest time without an elected government: 541 days — far longer than when post-Saddam Iraq had its own difficulties building a parliamentary coalition out of Sunnis, Shiites, and Kurds. Italy’s problems with regionalism, cronyism, and the Mafia seem mild by comparison. Like Italy, the Belgian state is deeply indebted , even if, like Italy, it had used the boom years to trim the ratio of public debt to GDP:

Like Spain and the Netherlands, Belgium also had a massive increase in house prices , although, crucially, Belgian property values just keep going up, unlike the other bubbly countries:

Belgian banks levered up, with bank debt rising as a share of the Belgian economy by about 100 percentage points between 2003 and 2007:

Since 2007, Belgium has experienced soaring labour costs :

Zero productivity growth :

An extremely indebted corporate sector :

A persistently wide government budget deficit :

And a significant deterioration in its external position :

You’d think this all would have added up to the kind of crisis that’s afflicted so much of the euro area, yet, unlike Spain and Italy, much less Greece, Ireland, and Portugal, the Belgian economy has actually done pretty well. Relative to the euro area as a whole, the downturn in 2008-9 was shallower (4 per cent peak-to-trough vs 5.4 per cent) and shorter (nine months vs 18 months).

Even better, the spike in Belgian sovereign borrowing costs and the collapse of Dexia and Fortis , two of Belgium’s biggest financial firms, didn’t seem to affect the real economy much at all. Unlike the euro area as a whole, Belgium missed out on the 2011 recession and its economy is now bigger than it was before the 2008 cyclical peak — a distinction shared by only eight other members (including tiny Malta and Luxembourg) of the 19-nation currency bloc:

(A little bit of the good fortune is due to population growth. Adjust Belgium’s economic output by the number of Belgians and GDP ends up slightly below the pre-crisis peak. This is also true for France. Then again, real output per person in the US, which supposedly handled its downturn better than the Europeans, didn’t surpass its pre-crisis peak until the beginning of 2014 .)

Unlike many other European countries, there was no deposit flight and no severe credit contraction:

(You can also see there wasn’t much of a domestic lending boom before 2008, which we’ll get to in a bit.)

Belgium’s relative success is even clearer in the employment data . The total number of Belgians with a job never meaningfully dropped during the recession and is now at an all-time high. For the euro area as a whole, total employment is down by about 4.5 per cent from the peak in 2008, and by far more in the hardest-hit countries . Moreover, the proportion of Belgians who are working is basically at an all-time high, in stark contrast to the continent as a whole:

Even relative to Belgium’s past experience with economic downturns, this performances is impressive. From the latest Economic Review published by the National Bank of Belgium:

(We can’t resist pointing out that Belgium’s employment performance has been significantly better than that of the US , which, again, is widely perceived to have done a better job of handling the crisis.)

How did this happen? Why did Belgium miss the crisis that hit other countries with seemingly similar fundamentals?

We don’t have any sure answers, but we’ll put forward a few hypotheses.

– First, as noted above, Belgium didn’t have a housing bust.

Part of the reason is that Belgian builders didn’t respond to soaring house prices by constructing too many homes. Residential investment spending grew at around the same pace as overall GDP and is still at its all-time high. In Spain, by contrast, nominal spending on dwellings has collapsed by about two-thirds from the 2007 peak because of the huge glut produced during the boom.

Builders were probably limited by the conservatism of Belgian households and lenders. Few Belgian households even have mortgage debt outstanding, which explains why household debt is quite small relative to GDP. Indebtedness barely increased during the boom years:

And a bunch of that debt isn’t even mortgage debt. Here’s a breakdown from a paper by economists at the National Bank of Belgium:

Mortgage debt in the Netherlands, by contrast, is nearly three times as large relative to GDP.

During the boom, loan-to-value ratios of new Belgian mortgages collapsed from around 80 per cent to around 60 per cent. From the latest report of the European Commission’s Macroeconomic Imbalances Procedure :

The MIP report also notes that, as of 2012, the price of a 120 sq meter apartment in Brussels is actually less, in euros, than the price of an apartment of the same size in Athens and about the same as the cost of 120 sq meter apartment in Lisbon, which suggests that homes in Belgium probably aren’t overvalued.

The comparison with the Netherlands, which has the most indebted households in the euro area by a huge margin, is particularly striking. Many Dutch households have mortgages worth far more than their homes and severe negative equity. They’ve responded to falling house prices by increasing their savings rates, cutting consumption, and slowly attempting to repay their debts.

(Although it’s now somewhat out of date, we recommend reading the Eurosystem’s “ Household Finance and Consumption Survey ” if you want more details.)

– Second, the standard Belgian corporate debt statistics are somewhat misleading. From the NBB paper mentioned above :

In Belgium there are considerable funding flows between non-financial corporations, on account of the activities of non-financial holding companies and finance companies of multinationals based in Belgium. These companies were previously attracted by the tax concessions available to coordination centres and, since 2006, by the “notional interest” allowance.

Although that mainly affects the non-consolidated debt concept (via the effect of financing between resident non-financial corporations, which is included in the concept of non-consolidated debt and was estimated at 93% of GDP at the end of 2012), it also influences the consolidated concept in so far as the finance is provided by a non-resident firm for a resident firm.

Since 2005, the loans granted by related foreign firms to firms based in Belgium have risen by 17 percentage points of GDP to 37% of GDP at the end of 2012, accounting for much of the rise in the consolidated debt ratio, up by 26 percentage points of GDP during that period. Rather than being due to an actual demand for funding on the part of firms, that debt accumulation therefore originates from financial flows aimed at optimum tax efficiency.

Just look at the difference between the pea green line and the black line in the chart below to get a flavour of the difference this makes:

The relative health of the Belgian private sector may explain why actual bank lending rates to households and businesses were essentially the same in Belgium and Germany throughout the period when sovereign CDS was blowing out. Economists at the NBB mischievously (and somewhat implausibly) concluded that banks would have lent at far lower rates to Belgian borrowers than German ones if not for the spike in sovereign default fears:

– Third, Belgium’s long history of current account surpluses and attendant capital outflows means that the country has accumulated significant claims on the rest of the world:

This is a big difference from the other crisis countries . At the beginning of 2008, foreign claims on Italian assets exceeded Italian claims on the rest of the world by about 25 per cent of GDP. The same was true for Cyprus. For Ireland, net liabilities to the rest of the world were worth about 45 per cent of GDP, for Spain and Greece they were worth about 80 per cent, and in Portugal, net liabilities were worth 90 per cent of GDP.

By contrast, few euro area countries shared Belgium’s large net foreign asset position going into 2008. The only ones that did were Germany, Luxembourg, and Malta. (France and the Netherlands had slightly negative but essentially balanced net foreign asset positions on the eve of the crisis.) Even if we start the clock in 2011, Belgium was in rarefied company. Within the euro area, only Germany, Luxembourg, Malta, the Netherlands, and Finland also had significant net claims on the rest of the world. Belgium’s net assets are among the biggest, relative to GDP, of all the countries in the euro area.

Belgium’s net claims on the rest of the world are concentrated in the private sector, and therefore aren’t directly available for the government to tap in the event of an emergency, but it’s reasonable to think that they insulated the country from the forces that afflicted Spain, Italy, etc. Even if every non-Belgian decided to liquidate their claims on the country, Belgian residents could, in the aggregate, afford to pay by selling off their foreign assets. The same could not be said for Spain or the other troubled countries, which was one reason so many people were worried about default and exit from the single currency.

– Fourth, Belgium is a major trading nation that plays a big role in the supply chains of German high-end manufacturing firms, which have done relatively well.

Exports and imports together are worth about 170 per cent of Belgian GDP, up from around 150 per cent in 2007. The National Bank of Belgium has estimated that the direct and indirect value added by the big ports, particularly Antwerp, is worth about 8 per cent of GDP . Belgium, in fact, is one of the world’s biggest entrepots, with more than half of its total goods exports produced elsewhere :

Net out the imported components and re-exports, and economists think a little more than half of Belgium’s actual exports go outside the euro area. The UK, US, China, Japan, and India together account for around 22 per cent of Belgium’s genuine exports. Somewhat surprisingly, the Netherlands is less important as a Belgian export destination (by value added) than either Italy or the US.

All this means a big chunk of the Belgian economy is shielded from the bad decisions of the bloc’s policymakers. (On the other hand, it also means that the same chunk of the economy is vulnerable to changes in other countries even further afield, many of which aren’t doing so well right now.)

For even more on the structure of Belgium’s export sector, which is dominated by a relatively small number of big multinationals, read this .

– Our fifth and final thought relates to fiscal policy.

Government consumption and investment spending have both increased as a share of GDP by a combined 3 percentage points since the start of 2008. One useful example, highlighted by the most recent IMF Article IV consultation , is Belgium’s spending on employment subsidies:

Meanwhile, as shown above, the general government’s net borrowing has stayed roughly constant around 4 per cent of economic output, in part because Belgium lacked an elected government with a mandate to do anything. (There is also a useful distinction to be made between spending at the federal and provincial levels. More on that here .)

There was a modest “consolidation” of the federal budget but it was tiny compared to what occurred in the rest of the euro area :

Moreover, this modest tightening of fiscal policy was more than entirely achieved by raising taxes. Those still hurt by taking money out of people’s pockets they could otherwise be using to spend, invest, and pay down debt, but the spending cuts many other euro area governments imposed on their citizens never hit Belgium. As Professor Krugman has argued , Belgium’s political paralysis may have worked in its favour, by ensuring that it was impossible to implement bad policies.

There’s also the fact that Brussels is home to much of the administrative infrastructure of the European Union and is therefore guaranteed to have a lot of high-income residents who don’t have to worry about job loss or pay cuts.

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It’s not clear whether these hypotheses are sufficient explanations of Belgium’s incredible resilience, but they at least help differentiate Belgium from Spain and Italy, when on the surface they first appeared so similar. If you have any other ideas why Belgium has done surprisingly well despite seemingly terrible fundamentals, please let us know in the comments.