Belgian political uncertainty no threat to fiscal consolidation

Moody’s expects that Belgium‘s fiscal stance will not be put at risk despite the long political standoff following last June’s parliamentary election.

In a Special Comment issued Wednesday, entitled “Belgian Political Uncertainty No Threat To Fiscal Consolidation”, Moody’s said that the “art du compromis” still guides policy even when the political parties have failed to form a new government more than six months after the election. The King has just asked a caretaker government to take over until the issue can be resolved.

“The bitter dispute has led to long-held taboos being broken, with the right-wing Flemish party calling for the country’s partition,” said Alexander Kockerbeck, a Moody’s Vice President/Senior Credit Officer and co-author of the report.

Kockerbeck lays out three different scenarios of what might happen to the Belgian political system going forward. He thinks the most likely outcome is more federalism, where the current crisis is resolved within the next year and any future institutional reform focuses more on improvements in the current distribution of powers between the federal tier and the federated entities on particular aspects.

A second possible scenario would be the formation of a confederation, where three independent states emerge as part of a very loose union. The most extreme scenario would result in outright partition, and three new sovereign states.

“We believe that the partition scenario is extremely remote. Although the reforms likely to be implemented may include some politically sensitive aspects, none would be likely to result in a destabilisation of the national or subnational finances”, said Sebastien Hay, a Moody’s Vice President/Senior Analyst and report co-author.

Kockerbeck agrees. “The virtuous trajectory of the government debt ratios is likely to continue in spite of the latest political standoff. Furthermore, the ongoing reduction of public-sector indebtedness and its interest burden is creating room to accommodate the additional pressures imposed by an ageing population,” he added.

However, there is a risk that some time may be lost in the budgetary and reform process due to the political impasse, posing longer-term risks given the social security and labour market spending dynamic.

“Moreover, the credibility of the longstanding union of very different cultural communities would be put at risk should the crisis be protracted,” said Aurelien Mali, a Moody’s Associate Analyst and another co-author of the report.