11.27.10

Wait, what? Belgium?

Posted in Economics, Financial Markets, Politics and Policy at 10:58 pm

It seems that a number of blogs have picked up on Belgium as a likely candidate for the next domino to fall – either immediately before or immediately after Portugal.

Let’s look at the facts here:

  • Belgium’s budget deficit is under 5% of GDP, below the Eurozone average
  • Belgium has a savings rate of 11.5%
  • Belgium is currently running a current account surplus, and has been for some time
  • Belgian GDP is growing around 2% per year
  • Belgian 10 yr bonds are trading at roughly 1% above German Bunds, a mere fraction of the spreads at which other Eurozone countries’ bonds are trading

So what is the case for a Belgian default?

It seems to be:

  • Belgian national debt is around 100% of GDP, third overall in the Eurozone, behind Greece and Italy
  • Belgium has failed to form a new government for the past 6 months, with a split between parties representing the Dutch and French speaking areas
  • Concerns over Belgian banks, which in reality are no shakier than those of other Eurpoean countries not consider to be on the domino list, certainly far less shaky than those of Ireland

National debt as a % of GDP is not an indicator of short term instability.  It’s only real relevance is with regard to debt service levels, and given Belgium’s current account surplus, savings rate, and GDP growth, this is a non-issue in the short to medium term.  The danger represented by lack of a government is completely overblown, and if there were a crisis, I’m fairly confident they’d pull together a government in short order.  The banks, again, really are in no more of a fragile state than those in the rest of Europe.

If, in fact, a “crisis” does develop in Belgium, I think it warrants stepping back and re-examining what’s really happening in Europe and whether the current approach to rectifying the problem is appropriate.

1 Comment »

  1. Rodger Malcolm Mitchell said,

    11.29.10 at 12:50 pm

    “National debt as a % of GDP is not an indicator of short term instability.”

    Nor is it an indicator of anything else. It is a completely meaningless ratio. See: http://rodgermmitchell.wordpress.com/2009/11/08/federal-debtgdp-a-useless-ratio/

    “Belgium is currently running a current account surplus, and has been for some time.”

    This is what will save Belgium from the Ireland/Greece disasters. As a monetarily non-sovereign government, Belgium must have money coming in from outside. The reasons can be found at: http://rodgermmitchell.wordpress.com/2010/08/13/monetarily-sovereign-the-key-to-understanding-economics/

    “. . . whether the current approach to rectifying the problem is appropriate.”

    The current approach is to lend money to monetarily non-sovereign nations already too deeply in debt — a recipe for failure. There are only two solutions. Either:

    1. The EU should use its monetarily sovereign powers to give (not lend) money to its member nations
    or
    2. The nations should leave the EU, and resume being monetarily sovereign, in which case the debt problem would disappear.

    Rodger Malcolm Mitchell

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