Saturday 5 June 2010

EU: Stability programme Belgium

Stability programmes for eurozone countries on the one hand, convergence programmes for member states still without the euro; you can start by reading the background remarks on economic policy coordination in the European Union, in the blog post EU: Useful stability and convergence programmes? (3 June 2010).

You can then move on to the EU Council opinion on the stability programme of the euro area country Belgium, published in the Official Journal of the European Union (OJEU):

COUNCIL OPINION on the updated stability programme of Belgium, 2009-2012; OJEU 2.6.2010 C 143/1

Economic background

On 26 April 2010 the Council examined the updated stability programme of Belgium, which covers the period 2009 to 2012. The assessment began with a short description of the economic situation:

The collapse of world trade together with decreasing confidence, wealth effects and tighter credit conditions led to a sharp contraction of the Belgian economy around the turn of 2008. While the downturn was very sharp, it was followed by a relatively strong rebound in the second half of 2009, which was partly the result of temporary factors, including the (domestic and foreign) stimulus packages and a positive contribution from inventories.

Continued headwinds stemming from the restructuring of financial institutions and a further rise in unemployment together with low capacity utilisation are expected to slow down growth again in the first half of 2010. While due to the high degree of openness of the Belgian economy the recovery could benefit considerably from the rebound of world trade, the extent of this impulse may be limited as a result of Belgium's loss of cost competiveness in recent years. The downturn has had a significant adverse impact on public finances. The general government deficit deteriorated from 1.2 % of GDP in 2008 to 5.9 % of GDP in 2009. Moreover, while the government debt-to- GDP ratio declined between 2000 and 2007 on the back of overall cautious fiscal policies, the ratio started to increase again in 2008 as a result of the interventions in the financial sector (to 97.9 % in 2009). The Council decided on 2 December 2009 that an excessive deficit existed in Belgium and issued a recommendation to correct the deficit by 2012 through an average annual fiscal effort of 0.75 % of GDP. The strong deterioration of public finances in combination with the above-average budgetary impact of population ageing and significant contingent liabilities following the operations to stabilise the financial system translate into a need for continued budgetary consolidation and structural reforms to ensure the long-term sustainability of public finances.

Council recommendation

After a detailed discussion, and in the light of the recommendation under Article 126 TFEU of 2 December 2009, the Council of the European Union invited Belgium to:

(i) ensure that the 2010 deficit target of the programme is met; specify the measures underlying the budgetary targets from 2011 onwards in order to achieve the recommended average annual fiscal effort of 0.75 % of GDP in line with the Article 126(7) Recommendation; and stand ready to strengthen the fiscal effort in case risks related to the fact that the programme scenario is more favourable than the scenario underpinning the Article 126(7) Recommendation materialise; seize as prescribed in the EDP recommendation any opportunity beyond the fiscal efforts, including from better economic conditions, to accelerate the reduction of the gross debt ratio towards the 60 % of GDP reference value;

(ii) ensure high primary surpluses over the medium term and undertake structural reforms in order to improve the long- term sustainability of public finances;

(iii) improve the quality of public finances by adopting a more stringent budgetary framework, encompassing the creation of enforceable, multi-annual expenditure ceilings.

Eurozone financial stability

On 31 May the European Central Bank (ECB) published its Financial Stability Review June 2010, which assesses the stability of the euro area financial system both with regard to the role it plays in facilitating economic processes and with respect to its ability to prevent adverse shocks from having inordinately disruptive impacts (page 7).

The Financial Stability Review (225 pages) offers a view of the inter-related financial markets and the consolidation measures of eurozone governments.

Ralf Grahn

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