Belgian Affairs

And the tax on labor goes... up

In the latest Economic Survey of Belgium the Organisation for Economic Co-Operation and Development (OECD) says that the fiscal federalism in our country is problematic:

The current system of fiscal federalism is creating imbalances between the federal and the sub-federal governments (vertical imbalance), and between sub-federal governments (horizontal imbalance). Without reform, the vertical imbalance will widen as the fiscal burden from the aging of the population falls mainly on the federal level.

In Flanders we are fast to blame the French speaking part of the country for mismanaging the economy and for not acknowledging what needs to be done in a rapidly changing environment. In Flanders we deplore the fact that the French speaking part of the country is very reluctant to discuss reforms of the state structures, even though it seems that those structures are not efficient.

However, there are reasons to believe that Flanders is not exactly perfect in following the recommendations of international institutions such as the OECD. In the agreement for the new Flemish government taxes on labor are actually going up rather than down while international institutions recommend to decrease the weight on labor. 

The discourse by politicians, employers and economists invariably stresses the need to incite people to work more and longer. The aging of the population and the generous social and health benefits have to be paid by someone, in fact by the working population.

There is a gap between the official discourses and the reality. If a big company needs to restructure, all of a sudden the older employees get all kinds of incentives to retire. Everyone seems to end up happy: the fifty-somethings who won't have to work ever again during their lifetime, the unions who defend their members, the politicians who don't have to deal with major social unrest and the company which can lower the labor costs. Yet, everyone agrees that in general these practices are not sustainable - until the next big company gets into trouble.

Now it seems that this attitude is not that different when Flemish political parties are at the negotiation table: socialists (sp.a), christian-democrats (CD&V) and Flemish nationalists (N-VA) agreed in the absence of the liberal party (VLD, in the opposition now) to get rid of a tax discount for workers, so effectively increasing the tax burden on labor.

There are other measures going into a strange direction: financial support will be increased for working parents who want to interrupt their carreers (to take care for the kids).

Those measures do not involve enormous amounts of money, but the direction which is taken is strange: do we want people to work more as everyone is recommending, or do we want to incite them to work less?

To be fair, it cannot be denied that the new Flemish government has lofty ambitions. Public expenditures will be tackled in a serious and courageous way, and financing of green and innovative projects will be stimulated. The Flemish government wants to have its budget in equilibrium in 2011. But increasing the tax burden for workers is a strange way to prepare for the future.

Roland Legrand

A no nonsense man for the European Commission

 

Flickr picture World Economic Forum, Creative Commons License: http://www.flickr.com/photos/worldeconomicforum/ / CC BY-SA 2.0

The rumor was there since the start of the federal government in 2008, and now it is official: minister of foreign affairs Karel De Gucht (Open VLD) will be the new 'Belgian' member of the European Commission.

De Gucht is the no-nonsense kind of politician. He is known for saying what he thinks, even if other people don't like that. And he is also known for giving arguments to explain his view and for never giving in. 'Am I right, or am I right?', he then asks, or so the story goes.

It goes without saying that this style of politics leads to frontal collisions. In 2004, as president of Open VLD, he strongly opposed the legal proposition to give non-European immigrants the right to vote in municipal elections, while prime minister Guy Verhofstadt (also Open VLD), was convinced that Open VLD should give in on that one.

It became a heroic battle, with a historic party congress where Verhofstadt in an impressive speech convinced the liberal militants that the immigration-voting act wasn't important enough to leave the government. The party seemed united again.

But a few days later in the federal parliament Karel De Gucht decided to try to amend the proposition anyway. According to a former colleague of De Tijd, he said 'If I can't do this, we have to abolish the parliament'. Verhofstadt was not amused and made him resign as president of the party.

De Gucht turned his weakness into a strength. That same year his slogan in the election campaign was 'redelijk onverzettelijk', which means 'reasonably indomitable', the first word referring to 'quite' but also to 'with reason'. It became his political motto. It suits him. De Gucht seldom refuses to go in a debate, even if others don't dare to. For years he was one of the only top politicians who debated the far right - and then far more popular than now - Filip Dewinter of Vlaams Belang.

So when Karel De Gucht became minister of Foreign Affairs in that same year 2004, the joke went that the least diplomatic politician of the country was now the boss of the Belgian diplomacy. And indeed, there were some incidents. Back from a trip to Congo, he said he hadn't met politicians who were capable of leading the country. As so often, a lot of Belgian politicians didn't deny that was true, but asked if it really was necessary to say it.

There were other incidents. In an interview he described the Dutch prime minister Jan-Peter Balkenende as a bourgeois Harry Potter without charisma. Again, most people in Belgium share that view, but was it so wise to say it? But maybe the most harmful thing to do was to criticize the president of the European Commission, José-Manuel Barroso, because in the eyes of De Gucht he didn't do what had to be done to cope with the financial and economic problems in the European Union.

These things may continue to be a disadvantage for De Gucht, because it is not decided yet which task he will get in the Commission. It is said he wants to become Trade commissioner, but Belgium is a small country in the EU, with a bad track record and - unlike the Irish or the Polish - without urgent strategical needs to be offered  political gifts.

Still, De Gucht has a strong European track record. He was European MP on his 26th and stayed it for fourteen years. He teaches European Law at the Brussels university VUB. During five years he was minister of Foreign Affairs. He has the experience of the inner circle, the academic knowledge and the international high level contacts, but above all, he has this reasonable indomitance.

Bart Haeck

And another top banker goes

It was yet another important week for the Belgian banks. André Bergen, the CEO of KBC, resigned. In a press release (pdf file) KBC said:

The Board of Directors of the KBC group decided (...)  to appoint Jan Vanhevel as President of the Executive Committee and CEO of the KBC group, with effect from 1 September 2009. He will succeed André Bergen, who – following surgery in the middle of May and due to the consequent long period of convalescence – has, in consultation with the Board of Directors, asked to be discharged early from his office.

For a while it seemed that KBC resisted well in the major banking crisis which hit Belgium particularly hard. Fortis, the biggest financial services group of the country, was sold to the French group BNP Paribas. Dexia is restructuring and managed this week to finalize the sale of the US subsidiary FSA.The top bankers had to go: Axel Miller (Dexia), Jean-Paul Votron, Herman Verwilst, Filip Dierckx and Karel De Boeck (all Fortis). 

André Bergen at first seemed to be a calm and self-confident commentator of what happened in the financial industry, but finally his bank too had to ask repeatedly for state support.

As a direct consequence of that state support, the European Commission asks for a convincing restructuring of the group. KBC gets three months to present a plan.

The consultancy group McKinsey assists KBC. The Flemish group will concentrate on the core markets and probably part of the activities in Eastern and Central-Europe will be divested.

Unavoidably, KBC got some negative press coverage. The New York Times:

Since October, KBC Bank has had to seek government relief three times. In all, it has received $41.5 billion in financing and guarantees to recover from disastrous mortgage bets that its financial engineers and traders made when times were good. For a bank with a balance sheet of just $425 billion, it is an astounding sum, exceeding the bailout of the Royal Bank of Scotland.

"KBC does not fit the profile of the classic overreaching bank", so The New York Times admits. "Its core business is serving Belgian corporations and individual investors. But as the credit boom approached its zenith, a small team of designers of exotic securitized investments pushed the envelope much further." The newspaper continues:

Whether it was manufacturing high-yielding collateralized debt obligations, leveraged lending to hedge funds or buying up life insurance policies and securitizing them, these bankers, based in London and New York, cultivated an anything-goes aura that was at odds with the bosses in Brussels.

KBC reacted on the article saying that it did not contain any new facts and also misrepresented a number of things. The group underlined that "the solvency problems KBC was confronted with are not the result of the collapse of the American housing market." KBC was "mainly forced by market circumstances to ask the government for help."

It should be noted that not only André Bergen resigns, but also Guido Segers, in charge of investment banking (and of the problematic financial products), leaves the bank. 

KBC is a public company, but it is controlled by important Flemish families. Keeping the group Flemish is important to them. At first Belgian Affairs mused whether the close relationship with the families protected the bank against the turmoil on the financial markets.

The idea was that the close conncetion with very motivated shareholders would allow the management to be more prudent and to focus on the longer term. It is difficult to say what went wrong. Just referring to "the market" as KBC seems to do is clearly not enough.

Other banks such as Rabo (the Netherlands) did much better. Rabo explicitly says that the fact they are not listed on the stock exchange allows them to be prudent and to focus on the longer term.

Did the top managers of KBC fully understand the risks and complexities of all the market activities the bank was engaged in? If so, were the shareholders/families aware of those risks?

Whatever the answers on those questions may be, it seems that KBC will have to concentrate for the next few years on repaying the authorities and on restructuring the group. The group will also have to tolerate close scrutiny by the authorities.

There is a risk that the involvement by politicians and authorities could lead to financial services groups which try to avoid all risks and innovation. At first that would be politically convenient, but in the end the economy needs risk-taking, also by the financial services industry. The fact that KBC is a very dynamic institution is a good thing for the Belgian/Flemish economy.

This issue is evidently much larger than the individual case of KBC: how do we keep our bankers from taking too much risk while keeping banks innovative enough so as to stimulate our economies?

Roland Legrand

Ensor in New York

Flick picture hibino, Creative Commons License: http://www.flickr.com/photos/hibino/ / CC BY 2.0

A short post about art. It seems these are interesting times for (dead) Belgian artists. In may, Réné Magritte got his museum in Brussels.The same month,  Hergé, the writer of the comic books 'the adventures of Tintin', got his museum in Louvain-La-Neuve. And last week the Moma in New York City started an exhibition on James Ensor, making it the first big American Ensor-show in thirty years. Read about it on The Economist site.

Bart Haeck

A man with a plan

Flickr picture Bertelsmann Stiftung:

http://www.flickr.com/photos/bertelsmannstiftung/ / CC BY-ND 2.0

'The European Union is the most successful project in the history', is one of the headlines on the website of former prime minister Guy Verhofstadt. Another headline reads: 'We don't need 27 crisis plans, we need one single European recovery plan', and a third one is 'Because the European liberals are the most pro-european politicians.'

This is the kind of 'yes we can' messages Guy Verhofstadt is known for in Belgian politics. The five years to come, he will do the same in Europe. Yesterday he was elected as the political leader of the liberal group in the European Parliament (ALDE).

Verhofstadt is known as a man with a plan, although it often seemed quite difficult to execute them. Actually, it's always difficult to put an idea into reality in Belgian politics, which is entirely built on compromises. But then again, the European situation is not that different. It will be interesting to see how Verhofstadt acts in his new political environment.

The European ambition of Verhofstadt is not something new. In 2004 he lobbied to become president of the European Commission, but as the story goes in Belgium, the British didn't want him because they opposed an ambitious president of the Commission. Some years before the same thing had happened to prime minister Jean-Luc Dehaene (CD&V).

For those who want to learn more about the ideas of Verhofstadt there is an essay about how Europe should respond to the financial crisis. The last year he also wrote two books: 'a new age of empires' and 'The way out of the crisis. How Europe can save the world'. He is working on a new book on the lost cosmopolitanism in Europe.

For the moment Verhofstadt is still president of Open VLD - he stepped in after Bart Somers resigned because the party lost the elections of June 7th. The plan is that Open VLD elects a new president after the summer holidays, and that from then on Verhofstadt starts the reality check of his European ideas, on a full-time basis.

Bart Haeck

I'll never be your beast of burden

Flickr picture Mela Sogono, Creative Commons License:

http://www.flickr.com/photos/fadedmilkyway/ / CC BY-ND 2.0

'I'll never be your beast of burden, my back is broad but its a hurting', the Rolling Stones sang in 1978. Thirty years later, it's exactly that message that all the governments in Belgium are sending to each other.

It's hardly a secret that the financial future of the Belgian state isn't bright. GDP will be down 4.1 percent this year, according to the OECD, and the budget deficit is rising to 4.6 percent this year and 6.1 percent next year. The political question now at stake is: which government should close which part of the gap?

Here's the result so far. The Flemish Government plans to get back to a balanced budget in 2011, the federal government chooses to do so in 2015, as does the government of the Walloon Region and the French Community. The Brussels Region thinks a balanced budget will only be possible in 2019. Prime minister Herman Van Rompuy is now talking with the regional governments to see what is possible.

Maddens-doctrine

In this context it is important to mention this brand new thing in Belgian politics: the Maddens-doctrine, named after a professor in Belgian politics at the catholic university of Leuven, Bart Maddens. It goes like this: the Flemish politicians have a tradition of demanding the French speaking politicians to talk about a more independent Flanders, and then the French speaking politicians simply say 'non'. Instead of doing that, the Flemish government should maximize its powers without crossing a legal border, and boldly refuse to help the federal government. By doing this the federal government will get into big trouble and for that reason the French speaking politicians will have  to ask to talk about a state reform. And then for the first time the Flemish politicians are in a decent position to negotiate.

In other words: the Flemish government shouldn't ask for more devolution, it should act as much as possible as if this has already happened, and wait till the other governments get nervous.

This is not an innocent game. Budget deficits are growing, but what's more, most of the costs that come with an aging population - healthcare and pensions - have to be paid for by the federal government. It is expected that the first wave of these costs rolls over the Belgian state finances in 2011.

It isn't the first time that the federal government is out of money and asks the Flemish Government to do something. In the past the Flemish government booked big surpluses on the budget, because that helps to improve the consolidated budget of the Belgian state (with all levels of governments in it). But now the Flemish government - which is the most wealthy of the country - says that it never will be the beast of burden for the federal government.

Bart Haeck

Probably the best beer in the world

(Flickr picture acme401, Creative Commons License)

Belgians are people without too much patriotic feelings, but there are some things they are very proud of. One of those is beer. So it is with a little sadness we have to announce that the export of Belgian beers decreased in 2008 for the first time in ten years. In the last decennium, export had doubled to 1.05 billion liter, (a liter is slightly under two pints, or three or four Belgian style beer glasses) but now we have to settle with 0.98 billion liter.

Things keep on booming however in the US. Especially small Belgian breweries, which produce special beers, are doing well. It is said that after the merger of Belgian-Brazilian Inbev  with the American brewery giant Anheuser Busch they discovered there is money to be made with Belgian beer in the States.

Just some figures to conclude: Belgium is a country with 10 million people and has 124 breweries that together get a revenue of 1.9 billion euro. Belgians drink 82 liter of beer each year, which sounds like an awfully big quantity, but which is 27 percent lower than in in 1990. And when it gets very hot in summer, beer consumption doubles. This means the tropic weather of the last week is very good news for the breweries.

Bart Haeck

Karel Van Miert (1942 - 2009)

He liked trees, as a young man already. The former member of the European Commission and socialist politician Karel Van Miert was fond of old, almost forgotten tree varieties.He was in his garden when he fell of  a ladder, and died at 67.

He was the oldest of nine kids of a farmer's family. At first he wanted to join the family company, but life decided otherwise. In the seventies he became the first president of the Flemish socialist party, when the Belgian socialist party BSP split in two.

In 1979 he started a European career as member of the European Parliament to become Commissioner in charge of Competition. It was in this role the international world still knows him best. Neelie Kroes today called him a source of inspiration and said she loved his persistence to fight big companies when it was necessary.

A socialist who had to keep the markets free, or make them free. As my colleague Bart Haeck says, he was pro-market, not pro business. But then again, big businesses do not always like free markets and the pressure it puts on them to make the best products at the best prices. I think Van Miert saw why free markets are necessary: to help the people, not the companies.

However, Van Miert did not dislike companies. He did not join the farm of his parents, but after his political career he joined the boards of numerous companies such as Agfa-Gevaert, Solvay, De Persgroep (shareholder of our newspaper De Tijd), Philips, RWE, Munich Re, Anglo American and Vivendi Universal.

His heavy involvement in companies and markets was not always appreciated by the rank and file of the socialist party. Long before Tony Blair and Gerhard Schröder he personified that very European political style of "The Third Way", the way between the raw power of the markets without social corrections on the one hand and the rigidly organized state economy on the other hand.

It is not the easiest way to defend politically, because it offers no easy slogans. It is a matter of slow and careful guiding of the economy and the society. Maybe one must love trees to fully appreciate that gentle art.

Roland Legrand

Belgium lacks credibility

(Flickr picture magnusfranklin,The Berlaymont building of the European Commission in glorious winter sunlight,  Creative Commons License)

I just visited some French friends, who happily remarked that the "problems in Belgium seem to calm down". People in France - as in many other countries - do not understand very well why Dutch-speaking and French-speaking Belgians constantly quarrel about reforming their state. In this case, the European Commission helped me to explain what all the fuss is about.

On Friday our newspaper De Tijd learned that the European Commission rejects the pluri-annual budget presented by the government of federal prime minister Herman Van Rompuy.

The assumptions regarding the state of the economy are no longer valid, there seems to be no concrete plan to lower the state expenditures, cost savings have a one-shot nature rather than being structural,  there are no figures for the regional authorities.  The Commission wants Belgium to present a new budget.

The Commission is uncharacteristically sharp. On Wednesday June 24 the Commission will not say that the Belgian budget deficit is far too high, but that the budget lacks any credibility.

Each year the members of the European Union have to present a pluri-annual budget, enabling the Commission to check whether the budgets correspond to the criteria of the Stability Pact.

The pluri-annual budget shows a deficit of 3.4% of GDP for this year, next year the deficit would rise to 4% and would decrease to 3,4% in 2011. During three years the 3% criterion would be violated. Because of the recession governments can say that the situation is exceptional, but the budgets presented by Belgium are beyond that, they lack all credibility.

Belgium could refer to more than the recession: the country also had to deal with a political and a banking crisis and with regional elections. However, Belgian Affairs is convinced there is a major structural problem: it is very hard to take tough decisions on the federal level.

Complicated coalition governments depend on political parties with very different visions on what should be done. This leads to ineffective government. "It is the price Belgium pays for a state structure where compromising is far more important than dealing with the real problems, like the costs of the recession and of the aging of the population", I told my French friends, adding that the debt level will exceed once again 100% of GDP. They shrugged and looked worried. Rightly so.

Roland Legrand

Exit liberal party

'Three is a party, four is a crowd', said N-VA-president Bart De Wever on Friday, and a few hours later the christian-democrat prime minister designate, Kris Peeters, announced that he would no longer talk with the liberal party Open VLD. This monday, negotiations on a new Flemish government continue with CD&V, the Flemish nationalists of N-VA and the socialist party sp.a.

That Peeters didn't want Open VLD was written in the stars, or rather written in the negotiations draft that Peeters made public last week. There was no tax relief included, while Open VLD had warned it would not enter a government without lower taxes. Still, the liberals were smart enough to not lock themselves out. They accepted the negotiation document, swallowed their pride and election promise and decided to stay in.

One of the reasons for that political flexibility is that former prime minister Guy Verhofstadt, the uncontested number one of Open VLD, doesn't want instability in the federal government. He wanted Open VLD to be a loyal partner in the federal government and not a nervous and wounded one. He seems to think that Open VLD can only win elections again if the party wins back it credibility and serenity.

The stategy of Guy Verhofstadt seemed too little too late. Two days after Open VLD accepted the 'negiotiatons draft' Kris Peeters kicked them out. Why did he do this? Well, it seems he and the others were fed up with the agressive political style of the liberal party. Patricia Ceysens, the outgoing Flemish minister of Economy, accused the N-VA last week of being a hazard to an open economy because of their nationalist ideology. The N-VA didn't like that. That was probably one of the reasons De Wever asked Peeters to make a government with N-VA and the socialist party.

The big question is now: what about the federal government? Verhofstadt wanted to stay in the Flemish government to guarantee stability in the federal government, but now we are exactly in the scenario he feared. Due to the economic crisis the federal government has to cut spending severely. According to the Planbureau the federal deficit this year will be 3.3% of the GDP. But if nothing happens it will be 4% next year and 4.3% in 2011. If you have to cut expenditure to that extent, it isn't easy talking with a party that is a wounded animal.

Another thing to consider is that Kris Peeters has chosen coalition partners that are very convenient to his Flemish government, but cause problems for the federal government of prime minister Herman Van Rompuy (CD&V). This means that within CD&V, Kris Peeters is giving the signal that he will not help the federal government too much to solve their problems. If you know that the Flemish government is the most financially healthy of the country, and the federal government is the sick man of the country, then you get an idea of the battle that will be going in within the christian-democrat party.

Bart Haeck