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Sep 14, 2011 | 21:02 GMT

Troubled Belgium Threatens Eurozone Stability

ERIC FEFERBERG/AFP/Getty Images
Summary
Yves Leterme indicated Sept. 13 that he would leave his post as Belgium's caretaker prime minister to pursue the position of head of the Organization for Economic Cooperation and Development. Despite having a national debt higher than Portugal's, Belgium has weathered the eurozone crisis on its reputation as an advanced, developed economy. Once investors realize a developed Western European economy can fall, they will begin looking for other potentially vulnerable states, namely Austria and Italy.
On Sept. 13, the caretaker Belgian prime minister, Yves Leterme, announced that he had applied to lead the Organization for Economic Cooperation and Development, indicating that he would soon leave the job he has held in a temporary capacity for more than a year. Afterward, the Belgian king hurried back from a trip in France to see if he could cajole the leaders of the main eight parties in the parliament to finally form a government. Even if Belgium manages to survive its newest political crisis, it has further complicated the eurozone crisis at a very inopportune time.

Belgium's Inherent Problems

Belgium is what STRATFOR calls a compromise country — it is not a state held together based on geography or national identity, but instead was artificially cobbled together. Belgium is largely dominated by the Flemings (Dutch) in the north and the Walloons (French) in the south. The elites of the two groups barely coordinate when handling governance in Brussels, the capital, while the vast majority of Flemings and Walloons simply do not interact with each other, living and working in different parts of the country. (click here to enlarge image) Modern Belgium was not forged by the Belgians but was instead fashioned by compromises among the Netherlands, France, Germany and the United Kingdom. The result of this geopolitical maneuvering was a buffer state where the interests of the four more coherent states overlapped. Belgium is the narrowest part of the North European plain, and by installing a state there, it was hoped that the Netherlands, France, Germany and the United Kingdom would have somewhat fewer conflicts. History suggests that this plan was not quite a complete success, but it also was not an abject failure. In the post-World War II era, holding Belgium together became somewhat easier. With the United States more or less occupying Western Europe, military competition in the region became a thing of the past and the Belgian buffer state was no longer a battlefield. And while intra-European tensions are certainly at a post-World War II high (and rising) right now, no one is yet even obliquely discussing the merits of using military force to address European disputes. (click here to enlarge image) But despite having existed for 140 years, the Flemings and Walloons have never knitted together into a single national identity. Belgian elections almost always create awkward coalitions, often among parties that have nearly as little to do with one another as the voting groups they represent. The most recent government fell apart in April 2010. Elections two months later produced a hung parliament, and the country has now been operating for 458 days with a caretaker government. There is little holding the state together. The military rationale for Belgium's existence has long since stopped being relevant. Belgium's neighbors would prefer to keep the country in one piece and are willing to act to prevent each other from damaging it, but there is nothing any of them can do to prevent internal forces from tearing Belgium apart. But the most significant problem for Belgium is that the method by which its political parties have papered over the ethnic differences is losing its efficacy. Since Belgium is considered an advanced, developed economy, it has been able to borrow larger volumes of cash at lower rates than most other states. Successive governments have used this financial access to fill in the gaps created by the lack of national unity, in essence bribing their constituents to ignore the inherent tensions. With the eurozone crisis in full swing, this option is no longer the easy solution it once was. Tiny Belgium now has a state debt worth about 360 billion euros ($495 billion), or about 90 percent of gross domestic product (for comparison, Portugal was forced to seek a bailout with a national debt load that was 10 percentage points lower). The only reason Belgium has so far escaped close financial scrutiny is its reputation as an advanced, developed economy.

Implications for the Eurozone Crisis

Leterme's sudden resignation leaves Belgium with only three options. The eight parties could somehow manage to cobble together a government, which they have failed to do for the past 15 months. Alternatively, they could give up working together and jointly declare new elections in the hopes of coming up with a better parliamentary solution. Finally, they could declare Belgium to be in its final days and begin the process of formal divorce, which would likely involve some sort of referendum. If either of the latter two options were selected, Belgium likely would devolve into a political and economic tailspin. Elections during the current eurozone instability would justify scrutiny anyway, doubly so since Belgium for all intents and purposes does not have a government. Breakup would spawn discussions over who should take the debt, which would trigger an investment run. Either option lumps Belgium with Europe's more economically dysfunctional states, such as Greece. Once investors come to the belated conclusion that a Western European state can fail — financially, politically or otherwise — they will be looking for other locations that are not as stable as they seem at first glance. That list likely would include Austria, where foreigners hold 80 percent of state debt. But if Belgium can fall, then few would seriously consider that Italy could not. Italy is also a state built on a compromise, in this case between the northern region of the Po Valley, which has been one of Europe's richest locations for nearly two millennia, and the southern half, which has been among its poorest. Italy's national debt is surpassed in relative terms only by Greece, and the Italian government lately has been in constant crisis. The government in Rome is only being held together by Prime Minister Silvio Berlusconi, who this week began scheduling meetings with senior EU officials in order to fill up his schedule so that Italian prosecutors investigating corruption charges could not interview him. The existing eurozone bailout program can handle a Belgian and even an Austrian rescue. But Italy's towering stack of debt — currently 1.9 trillion euros — demands commitments on an entirely new level. Granting a bailout to Rome on terms similar to those of the three states currently in receivership would cost at least 700 billion euros, and the bailout facility's maximum ceiling is currently only 440 billion euros.
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