When having no government helps: the strange case of Belgian growth

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Belgium has had no official government for more than a year and yet its economy is growing faster than the UK’s. So what’s the secret?

In the past nine months the UK economy has grown by 0.2%. Belgium, meanwhile, has grown by 2.2% – a very healthy performance. In the second quarter of this year it racked up quarterly growth of 0.7% – putting it near the top of the eurozone growth league.

What’s the secret of the small state’s recent faster growth?

Oddly enough, the answer appears to be its lack of functioning government. But before the small state libertarians open the champagne – the connection isn’t the one they might expect and hope for.

It’s not that the lack of an intrusive, interfering government has set the forces of enterprise free – instead the political paralysis afflicting Belgium has meant that, unlike most euro-area governments, it has not embarked on an austerity drive.

As the FT reports the absence of austerity (and the fact that Belgian salaries and pensions are indexed to inflation) is providing a boost to growth.

Belgium can’t avoid austerity forever – public debt to GDP stands at over 100% (much higher than the UK). But in the short to medium term it is certainly outperforming its neighbours. The FT quotes a perplexed economist from ING:

‘In the case of public spending, the short-term gain is paradoxical. It makes it more and more clear that we will have to undertake deeper austerity measures in the future.’

I don’t think this is paradoxical at all – nor do I agree that an effective short-term stimulus now necessarily means deeper austerity later. As new IMF director Christine Lagarde argued yesterday, the right policy mix for most states is a short-term stimulus to get growth moving coupled with a medium- to long-term programme to balance the budget.

Belgium, in the absence of a functioning government, lacks the ability to commit to a credible medium-term plan – hence the recent market pressure on its bond yields, but in the short term its current policy mix is certainly generating growth – as a result of which the government’s deficit narrowed from 4.6% of GDP in 2010 to an estimated 4.0% this year (according to the IMF’s Fiscal Monitor).

Duncan Weldon has worked as an economist at the Bank of England and as a fund manager. He was economic adviser to Harriet Harman when she was acting leader of the Labour Party and now works for an international trade union confederation. This post first appeared on the Searching Finance site

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