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IMF warns Belgium’s political crisis hampers recovery

Published on April 04, 2011

The International Monetary Fund warned Monday that a 10-month wait for a government in Belgium carries a fresh threat to its economic recovery.

“The political stalemate hampers economic policy making and compounds post-crisis vulnerabilities,” the Washington-based lender of last resort said in its latest country assessment published online.

Belgium now holds the world record for the country to have gone the longest since elections, last June, without being able to form a government.

An agreement on radical “fiscal devolution,” shy of an independent break-up for its three federal regions of wealthy Dutch-speaking Flanders, French-speaking Wallonia and bi-lingual Brussels, is the key hold-up.

“The Belgian economy is gradually recovering from the downturn but the protracted political negotiations have detracted from addressing important challenges,” the IMF underlined.

The Fund predicts “real” growth in Gross Domestic Product this year to dip to about 1.7 percent, down from 2.0 percent in 2010 — a level likely to remain optimal “over the medium term.”

Despite praising a better-than-promised reduction in Belgium’s debt-to-GDP ratio from 6.0 percent in 2009 to 4.6 percent in 2010, the IMF nevertheless stressed that the “political impasse has weakened market confidence in the country’s resolve to bring its public debt under control.

“The Belgian sovereign and banks are vulnerable to contagion from possible renewed market turmoil in the euro area,” it said.

While the report highlighted a stabilising unemployment rate and ongoing banking sector restructuring, the IMF said the country “remains vulnerable to spillovers from its sizable foreign exposures.”

The Belgian state needs to raise an average of 3.5 billion euros per month in 2011.

A draft 2011 budget being prepared by Prime Minister Yves Leterme’s caretaker government will “mostly rely on ad hoc measures,” the IMF said.

“Achieving the appropriate objective of a balanced budget by 2015 will require significant efforts, including a reform of fiscal federalism arrangements, spending constraint at all levels of government and social security, as well as revenue measures,” it underlined.

“The authorities considered that this would require a new federal government,” the IMF said of the input from Belgian officials.