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(Adds comments from EU in 12th paragraph. For more on Europe’s sovereign-debt crisis, see EXT4.)
Jan. 9 (Bloomberg) -- Europe’s newfound powers over national taxing and spending face a first test when the European Commission prods Belgium to make deeper savings just over a week into the budget year.
Under authority granted last month, the commission will on Jan. 11 decide whether an emergency Belgian spending freeze is enough to drive the deficit below the euro-area limit in 2012.
A negative verdict would expose Belgium, saddled with Europe’s fifth-highest debt, to potential sanctions in a precedent-setting trial of rules designed to overcome investors’ skepticism about the euro area’s response to the two-year-old debt crisis.
“The key challenge for Belgium is the reduction of its sizable public debt,” Olivier Bizimana, an economist at Morgan Stanley in London, said in a research note. “Near-term pressures on public debt have significantly increased, with rising costs of borrowing, lower growth and a still-fragile banking sector.”
With an economic philosophy split between the fiscal rigor of its Dutch-speaking north and pro-welfare bias of the French- speaking south, Belgium is a laboratory for the political conflicts that bedevil Europe’s broader crisis management. Efforts to heal that divide continue today when German Chancellor Angela Merkel meets French President Nicolas Sarkozy in Berlin as part of ad hoc consultations leading up to the next European crisis summit on Jan. 30.
As home to the European Union’s institutions, Belgium tends to follow the EU script, as in the 1990s when the parliament granted the prime minister extraordinary budget- cutting powers to make sure the country would qualify for the euro in the first wave in 1999.
More recently, the new government was still being formed when it took less than 24 hours to reach a budget deal after Standard & Poor’s Ratings Services on Nov. 25 lowered Belgium’s credit rating one step to AA with a negative outlook.
The next broadside came on Jan. 5, when EU Economic and Monetary Affairs Commissioner Olli Rehn calculated that weaker- than-projected growth would push the 2012 deficit to 3.25 percent of gross domestic product, above the government’s target of 2.8 percent.
The EU’s prediction weighed on Belgian bonds, pushing the extra yield over German debt up by 6 basis points to 278 basis points, the most since the six-party coalition took office on Dec. 6 after 18 months of wrangling. The spread narrowed to 270 basis points at 1:41 p.m. in Brussels today.
‘Matter of Urgency’
Rehn gave Prime Minister Elio Di Rupo’s government two options: immediately slice 1.2 billion euros to 2 billion euros ($1.5 billion to $2.6 billion) out of the budget, or set aside a similar-sized reserve by freezing spending in the run-up to a planned February budget review. Rehn called it “a matter of urgency” to guarantee “a timely and lasting correction of the excessive deficit in 2012,” according an EU letter published by De Tijd newspaper on its website.
Belgium went for the second option -- a 1.3 billion-euro freeze that will have “zero impact” on the population, Budget Minister Olivier Chastel told Belga newswire yesterday. The cap is on spending slated for the end of the year, he said.
The commission considers the spending freeze a “positive piece of news,” Amadeu Altafaj, Rehn’s spokesman, told reporters today in Brussels. The EU will issue an official assessment “soon,” Altafaj said while declining to give a specific date.
Belgium’s first-half economic prospects range from “very anemic growth” at best to a contraction of 0.5 percent at worst, said Luc Coene, head of the Belgian central bank. He backed the EU push for budget cuts and steps to boost the nation’s “meager” employment level.
“It is very important to make this commitment to reassure the markets and reduce our interest burden,” Coene said in a joint interview with La Libre Belgique newspaper and RTBF radio.
While the commission will issue opinions on five budgets on Jan. 11, the spotlight will be on Belgium. Two others -- Malta and Cyprus -- rank among the euro area’s three smallest economies, and the remaining two -- Poland and Hungary -- don’t use the euro.
“We don’t need the European Union to motivate us to do this,” Belgian Finance Minister Steven Vanackere told RTBF radio today. “I am completely convinced and confident that the European Union is in agreement with what we’ve done.”
--Editors: Jones Hayden, John Simpson
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