24th Apr 2019


Italy and Belgium - eurozone's overlooked Achilles' heel

  • Silvio Berlusconi's clinging to power does little for the country's economic health (Photo: Council)

The financial crisis in Europe continues to run and run. Every day, analysts feel compelled to proclaim the demise of the euro. Mostly, their focus is on Greece, Portugal, Ireland, or Spain. Yet strangely enough, Italy and especially Belgium have so far luckily escaped the gloomy predictions, despite both being weighed down by large deficits and debts while their political situation is markedly unstable.

Belgium has been without a government for three quarters of a year. The differences between the parties largely run along linguistic frontiers. The Flemish parties - led by Bart de Wever - demand more autonomy for the regions while the French-speaking Walloons are more federally minded.

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A mediator, Vande Lanotte, recently managed to speed up things. Were he to pull off an agreement before year's end, it would be a remarkable achievement.

Not so long ago Mr De Wever referred to Belgium as the "sick man of Europe" while describing the forming of a coalition as "fashioning granite with bare hands." Regardless of this tense atmosphere a consensus has been reached on a new tax code. Still, there is no room for celebration just yet. The crux of the Flemish-Walloon problem - the borders of the electoral district of Brussels-Halle-Vilvoorde - is still far from being solved.

The country badly needs a government. Rating agency Standard&Poor's already put pressure on Belgium by threatening to downgrade its rating unless a new government quickly takes office. This is not unexpected, as the Belgian public finances are in a very poor state.

However, the Belgian data have spooked the markets far less than the balance sheets of Ireland, Greece, Spain, or Portugal. The Belgian state is paying a higher rate of interest than before to borrow money, butcompared to the other "problem children", Belgium still pays a small premium.

That the markets are not yet "punishing" Belgium as hard as - for example - Portugal is quite remarkable. Financially, the Belgians are often doing even worse than the (southern) European countries that are already in sickbay. The national debt equals the Belgian GDP and the country has been struggling with high structural deficits for a long time. Moreover, the Belgian banking sector is very vulnerable.

Belgian indebtedness is disproportionally higher in the Francophone part of the country and the Flemish are complaining bitterly that they have to act as benefactors to Wallonia. So the higher the Belgian debt positions, the larger the risk that the Flemish will say, "Enough is enough!"

This is precisely what the Italians - at least, the Italian parliament - could have told Prime Minister Silvio Berlusconi last week. The flamboyant leader is hanging on by a thread and barely survived a vote of confidence. His wings have been clipped because his support in the lower house is minimal. When laying his political plans he has to seriously reckon with two right-wing opposition parties. At the same time, his coalition partner Lega Nord has a very strong negotiating position. This is far from good news. The far-right party has an explicit regional focus and wants to have little to do with Europe.

The likelihood that the sclerotic Italian economy will be tackled effectively has substantially diminished. To make matters worse, Mr Berlusconi - who has held office during eight of the past 10 years - only implemented minimal reforms. During the era of "Berlusconismo" the usual "Tangentopoli" (AKA Bribesville) system only became more entrenched in Italian society, while the prime minister kept few of his election promises.

Mr Berlusconi's antics may be farcical in many ways but the opposition failed to make the most of its opportunities. It doesn't take a hard line or produce appealing leaders. As the Italian economy is edging ever closer to the abyss - its debts are larger than the combined shortfalls of Greece, Ireland, Portugal, and Spain - Italian politics continues to be highly dysfunctional.

Italian politics are rotten without and within while the economy is far from competitive and the country threatens to drown in debt. Meanwhile, in Belgium political nepotism and corruption are less in evidence but the language groups are at each others' throats and the public finances are in dangerous waters. Both states urgently need large-scale interventions in order to stay afloat financially, yet a likelier scenario is that the stalemate will continue for the time being.

It is obvious that Belgium and Italy are right in the middle of the danger zone. Political developments in these countries are vital to the health and viability of the Monetary Union. And just as Flanders could eventually tell Wallonia it has "had enough" the same could apply to the eurozone as a whole.

For Flanders, read Germany, the Netherlands, and the other strong euro countries and instead of Wallonia read Greece, Portugal, Italy, and other EMU members that are knee deep in trouble. Unless countries such as Belgium and Italy get their act together in the coming period, eurozone-wide solidarity could come under huge pressure.

Voters in the strong member states will likely grumble ever more loudly about the large sums of money disappearing into the void of the "needy" countries as populist anti-European parties continue to rise. Elections loom. Next year, important regional German polls will take place while in 2012 the French will vote on a new president. Any politicians would have to be extremely sure of themselves to make a strong case for handing money to countries that voters believe have pursued an irresponsible financial policy.

Andy Langenkamp is a political analyst with ECR Research, monitoring developments which may have an impact on the markets.

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