COMMISSION STAFF WORKING DOCUMENT In-depth review for BELGIUM in accordance with Article 5 of Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL AND TO THE EUROGROUP Results of in-depth reviews under Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances
Date: 2013-04-10
Institutions: European Commission
Subjects: Belgium, competitiveness, economic growth, economic recession, economic reform, macroeconomics, public debt, trade balance

EUROPEAN 
COMMISSION 

Brussels, 10.4.2013  
SWD(2013) 113 final 

COMMISSION STAFF WORKING DOCUMENT 

In-depth review for BELGIUM 

in accordance with Article 5 of Regulation (EU) No 1176/2011 on the prevention and 
correction of macroeconomic imbalances 

Accompanying the document 

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT AND THE COUNCIL AND TO THE EUROGROUP 

Results of in-depth reviews under Regulation (EU) No 1176/2011 on the prevention and 
correction of macroeconomic imbalances 

{COM(2013) 199 final} 
{SWD(2013) 114 final} 
{SWD(2013) 115 final} 
{SWD(2013) 116 final} 
{SWD(2013) 117 final} 
{SWD(2013) 118 final} 
{SWD(2013) 119 final} 
{SWD(2013) 120 final} 
{SWD(2013) 121 final} 
{SWD(2013) 122 final} 
{SWD(2013) 123 final} 
{SWD(2013) 124 final} 
{SWD(2013) 125 final}

EN 

   EN 

 
 
 
 
 
  
 
 
 
 
 
Contents 

Executive summary and conclusions .......................................................................4 

1. 

2. 

2.1. 

2.2. 

Introduction................................................................................................7 

Macroeconomic situation and potential imbalances..................................7 

Macroeconomic scene setter......................................................................7 

Assessment of the existence of external imbalances .................................8 

2.2.1.  The evolution of the current account .........................................................9 

2.2.2.  The evolution of market shares................................................................10 

2.2.3.  Geographical and product specialisation .................................................12 

2.2.4.  Cost competitiveness ...............................................................................14 

2.2.5.  The wage setting mechanism...................................................................17 

2.2.6.  Costs of intermediary inputs....................................................................20 

2.2.7.  Non-cost competitiveness........................................................................21 

2.2.8.  Conclusion on external imbalances .........................................................23 

2.3. 

Assessment of the existence of internal imbalances................................24 

2.3.1.  Public sector indebtedness.......................................................................25 

2.3.2.  Non-financial corporations indebtedness ................................................29 

2.3.3.  Financial position of households .............................................................31 

2.3.4.  The financial sector..................................................................................33 

3. 

3.1. 

In-depth analysis of selected topics .........................................................35 

The role of services in the Belgian current account balance ...................35 

3.1.1.  Evolution and orientation of trade in services .........................................35 

3.1.2.  Breakdown of external service surplus....................................................37 

3.1.3.  Conclusions..............................................................................................41 

3.2. 

Innovation in Belgium .............................................................................43 

3.2.1.  Belgium's strengths and weaknesses .......................................................43 

3.2.2.  Governance of public R&D policy ..........................................................44 

3.2.3.  Concentration of private R&D activity....................................................45 

3.2.4.  Human Resources ....................................................................................47 

3.2.5.  Conclusion ...............................................................................................48 

3.3. 

The housing market in Belgium ..............................................................49 

3.3.1.  House price evolution ..............................................................................49 

3.3.2.  House price valuation ..............................................................................49 

3.3.3.  The determinants of house prices ............................................................51 

3.3.4.  Risk factors ..............................................................................................52 

3.3.5.  Possible macroeconomic impact..............................................................52 

4. 

Policy challenges .....................................................................................53 

2 

 
EXECUTIVE SUMMARY AND CONCLUSIONS 

the  Commission  concluded 

In  May  2012, 
that  Belgium  was  experiencing 
macroeconomic imbalances, in particular as regards developments related to external 
competitiveness and indebtedness. In the Alert Mechanism Report (AMR) published 
on 28 November 2012, the Commission found it useful, also taking into account the 
identification  of  imbalances  in  May  2012,  to  examine  further  the  persistence  of 
imbalances or their unwinding. To this end this In-Depth Review (IDR) takes a broad 
view  of  the  Belgian  economy  in  line  with  the  scope  of  the  surveillance  under  the 
Macroeconomic  Imbalance  Procedure  (MIP).  The  main  observations  and  findings 
from this analysis are: 

•  Belgium  continues  to  suffer  from  export  market  shares  losses.  This  is 
mainly due to declining shares in goods that are only partially offset by export 
share gains in services. While the current account position remains broadly in 
balance, the gradual but steady deterioration observed over the past years is a 
source  of  concern.  As  concluded  in  last  year's  IDR,  Belgium's  export 
performance  highlights  competitiveness  issues.  In  terms  of  geographical 
orientation,  Belgium  is  still  predominantly  trading  with  the  EU27,  although 
compared to last year the scope has widened. Should this trend be confirmed, 
a  softening  of  export  market  share  losses  may  follow.  As  regards  product 
specialisation,  intermediate  goods  still  dominate  other  types  of  manufactured 
exports. However, high-tech exports have been on an increasing trend, which 
reflects the strengths of the Belgian research and innovation system.  

•  The  specialisation  in  cost-sensitive  products  makes  the  evolution  of  unit 
labour costs a key issue for Belgium's competitiveness. The trend depicted 
in  last  year's  IDR,  with  unit  labour  costs  in  Belgium  rising  faster  than  in 
trading partner countries, has been confirmed, driven to a large extent by the 
wage  setting  mechanism.  Since  the  publication  of  the  2012  IDR,  the 
authorities  have  announced  measures  to  reduce  the  widening  wage  gap. 
However,  such  a  correction  will  only  materialise  gradually  and  additional 
measures may be needed to close the historic gap entirely, the more as several 
trading partners have been implementing relevant labour market reforms.  

•  Belgium  needs  to  foster  total  factor  productivity  as  gains  to  be  expected 
from labour productivity are limited. For this to happen, it is essential for 
Belgium  to  speed  up  the  transition  towards  a  more  knowledge-intensive 
economy, enabling the full exploitation of the strengths of its research system. 
As  business  R&D  is  very  concentrated,  Belgium  needs  to  broaden  its 
innovation  base  and  fasten  the  renewal  of  its  economic  fabric.  However, 
Belgium's  weaknesses  in  terms  of  entrepreneurship  and  firms'  dynamics 
impede this necessary renewal.  

•  The  high  level  of  public  debt  still  represents  an  imbalance  in  view  of 
sustainability concerns.  Since 2008, the public debt has peaked up again to 
reach  around  100%  of  GDP.  This  deterioration  of  public  finances  is  largely 
due  to  the  effect  of  the  crisis  on  government  revenues,  temporary  stimulus 
measures  and  rescue  operations  in  the  financial  sector.  Recent  consolidation 
efforts  have  slowed  down  the  increase  but  the  debt  ratio  is  expected  to 

3 

 
 
stabilize  only  in  2014.  The  high  debt  level  makes  Belgium  vulnerable  to 
tensions in financial markets that could result in an upward debt spiral. A large 
share  of  Belgian  debt  is  held  domestically,  which  may  reduce  external 
vulnerabilities  but  reinforces  risks  for  spill-overs  between  the  public  sector, 
the banking sector and the real economy. Contingent liabilities to the financial 
sector  for  around  15%  of  GDP  constitute  an  additional  risk.  Moreover,  the 
remaining  fiscal  space  to  address  the  debt  burden  is  very  limited,  while  the 
fiscal  sustainability  risk  is  high  in  the  medium  to  long-term  due  to  the 
budgetary impact of ageing in Belgium.   

•  The  indebtedness  level  of  non-financial  corporations,  which  is  high  in 
terms of non-consolidated debt, does not point to emerging risks given the 
still reasonable consolidated level. As pointed out in last year's IDR, the high 
divergence between both levels is explained by the high degree of intra-group 
loans,  which  have  been  fostered  by  advantageous  tax  regimes.  Although 
abolishing this tax policy would result in a reduction of such loans, it would 
not  constitute  a  macro-economic  risk.  Household  indebtedness  is  mostly 
mortgage  related.  As  this  IDR  argues,  however,  a  possible  downward 
correction of housing prices would only have limited effects on consumption, 
on the construction sector and on the financial sector. 

The IDR also discusses the policy challenges stemming from these developments and 
what could be avenues worth exploring in terms of policy actions. 

•  In order to improve external competitiveness, the Belgian economy would 
benefit from a reform of the wage bargaining system, a reduction of the 
tax burden on labour, and measures to improve total factor productivity. 
The 'wage norm', adopted during a phase of high productivity growth, would 
benefit  from  a  modernisation.  Some  examples  that  could  be  considered 
include  the  incorporation  of  productivity  growth  differentials  in  the  wage 
norm, the application of ex-post corrections, as well as all-in agreements. This 
would  help  align  wage  developments  more  closely  with  productivity 
dynamics,  allow  more  wage  diversification  between  sectors  and  push  back 
structural  labour  mismatches.  With  regard  to  automatic  wage  indexation, 
allowing  a  more  flexible  application  would  help  the  very  open  Belgian 
economy  to  absorb  external  shocks  more  smoothly.  Competitiveness  would 
also  be  enhanced  by  a  further  shift  in  the  tax  burden  from  labour  to  other 
sources  of  revenue  and  a  continued  effort  to  improve  the  functioning  of 
networking  industries.  A  further  stimulation  of  investment  in  R&D  and  ICT 
would  increase  the  technological  content  of  products  as  well  as  total  factor 
productivity. While the orientations taken by research and innovation polices 
in  recent  years  are  appropriate,  efforts  need  to  be  reinforced.  In  particular, 
further  development  of  the  support  to  clusters  and  better  conditions  for  the 
growth  of  innovative  firms,  as  well  as  the  further  development  of 
entrepreneurial education and culture, are required. 

•  Concerning  the  challenge  linked  to  the  high  public  indebtedness,  the 
economy  as  a  whole  would  benefit  from  a  continued  implementation  of 
measures  aiming  at  a  consolidation  of  public  finances  in  a  sustainable 
way,  putting  the  public  debt  on  a  firm  downward  path,  in  line  with  the 

4 

 
commitments  under  the  Stability  and  Growth  Pact.  Also  the  implicit  debt 
associated with an ageing population may be addressed by curbing age-related 
expenditure in order to prevent new increases of the debt levels.  Decreasing 
debt levels would also provide the authorities with more latitude to implement 
a fiscal policy aimed at improving the competitiveness of the country, as well 
as  to  face  unexpected  developments  in  other  economic  sectors  such  as 
financial markets. 

5 

 
 
 
1. 

INTRODUCTION 

On  28  November  2012,  the  European  Commission  presented  its  second  Alert 
Mechanism Report (AMR), prepared in accordance with Article 3 of Regulation (EU) 
No. 1176/2011 on the prevention and correction of macroeconomic imbalances. The 
AMR  serves  as  an  initial  screening  device  helping  to  identify  Member  States  that 
warrant  further  in-depth  analysis  to  determine  whether  imbalances  exist  or  risk 
emerging. According to Article 5 of Regulation No 1176/2011, these country-specific 
'in-depth  reviews'  (IDR)  should  examine  the  nature,  origin  and  severity  of 
macroeconomic  developments  in  the  Member  State  concerned,  which  constitute,  or 
could lead to, imbalances. On the basis of this analysis, the Commission will establish 
whether  it  considers  that  an  imbalance  exists  and  what  type  of  follow-up  it  will 
recommend to the Council. 

This  is  the  second  IDR  for  Belgium.  The  previous  IDR  was  published  on  May  30 
2012 on the basis of which the Commission concluded that Belgium was experiencing 
macroeconomic imbalances, in particular as regards developments related to external 
competitiveness  and  indebtedness.  Overall,  in  the  AMR  the  Commission  found  it 
useful, also taking into account the identification of imbalances  in  May, to examine 
further the persistence of imbalances or their unwinding.1 To this end this IDR takes a 
broad view of the Belgian economy in line with the scope of the surveillance under 
the Macroeconomic Imbalance Procedure (MIP). 

Against this background, Section 2 of this in-depth review looks more in detail into 
these  developments  covering  both  the  external  and  internal  dimensions.  Section  3 
focuses on the role of services in the current account balance, innovation in Belgium 
and the evolution of the housing market. Section 4 discusses policy considerations. 

2. 

MACROECONOMIC SITUATION AND POTENTIAL IMBALANCES 

2.1.  Macroeconomic scene setter 

Having a small open economy, Belgium was strongly affected by the slump in world 
trade  during  the  global  economic  crisis  of  2008-09  (see  Graph  1).  Following  the 
crisis,  the  Belgian  economy  has  not  been  able  to  fully  benefit  from  the  rebound  in 
global activity. This has largely been due to accumulated losses of competiveness and 
a  geographical  focus  on  the  weak  European  market  (see  section  2.2.3).  Belgium's 
deteriorating competitiveness is also reflected in a lower potential growth (see Graph 
2), with productivity growth below the level observed during pre-crisis years. In 2012, 
GDP  contracted  by  0.2%  according  to  Commission  estimates,  while  for  2013  an 
expansion  by  0.2%  is  expected.  In  2014,  growth  is  projected  to  accelerate  to  1.5%. 

1   As was the case last year, on the external side the AMR scoreboard highlighted a loss in export 
market shares.  On the internal side, the high and increasing levels of private and public debt were 
identified  as  a  matter  of  concern.  Other  indicators  pointing  to  potential  problems  were  rising 
house  prices  and  the  debt  to  equity  ratio  of  the  financial  sector,  increasing  again  due  to  losses 
incurred. 

6 

 
 
                                                 
The subdued growth in 2012-13 can be attributed to weak domestic demand as shown 
in Graph 1 with net exports contributing positively to overall growth since 2010. 

Graph 1: GDP growth decomposition  Graph 2: Potential growth rate 

)

%

(

y
-
o
-
y
e
g
n
a
h
c

f
o
e
t
a
R

2.5

2.0

1.5

1.0

0.5

0.0

Source: Commission services 

Source: Commission services 

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

Hourly productivity contribution
Total Labour (Hours) Contribution
PF Potential Growth

With  respect  to  public  finance  developments,  public  debt  had  been  on  a  steady 
downward  path  until  2007,  when  total  debt  amounted  to  84%  of  GDP.2  This 
substantial  decline3  was  essentially  due  to  high  –  albeit  decreasing  –  primary 
surpluses. Between 2007 and 2012, the public debt jumped back to 99.8% of GDP4. 
Around  half  of  this  increase  resulted  from  the  operations  to  stabilize  the  financial 
system,  which  amounted  to  more  than  8%  of  GDP.  The  public  deficit  has  slowly 
decreased since 2009, but still stands around 3% of GDP and is currently projected to 
rise  again  above  this  threshold  in  2014.  The  public  debt  is  projected  to  stabilize  at 
around 101% of GDP in 2013-14 (see also section 2.3.1).  

2.2. 

Assessment of the existence of external imbalances 

The apparent stabilisation of the current account deficit does not take away concerns 
about the significant deterioration over the longer term, highlighted in the 2012 IDR. 
The  driver  behind  this  decline  is  the  goods  balance  with  the  services  balance 
improving. Belgian exports of goods have lost ground with respect to the expanding 
world trade, resulting in a loss in market shares. While the productivity level is still 
among  the  highest  in  the  EU,  productivity  growth  remains  among  the  lowest  and 
plays an important role in the fact that ULCs in Belgium continue to grow faster than 
in trading partner countries, eating into Belgium's cost competitiveness. Despite these 
negative  developments,  the  Net  International  Investment  Position  (NIIP)  of  the 
country  is  positive  and  has  been  improving  since  2008  (see  Graph  3).5  This  strong 

2  

The assumption of the national railway company's debt in 2005 caused a temporary slowdown of 
the downward trend. 
In 1993 the Belgian public debt peaked at 134.1% of GDP. 

3  
4   Commission services' Winter forecast 2013. 
5   Among EU27 countries, only LU has a NIIP larger than Belgium in terms of GDP. 

7 

 
 
 
 
 
 
 
 
 
                                                 
overall  NIIP  encompasses,  on  the  one  hand,  sizeable  net  foreign  liabilities  by  the 
Belgian government and, on the other hand, a large net foreign asset position by the 
Belgian private sector (see Graph 4). 

Graph 3: Decomposition of Net IIP 

Graph 4: IIP by Sector 

P
D
G

f
o
%

150

100

50

0

-50

-100

P
D
G

f
o
%

,
n
o
i
t
i
s
o
p
t
e
N

150

100

50

0

-50

-100

02

03

04

05

06

07

08

09

10

11

12*

05Q4

07Q1

08Q2

09Q3

10Q4

12Q1

Net portfolio investment
Other investment (net)
Net financial derivatives
Net int'l investment position

Reserve changes (net)
Net direct investment
Net external debt (neg. sign)

Central Bank (incl reserves)

General Government

MFI (excl central bank)

Private sector

Net int'l investment position

Source: Commission services;  
note: * indicates estimated figure using quarterly data 

Source: Commission services 

2.2.1.  The evolution of the current account  

Rather than the level of the current account, the main source of concern  remains its 
steep  downward  trend.  After  1999  Belgium's  current  account  balance  gradually 
eroded and eventually turned negative in 2008 (see Graph 5). With the exception of 
2010, Belgium's current account balance has remained negative ever since. For 2012, 
a  deficit  of  around  1%  is  expected  according  to  Commission  estimates.  The  same 
level  is  projected  for  2013-14.6  The  bulk  of  this  deterioration  can  be  attributed  to  a 
declining  surplus  in  the  goods  trade  balance,  which  moved  into  deficit  as  of  2008. 
This  deterioration  was  only  partly  compensated  by  the  gradual  improvement  of  the 
services balance. Moreover, the deficit in current transfers has grown over time7 while 
the income balance has remained positive at around 2% of GDP. 

The  deterioration  of  the  goods  balance  can  partly  be  attributed  to  rising  net  energy 
imports, which rose from EUR 6.7 bn in 2002 to EUR 19 bn in 2012 on the back of 
increasing international energy prices (see Graph 6). However, making abstraction of 
energy  products,  imports  grew  still  by  3.5%  on  annual  average  between  2002  and 
2012,  compared  to  2.9%  export  growth  over  the  same  period.  Aside  from  higher 
energy  prices,  slower  export  growth  can  thus  be  blamed  for  the  current  account 
deterioration. In what follows, the focus will therefore be on export performance. 

6   According  to  the  national  accounts  definition,  the  same  trend  can  be  observed  although  the 
current account remained in surplus even in the crisis years 2008 and 2009. While between 1993 
and 2004 the current account according to the national accounts definition fluctuated between 4% 
and 6%, this surplus gradually eroded and is currently fluctuating around 1.5% of GDP.  

7   Reaching  -1.8%  of  GDP  in  2011  and  -2.4%  during  the  first  nine  months  of  2012.  This  reflects 
outward transfers by immigrants as well as the fact that  Belgium is a net contributor to the EU 
budget. 

8 

 
 
 
 
  
 
 
 
 
 
 
                                                 
Graph 5: Evolution of the current account 
balance (BoP definition) 

Graph 6: Evolution of the goods balance 
(national accounts) 

P
D
G

f
o
%

8

6

4

2

0

-2

-4

-6

-8

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12*

Capital account

Income balance

  Trade balance - goods

Current transfers

  Trade balance - services

Trade balance

Current account balance (CA)

Net lending/borrowing (CA+KA)

20000000

15000000

10000000

5000000

0

-5000000

-10000000

-15000000

-20000000

-25000000

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12*

Other goods (net)

Energy export (net)

Goods balance

Source: Commission services; note: * indicates 
estimated figure using quarterly data 

Source: NBB; note: * indicates estimated figure using 
quarterly data 

2.2.2.  The evolution of market shares 

Belgian exports have been growing slower than global trade and are also outpaced by 
the exports of other euro area countries, most notably Germany (see Graph 7)8. As all 
EU15 countries have experienced losses in export market shares, Belgian losses could 
be explained by shifting global patterns. Changes in market shares at constant prices, 
however, show that Belgium already began losing ground in 2003. This indicates that 
aside  from  matters  of  cost  competitiveness  resulting  in  higher  relative  export  prices 
(see  Graph  8),  elements  of  non-cost  competitiveness  also  play  a  role  in  explaining 
Belgium's worse trade performance compared to the euro area.  

Graph 7: Evolution of exports of goods 
and services (constant prices, 2000=100) 

Graph 8: Deflator of export of goods 
(2000=100) 

200

180

160

140

120

100

80

60

Index 
2000=100

World

BE

EA16

125

120

115

110

105

100

95

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

BE

DE

EA-17

00

01

02

03

04

05

06

07

08

09

10

11

12f 13f 14f

Sources: Euro area and BE: Commission services; IMF: 
World Economic Outlook Database, October 2012. 

Source: Commission services 

8   Belgian export performance would be close to the euro area average, if Germany was left out of 

the equation. 

9 

 
 
 
 
 
 
 
 
 
                                                 
The loss of export market shares is only relevant for goods, with a better performance 
by  services  (see  Graph  10).  Indeed,  the  5-year  change  in  export  market  share  for 
goods and services combined reached -10.2% in 20119 with the loss in export market 
share  for  goods  at  -13.7%  and  a  gain  of  3.4%  for  services.  As  highlighted  by  the 
Federal Planning Bureau10, service sector exports are less price elastic. While services 
might  be  partially  replacing  goods  as  the  main  growth  driver  behind  international 
trade,  the  challenge  of  increasing  the  competitiveness  of  goods  remains.  Export  of 
services cannot be expected to fully occupy the space left by goods as witnessed by 
the  overall  loss  in  market  share  (see  Graph  9)  and  the  risk  that  the  evolution  of 
services might not be as positive in the future (see also 3.1.). 

Graph 9: Export market shares 
decomposition 

Graph 10: Balance of goods and services as 
percentage of world trade (BoP data) 

)

%

(

t

e
a
r
h
w
o
r
G

t

20

15

10

5

0

-5

-10

-15

-20

-25

-30

03

04

05

06

07

08

09

10

11

2.9

2.7

2.5

2.3

2.1

1.9

1.7

1.5

e
d
a
r
t

d
l
r
o
W

f

o
%

Denominator: World Export growth (neg. sign)
Numerator: Export growth
EMS growth rate

02

03

04
Goods

05

06
Services

07

Source: Commission services 

Source: Commission services 

08

10
Goods and Services

09

11

The  European  Commission’s  recent  Surplus  Report  (2012)  looks  into  changes  in 
export market shares  by decomposing total nominal export growth per country (net of 
the global import growth) into four components (see Graph 11).11 According to this 
analysis,  in  pre-crisis  years  (2000-07),  Belgium  benefited  slightly  from  its  initial 
export  specialisation  in  terms  of  products  and  destination,  though  in  general  less  so 
than other ‘surplus countries’.12 However, competiveness changes in product as well 

9   A loss of 10.2% between 2006 and 2011, compared to an AMR threshold of -6%. 
10   H.  Bogaerts  and  C.  Kegels,  ‘Competitiveness  of  Belgium,  Challenges  and  growth  tracks’, 

Planning paper 112, Federal Planning Bureau, 2012. 

11   The  use  of  a  shift-share  analysis  can  contribute  to  the  identification  of  the  factors  behind  long-
term  changes  in  export  market  shares.  The  first  two  components  (initial  specialization)  are 
structural  factors,  capturing  the  initial  product  and  geographical  specialization  and  reflecting 
whether a country is specialized in sectors with dynamic global demand and whether destination 
countries  are  dynamic  markets.  As  such  they  reflect  past  export  strategies  and  competitive 
advantages. The other two, dynamic components (market share gains) capture how successful a 
country  has  been  in  increasing  its  exports  above  market  growth  in  product  and  geographical 
markets as a consequence of competitiveness developments. Competitiveness is understood in a 
broad sense, comprising both cost and non-cost elements. 

12   AT, BE, DE, DK, FI, LU, NL & SE. 

10 

 
 
 
 
 
 
 
 
 
                                                 
as  in  geographical  destination  were  much  more  outspoken  drivers  behind  nominal 
export growth during 2000-07.  

Since the crisis erupted, the strong orientation towards the slow growing EU market 
has  contributed  to  Belgium’s  loss  in  market  shares.  While  product  specialisation 
proved to be a neutral factor, competitiveness changes, in geographical destination but 
particularly  in  product  market,  have  been  another  contributing  factor.  Market  share 
losses in product markets can loosely be interpreted as an indication of a loss in cost 
competitiveness (with geographical changes being more the result of demand-driven 
elements  such  as  quality  and  preferences  of  export  markets).13    It  can  thus  be 
concluded  that  in  recent  years  both  geographical  specialisation  and  competitiveness 
developments have caused Belgium to suffer a loss in market share. These individual 
elements are discussed in the following sections. 

Graph 11: Decomposition of nominal export market growth 

)

D
S
U
n
i
(

t

h
w
o
r
g

t
r
o
p
x
e

l

i

a
n
m
o
n

l

a
u
n
n
a

t

h
w
o
r
g

l

a
b
o
g

l

e
h

t

f

o

t

e
n

f

o
s
t

i

n
o
p
-
%

03

02

01

00

-01

-02

-03

-04

-05

Market share gains in
product markets

Market share gains in
geographical
destinations

Initial product
specialisation

Intial geographical
specialisation

Pre-crisis

Post-crisis

Belgium

Source: COMTRADE and Commission services' calculations 

2.2.3.  Geographical and product specialisation  

Belgian  exports  consist  largely  of  intermediary  goods  that  are  traded  with 
neighbouring  or  other  euro  area  countries.  As  to  its  geographical  specialisation  (see 
Table 1), 60% of Belgian exports are oriented to euro area countries with the largest 
share going to DE, FR and NL – 50% of total exports and 80% of euro area exports. 
This  is  in  accordance  with  the  finding  in  the  preceding  section  that  Belgium's 
geographical specialisation has partly been responsible for observed losses in export 
market share. Nevertheless, compared with the situation in 2000, the trend in export 
orientation goes in the right direction. Between 2000 and 2011, the share of exports 
going to the largest emerging markets has increased from 4.7% to 8.4%. Furthermore, 
export growth towards these markets seems to have accelerated in recent years given 
the  sluggishness  of  many  traditional  export  markets:  in  2010  extra-EU27  exports 
represented 25.8% of overall exports, rising to 28.1% in 2011. It should also be noted 

13   LIME Working Group (2012), Measurement and Determinants of Non-Price Competitiveness. 

11 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
that Belgian exporters benefited indirectly from the new markets through their exports 
towards Germany, which increased in importance compared to 2000.14 

Table 1: Main trading partners (in % of total) 

exports 

imports 

Total 
EU27 - INTRA 
EU27 - EXTRA 
DE 
FR 
NL 
UK 
US 
Largest emerging markets15 

Source: Commission services 

2000 
100 
79.7 
20.3 
17.5 
18.3 
12.9 
10.4 
6.0 
4.7 

2011 
100 
71.9 
28.1 
18.1 
16.5 
12.2 
6.9 
5.1 
8.4 

2000 
100 
70.8 
29.2 
16.4 
12.7 
17.5 
8.6 
7.5 
5.9 

2011 
100 
67.9 
32.1 
14.8 
10.7 
19.6 
5.9 
5.7 
11.1 

Table 2 highlights Belgium's product specialisation in intermediate goods. Compared 
to neighbouring countries, Belgium is clearly more dependent on the export of these 
products, which represent 60% of total manufactured exports. This reflects Belgium's 
tight  integration  in  international  supply  chains.  Furthermore,  the  specialisation  in 
intermediate goods, already a fact in 2000, has intensified over the past decade. This 
mirrors  a  decline  in  the  prominence  of  capital  goods,  which  play  a  smaller  role  in 
Belgium than in DE, FR and NL. This trade specialisation entails risks as intermediate 
products  tend  to  be  more  easily  substituted  and  thus  more  price  elastic  than  capital 
limited  proportion  of 
goods.  This  product  specialisation  resonates  with  a 
manufactured exports being high-tech in nature, although it should be noted that the 
proportion of high-techn exports is increasing rapidly since 2000 (see also 2.2.7.). 

In this regard it is also interesting to note that overall export similarity with China (a 
broad indicator of exposure to price competition) is rather low. Graph 12 shows the 
degree  of  overlap  by  sector  in  exports  and  indicates  that  traditional  sectors  such  as 
textile, footwear and metals seem from this point of view more at risk than important 
sectors like vehicles and chemicals. Nevertheless, a continuation of the reorientation 
towards harder to imitate products higher upon the value chain is essential to render 
the Belgian export industry less exposed to international competition on cost factors. 

14   Based  on  the  import  content  of  German  exports  and  the  Belgian  share  in  German  imports,  the 

Belgian share in overall German exports has risen from 1.4% in 1999 to 2.2% in 2008. 

15   China, Brazil, Russia, India, Mexico, Indonesia & Turkey. 

12 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
Table 2: Manufactured exports by type 
of goods (in % of total) 

Graph 12: Export similarity with China vs. 
share in total exports  

BE 

DE 

FR 

NL 

Capital goods 
Intermediate goods 
Consumption goods 
Unclassified goods 
Capital goods 
Intermediate goods 
Consumption goods 
Unclassified goods 
Capital goods 
Intermediate goods 
Consumption goods 
Unclassified goods 
Capital goods 
Intermediate goods 
Consumption goods 
Unclassified goods 

2000 
11.3 
56.4 
31.6 
0.7 
22.0 
49.1 
25.2 
3.7 
23.2 
47.4 
28.0 
1.4 
18.5 
49.7 
26.2 
5.6 

2011 
8.1 
59.6 
31.2 
1.1 
20.7 
50.4 
26.7 
2.2 
18.6 
48.7 
30.6 
2.1 
19.6 
52.4 
25.1 
2.9 

)

%

i

(
g
n
p
p
a
l
r
e
v
O

70

60

50

40

30

20

10

0

mineral

other manuf

leather

art

textile

footwear
paper

machines

metals
plastic

vehicles

wood
arms

stone

food

vegetables
optical

fats

animals

chemical

10

Exports share (%)

20

30

Source: Commission services 

Source: Commission services 

2.2.4.  Cost competitiveness 

As  concluded  above,  the  deterioration  of  the  current  account  and  the  loss  in  export 
market  shares  can  be  attributed  at  least  partially  to  Belgium's  declining  cost 
competitiveness. The latter is an important issue given the discussed specialisation in 
cost-sensitive products, the high tax wedge (see also section 2.3.1.) and the prolonged 
wage  moderation  by  main  trading  partner  Germany.  The  resulting  wage  differential 
vis-à-vis  Germany  could  have  been  compensated  by  higher  productivity  growth. 
However, international comparison shows that, while in terms of productivity levels 
Belgium  belongs  to  the  top  EU  countries  (see  Graph  13),  in  terms  of  productivity 
growth,  it  is  among  the  worst  performing  countries  (see  Graph  14).16  Although 
subdued  productivity  growth  constitutes  a  general  challenge  for  euro  area  countries, 
this does not take away Belgium's competitiveness issues. Given that capital intensity 
of  production  is  already  high,  further  increases  are  unlikely  to  yield  the  strong 
productivity gains that warranted rapid wage increases in the past. This highlights the 
importance  of  stronger  total  factor  productivity,  originating  from  innovation  and 
technological advance or an improvement of public infrastructure. 

16   This  slower  rise  in  productivity  is  not  a  purely  negative  phenomenon  since  it  mostly  reflects  a 
stronger  employment  growth  with  e.g.  the  inclusion  of  many  low-productivity  workers  through 
the service voucher system. 

13 

 
 
 
 
                                                 
 
 
  
 
 
Graph  13:  Productivity  level  (2011) –  GDP 
per person employed - EA17=100 

Graph  14:  Productivity  growth  (2011)  - 
GDP per person employed - EA17=100 

160

140

120

100

80

60

40

20

0

E

I

U
L

L
N

T
A

K
D

E
S

E
B

I

R F
F

K
U

E
D

T

I

S
E

7
1
-

A
E

7
2
-
U
E

L
E

I

Y S
C

T
M

T
P

Z
C

K
S

U
H

E
E

L
P

T
L

V
L

O
R

G
B

3

2

1

0

-1

-2

-3

S
E

G
B

V
L

K
S

L
P

L
E

Y
C

E

I

T
L

T
P

K
D

E
S

E
E

O
R

R
F

7
1
-

A
E

7
2
-
U
E

T
M

L
N

I

F

E
D

E
B

I

T S
A

K
U

Z
C

T

I

U
L

U
H

Source: Commission services 

Source: Commission services 

Belgium's  deteriorating  cost  competitiveness  is  reflected  in  above-average  increases 
in nominal unit labour costs (ULCs) relative to main trading partners (DE, FR, NL) 
and  the  euro  area  as  a  whole  (see  Graph  15).  Although  the  ULC  indicator  in  the 
scoreboard has not exceeded the indicative threshold since 2010, the ULC increases 
recorded compare unfavourably with all main trading partners since 2007, suggesting 
a worrisome trend.  

Graph 16 provides a breakdown of Belgian ULCs. It shows that both a higher wage 
and a lower productivity growth resulted in a widening gap vis-à-vis the EU3. When 
1996 is taken as a base year17, the accumulated nominal labour costs surplus stands at 
12.4%  in  2011.  Belgian  ULCs  are  expected  to  continue  outpacing  the  average  euro 
area ULC in 2013. According to the latest estimates by the Belgian Central Economic 
Council18, the hourly wage gap amounted to 5.1% at the end of 2012. This figure does 
not  take  into  account  the  effect  of  wage  cost  reductions  through  wage  subsidies, 
which would reduce the gap by 1.8 pps according to the authorities.19 At the end of 
2012,  the  authorities  announced  measures  to  narrow  the  wage  gap,  discussed  lower 
(see Box 1). 

17   As the Law on competitiveness was passed in 1996, that year is conventionally taken as a base 

year in the public debate on Belgian cost competitiveness. 
18   Central Economic Council, Technical Report December 2012. 
19   While  it  makes  sense  to  incorporate  wage  subsidies  when  comparing  overall  labour  costs  –  the 
more as such subsidies have increased fast in Belgium since 2005 – it should not be overlooked 
that  neighbouring  countries  also  have  wage  subsidies,  which  should  evidently  be  taken  into 
account as well for this exercise. To clarify matters, a panel of experts (comprising representatives 
from  the  Belgian  National  Bank,  Eurostat,  the  Federal  Planning  Bureau,  the  High  Council  for 
Employment,  the  General  Direction  of  Statistics  and  Economic  Information  and  the  Central 
Economic Council) has been requested by the federal authorities to determine the net wage gap as 
well as the impact of wage cost reduction measures in Belgium and the neighbouring countries. 
The expert panellists are required to report back before June 2013 and to include in the analysis a 
sectoral breakdown of Belgium's cost competitiveness position vis-à-vis neighbouring countries. 

14 

 
 
 
 
 
                                                 
Graph 15: Evolution of nominal ULCs  

Graph 16: Components of Belgian ULCs 

140

135

130

125

120

115

110

105

100

1996=100

Gap is widening 
since 2005

)

%

(

y
-
o
-
y
e
g
n
a
h
c

f
o
e
t
a
R

5

4

3

2

1

0

-1

-2

-3

-4

96

96

00

02

04

06

08

10

12f

14f

BE

EA-17

EU-3 (DE FR NL)

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Inflation (GDP deflator) Compensation per Employee
Real Compensation per Employee
Productivity Contribution (negative sign)
Nominal unit labour cost
ULC in Euro Area

Source: Commission services 

Source: Commission services 

As  the  three neighbouring countries absorb 60% of Belgian  exports,  Belgium's  euro 
area  real  effective  exchange  rate  (REER)  gives  a  more  complete  picture  of  cost 
competitiveness  (see  Graph  17).  Belgium’s  REER  appreciated  since  the  late  1990s, 
indicating that Belgium has indeed been losing cost competitiveness. As can be seen 
in the graphs below, between 2000 and 2008, losses in price competitiveness vis-à-vis 
the euro area contrasted most sharply with developments in Germany.  

This  assessment  is  also  reflected  in  the  development  of  relative  ULCs.  While  ULC 
increases  in  Belgium  since  1996  kept  pace  with  developments  in  France  and  the 
Netherlands  until  2009,  Germany  clearly  outperformed  all  three  Member  States 
throughout  the  entire  period.  As  of  2010  however,  Belgium  has  also  been  losing 
ground against FR and NL, a trend forecast to continue over the medium term horizon 
(see  Graph  18).  This  is  particularly  worrisome  as  it  is  important  for  a  small  open 
economy like Belgium to keep pace with evolutions in its main trading partners. This 
has  become  even  more  important  given  recent  developments  in  the  wider  European 
area.  Indeed,  several  other  important  trading  partners  such  as  IE,  IT  and  ES20  have 
been  pursuing  significant  labour  market  reforms,  resulting  in  a  fast  improvement  of 
their cost competitiveness as can clearly be seen for IE and ES in Graph 17.  

20   Together these three countries represent 9.2% of Belgium's export markets. 

15 

 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
Graph  17:  REER  vàv  35 
countries  

industrial 

Graph  18:  Relative  ULC  of  the  main 
trading partners vàv euro area 

150

140

130

120

110

100

90

BE
DE
IE
EL
ES
FR
IT
NL
AT
PT
FI

110

105

100

95

90

85

80

75

BE

DE

FR

NL

00 01 02 03 04 05 06 07 08 09 10 11 12f 13f 14f

00 01 02 03 04 05 06 07 08 09 10 11 12f 13f 14f

Source: Commission services 

Source: Commission services 

2.2.5.  The wage setting mechanism  

The  strong  rise  in  nominal  Belgian  wages  in  recent  years  is  linked  to  two 
characteristic  elements  of  the  Belgian  labour  market:  the  highly  centralized  wage 
bargaining system and the near-universal application of automatic wage indexation.21 

Collective  bargaining  takes  place  at  three  levels.  Every  two  years,  social  partner 
organisations  represented  in  the  National  Labour  Council  conclude  an  'inter-
professional  agreement'  at  national  level.  It  sets  a  framework  for  the  negotiations 
conducted  at  sectorial  and  firm-level  by  fixing  the  so-called  "wage  norm"  and  the 
minimum  wage.  At  sectorial  level,  collective  agreements  are  concluded  on  various 
topics  within  the  framework  of  the  inter-professional  agreement,  including  on 
industry job classification systems and salaries. These sectorial agreements determine 
which wage increases are implemented and in what manner as well as the method to 
adapt wages to inflation22.  Upon request by one or more of the signatory parties, they 
can  be  made  legally  binding  by  Royal  Decree  for  all  companies  and  employees 
represented  by  the  sector  committee.  However,  such  extensions  are  conditional  on 
approval  by  the  government.  Firm-level  agreements,  finally,  are  bound  by  the 
agreements  concluded  at  sector  level.  They  can  go  below  the  minima  defined  at 
industry  level  when  this  possibility  is  foreseen  in  the  relevant  sector  agreement  and 
when the conditions stipulated therein are met. 

21   On  the  basis  of  the  Wage  Dynamics  Survey  conducted  under  the  supervision  of  the  ECB,  the 
Belgian National Bank estimates that approximately 98.2% of all Belgian employees are covered 
by an automatic wage indexation system of some kind. This is slightly lower than in LU (100%) 
but higher than in most other countries in which price indexation of wage is widespread (CY, ES, 
MT, SI). 

22   A  wide  range  of  wage  indexation  systems  are  applied  at  sectorial  level,  applying  different 
periodicity  rules  or  modification  triggering  systems  and  different  methods  of  determining  the 
moving average of the index. They also differ in coverage with some agreements on indexation of 
wages only applying to specific categories of employees.  

16 

 
 
 
                                                 
The  so-called  'wage  norm'  was  introduced  by  the  1996  Law  on  competitiveness  to 
keep labour costs developments in line with these of the main trading partners (DE, 
FR, NL). The norm is fixed at the weighted average of the expected nominal average 
hourly  wage  increases  in  these  countries.  As  indicated,  this  system  has  allowed 
Belgium to keep ULC increases since 1996 in line with developments in France and 
the  Netherlands  until  2009  but  could  not  prevent  a  significant  loss  of  relative  cost 
competitiveness vis-à-vis Germany. What is more, since 2010 Belgium has been also 
losing  ground  against  FR  and  NL,  suggesting  that  a  reform  of  the  collective 
bargaining system is warranted. 

The method by which the wage norm is determined suffers from several drawbacks.  
Conceived  at  a  time  of  strong  overall  productivity  growth,  the  wage  norm  does  not 
take into account productivity growth differentials relative to reference countries. In 
recent years, productivity growth has been lower than in the reference countries while 
nominal wages have been increasing at a faster rate because the wage norm repeatedly 
overestimated  the  weighted  average  wage  growth  observed  in  the  main  trading 
partners.  Taken  together,  this  has  resulted  in  the  observed  losses  in  relative  cost-
competitiveness.   

Despite  sector  and  regional  productivity  differentials,  the  wage  norm  applies  to  all 
sectors  and  regions  in  Belgium.  This  reduces  the  margin  for  sectorial  and  regional 
wage differentiation based on productivity differentials. As a consequence, incentives 
for  labour  mobility  are  weakened  and  labour  market  mismatches  are  likely  to  arise 
contributing  to  the  large  and  widening  regional  differences  in  employment  and 
unemployment rates currently observed in Belgium. 

While  the  wage  norm  determines  the  maximum  increase  for  labour  costs,  automatic 
wage  indexation23  ensures  that  the  inflation  rate  sets  the  lower  boundary.  These 
indexation  mechanisms  help  safeguard  purchasing  power,  but  have  a  number  of 
disadvantages for Belgium's cost competitiveness. Most importantly, they narrow the 
margin for wage bargaining to the range between the inflation rate as measured by the 
health  index  and  the  wage  norm  and  they  embed  incurred  losses  in  cost 
competitiveness  by  complicating  the  adjustment  of  real  wages.  Also,  the  indexation 
system generates second-round inflationary pressures, explaining to some extent why 
inflation  has  in  general  been  higher  in  Belgium  than  in  neighbouring  countries  (cf. 
infra).  

Another important disadvantage of the indexation system is the difficulty to apply ex-
post corrections in cases where, as a result of forecast errors or unexpected inflation 
hikes,  Belgian  wage  increases  turn  out  to  exceed  those  observed  in  the  reference 
countries. According to the Law on Competitiveness, such ex-post adjustments cannot 
reduce  the  nominal  wage  increases  below  the  level  which  would  result  from  the 
application of the sectorial indexation mechanisms. Since the difference between the 
"wage  norm"  and  the  "health  index"  inflation  level  is  often  small,  in  practice,  this 
implies  that  there  is  only  little  room  for  effective  ex-post  corrections.  Moreover, 

23   

Indexation  schemes  are  agreed  upon  at  sectoral  level  and  are  legally  bound  to  refer  to  the  so-
called "health index". The latter was introduced by Royal Decree in 1994 in and differs from the 
HICP in that it excludes the price evolution of alcoholic beverages, tobacco products and motor 
fuels. 

17 

 
                                                 
efforts to reduce the growing wage gap were often offset by new overestimations of 
future wage developments in neighbouring countries. In this respect, the use of 'all-in 
clauses' could be useful: the determination of an overall margin that incorporates both 
inflationary  adjustment  and  real  wage  increases  so  that  unanticipated  inflationary 
pressure can be neutralized by limiting real wage increases.24 

The  wage  norm  was  designed  when  Belgium  was  still  realizing  high  productivity 
growth  and it did  have its merits  in the  past.  However,  as  trade  partners  have  made 
considerable  efforts  to  contain  wage  pressures  and  increase  productivity,  the  wage 
setting system has become a burden for the Belgian labour market. In this context, and 
given  the  fact  that  the  1996  Law  was  specifically  adopted  to  preserve  external 
competitiveness,  a  review  of  the  current  wage  setting  mechanism  seems  desirable.25 
Especially  as  it  is  questionable  whether  the  tangible  advantage  of  the  indexation 
mechanism  in  terms  of  purchasing  power  protection26  compensates  for  the  creeping 
disadvantages in terms of growth and employment over the longer term. In an effort 
to tackle some of the identified problems, the Belgian authorities recently announced 
actions (see Box 1). 

Box 1: Measures announced by authorities to improve cost competitiveness 

On 19 December 2012, when proposing its 2013 draft budget, the federal government 
declared its intention to Parliament to gradually eliminate the accumulated wage gap 
with  neighbouring  countries  over  the  next  five  years.  The  gap  was  estimated  to 
amount to 3.4% (excluding the impact of wage subsidies). To reduce the wage gap the 
government decided on the following measures27: 

A freeze in real wages throughout 2013 and 2014 is expected to reduce the gap by 0.9 
pp.  according  to  the  authorities  although  this  will  be  contingent  upon  wage 
developments in the neighbouring countries. While indexation mechanisms and age-
related increases will still be applied in full, no additional wage increases are allowed. 

In  addition,  the  wage  indexation  calculation  formula  has  been  revised  to  better  take 
into account actual consumption patterns (e.g. taking into account the market share of 
different  formulas  for  telecom  contracts,  using  scanning  data  from  supermarkets  for 
food  and  household  products,  factor  in  the  price  effect  of  sales  periods,  measuring 
fixed  energy  contracts  at  time  of  effective  use  instead  of  time  of  purchase).  The 

In fact, the real wage freeze for 2013-14 (see Box 1) boils down to an all-in agreement. 

24  
25   The National Bank of Belgium discussed different ways to enhance the flexibility of the system in 

an elaborate 2012 study. 

26   This  advantage  should  be  put  into  perspective:  the  experience  since  1996  of  neighbouring 
countries demonstrates that the absence of an automatic indexation does not imply an erosion of 
purchasing power over the medium term. Real wages did not fall in these countries between 1996 
and 2011 – on the contrary, they rose in all three countries and more in FR and NL than in BE –, 
while they were able to absorb sudden external shocks more easily through real wage adjustment.  
27   Actions  to  close  the  remaining  wage  gap  after  2014  will  have  to  be  decided  by  the  next 

government. General elections are scheduled for May 2014. 

18 

 
 
                                                 
Belgian  authorities  estimate  that  these  changes  in  measurement  could  reduce  labour 
costs by 0.4pp over 2013-14.28  

Also, the government has earmarked a budget of EUR 400 million/year for additional 
wage  cost  moderation  measures  in  the  form  of  targeted  social  security  reductions.  
The social partners were requested to identify the target groups the reductions should 
focus on in order to maximise the employment impact. The government expects these 
additional reductions to further reduce the relative wage gap by 0.3 pps. 

To reduce the risk of overestimating wage developments in neighbouring countries, a 
new method will be adopted to set the wage norm, which would not only be based on 
forward-looking  projections  but  also  on  actual  data  regarding  past  relative  inflation 
and wage developments. In addition, the mechanisms for ex-post corrections foreseen 
in  the  Law  of  1996  on  Competitiveness  would  be reinforced  and the  social  partners 
would  be  required  by  law  to  ensure  that  the  remaining  losses  in  relative  cost-
competitiveness are compensated for by additional measures after 2015. 

2.2.6.  Costs of intermediary inputs 

Wages represent an important part of total costs for companies. Cost competitiveness, 
however,  is  also  determined  by  other  factors.  For  exporting  companies  to  stay 
competitive, the price of intermediary inputs also plays an important role. As has been 
discussed already in the 2012 IDR, the general price level in Belgium is higher than in 
the neighbouring countries and the euro area. Given Belgium's product specialisation, 
producers often cannot pass on these higher input costs to the price of their products. 
Deteriorating  terms  of  trade  have  thus  affected  the  cost  competitiveness  of  Belgian 
companies.29  

An important share of the observed inflationary differential stems from higher energy 
prices. Belgian authorities have recently put in place policies to tackle the inflationary 
pressure  resulting  from  rising  energy  prices.  A  price  observatory  has  been  granted 
extra  powers  and  customer  mobility  has  been  fostered  by  enhancing  competition 
between  energy  providers.30  Following  a  temporary  price  freeze,  energy  prices  are 
again determined by market forces, though they will have to reflect relevant and real 
input costs – i.e. (international) market prices for gas and electricity – and can thus no 
longer be linked to the oil price evolution or incorporate other items such as personnel 
or  exploitation  costs.  Price  formulae  will  also  be  simplified  as  to  enhance 
transparency,  while  indexation  for  variable  contracts  is  limited  to  once  every 

28   While  the  actions  announced  should  reduce  inflationary  pressure  towards  levels  observed  in 
neighbouring countries and prevent the wage cost differential from rising, this does not seem to 
correspond to a gain in cost competitiveness as the differential remains. 

29   As  discussed  infra,  the  profitability  of  Belgian  companies  does  not  reflect  a  big  squeeze  in 
margins.  However,  as  indicated  by  the  Federal  Planning  Bureau  (2012),  product  subsidies  have 
prevented margins from falling. 

30   Through  the  introduction  of  on-line  price  comparability  tools  for  electricity  and  gas,  the 
elimination  of  switching  fees,  a  revision  of  the  social  tariff  system  and  a  freeze  of  distribution 
tariffs until 2014. More directly, the dominant player on the market, GDF Suez, has been forced 
to divest part of its production capacity (of amortised nuclear plants) and sell it on the market. 

19 

 
 
                                                 
quarter.31  Nevertheless,  for  some  energy  carriers  prices  remain  more  elevated  in 
Belgium than in many other EU countries, so that vigilance by the Belgian authorities 
remains  warranted.  While  progress  has  been  made  to  reduce  energy  prices, 
distribution  tariffs  and  transportation  charges  for  electricity  by  the  authorities 
constitute a large part of the final price. 

Nevertheless,  in  recent  years  Belgium  has  also  been  performing  worse  than  its 
neighbours and the euro area in terms of core inflation (i.e. excluding energy and food 
prices). Indeed, price levels for many other goods and services are higher in Belgium, 
as  are  price  increases.32  For  one  part  this  can  be  attributed  to  relatively  weak 
competitive pressures33,  especially  in  the  retail  sector,  due  to  competition-restricting 
regulation,  and  in  network  industries  (postal  services,  transportation  and  telecom, 
though recent measures seem to have enhanced competition in the latter), due to high 
entry-barriers  with  dominant  incumbent  firms,  and  a  weak  supervisory  framework. 
The scope for product market enhancement in Belgium seems to be still considerable 
in  other  words.  On  the  other  hand,  apart  from  the  high  weight  of  energy  prices  and 
weak  competition,  the  higher  inflationary  pressure  can  also  be  partly  attributed  to 
stronger second-round effects generated by automatic wage indexation mechanisms as 
well as by the widespread practice of indexing prices in the services sector. 

2.2.7.  Non-cost competitiveness 

There are a number of additional, non-cost factors that need to be taken into account 
when  analysing  the  reasons  behind  the  deterioration  of  the  current  account  and  the 
loss  of  market  shares.34  For  example,  technological  competitiveness  driven  by  the 
capacity  to  innovate  as  well  as  to  increase  efficiency  is  an  important  feature  behind 
overall export performance. 

The  technological  content  of  manufactured  products  reflects  a  country's  ability  to 
translate  innovation  into  exportable  products  with  a  higher  value  added.  Table  3 
indicates that while the share in manufactured exports of high-tech products increased 
strongly  between  2000  and  2011,  it  remains  below  levels  observed  in  FR  and  NL, 
though  close  to  Germany  and  the  euro  area.  Moreover,  Belgium's  technological 
configuration  has  converged  in  general  towards  that  of  the  euro  area  since  2000, 
implying an orientation towards medium-tech products. This is in line with the earlier 
finding  that  Belgium  exports  mainly  intermediate  products.  The  still  moderate 
proportion of high-tech products in total exports can be related to R&D intensity, as 
discussed in section 3.2., which looks into relevant aspects of innovation. 

31   According to the federal energy regulator CREG, a reason for rising prices could be found in the 
monthly  indexation  of  the  energy  component  of  electricity  and  gas  bills,  which  was based  on  a 
formula that took into account the price of gas but also that of coal and oil.   

32   See  e.g.  SPF  Economie  (2012),  'Niveau  de  prix  dans  les  supermarchés',  which  found  that  the 

average price differential with the neighbouring counties fluctuates between 7% and 12%. 

33   The  Belgian  authorities  have  announced  a  reform  of  the  Competition  Authority,  which  should 

help to address this issue. 

34   A joint report by different Belgian institutions deals with the issue of non-cost competitiveness: 

see NBB, CCE and FPB (2011). 

20 

 
  
 
                                                 
Table 3: Manufacturing exports by 
technological content (% of total) 

Graph 19: Break-down of high-tech 
exports 

BE 

EA17 

DE 

FR 

NL 

High tech 
Medium-high tech 
Medium-low tech 
Low tech 
High tech 
Medium-high tech 
Medium-low tech 
Low tech 
High tech 
Medium-high tech 
Medium-low tech 
Low tech 
High tech 
Medium-high tech 
Medium-low tech 
Low tech 
High tech 
Medium-high tech 
Medium-low tech 
Low tech 

2000 
14.1 
41.2 
19.9 
24.8 
22.5 
39.8 
16.8 
20.9 
20.5 
49.9 
15.3 
14.3 
31.5 
35.7 
14.7 
18.1 
34.3 
26.2 
18.2 
21.4 

2011 
18.0 
39.2 
24.2 
18.6 
19.6 
40.4 
21.5 
18.4 
18.8 
50.5 
17.4 
13.3 
26.2 
35.8 
18.0 
20.1 
27.3 
28.4 
25.1 
19.2 

100%

80%

60%

40%

20%

0%

2000

2011

2000

2011

Belgium

EU27

Armement
Chemistry
Scientific instruments
Electronics-telecommunications
Aerospace

Non-electrical machinery
Electrical machinery
Pharmacy
Computers-office machines

Source: Commission services 

Source: Commission services 

When  looking  into  the  composition  of  high-tech  exports  (see  Graph  19),  it  can  be 
observed that the main rise comes from a strong performance by the pharmaceutical 
sector  while  sectors  such  as  ICT,  telecom,  office  and  transport  equipment  have  lost 
importance. As highlighted by the Federal Planning Bureau (2012), the development 
of  ICT  activities  has  been  modest  in  Belgium  in  comparison  to  other  European 
countries.  

The  availability  of  appropriately  skilled  labour  in  sufficient  amounts  is  another 
important  factor  with  regard  to  external  performance.  While  Belgian  workers  are  in 
general highly skilled, in terms of volume there are clearly serious problems. Belgium 
suffers from a persistently low labour participation rate and the gap with neighbouring 
countries has widened further in recent years (see Graph 20). This reflects the fact that 
Belgium  has  a  high  share  of  long-term  unemployment  and  particularly  low 
participation rates among older  and  non-EU workers. The working life duration lies 
also  significantly  lower  in  Belgium  than  is  the  case  in  neighbouring  countries  (see 
Graph 21). 

Furthermore,  certain  sectors  suffer  from  structural  mismatches  between  labour 
demand and supply. This results in the coexistence of high unemployment and a high 
number of vacancies. Both the low participation rate and the structural mismatches in 
labour  allocation  can  be  explained  by  the  rigidities  that  characterise  the  Belgian 
labour  market.  The  wage  setting  mechanism  can  be  seen  as  the  main  driver  as  it 
introduces  a  high  degree  of  real  wage  rigidity  and  limits  the  margin  for  wage 
differentiation,  thereby  hampering  labour  mobility  towards  more  productive  and 
tradable sectors as discussed under section 2.2.5. Also financial disincentives to work 
stemming from the existing tax and benefit system, ineffective activation policies and 
the  continuation  of  early  retirement  schemes  contribute  to  Belgium's  labour  market 
problems.  

21 

 
 
 
  
 
 
 
Graph 20: Participation rate (%) 

Graph 21: Duration of working life (y) 

85.0%

80.0%

75.0%

70.0%

65.0%

00

02

EA17

04

BE

40

35

30

25

06

08

10

12f

14f

00

02

04

06

08

DE

FR

NL

EU27

BE

DE

FR

10

NL

Source: Commission services 

Source: Commission services 

2.2.8.  Conclusion on external imbalances 

Belgium  has  been  suffering  losses  in  export  market  shares  for  goods  over  the  past 
decade,  mirrored  in  a  dwindling  of  its  current  account  surplus.  This  trend  is 
unchanged  from  last  year's  IDR  and  reflects  an  erosion  of  Belgium's  external 
competitiveness.  Although  further  market  share  losses  might  be  contained  by  the 
geographical  reorientation  of  Belgian  exports,  Belgium's  growing  specialisation  in 
cost-sensitive  intermediary  goods  seems  problematic.  Goods  exports  could  benefit 
from action with respect to both cost and non-cost competitiveness factors, although it 
seems  to  be  more  urgent  to  act  on  the  cost  side  given  the  existing  wage  gap  with 
neighbouring countries and the recent actions undertaken by other European countries 
to improve their cost competitiveness. In this regard, an enhancement of the flexibility 
of  the  wage  setting  mechanism  would  allow  wages  to  progress  more  in  line  with 
productivity  developments,  absorb  external  shocks  and  could  introduce  more 
differentiation  among  sectors.  Additionally,  companies  would  benefit  from  a  better 
functioning of product markets.  

Regarding  non-cost  competitiveness,  a  push  towards  more  sophisticated  goods  and 
services  with  a  higher  value  added  would  shield  the  Belgian  industry  better  from 
intense  international  price  competition.  A  focused  and  concerted  effort  by  the 
authorities  on  items  such  as  R&D  investment  or  currently  underdeveloped  ICT 
activities would assist the Belgian economy in its reorientation and allow it to reap its 
comparative  advantages  more  aptly.  Further  considerations  on  the  strengthening  of 
the research and innovation policy will also be discussed in section 3.2. 

22 

 
 
 
2.3. 

Assessment of the existence of internal imbalances 

The overall indebtedness of the Belgian economy is substantially higher than that of 
the  euro  area  as  a  whole:  348%  of  GDP  in  2011,  excluding  the  financial  sector, 
against  253%  of  GDP  in  the  euro  area(see  Graph  22).  Both  the  indicator  for  (non-
consolidated)  private  debt  (237%  of  GDP  in  2011)  as  well  as  the  one  for  the 
consolidated  public  debt  (98%  of  GDP)  are  above  the  scoreboard  threshold.  Non-
financial corporations account for the bulk of the outstanding private debt (182.5% of 
GDP  compared  to  99.0%  in  the  euro  area),  while  household  debt  is  relatively 
contained (54.3% of GDP compared to 64.2% in the euro area). However, the private 
debt is only at 144% of GDP in consolidated terms, i.e. netting out lending between 
non-financial corporations, just below the 146% for the euro area (see Graph 23). The 
risks related to the indebtedness of the different sectors are analysed in this chapter.  

Graph  22:  Decomposition  of  public  and 
private debt (non-consolidated) 

Graph  23:  Decomposition  of  public  and 
private debt (consolidated) 

P
D
G

f
o
%

400

350

300

250

200

150

100

50

0

P
D
G

f
o
%

300

250

200

150

100

50

0

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12*

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Financial corporations
Household
Private sector EA17
Private sector

Government
Non financial corporations
MIP Threshold

Financial corporations
Household
Private sector EA17
Private sector

Government
Non financial corporations
MIP Threshold

Source: Commission services; note: * indicates estimated 
figure using quarterly data. 

Source: Commission services 

On the other hand, the economy is still in a net lending position despite the sizeable 
public sector borrowing in recent years (see Graph 24).  Net lending of  the  financial 
sector, the non-corporate sector and households has been positive in 2010-2011. 

Graph 24: Net lending/borrowing by sector 

P
D
G

f
o
%

8

6

4

2

0

-2

-4

-6

-8

99

00

01

02

03

04

05

06

07

08

09

10

11

Households
Financial corporations
Total Economy

General government
Non-Financial corporations

Source: Commission services 

23 

 
 
 
 
 
 
 
 
 
 
 
 
2.3.1.  Public sector indebtedness  

Belgian  public  debt  rose  from  97.8%  of  GDP  in  2011  to  99.8%  of  GDP  in  2012, 
which is substantially above the indicative scoreboard threshold of 60% of GDP. This 
makes  the  Belgian  public  debt  ratio  the  5th  highest  in  the  EU,  after  Greece,  Ireland, 
Portugal and Italy. According to the Commission services' Winter Forecast, the debt 
ratio is expected to increase slightly further before stabilizing in 2014. 

The Belgian public debt had declined from 134.2% of GDP in 1993 to 84.0% of GDP 
in 2007 due to primary surpluses and uninterrupted positive economic growth. From 
2008 onwards, the debt ratio started to increase again (+16% of GDP), although the 
rise was more limited than in many other EU member states where government debt 
rose by +28% on average between 2007 and 2012.  Rescue operations in the financial 
sector  under  the  form  of  capital  injections  (Dexia,  Fortis,  Ethias),  loans  (KBC35, 
Kaupthing)  and  the  nationalization  of  Belfius  amounted  to  almost  EUR  25  bn 
(excluding  interest  payments  and  guarantee  fees)  or  7%  of  GDP  at  the  time  of  the 
operations.  The  accumulation  of  deficits  due  to  the  impact  of  the  crisis  on  public 
finances and the financing of stimulus measures led to a debt increase by 9% of GDP, 
while other stock flow adjustments (e.g. participation in the EFSF) accounted for the 
remaining debt increase (+1% of GDP). 

Moreover,  Belgium  still  carries  substantial  contingent  liabilities  due  to  guarantees 
granted  in  the  context  of  the  financial  crisis,  although  the  maximum  amount  of 
guarantees  that  financial  institutions  can  use  have  recently  been  decreased.  Belgium 
and France agreed to lower the maximum amount of guarantees to Dexia from 2013 
onwards from EUR 90 bn to 85 bn. The Belgian share will be reduced from 60.5% to 
51.45%, lowering the maximum risk for Belgium from EUR 54.5 bn to 43.7 bn (12% 
of GDP). On the other hand, the guarantee fee to be paid by Dexia has been lowered 
from an annual rate of 90 basis points to 5 basis points of the outstanding guarantees. 
At  the  end  of  2012,  Belgium  and  BNP  Paribas  agreed  to  put  an  early  end  to  state 
guarantees of EUR 1.5 bn (0.4% of GDP) on an investment portfolio. The guarantee 
scheme granted to KBC has been reduced at the end of 2012 from EUR 15.1 bn to 9.4 
bn (2.5% of GDP). 

According  to  the  European  Commission's  Fiscal  Sustainability  Report  (EC,  2012), 
Belgium  does  not  appear  to  face  a  risk  of  fiscal  stress  in  the  short  term.  However, 
risks to fiscal sustainability are high from a medium- to long-term perspective.  This 
reflects  the  budgetary  impact  of  the  cost  of  ageing,  which  derives  from  a  rapidly 
ageing  population  and  a  high  level  of  expenditure  on  social  transfers.  Under  a  no-
policy-change assumption, the public debt would increase to 106.7% of GDP by 2020 
and to 147.4% of GDP by 2030.  

In addition, the recent increase in the debt burden did not go hand in hand with a high 
level  of  public  investment  or  expenditure  on  growth-enhancing  policies.  On  the 

35   KBC has received total state support under the form of a loan for an amount of EUR 7bn, spread 
evenly over the federal state and the Flemish Region. KBC reimbursed EUR 500 mn in January 
2012  and  EUR  3  bn  at  the  end  of  2012.  KBC  intends  to  reimburse  also  EUR  1.17  bn  to  the 
Flemish Region in the first half of 2013 and EUR 4.67 bn by the end of 2013. 

24 

 
                                                 
contrary, gross fixed capital formation fluctuated around 1.7% of GDP between 2008 
and 2012, while it accounted for around 2.5% of GDP in the euro area as a whole.  

Finally, the fiscal space to service a higher debt or to reduce the debt burden is very 
limited.  Belgium  belongs  to  the  group  of  EU  countries  with  the  highest  tax  levels, 
alongside  the  Nordic  countries,  France  and  Austria.  At  44.1%  of  GDP,  the  Belgian 
total tax-to-GDP ratio was the third highest in the EU in 2011 (EU average 38.8%), 
while taxes on labour accounted for 24.0% in 2011 (EU average: 19.7%)36. The high 
burden  on  labour  mirrors  primarily  high  taxation  of  personal  income.  The  2013  top 
personal  income  tax  rate  of  53.7%  (EU:  38.3%)  is  the  third  highest  in  the  EU.  The 
2011 tax wedge on labour income is among the highest in the EU, at 49.7% for low-
wage earners and at 48.2% for average-wage earners in a two-person household. The 
implicit tax rate on labour employed is the highest in the EU at 42.8% in 2011. As a 
consequence, marginal effective tax rates on labour are in general significantly above 
the EU average while the unemployment trap is very high. 

The  high  debt  level  makes  Belgium  particularly  vulnerable  to  tensions  in  financial 
markets.37 This has been illustrated by the sudden rise in risk premia that occurred at 
the end of November 2011. The spread on Belgian 10-year bonds (with respect to the 
German  Bund)  rose  to  more  than  360  basis  points,  while,  at  the  same  moment,  the 
spreads  on  French  and  Dutch  bonds  reached  about  190  and  60  basis  points, 
respectively. Since November 2011, the spread decreased steadily, but debt financing 
costs remain higher for Belgium than for France or the Netherlands (see Graph 25).  

Graph 25: Evolution of government bond spreads (2007-13) 

6.5

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

i

s
v
-
à
-
s
v

i

)
s
r
a
e
y
0
1
(

s
d
n
u
b
n
a
m
r
e
G

s
d
n
o
b

t
n
e
m
n
r
e
v
o
g
m
r
e
t
-
g
n
o

l

s
d
a
e
r
p
S

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

FR

BE

NL

IT

ES

Source: Commission services 

36   European  Commission,  'Taxation  trends  in  the  European  Union  –  2013  edition',  forthcoming. 
(http://ec.europa.eu/taxation_customs/taxation/gen_info/economic_analysis/tax_structures/index_
en.htm) 

37   According to a VAR analysis by the IMF, most of the variation in the Belgian government bond 
spread appears to be associated with external factors (IMF, 2012). However, two distinct periods 
in time have been identified in which domestic factors played temporarily a more important role. 
In late 2008 and early 2009, domestic factors are estimated to have accounted for an average of 
15%  of  the  increase  in  the  spread  reflecting  the  concerns  around  the  banking  sector  and  the 
needed capital injections by the state, which was already under strain due to the high debt level. 
From the end of 2010 onwards, the political deadlock and renewed concerns around Dexia pushed 
the spread up again, which dropped only after the announcement of a 2012 budget agreement at 
the end of November 2011. 

25 

 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
The  weighted  average  term  to  maturity  of  central  government  debt  is  around  6.8 
years,  which  is  relatively  high  compared  to  other  euro  area  countries.  Only  26%  of 
outstanding debt is maturing before the end of 2014, which might temper somewhat 
the adverse effects of temporary rises in interest rates (see Graph 26). 

Graph 26: Maturity profile of Belgian public debt 

% of total debt

20

18

16

14

12

10

8

6

4

2

0

2013

2015

2017

2019

2021

2023

2025

2027

2029

>2030

Source: Commission services, January 2013 

Due to the high public debt level, a sustained period of high interest rates could lead 
to  an  upward  debt  spiral.  Increased  interest  payments  can  in  turn  lead  to  a  further 
increase  in  the  debt  level  (snowball-effect),  as  witnessed  in  the  1980s,  making  the 
debt developments unsustainable. Given the current financing and re-financing needs 
of the Belgian State, an increase in the average risk premium by 1 pp. during one year 
may cost the Belgian state EUR 700 mn or around 0.2% of GDP a year. A sustained 
increase in the risk premium by 1 pp. would lead to an additional increase in the debt 
level by 11 pps. by 2030 (see Graph 27). 

Graph 27: Medium term debt projections and interest rate sensitivity 

% of GDP

180

160

140

120

100

80

60

40

20

0

90

92

94

96

98

00

02

04

06

08

10

12

14

16

18

20

22

24

26

28

30

No-policy change scenario
Shock -1p.p. in the short-term/long-term interest rate on maturing and new debt from 2015
Shock +1p.p. in the short-term/long-term interest rate on maturing and new debt from 2015
Consolidation scenario (0.5% per year on SB) in order to achieve MTO
Consolidation scenario (1% per year on SB) in order to achieve MTO
Constant average 1998-2007 interest (on new & maturing debt)/growth rates differential

Source: Fiscal Sustainability Report 2012 

26 

 
 
 
 
 
 
 
An increased risk premium would not only endanger the sustainability of public debt, 
but could also have spill-over effects to the financial sector. It may negatively affect 
the  asset  value  of  bond  holdings  by  Belgian  financial  institutions,  which  currently 
hold  around  EUR  70  bn  of  Belgian  bonds.  At  the  end  of  the  third  quarter  of  2012, 
around 56 % of Belgian government bonds were held by Belgian residents (Belgian 
Debt  Agency,  2012),  mainly  by  financial  corporations  and  pension  funds.  As 
mentioned above, the interlinkages between public debt and financial institutions also 
play in the other direction: pressure on financial institutions could fuel doubts about 
the  creditworthiness  of  the  sovereign  due  to  guarantees  and  loans  provided  to 
financial institutions or due to market expectations about new rescue operations into 
the financial system. 

Higher risk premia may not only affect the sustainability of public finances, but could 
also impact growth and competitiveness. A high interest rate for public debt may pass 
through  to  the  private  sector,  driving  up  financing  costs  for  domestic  financial 
institutions and ultimately of non-financial companies and households, which would 
have a negative impact on investment and R&D expenditure. An additional channel is 
the fact that the perceived creditworthiness of private borrowers is influenced by the 
risks associated with the sovereign creditor. 

Variable  rates  of  mortgages  are  legally  linked  to  interest  rates  on  Belgian  treasury 
certificates  and  3  to  5  year  bonds  (although  with  a  legal  cap)  so  that  an  increase  in 
bond rates leads to a loss in disposable income for house owners with a floating rate 
loan. An increase in non-performing loans would in turn have second-round effects on 
the  banking  sector.  Nowadays,  house  buyers  choose  more  often  mortgage  contracts 
with  an  interest  rate  which  is  fixed  for  the  full  term  of  the  loan  (over  80%  of  new 
mortgage  loans  in  2012).  However,  the  level  of  the  fixed  rates  financial  institutions 
offer to new customers tends to follow bond rates. Hence, a shock in lending costs for 
the Belgian sovereign can filter through to the housing market, and thus affect activity 
in the construction sector. 

The government's high debt service poses a drag on growth since it drives out more 
productive  government  expenditure  and  increases  the  (expected)  tax  burden,  which 
weighs  on  labour  and  capital  costs.  Recent  empirical  studies  on  the  subject  confirm 
the existence of an inverse relationship between the level of public debt and economic 
growth.38  In  addition,  interest  payments  to  non-residents  deteriorate  the  balance  of 
primary  income  and  thus  the  current  account  balance.  Conversely,  the  loss  of 
competitiveness discussed in the previous section renders high debt levels even more 
problematic as it weighs on growth prospects, which in turn makes it more difficult to 
put  the  debt  ratio  on  a  downward  path.  Lastly,  the  high  debt  burden  reduces  the 
margin  for  Belgium  to  tackle  future  shocks  and  loosen  fiscal  policy  in  times  of 
recession. As such, it affects the stability of the economy as a whole.  

38   For instance, Reinhart and Rogoff (2010) find a 2.6 pps. difference in median real GDP growth 
between  advanced  countries  with  public  debt  below  30%  and  above  90%  of  GDP.  Kumar  and 
Woo  (2010)  estimate  that  for  advanced  economies  a  10  pps  increase  in  the  initial  debt-to-GDP 
ratio is associated with a slowdown in annual real per capita GDP growth of around 0.15 pp., with 
some evidence of nonlinearity implying larger negative effects with initial debt above 90%. 

27 

 
 
                                                 
2.3.2.  Non-financial corporations indebtedness  

As  already  observed  in  last  year's  In-depth  Review  on  Belgium,  the  scoreboard 
indicator of the private sector debt39 level (237% of GDP in 2011) is well above the 
scoreboard  threshold  of  160%.  It  has  increased  steadily  since  2006.  Non-financial 
corporations account for the bulk of this outstanding debt: 182.5% of GDP compared 
to 99.0% on average in the euro area. 

The consolidated debt level of non-financial corporations – i.e. excluding intra-sector 
liabilities,  thus  eliminating  the  credit  transactions  between  different  companies  or 
subsidiaries of companies inside Belgium40 – is significantly lower. It stands only at 
89.4% of GDP, against 81.4% of GDP in the euro area. Belgium is the country with 
the most prominent difference41 between non-consolidated and consolidated data, i.e. 
93 pps. in 2011.  

The  sizeable  difference  between  non-consolidated  and  consolidated  data  can  be 
explained  by  the  large  credit  provision  between  Belgian  companies,  mainly  intra-
group loans42. This in turn reflects the wide use of financial centres inside company 
groups,  which  for  accounting  practices  form  part  of  the  non-financial  corporations 
sector. The origins of the large presence of such 'internal banks' in Belgium lies in the 
previously  advantageous  tax  regime  for  the  coordination  centres  (coordinating  the 
financial and fiscal activities of multinationals) and non-financial holdings (operating 
as intermediary in the financing of companies). Since 2006, this tax regime has been 
substituted  by  an  allowance  for  corporate  equity  (ACE).  This  system  enables  all 
companies  subject  to  Belgian  corporate  income  tax  to  deduct  from  their  taxable 
income a fictitious interest (3% for tax year 2013, 3.5% for SMEs) calculated on the 
basis of their shareholder’s equity (net assets). The main purpose of this measure is to 
reduce  the  tax  discrimination  between  debt  financing  and  equity  financing,  and 
safeguarding  the  attractiveness  of  Belgium  for  multinationals  after  the  gradual 
phasing out of the coordination centre regime. 

The  ACE  constitutes  an  incentive  for  a  triangular  construction,  where  a  subsidiary 
provides  capital  to  a  financing  vehicle  of  the  same  group,  which  in  turn  lends  this 
capital  to  the  same  or  another  subsidiary.43    The  capital  increase  in  the  financing 
centre  allows  for  a  more  extensive  use  of  the  notional  interest  deduction  by  the 

40  

41  

39   Private  sector  is  defined  as  non-financial  corporations,  households,  and  non-profit  institutions 
serving  households.  The  nonfinancial  corporations  sector  includes  both  private  and  public 
corporations. 
It  should  be  noted  that  cross-border  intra-group  and  intra-sector  lending  is  still  included  in  the 
consolidated data. 
In  Belgium,  detailed  statistical  sources  on  an  unconsolidated  basis  are  used  to  compile  the 
financial accounts. Differences in coverage with other Member States may blur the international 
comparison. 
In  the  financial  accounts,  it  is  not  possible  to  make  a  distinction  between  loans  to  related 
companies  and  loans  between  unrelated  companies.  However,  data  from  the  Central  Balance 
Sheet Office gives an indication. According to the balance sheets of large companies, the amount 
of loans between related companies (EUR 465 bn in 2010) was around the same size as the sum 
of loans between companies (EUR 352 bn) and cross border non-bank loans (EUR 104 bn) in the 
financial  accounts.  This  confirms  that  the  high  non-consolidated  figure  is  largely  explained  by 
intra-group loans. 

42  

43   The Belgian ACE does not contain anti-abuse rules to avoid such tax planning scheme. 

28 

 
                                                 
financing  vehicle  and  thus  a  reduction  in  income  taxation,  while  the  interest  on  the 
internal  loan  paid  by  the  subsidiary  to  the  financing  centre  also  reduces  the  taxable 
income of the subsidiary. Such an intra-group construction leads to an overall increase 
in  the  outstanding  corporate  debt  in  non-consolidated  terms,  but  does  not  affect  the 
consolidated  debt  level  of  the  corporation.  The  above-described  intra-group 
operations  for  tax  optimization  purposes  do  not  constitute  a  risk  in  terms  of  macro-
economic  stability  even  under  stressed  conditions.  Their  only  cost  is  that  these 
operations blur the statistics and reduce tax revenues. A change in the treatment could 
possibly  induce  an  internal  reorganization  of  the  financial  architecture  within  each 
group,  but  should  not  affect  the  real  economy,  apart  from  making  Belgium  a  less 
attractive  location  for  multinationals  to  invest.  On  the  other  hand,  loans  between 
unrelated companies entail risks related to insolvency which could lead to contagion 
under stressed conditions. 

Various  indicators  of  Belgian  corporations'  financial  health  do  not  point  to  any 
significant sustainability risks. As can be seen in Graph 28, the increase in the debt-to-
GDP ratio is not mirrored by an increase in debt-to-asset or debt-to-equity ratios. On 
the contrary, these indicators point to a clearly declining trend in the leverage of non-
financial corporations, and the indicators for Belgium are currently among the lowest 
in the EU. This could be due to the presence of the ACE system which seems to have 
decreased  the  leverage  of  corporations.44    Also,  as  can  be  seen  in  Graph  29,  the 
increased  indebtedness  of  non-financial  corporations  was  not  accompanied  by  a 
decline in profitability. 

Graph  28:  Leverage  of  non-financial 
corporations 

Graph  29:  Profit  margins  of  non-financial 
corporations 

200

180

160

140

120

100

80

60

40

20

0

)

%

,
s
t
e
s
s
a

l

a
t
o
t

&
P
D
G

,
y
t
i
u
q
e
.
s
v
(

s
o
i
t
a
r

t
b
e
D

Value added 
(%)

Value added 
(%)

60

50

40

30

20

10

0

30

25

20

15

10

5

0

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12*

Debt / GDP

Debt / assets

Debt / equity

Debt / assets, consolidated

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Gross entrepreneurial income
Gross operating surplus
Retained earnings (right axis)
Retained earnings, EA17 (right axis)

Source: Commission services; note: * indicates 
estimated figure using quarterly data. 

Source: Commission services 

The  capacity  to  repay  should  also  be  taken  into  account  when  assessing  the 
sustainability of debt levels. Gross operating surplus might provide a signalling of a 
firm's capacity to generate income and thus service its debt. From Graph 30 it can be 

44      See for example Princen, S. (2012) who finds that the Belgian ACE decreased leverage of Belgian 

non-financial corporations by between 2 and 7%. 

29 

 
 
 
 
 
 
 
 
 
 
 
                                                 
seen that Belgium is following the increasing trend of the euro area as a whole, with 
the  exception  of  2008  and  2011  when  the  relative  debt  has  been  increasing  more 
rapidly  for  Belgian  companies.  Again,  this  could  possibly  be  explained  by  the 
establishment  of  financial  centres  of  multinationals attracted  by the notional interest 
system. 

Graph  30:  Consolidated  debt  of  non-financial 
corporations as % of gross operating surplus 

800%

700%

600%

500%

400%

300%

200%

100%

0%

00

01

02

03

04

05

06

07

08

09

10

11

Euro area (17 countries)

Belgium

Source: Commission services 

To  sum  up,  despite  the  high  levels  of  indebtedness  of  Belgian  firms  in  non-
consolidated  terms,  several  factors  call  for  a  qualification  of  potential  deleveraging 
pressures.  Due  to  the  high  share  of  intra-group  loans,  the  level  is  much  lower  in 
consolidated  terms.  Moreover,  debt-to-asset  and  debt-to-equity  ratios  have  been 
gradually declining.  

2.3.3.  Financial position of households 

Household  indebtedness  is  relatively  low  in  Belgium  (54.3%  of  GDP,  compared  to 
64.2% on average in the euro area) but has been increasing steadily since 2001 (see 
Graph 31). As can be observed from the graph, the increase in the debt/asset ratio is 
far less pronounced, given that the accumulation of debt has been accompanied by an 
accumulation  of  assets.  Indeed,  more  than  80%  of  the  household  indebtedness  is 
mortgage related, and hence the rising indebtedness can be explained by rising house 
prices  (see  section  3.3).  The  decrease  in  interest  rates  could  have  been  a  driver  for 
increased  indebtedness.  Also  the  more  favourable  tax  treatment  of  mortgage  loans 
since 2005 can explain part of the recent increase. Indeed, while household debt levels 
are increasing, the interest burden on households did not seem to have increased (see 
Graph 32). 

30 

 
 
 
 
 
 
Graph 31: Leverage of households 

Graph 32: Interest burden on households 

)

%

,
s
t
e
s
s
a
&
P
D
G

.
s
v
(

s
o
i
t
a
r

t
b
e
D

60

50

40

30

20

10

0

100

90

80

70

60

50

40

30

20

10

0

)

%

,
I

D
G

.
s
v
(

o
i
t
a
r

t
b
e
D

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Debt / GDP, Households
Debt / assets, Households
Debt / gross disposable income, Households (right axis)

Source: Commission services 

Source: Commission services 

The net financial assets of Belgian households amount to about 200% of GDP, which 
is  much  higher  than  the  average  of  the  euro  area  (see  Table  4).  Looking  at  the 
evolution  in  recent  years,  a  big  impact  of  the  fall  in  equity  prices  in  2008  can  be 
observed (see Graph 33). Net financial wealth dropped from EUR 706 bn mid-2007 to 
EUR  616  bn  by  end-2008.  Afterwards,  net  financial  wealth  of  individuals  started 
increasing again in nominal terms, to EUR 770 bn in mid-2012,45 but the increase was 
insufficient to compensate for inflation.   

Table 4: Households' Net Financial Assets (2007-2011) 

2007 
217.2 
134.9 

Belgium 
Euro area 
Source: Commission services 

Net Financial Assets (% of Gross Domestic Product) 

2008 
188.1 
119.7 

2009 
208.6 
131.3 

2010 
200.4 
132.3 

2011 
199.3 
127.6 

Graph 33: Households balance sheet (BE) 

Graph 34: Households balance sheet (EA) 

% of GDP

250

200

150

100

50

0

-50

-100

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

A, securities OTS (F3)
A, loans (F4)
A, F7 (other accounts)
L, other accounts (F7)
L, loans (F4)
A, currency and deposits (F2)

A, shares and other equity (F5)
A, insurance & TR (F6)
L, insurance & TR (F6)
L, securities OTS (F3)
L, shares and other equity (F5)
Net financial assets

Source: Commission services 

Source: Commission services 

45   See http://www.nbb.be/belgostat/PresentationLinker?TableId=347000044&Lang=E. 

31 

 
 
 
 
 
 
 
 
 
 
 
 
 
  
  
 
 
 
                                                 
The  large  accumulation  of  net  financial  assets  can  be  attributed  to  the  high  savings 
rate of Belgian households. Although the rate dropped considerably after the outbreak 
of  the  crisis,  it  is  still  among  the  highest  in  Europe  (see  Table  5).  Furthermore,  the 
deterioration in net financial wealth was accompanied by an increase in the value of 
non-financial assets (see section 3.3). Also, the share of risky assets (shares and other 
equity) in the portfolio of households is declining (see Graph 35). 

Table 5: Household saving rate (2010-2014) 

Household saving rate (% of Gross disposable income) 

2011 
14.4 
Belgium 
Euro area 
13.5 
Source: Commission services' 2013 Winter Forecast (Euro area excluding EL, LU, MT) 

2012f 
14.7 
13.3 

2013f 
15.5 
13.3 

2010 
15.4 
14.1 

2014f 
15.6 
13.3 

Graph 35: Balance Sheet Repair, Households 

Source: Commission services 

While the financial situation of households is reassuring, some risks associated with 
the housing market deserve further consideration. A growth in outstanding mortgages 
could  be  observed  during  the  years  prior  to  the  crisis.  The  interest  rate  structure, 
dominated  by  fixed  interest  rates  ensures  some  protection  to  households  to  interest 
rate hikes risks.  The housing market developments will be analysed more in-depth in 
section 3.3. 

2.3.4.  The financial sector  

Both  the  macro-economic  situation  as  well  the  state  of  public  finances  are  heavily 
interlinked with developments in the financial sector. 

Total  financial  assets46  of  the  Belgian  financial  sector  are  estimated  to  amount  to 
483%  of  GDP  in  2012  (see  Graph  36).  Compared  to  other  euro  area  countries,  the 
Belgian financial sector is somewhat ahead in the deleveraging (NBB, 2012), because 
disinvestment  was  often  a  condition  for  receiving  state  aid.  The  adjustment  of  the 

46   Excluding Monetary gold and SDR (F1) 

32 

 
 
  
  
 
 
 
 
                                                 
Belgian banking sector is taking place through a divestment in foreign markets and a 
renewed  focus  on  the  domestic  market.  The  sector  is  highly  concentrated,  although 
less  than  before  the  financial  crisis,  with  the  four  largest  banks  holding  more  than 
84.4% of total bank assets in 2011. 

Graph 36: Balance Sheet Financial Corporations Belgium (left) and euro area (right) 

P
D
G

f
o
%

,
s
e
i
t
i
l
i

b
a

i
l

d
n
a
s
t
e
s
s
A

800

600

400

200

0

-200

-400

-600

-800

15

10

5

0

-5

-10

-15

-20

-25

P
D
G

f
o
%

,
s
t
e
s
s
a

l

i

a
c
n
a
n
i
f

t
e
N

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12*

A, securities OTS (F3)
A, loans (F4)
A, shares and other equity (F5)
A, insurance & TR (F6)
A, F7 (other accounts)
A, currency and deposits (F2)
Net financial assets (right axis)

L, securities OTS (F3)
L, loans (F4)
L, shares and other equity (F5)
L, insurance & TR (F6)
L, other accounts (F7)
L, currency and deposits (F2)

Source: Commission services 

% of GDP

800

600

400

200

0

-200

-400

-600

-800

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

A, securities OTS (F3)
A, loans (F4)

A, F7 (other accounts)
L, other accounts (F7)
L, loans (F4)
A, currency and deposits (F2)
Net financial assets, BF90

A, shares and other equity (F5)
A, insurance & TR (F6)

L, insurance & TR (F6)
L, securities OTS (F3)
L, shares and other equity (F5)
L, currency and deposits (F2)

Over the last year, the Belgian banking sector continued to reduce its exposure to the 
public  sector  of  European  peripheral  countries.47  On  the  other  hand,  Belgian  banks 
further increased their holdings of Belgian government bonds, from around EUR 61 
bn  at  the  end  of  2010  to  EUR  69  bn  at  the  end  of  September  2012.  These  holdings 
now represent over 44% of sovereign debt exposure. The geographical re-orientation 
can  also  be  observed  when  looking  at  the  breakdown  of  other  assets.  Not  only  the 
exposure to foreign government bonds decreased, but also the exposure to the foreign 
private sector continues its strong decline since 2007, from EUR 322 bn at the end of 
2011 to EUR 307 bn at the end of September 2012. On the other hand, despite the on-
going  deleveraging,  outstanding  loans  to  Belgian  counterparts  remained  relatively 
stable  at  around  EUR  365  bn  between  the  end  of  2011  and  September  2012.  These 
figures  illustrate  the  downsizing  of  Belgian  banks  to  their  core  market,  where  they 
continue to play their intermediary role in the Belgian economy. As discussed in the 
previous section, loans to households have slowed down during the crisis rather than 
fallen, but credit standards for mortgages are tightening. Corporate loan growth was 
almost  flat  between  November  2011  and  November  2012,  due  to  both  demand  and 
supply factors. 

At the end of September 2012, the rate of non-performing loans had increased to 3.6% 
of total loans from 3.3% in 2011 (NBB). Before the financial crisis, it stood only at 
1.5%.  The  increase  stems  predominantly  from  the  corporate  sector,  but  also  non-
performing retail loans (households and some SMEs) are steadily rising. The impaired 

47   Public exposure to these countries decreased from EUR 16 bn or 11% of total public exposure at 
the end of 2011 to EUR 10 bn (6.6% of total public exposure) at the end of the third quarter of 
2012, with Italian government bonds accounting for the bulk of this figure (EUR 6.8 bn). 

33 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
claims are mainly of foreign origin, but recently the rate of domestic non-performing 
loans also started to increase. With a rather subdued growth outlook in Belgium and 
in the euro-area, the rate of non-performing loans may further rise which weighs on 
the asset quality of Belgian banks. 

Risk-weighted assets stabilized in 2011 and declined in the first 9 months of 2012. As 
a consequence, solvency ratios improved (NBB). 

On  the  liabilities  side,  a  strong  increase  in  the  outstanding  amount  of  customer 
deposits was observed during the first nine months of 2012, from EUR 500 bn to EUR 
525 bn. Other liabilities are steadily being reduced48 as part of the strategy to shrink 
balance sheets and lower the reliance on the wholesale market. As a consequence, the 
liquidity position and funding of Belgian banks has improved over the last year. The 
regulatory liquidity stress test continued to display an improvement while the loan-to-
deposit ratio is stable at around 90%.  

Profitability  of  Belgian  banks  remains  weak,  although  it  improved  in  2012  due  to  a 
higher net interest income and lower impairments.  

Overall, risks for the Belgian financial sector seem to have fallen substantially since 
last  year,  although  the  adjustment  is  still  on-going.  A  particular  case  was  Dexia, 
which  was  recapitalized  by  the  Belgian  and  French  State  in  order  to  remedy  a 
negative  net  asset  position  and  to  allow  the  pursuit  of  the  orderly  resolution  of  the 
Group. The increased orientation of the banking sector towards the home market, also 
observed  in  other  euro  area  countries,  reinforces  the  interdependence  and  risks  for 
spill-overs between the real economy, the public sector and the financial sector. 

3. 

IN-DEPTH ANALYSIS OF SELECTED TOPICS  

3.1. 

The role of services in the Belgian current account balance49 

3.1.1.  Evolution and orientation of trade in services 

As highlighted above, Belgium has been realising a growing external service surplus. 
According to the EC's Surplus Report (2012) this surplus reflects the shift towards an 
outward-looking,  services-oriented  economy  and  has,  to  some  extent,  offset  the 
declining trend in the balance of goods. This warrants a closer investigation into the 
service balance and its composition.  

Both  in  terms  of  value  added  (77.5%  vs.  73%  for  the  EU27)  and  in  terms  of 
employment  (75.3%  vs.  69.1%)  Belgium  is  more  service-oriented  than  the  average 
EU  country.  Nevertheless,  when  it  comes  to  international  trade,  services  are  still 
dominated by goods: 22% of total exports are services, up from 20% in 2002. For the 

48   Except central bank financing following the ECB's Long Term Refinancing Operation. 
49   This analysis of the trade balance in services does not cover all services in the economy but the 
tradable  services.  A  tradable  service  can  be  sold  in  another  location  distant  from  where  it  was 
produced, as opposed to a non-tradable service that cannot be sold in another location.  

34 

 
 
                                                 
EU27  this  ratio  went  from  23%  in  2002  to  24%  in  2011,  though  with  important 
differences among Member States. In general, their intrinsic intangible nature makes 
services  more  vulnerable  to  trade  constraints  than  goods.  As  it  is  often  hard  to 
distinguish between the production, the delivery and the consumption of a service, the 
proximity  of  supplier  and  customer  may  be  required  so  that  many  producers  offer 
their  products  by  the  establishment  of  foreign  affiliates  instead  of  cross-border 
transactions.  This  FDI  channel  –  not  incorporated  in  trade  statistics  –  is  often 
considered  to  be  at  least  as  important  in  value  terms  as  ‘conventional’  international 
trade  in  services.  In  this  regard,  it  should  be  noted  that  between  2008  and  2011 
services represented on average 84% of the Belgian stock of outward FDI and 82% of 
the inward stock according to NBB data.  

The National Bank of Belgium provides detailed statistics for the service balance as 
of 1995, the last year it turned (slightly) negative. Ever since, the surplus has steadily 
expanded  as  seen  in  Graph  38,  reaching  close  to  2%  of  GDP  in  2009-10,  before 
falling back to 0.8% in 2011 as exports stagnated and imports (mainly travel) rose by 
5%, marking the first time since 2003 that the surplus fell below 1%.50  

Graph 37: Service balance 

R
U
E
n
b

80000

60000

40000

20000

0

-20000

-40000

-60000

-80000

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

credit

debit

net (RHS)

net (goods balance; RHS)

Source: NBB 

6.0%

4.0%

2.0%

0.0%

-2.0%

-4.0%

-6.0%

P
D
G
%

The growing importance of Belgium's service exports is also reflected in their export 
market share. While the downward trend for goods applied also to services until 2006, 
between  2007  and  2009  this  loss  was  more  than  offset,  even  though  in  recent  years 
services  have  again  lost  some  ground  as  can  be  seen  in  Graph  38.51  Over  a  longer 
horizon, Belgium's share in world service exports (in current prices) remained broadly 
stable between 1995 and 2011  at about 2.25% as export growth has kept  track  with 
world growth. Though Belgium did not manage to increase its market share, over the 
same period many other European countries saw their market shares fall (see Graph 

50   Based on data for the first three quarters of 2012 the surplus reaches 0.9% of GDP, with the 12 

month moving average for net services increasing since Q2-2012. 

51   As  indicated  by  Duprez  (2011),  it  should  be  noted  that  the  increase  in  export  market  share  for 
services  in  2007  coincides  with  the  introduction  of  a  new  data  collection  method  for  the  BoP. 
Nevertheless,  Belgium  increased  its  market  share  further  in  2008-09  under  the  new  method,  so 
that these gains reflect an economic reality. 

35 

 
 
 
 
 
                                                 
39). While the Belgian economy represents a little less than 3% of the EU GDP, its 
share in the EU's service exports towards the rest of the world reaches 5%, a level it 
has managed to retain over the past decade following a decrease during the 90s and 
despite the EU as a whole losing market share.  

Graph  37:  Goods  and  services  exports  as 
percentage of world trade (BoP data) 

Graph  39:  Share  of  services  in  world 
trade in services 

e
d
a
r
t
d
l
r
o
W

f
o
%

2.9

2.7

2.5

2.3

2.1

1.9

1.7

1.5

i

s
e
c
v
r
e
s

n

i

e
d
a
r
t

d
l
r
o
w

f
o
%

10

9

8

7

6

5

4

3

2

1

0

02

03

04

05

06

07

08

09

10

11

Goods

Services

Goods and Services

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

BE

DE

FR

IT

NL

UK

Source: Commission services 

Source: UNCTAD  

Table 6: Service exports by destination 

Table 7: Destination of intra-EU27 exports 

EU27

Belgium

2004-07

2008-11

2004-07

2008-11

EU27

N. America

Asia

S. America

Arab Gulf

Africa

CIS

58.0%

13.5%

9.9%

4.8%

1.6%

3.0%

2.3%

56.3%

11.9%

10.8%

6.0%

1.9%

4.7%

3.5%

other

4.9%
Source: Commission services 

6.9%

72.8%

12.3%

67.9%

10.5%

4.7%

1.6%

3.6%

1.4%

0.4%

3.2%

7.2%

2.4%

3.7%

4.0%

1.7%

2.6%

2005

2008

2011

1

2

3

4

5

UK

NL

FR

DE

LU

23%

22%

18%

14%

7%

85%

NL

FR

UK

DE

LU

21%

21%

15%

14%

6%

77%

FR

NL

UK

DE

LU

22% 1

20% 2

15% 3

14% 4

6% 5

76%

Source: Commission services 

As  shown  in  Table  6,  other  EU  countries  are  Belgium’s  main  trading  partner, 
importing  together  about  two-thirds  of  Belgian  services.  Even  though  this  share  has 
diminished  in  recent  years,  Belgium  clearly  exports  less  to  the  extra-EU27  market 
than  the  average  European  country.  More  than  three  quarters  of  all  intra-EU27 
services go to the five neighbouring countries (see Table 7). While this runs parallel 
to  what  is  observed  for  goods,  the  underlying  distribution  contrasts  as  Germany  is 
only the fourth intra-EU27 importer of Belgian services and the fifth overall importer, 
behind the US.  

3.1.2.  Breakdown of external service surplus  

As  can  be  read  from  both  Graph  40  and  Table  8,  ‘transportation’  and  ‘business 
services’ together account for almost two thirds of all service exports by Belgium – 
far  more  than  in  neighbouring  countries  –  and  are  the  main  contributors  behind  the 
overall surplus with smaller contributions by ‘government services’, ‘information and 

36 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
communication services’ and ‘financial services’.52 In fact, travel is the only category 
that  has  seen  a  net  deficit  ever  since  1995.  In  this  respect,  Belgium  stands  out 
compared to most other EU27 countries that realize a (often sizeable) service surplus 
since  for  most  of  them  this  surplus  is  due  to  a  strong  performance  in  one  particular 
sector such as travel53, finance54 or both55 so that their net surplus can be considered 
to be the outcome of a 'single source'56 while as for Belgium the surplus configuration 
is more diverse.57 Individual sectors are discussed in what follows. 

Graph 38: Composition of service balance 

15000

10000

5000

R
U
E
n
b

0

-5000

-10000

15000

Other business services

10000

Transportation

5000

0

R
U
E
n
b

-5000

Government services

Information services

Communication services

Financial services

Other services

Travel

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

-10000

overall balance

Source: NBB 

Table 8: Composition of service trade 

exports (avg 2009-11)

imports (avg 2009-11)

BE

FR

DE

NE

UK

avg

BE

FR

DE

NE

UK

avg

Transportation 28% 23% 23% 22% 13% 22% 23% 27% 23% 17% 18% 22% Transportation

Travel 12% 33% 15% 11% 13% 17% 26% 29% 30% 18% 30% 27% Travel

Communications services

5% 3% 2% 4% 3% 4%

4% 3% 3% 4% 4% 3% Communications services

Construction

2% 4% 5% 2% 1% 3%

2% 2% 3% 2% 1% 2% Construction

Insurance services

1% 1% 2% 1% 3% 2%

1% 2% 1% 1% 1% 1% Insurance services

Financial services

4% 2% 5% 1% 22% 7%

3% 2% 3% 2% 6% 3% Financial services

Computer and information services

5% 1% 7% 5% 5% 5%

4% 2% 5% 5% 4% 4% Computer and information services

Royalties and license fees

3% 7% 6% 20% 5% 8%

3% 4% 5% 18% 5% 7% Royalties and license fees

Other business services 36% 23% 32% 31% 32% 31% 31% 26% 25% 32% 26% 28% Other business services

Personal, cultural and recreational services

1% 1% 0% 1% 2% 1%

1% 3% 1% 1% 1% 1% Personal, cultural and recreational services

Government services

2% 1% 2% 2% 1% 2%

0% 1% 0% 1% 4% 1% Government services

Source: WTO 

52  

'Construction' – incorporated under 'Other services' – does not include building activities abroad 
by Belgian companies taking more than one year as the proceeds of these works are regarded as 
income  from  direct.  As  a  consequence,  substantial  amounts  from  e.g.  dredging  works  are  not 
incorporated in the service balance.  

53   BG, CZ, EL (transportation as well), ES, HU, MT, AT, PT & SI 
54   LU & UK 
55   CY 
56   For  DK,  PL  and  the  Baltic  countries  transportation  dominates,  with  secondary  contributions  by 

travel for PL, EE and LT. 

57   This  seems  also  to  be  the  case  for  France  with  a  transport  deficit  being  compensated  by  most 
other  sectors.  The  same  can  be  said  about  the  size  of  both  countries'  surpluses,  which  remain 
modest  in  terms  of  GDP  compared  to  other  countries,  presumably  a  reflection  of  the  broad 
underlying composition. Also the surpluses of the Netherlands (comparable to Belgium's in terms 
of  GDP)  and  Sweden  (higher  structural  surplus  than  BE,  FR  and  NE)  look  more  diverse  in 
composition. 

37 

 
 
 
 
 
 
 
                                                 
Transportation 

As Belgium’s ports make the country a hub for international trade, transportation is an 
important sector, both with respect to exports as to imports. In terms of GDP, the net 
transportation surplus has been hovering around 1% of GDP since 2007, a level that 
had  not  been  attained  since  the  late  1990s.  Transportation  services  are  by  default 
entangled with trade in goods. As such, the nominal fall in 2009 of both exports and 
imports reflects the contracting international goods trade that year (Graph 41).  

Maritime freight services and related activities are predominantly responsible for the 
transport  surplus.  With  Antwerp,  Zeebrugge  and  Ghent,  Belgium  hosts  three  of 
Western  Europe’s  ten  largest  ports  in  terms  of  traffic  volume  –  Antwerp  being  the 
second largest. Together the Belgian ports attributed a total direct value added in 2010 
of  EUR  14.7  bn  (4.1%  GDP)  and  direct  employment  of  almost  102,000  fulltime 
equivalents (2.0% of the working population). Indirectly, another EUR 13.2 bn (3.7% 
GDP)  value  added  is  created,  as  well  as  131,000  extra  fulltime  equivalents  (2.6% 
working  population)  as  stated  by  the  Annual  Report  of  the  Flemish  Port  Authority 
(2012).  

The transportation sector has maintained its relative position within Belgium’s export 
services,  as  well  as  its  market  share  in  global  transportation  exports,  with  Belgium 
representing about 3% of global activity in the sector in 2011 according to UNCTAD 
data. This market share has been remarkably stable since 1980 and the same applies to 
the market share within the so-called Le Havre-Hamburg range (a cluster of big sea 
ports), which for the last two decades has stood at around 24% of total traffic volume 
despite  the  heavy  competitive  pressures  that  characterize  the  sector.  In  contrast,  the 
EU’s part in global transportation exports fell from 55% in 1980 to 46% in 2011. 

Graph 39: Transportation services 

Graph 40: Travel services 

R
U
E
n
b

20000

15000

10000

5000

0

-5000

-10000

-15000

-20000

2.0%

1.5%

1.0%

0.5%

0.0%

-0.5%

-1.0%

-1.5%

-2.0%

P
D
G
%

R
U
E
n
b

10000

5000

0

-5000

-10000

-15000

-20000

2.0%

1.5%

1.0%

0.5%

0.0%

-0.5%

-1.0%

-1.5%

-2.0%

-2.5%

-3.0%

-3.5%

-4.0%

P
D
G
%

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

credit

debit

net (RHS)

credit

debit

net (RHS)

Source: NBB 

Source: NBB 

Travel 

As  mentioned,  travel  services  are  the  only  category  that  holds  a  substantial  and 
structural  deficit  (Graph  42).  This  deficit  has  been  widening  as  export  transactions 
have  stagnated  while  imports  have  risen  steadily.  In  terms  of  GDP,  the  deficit 
expanded to around 2% in recent years, whereas until 2007 it was more stable at about 
1.3%.  However,  little  can  be  read  from  this  deficit  as  these  travel  transactions  are 
more  a  function  of  intrinsic  attractiveness  (climate,  historic  sites,  nature…)  and 

38 

 
 
 
 
 
general income level than of competitiveness. This seems to be the case for Belgium 
as no other service sector reports a deficit.  

Information and communication services 

As ICT is an important driver of productivity growth in the overall economy a high 
propensity to trade would seem logical. But while ICT services together account for 
10% of exports and 8% of imports, in general they are still little traded (Graph 43 and 
44).  This  is  not  only  the  case  for  Belgium,  but  also  for  other  EU  countries.58 
According  to  a  2010  study  by  Copenhagen  Economics,  the  EU  could  gain  4.1%  of 
GDP by 2020 through the creation of a digital single market. Given Belgium's decent 
performance  with  respect  to  trade  in  ICT  services,  it  is  reasonable  to  assume  that 
Belgium  could  reap  important  economic  gains  from  such  a  digital  push,  though 
currently no detailed estimates are available.59 

Graph 41: Information services 

Graph 42: Communication services 

R
U
E
n
b

5000

4000

3000

2000

1000

0

-1000

-2000

-3000

-4000

-5000

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

credit

debit

net (RHS)

0.5%

0.4%

0.3%

0.2%

0.1%

0.0%

-0.1%

-0.2%

-0.3%

-0.4%

-0.5%

P
D
G
%

R
U
E
n
b

5000

4000

3000

2000

1000

0

-1000

-2000

-3000

-4000

-5000

0.5%

0.4%

0.3%

0.2%

0.1%

0.0%

-0.1%

-0.2%

-0.3%

-0.4%

-0.5%

P
D
G
%

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

credit

debit

net (RHS)

Source: NBB 

Source: NBB 

Government services 

A  modest  but  very  stable  surplus  of  0.3%  of  GDP  originates  from  government 
services  (Graph  45).  The  bulk  of  export  receipts  originate  from  the  EU  institutions, 
considered to be extra-territorial. The amounts recorded under this heading resulted in 
total  exports  of  EUR  1.4  bn  in  2011  and  net  revenues  totalling  EUR  1.3  bn.60  This 
entails  two  types  of  transactions:  reimbursement  of  the  collection  costs  relating  to 
own EU resources and the operating expenses of the European institutions. Both are 
sizeable for Belgium. As a lot of the EU’s trade with non-EU countries passes through 

58   Only IE, FI and SE realized in 2011 a net surplus for IT services superior to 1.0% of GDP (0.4% 
for  EU27;  0.2%  for  Belgium).  For  communication  services  this  was  only  the  case  for 
Luxembourg (0.0% for EU27; 0.2% for Belgium). 

59   However,  the  Federal  Planning  Bureau  points  out  that  ICT  activities  are  little  developed  in 
Belgium  so  that  the  Belgian  industry  hasn't  reaped  the  full  productivity  gains  from  ICT 
innovation. A single market push for this type of products could render them more accessible for 
Belgian companies though, so that economic gains could originate from this side as well. 

60   Many revenues from services provided by Belgium to the EU are recorded directly under various 
other  headings  in  the  BoP  (e.g.  ICT).  As  a  consequence,  the  EU  contributed  EUR  2.3bn  to  the 
Belgian service surplus in 2011. 

39 

 
 
 
 
 
 
                                                 
Belgian  ports,  Belgium  gets  on  average  9-10%  of  total  EU  reimbursement 
expenditure,  amounting  to  EUR  527  mn  in  2011.  Operational  spending  by  the  EU 
such  as  rents  is  also  recorded  as  government  service  receipts.  With  the  seat  of  a 
number of major institutions located in Brussels the corresponding revenues surpassed 
EUR 830 mn in 2011, equal to one third of total EU expenditure on this item. 

Graph 43: Government services 

Graph 44: Other business services 

R
U
E
n
b

2500

2000

1500

1000

500

0

-500

-1000

-1500

-2000

-2500

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

credit

debit

net (RHS)

P
D
G
%

R
U
E
n
b

30000

20000

10000

0

-10000

-20000

0.5%

0.4%

0.3%

0.2%

0.1%

0.0%

-0.1%

-0.2%

-0.3%

-0.4%

-0.5%

3.0%

2.0%

1.0%

0.0%

-1.0%

-2.0%

P
D
G
%

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

total credit
international merchanting
net (RHS)

services to affiliated companies (as of '04)
debit

Source: NBB 

Source: NBB/Eurostat 

Business services 

This last category has been a fast grower and is the single largest contributor to the 
service  surplus  with  a  net  balance  of  1.2%  of  GDP  in  2011  (Graph  46).  Business 
services  form  a  heterogeneous  group  that  entails  activities  such  as  leasing,  R&D, 
consultancy,  legal  advice,  architecture  and  marketing.  But  also  'International 
merchanting', implying two consecutive transfers of ownership of a good: from a non-
resident to a resident and vice-versa. The resulting merchanting margin is recorded in 
the balance of payments as a net item. Evidently, this service is very much related to 
the  international  trade  in  goods  and  Belgium's  ports.  Net  merchanting  exports  are 
considerable  for  Belgium,  both  when  compared  to  other  services  as  when  looked  to 
neighbouring countries.61  

Even  more  important  are  'Services  to  affiliated  enterprises'.  These  have  grown 
strongly in recent years and involve those overhead expenses of parent companies and 
their  subsidiaries  or  branches  that  cannot  be  allocated  more  precisely.  Belgium’s 
central location makes it attractive for regional headquarters of multinationals. For the 
period 2004-11, these services represented on average a third of all business service 
exports, with their share growing further in recent years. 

3.1.3.  Conclusions 

Belgium  has  been  moving  progressively  towards  a  service-based  economy  over  the 
past decades and services have been realizing an important external surplus that has 
steadily  grown  to  2%  of  GDP.  In  this  IDR,  Belgium's  services  surplus  has  been 
examined in greater detail. Taking a closer look at Belgium's services surplus allows 

61   The UK being the main consumer of international merchanting services explains why the country 

is one of the main trading partners for Belgium in the field of services.  

40 

 
 
 
 
 
 
                                                 
drawing  conclusions  as  to  the  nature  of  this  surplus  and  its  prospects.  The  main 
findings of the in-depth analysis on this surplus are that: 

•  Belgian  services  have  maintained  their  export  market  shares  within  the  EU  as 

well as globally, in contrast to Belgian goods;  

•  The net service surplus is more diverse in composition compared to other EU27 
countries that realize a positive service balance as for these countries the surplus  
has its origin often in one single source; 

•  The  Belgian  surplus  originates  from  four  main  sources,  driven  by  goods 
shipments  (transportation  and  international  merchanting)  and  by  the  fact  that 
Belgium  hosts  many  multinationals  and  international  organisations  (government 
services62 and services to affiliated enterprises); 

•  Together  these  four  sectors  realize  a  net  surplus  of  2.5-3%  of  GDP  with  travel 

being the only negative contributor at around -2% of GDP; 

•  Whereas government services are a very robust revenue source, they are no driver 
of  expansion  with  a  constant  net  surplus  of  0.3%  of  GDP  ever  since  1995.  In 
contrast,  the  other  three  sectors  have  seen  their  surplus  rise  by  0.4  percentage 
points of GDP in recent years; 

•  As these three sectors are to a large extent subject to external factors (e.g. global 
trade,  investment  decisions  by  multinationals),  keeping  the  general  business 
climate investor-friendly seems a key element in nurturing future gains; 

•  Given  that  the  share  of  high-tech  goods  (in  particular  ICT)  in  trade  is  rather 
modest,  for  Belgium  as  well  as  for  EU27,  services  related  to  more  high-tech 
products have not increased their export share and leave an important potential, 
also for the wider Belgian economy. 

All  in  all,  the  trend  observed  for  the  Belgian  trade  in  services  is  promising,  even 
though  it  remains  to  be  seen  whether  these  activities  can  fully  compensate  for 
declining  industrial  activities,  which  at  the  present  time  is  not  the  central  scenario. 
Still,  services  mitigate  the  loss  of  market  share  by  goods  and  the  country  would 
benefit  from  a  full  development  of  its  potential.  Policy  actions  might  also  take  into 
account  that  many  services  operate  in  the  periphery  of  industrial  activity  so  that  an 
accelerated deindustrialization may hurt services as well. As a consequence, tackling 
matters  of  cost  competitiveness  remains  paramount  for  the  Belgian  economy  and 
overall export performance. In this respect, it should be noted that the services sectors 
are  less  affected  by  price  developments  than  is  the  case  for  goods63,  which  helps  to 
explain  their  better  performance.  At  the  same  time,  as  services  are  also  inputs  into 
other industries' production processes, weak performance of sheltered service can be 
considered as a hindrance to the performance of other sectors and of the economy as a 

62   While ICT services, when taken together, realized a 0.4% GDP surplus in 2011, the surplus for 

government services (0.3%) had one single source, the EU, making it more relevant. 

63   Services are for example less energy-intensive than manufacturing activities so that high energy 

costs seem less of an issue. 

41 

 
                                                 
whole. Removing remaining restrictions on the large part of the service sector that is 
less exposed to competition through external trade would contribute to lower the cost 
of these services, improving in turn cost-competitiveness of exporting sectors. 

3.2. 

Innovation in Belgium 

Non-price competitiveness is a set of factors that determine the attractiveness 
of an economy and its innovation and adaptation potential, through quality, 
design and product differentiation offered,  marketing of  these  products and 
the organization of the production process. Among the determinants of non-
price  competitiveness,  we  find  the  quantity  and  quality  of  capital  stock, 
including  infrastructure,  the  volume  and  the  training  of  human  capital, 
organization of work, R&D intensity, and the proper functioning of markets 
for  goods  and  factors.  Due  to  the  already  high  capital  intensity  of 
production,  productivity  gains  could  better  be  achieved  by  innovation  in 
products  or  processes.  As 
in  chapter  2.2.7  on  non-cost 
competitiveness, Belgium is still specialised in medium technological goods, 
which are easily substituted and are thus more exposed to competition from 
lower  wage  countries,  and  the  share  of  high  tech  goods  in  total  exports  -
despite  its  increase-  is  still  below  20%.  In  this  chapter  Belgium's  strengths 
and weaknesses are analysed to understand better why this country does not 
reap all the innovation benefits although it is close to the innovation leaders.  

identified 

3.2.1.  Belgium's strengths and weaknesses 

As set out in the 2010 and 2011 Innovation Union Scoreboard (IUS)64, Belgium is an 
innovation follower, with a performance above the EU average. Relative strengths are 
in Human Resources, Open, Excellent and Attractive Research Systems and Linkages 
&  Entrepreneurship.  Relative  weaknesses  are  in  R&D  Expenditures,  Intellectual 
Assets and Economic Effects. Overall, the research and innovation system of Belgium 
displays  a  set  of  very  strong  indicators.  According  to  the  Innovation  Union 
Competitiveness  report  of  2012,  based  on  the  2011  IUS,  the  number  of  researchers 
per  thousand  employees  is  7.6,  well  above  the  EU  average  of  6.3  researchers.  The 
number  of  international  scientific  co-publications  per  million  habitants  is  more  than 
double  the  EU  average,  giving  evidence  of  the  degree  of  openness  of  the  Belgian 
research and innovation system. Moreover, the quality of the scientific production is 
evidenced  by  the  number  of  scientific  publications  within  the  top  10%  most  cited 
publications worldwide, as % of the total publications of Belgium (13.6%, well above 
the EU average). Finally, 38.3% of all innovative SMEs in Belgium introduced a new 
or a significantly improved product on the market, a figure only surpassed in Sweden. 

Nonetheless, the Belgian research and innovation system also has some weaknesses: 
in 2011, R&D expenses totaled an average of 2.03% of GDP in Belgium, a proportion 

64   European Commission, ‘Innovation Union Scoreboard 2011’, 2012, available at  

http://ec.europa.eu/enterprise/policies/innovation/files/ius-2011_en.pdf 

42 

 
 
 
 
                                                 
 
almost  equal  to  the  average  of  the  euro  area,  but  well  below  those  of  the  Nordic 
countries  or  Germany.  Despite  a  slight  increasing  trends  since  2005  (thanks  to 
increases  both  in  public  R&D  expenditure  (from  0.56%  to  0.65%  of  GDP)  and  in 
private  expenditure  on  R&D  (from  1.24%  to  1.37%)),  Belgium  is  not  on  track  to 
reach its 2020 target (see Graph 47). Patent applications and conversion of knowledge 
to  products  is  also  below  the  average.  According  to  its  R&D  profile,  the  Belgian 
growth  rate  is  weaker  than  the  EU  in  public  and  private  expenditure  on  R&D,  PCT 
patent applications, employment in knowledge intensive activities and percentage of 
researchers in the labour force.  

All  innovation  leaders  (FI,  SE,  DK  &  DE),  perform  very  well  in  business  R&D 
expenditures,  have  higher  than  average  scores  in  public-private  co-publications  per 
million habitants and excel in the marketing of their technological knowledge. Most 
of  the  innovation  leaders  also  perform  very  well  according  to  other  innovation 
indicators related to firm activities. Comparing Belgium to the innovation leaders, it 
can  be  reaffirmed  that  Belgium's  weaknesses  are  a  lower  level  of  public  &  private 
R&D  expenditure,  lower  excellence  in  marketing  of  the  innovations  and  less 
entrepreneurship.  

In a nutshell, it can be said that Belgium has a high quality research system, but that, 
in  order  to  enable  the  full  exploitation  of  this  strength,  it  needs  to  speed  up  the 
transition  towards  a  more  knowledge-intensive  economy  and  broaden  its  innovation 
base.  

Graph 45: Belgium R&D intensity projections, 2000-2020 

)

%

(
y
t
i
s
n
e
t
n
I

D
&
R

3.5

3.0

2.5

2.0

1.5

EU - target

BE - target

EU - trend

BE - trend

00

02

04

06

08

10

12

14

16

18

20

Source: Commission services 

3.2.2.  Governance of public R&D policy 

Since  the  early  1990s,  most  of  the  research  policies  have  been  decentralised  across 
several Belgian governments, each enjoying complete autonomy of decision-making 
power  in  these  matters.  The  regions  (Flanders,  Wallonia,  Brussels-Capital)  have 
authority on research policy for economic development purposes, thus encompassing 
technological development and applied research. The communities (French-, Flemish- 

43 

 
 
 
 
 
 
and  German-speaking)  are  responsible  for  education  and  fundamental  research  at 
universities and higher education establishments.  

The  federal  state  retains  the  responsibility  for  research  areas  requiring  homogenous 
execution at the national level, and research in execution of international agreements 
(e.g.  space  research,  defence  research),  as  well  as  for  fiscal  instruments.  Indeed,  on 
top of grants provided by regional authorities to help companies to finance new R&D 
projects, the federal government has developed powerful tax incentives (in particular 
a 75%65 payroll tax exemption for researchers, as well as a patent tax credit) leading 
to  a  situation  where  foregone  revenues  due  to  R&D  tax  incentives  are  almost 
equivalent to the amount of direct public funding of business R&D.  

There  are  formally  seven  independent  Belgian  authorities  carrying  out  their  own 
policy in the wider field of science, research, technology and innovation. In practice, 
there  are  only  five  active  entities,  since  the  region  of  Flanders  and  the  Flemish 
the  German-speaking 
community's  governments  have  merged 
community does not carry out any policy in the research area due to its small size. 

into  one  and 

This high degree of decentralisation of the responsibilities for research and innovation 
policies has not always been accompanied by the setting of appropriate coordination 
and cooperation mechanisms. As a result, opportunities for transregional synergies are 
missed. In order to address the possible lack of coherence, the idea of an Interfederal 
Plan  for  Research  and  Innovation  has  been  conceived.  This  initiative  would  aim  at 
ensuring  a  better  coordination  of  the  efforts  made  by  the  Regions  and  the  federal 
government  with  regard  to  R&D  and  technological  innovation,  but  it  is  still  not 
developed. 

Moreover,  governance  of  research  and  innovation  inside  each  region  needs  to  be 
strengthened  in  order  to  ensure  an  overall  strategic  and  integrated  approach  of 
research and innovation across the many organisations and instruments involved. This 
should  be  accompanied  by  a  reinforcement  of  the  mechanisms  for  monitoring  and 
evaluating  the  performance  of  the  organisations  and  of  the  instruments.  Further 
simplification  of  the  intermediary  support  structure  could  be  envisaged.  The 
preparation of the post-2014 period should be opportunity for a comprehensive review 
of the regional strategies, including the support instruments.          

There  is  also  a  case  for  the  national  and  regional  research  and  innovation  policy  to 
integrate  more  systematically  demand-side  policy  tools,  such  as  innovative  public 
procurement. 

3.2.3.  Concentration of private R&D activity 

The  business  enterprise  sector,  which  is  the  main  contributor  to  R&D  expenses  in 
Belgium,  saw  its  expenses  shrink  from  1.51%  of  GDP  in  2001  to  1.37%  in  2011, 
which is nonetheless still above the EU27 average of 1.26%. This decline is mainly 

65       Increased to 80% since 1 January 2013 

44 

 
 
                                                 
due  to  two  reasons:  the  economic  structure  becoming  more  service-oriented  and  a 
reduction in the R&D activities of the telecommunications and chemical sectors. 

Even if this share is slowly decreasing, approximately two-thirds of Belgian research 
(66.3%)  was  performed  in  the  business  sector  in  2010  (EU27:  61.52%).  In  2007, 
44.6%  of  business  R&D  expenditure  (BERD)  was  performed  by  companies  having 
more  than  1000  employees.66  Business  R&D  is  indeed  highly  concentrated  in 
Belgium and under foreign control: 59% of industrial R&D was realised by foreign-
owned companies in 2007. The importance of BERD and the fact that a large part of 
the BERD activity is undertaken by foreign enterprises raises the threat of a long-term 
decline  in  R&D  intensity  if  these  enterprises  are  not  encouraged  to  maintain  their 
R&D operations in Belgium. 

While Belgium performs well compared to the EU average in terms of R&D intensity 
and  innovation  rate,  it  underperforms  in  the  conversion  of  knowledge  into  new 
products  and  processes.  Belgium  still  outperforms  the  neighbouring  countries  in  the 
field of innovation process, indicating a possible consequence of higher hourly labor 
costs,  which  is  a  permanent  incentive  in  the  quest  of  new  process  improvements. 
However, Belgium underperforms on product innovation, which has a major impact 
on  export  growth.  Besides,  the  percentage  of  firms  with  marketing  innovation 
between  2006  and  2008  was  lower  in  Belgium  than  on  average  in  the  three 
neighbouring countries. This weak performance could be at least partially explained 
by the product specialization, skewed towards pharmaceuticals and chemicals, which 
are sectors enjoying a slower conversion rate than ICT  in general.  

More  than  three  quarters  of  BERD  was  performed  in  the  manufacturing  sector  in 
2009:  28%  by  the  pharmaceutical  sector  (2009  data),  11%  by  chemicals  and  5%  by 
radio, TV and communication.  

Over  the  period  2000-10,  Belgium  appears  to  have  increased  its  comparative 
advantage in chemicals and pharmaceuticals, but has reduced its advantage in stone, 
glass, plastics, rubbers, transportation, machinery and food products (see Graph 48). 
This can be linked to the change in relative importance of R&D expenditure. Over the 
period,  chemicals  and  pharmaceuticals  increased  their  share  of  R&D  expenditure 
while  transportation  and  machinery  (especially  radio,  television  and  communication 
equipment)  saw  their  relative  share  declining.  This  concentration  is  reflected  in  the 
number  of  large  companies  and  foreign  owned  multinationals  in  the  chemicals, 
pharmaceuticals  and  biotech  sectors.67  In  general  terms  one  can  say  that  research  in 
Belgium is now more than ever dominated by life sciences.  

The  key  challenge  for  Belgium  is  to  generate  similar  dynamics,  where  R&D 
investments  lead  to  trade  performance,  across  a  wider  range  of  sectors.  In  order  to 
speed  up  the  transition  towards  a  more  knowledge-intensive  economy,  enabling  the 
full exploitation of the strengths of its research system, Belgium needs to broaden its 
innovation  base  and  fasten  the  renewal  of  its  economic  fabric.  However,  the 

66      Data from Belgium Federal Science Policy Office. 
67   Agfa-Gevaert,  Anheuser-Busch  Inbev,  Barco,  Bekaert,  Belgacom,  Dexia,  KBC,  Solvay,  UCB, 
Umicore  were  the  top  10  R&D  performers  in  Belgium  in  2009  (IPTS  Scoreboard)  and  are 
responsible for about 40 % of BERD. 

45 

 
                                                 
weaknesses of Belgium in terms of entrepreneurship and firms' dynamics impede this 
necessary  renewal.  In  order  to  address  this  bottleneck,  further  development  of  the 
support to clusters and better conditions for the growth of innovative firms, as well as 
the further development of entrepreneurship education and culture, are required. 

Graph 46: Comparative advantages 

Total goods

Miscellaneous

Transportation

Machinery / Electrical

Metals

Stone / Glass

Footwear / Headgear

Textiles

Wood & Wood Products

Raw Hides, Skins, Leather, & Furs

Plastics / Rubbers

Chemicals & Allied Industries

Mineral Products

Foodstuffs

Vegetable Products

Animal & Animal Products

-0.600

-0.400

-0.200

0.000

0.200

0.400

0.600

2000-2001

2009-2010

Trade in goods: Symmetric Revealed Comparative Advantage Index

Source: COMTRADE and Commission services' calculation 

Areas  of  innovation  that  might  be  useful  to  emphasize  in  the  current  economic 
environment  are  innovation  towards  ICT,  durable  products,  client  services  and 
organizational innovation, which are not yet sufficiently developed in Belgium, even 
if regional policies emphasize their importance in their R&D strategy. 

3.2.4.  Human Resources 

Belgium disposes of a qualified workforce, reflected in the ambitious 2020 target in 
terms  of  education.68  The  total  number  of  researchers  is  growing  steadily  over  time 
(28.000  researchers  in  1998;  38.000  in  2009)  and  exceeds  the  growth  of  the  total 
population  and  the  active  population  in  Belgium.  Most  researchers  work  in  the 
business  enterprise  sector  (51.3%)  and  the  Higher  Education  sector  (41.1%). 
However,  the  number  of  graduates  in  science  and  technology  is  relatively  low  in 
Belgium,  accounting  for  15.8%  of  the  new  tertiary  education  graduates  in  2008 
compared  to  the  EU  average  of  21.9%.  This  lack  of  interest  does  not  only  concern 

68   The general 2020  target  calls  for  a  minimum  of 40%  of  the population  aged  30-34  to  complete 
higher education. In 2010, this indicator already reached 44.4% in Belgium so that the 2020 target 
has been set at 47% for Belgium. 

46 

 
 
 
 
 
                                                 
highly  qualified  technical  staff,  also  in  secondary  schools  fewer  students  choose 
technical  orientations.  There  is  still  a  mismatch  between  labour  supply  and  demand 
resulting in many firms considering the lack of qualified staff as a significant barrier 
to innovation.  

It is also important that workers are learning throughout their careers. In this respect, 
the  percentage  of  the  population  aged  25  to  64  years  who  reported  having  received 
training declined between 2005 and 2008. Even if between 2008 and 2010 the Belgian 
indicator rose from 6.8% to 7.2% on average over the period, it is still lower, at 6.9%, 
than the average of the three neighbouring countries (10.1%) and the euro area (8%). 
For graduates of higher education, the percentage is slightly higher (11.7% in 2008).  

Most  indicators  identify  entrepreneurship  to  be  a  problem  in  Belgium,  as  in  many 
other  European  countries.  According  to  the  latest  Eurobarometer  survey  on 
entrepreneurship,  less  Belgians  (30%)  would  like  to  be  self-employed  than  the  EU 
average  (37%).  Demand  prospects,  recruitment  of  qualified  personnel  and  strong 
competition represent major obstacles for SMEs.  

3.2.5.  Conclusion 

Through business R&D investments, many firms have been able to exploit the quality 
of the Belgian research system leading to excellent export performance in the sectors 
in  which  these  investments  took  place,  translating  notably  in  a  fast  increase  of  the 
share  of  high-tech  products  in  the  Belgian  exports.  The  strengths  of  the  Belgian 
research and innovation system have thus to some extent played a counter-balancing 
and mitigating role vis-à-vis the Belgian cost-competiveness issue.  

Nevertheless,  although  Belgium  is  among  the  first  of  the  innovation  followers,  in 
order  to  close  the  gap  with  the  innovation  leaders,  Belgium  should  speed  up  the 
transition 
the  full 
towards  a  more  knowledge-intensive  economy,  enabling 
exploitation of the strengths of its research system. As identified in this chapter, the 
weaknesses of Belgium are the low level and concentration of R&D expenditure, the 
low conversion rate of innovation into products, the mismatch between labour market 
needs  and  supply  and  most 
level  of  growth-oriented 
entrepreneurship. In order to move from the follower to the leader category, it appears 
useful  for  Belgium  to  move  towards  more  ambitious  and  integrated  research  and 
innovation  policy,  addressing  jointly  the  present  shortcomings.  Such  a  policy  could 
aim at diversifying R&D to promising sectors and to increase the  R&D expenditure 
towards  the  set  target,  encouraging  students  to  take  up  scientific  education  and 
upgrade  their  entrepreneurship  spirit,  ensuring  better  conditions  for  the  growth  of 
innovative firms, further developing  the  support to clusters and strengthening multi-
level governance of research and innovation. 

importantly 

low 

the 

47 

 
 
 
1.1. 

The housing market in Belgium 

1.1.1.  House price evolution 

From the mid-1990s the sustained increased demand for housing led to higher prices 
on  the  Belgian  housing  market.  Specifically,  between  2005  and  mid-2012,  housing 
prices  have  increased  by  around  31%  in  nominal  terms  and  12%  in  real  terms  (see 
Graph  49).  Contrary  to  other  EU  countries  that  saw  large  upswings  in  house  prices 
over  the  same  period,  Belgium  has  not  suffered  a  bust  episode  but  rather  a 
stabilization of real housing prices since 2008. 

Graph 47: Evolution of House Price Index 
and MFI Loans for House Purchase 

Graph 48: Residential investments  (% of 
GDP) 

yoy change in 
% GDP

2005=100

6.0

4.0

2.0

0.0

-2.0

-4.0

-6.0

-8.0

-10.0

-12.0

99Q3 01Q1 02Q3 04Q1 05Q3 07Q1 08Q3 10Q1 11Q3

MFI loans for house purchase (% GDP, yoy)
Real House Price Index (2005=100), right axis
Nominal House Price Index (2005=100), right axis

140

120

100

80

60

40

20

0

8.0

7.5

7.0

6.5

6.0

5.5

5.0

Mar 05

Sep 06

Mar 08

Sep 09

Mar 11

Sep 12

Source: Commission Services  

Source: Commission Services 

The price increase in the housing market could have led to an increase of investments 
in  new  dwellings  as  it  may  be  pointing  to  an  excess  of  demand  in  the  market. 
However,  this  was  only  the  case  until  2007.  Following  the  onset  of  the  crisis,  the 
share of the construction sector in GDP declined from 7.3% in the 4th quarter of 2007 
to 6.4% in the 3rd quarter of 2009. During 2010, there was a temporary improvement 
due to fiscal measures ending in 2011. Overall, investment decreased from around 7% 
of GDP in 2005 to 5.9% in the 3rd quarter of 2012 (see Graph 50). 

1.1.2.  House price valuation  

Assessing whether house price increases are sustainable remains a challenge. Several 
methods  exist  to  determine  the  deviation  from  the  long-term  average.  The  price-to-
rent  ratio  compares  the  evolution  of  house  prices  to  the  evolution  of  rent.  Another 
method  is  based  on  the  affordability,  the  price-to-income  ratio,  usually  defined  as  a 
price  index  divided  by  income  per  capita.  But  while  these  are  commonly  used 
methods to assess house prices, they do not incorporate factors such as deductibility 

48 

 
 
 
 
 
 
of  borrowing  costs  or  the  characteristics  of  mortgage  contracts  like  the  term  or  the 
loan-to-value ratio.69 

Graph  51  presents  our  analysis  based  on  three  indicators:  the  price-to-income  ratio, 
the price-to-rent ratio and an econometric model that includes the interest rates in the 
price-to-rent ratio. All three of these indicators point to a current level of 41% to 58% 
above  their  long-term  average.  If  these  results  point  to  either  an  important 
overvaluation compared to the long-term average or to an undervaluation in the past, 
they  need  to  be  interpreted  with  caution  since  they  do  not  include  changes  in 
mortgage  term  and  loan-to-value  ratio  while  just  one,  the  adjusted  price-to-rent 
model,  incorporates  changes  in  interest  rates.  Our  overall assessment  of  house  price 
dynamics classifies Belgium as a country where no booming episode was identified, 
due to the reasonable amplitude and duration of the bull and bear phases but with high 
downward  price  pressure  according  to  the  two  first  indicators  and  medium  pressure 
according to the econometric model.  

According  to  a  study  by  the  National  Bank  of  Belgium70,  taking  into  account  the 
mortgage term, the loan-to-value ratio and the general mortgage interest rates, the gap 
with the long-term average, even if lower compared to our analysis, still amounts to 
16% in mid-2011.  

Graph 49: Housing price ratios 

Graph 50: Affordability indicator 

27

24

21

18

15

Source: Commission Services  

Source: Commission Services  

1
Q
5
0

3
Q
5
0

1
Q
6
0

3
Q
6
0

1
Q
7
0

3
Q
7
0

1
Q
8
0

3
Q
8
0

1
Q
9
0

3
Q
9
0

1
Q
0
1

3
Q
0
1

1
Q
1
1

3
Q
1
1

1
Q
2
1

3
Q
2
1

In order to try to shed some light on the sustainability of prices, this IDR now takes a 
closer  look  at  the  annual  financial  effort  households  have  to  make  to  repay  their 
mortgage. The  annual financial effort indicator constructed by the National Bank of 
Belgium  is  the  ratio  between  the  monthly  debt  service  and  disposable  income  per 
household,  including  an  average  maturity  of  20  years  and  a  loan-to-value  ratio  of 
80%.  Looking  at  the  evolution  of  this  affordability  ratio,  just  before  and  during  the 
crisis, the annual financial effort of households increased from 18% to 22%, peaking 

69   For a deeper discussion on the merits of these indicators and some qualifiers see LIME Working 

Group (2012), Assessment of house price dynamics. 

70   According  to  this  study,  an  accurate  loan-to-value  ratio  would  amount  to  65%,  down  from  the 
average  of  80%  commonly  used,  and  the  accurate  mortgage  term  amounts  to  22.2y  on  average 
until 2007 and 18y by 2011 instead of 20y on average.   

49 

 
 
 
 
                                                 
at  24.2%  in  3Q2008.  According  to  our  own  calculations  based  on  a  similar 
affordability index71 (see Graph 52), the effort calculated with adjusted loan-to-value 
ratio and length of contract points to an annual financial effort of 19% in 2005 to 21% 
at the 3rd quarter of 2012 with a peak at the end of 2008 of 25%. On the one hand, the 
increase in effort until 2008 is a source of concern. On the other hand, both its current 
level and its stabilization are rather reassuring. Additionally, the loan-to-value ratio is 
low and decreased from 80% in 2005 to 65% in 2010 and financing at fixed rates is 
the  common  practice,  with  more  than  80%  of  mortgages  loans  in  2012  being 
contracted  under  fix  interest  rates,  indicating  that  the  interest  burden  will  not  rise 
unexpectedly. 

1.1.3.  The determinants of house prices 

While price increases do not seem to have reached unsustainable levels, the analysis 
of housing price fundamentals could reveal additional insights. 

First, demographic factors such as a population growth and a decline in the average 
household size72, have led to an increase in the number of households. Second, stable 
growth  of  disposable  income  and  stable  GDP  growth  have  ensured  a  climate  of 
certainty  encouraging  private  investment.  Third,  the  fall  in  interest  rates  resulting 
from accommodative monetary and fiscal policies and financial innovations (coupled 
with softened and flexible credit conditions) have triggered an increase in the demand 
for loans. Interest rates have dropped from levels of 8 to 10% between 1986 and 1992 
to levels between 5 and 7% between 1995 and 2002 and to levels of 3 to 5% between 
2003  and  2012.  With  the  decrease  in  interest  rates,  the  average  loan  term  has 
increased from a long-term average of 20 years to around 22 years until 2007 before 
decreasing  again.  Fourth,  the  financial  crisis  has  shifted  some  of  the  investments  in 
financial  assets  to  property.  Fifth,  scarcer  land  availability  also  plays  a  role, 
particularly  in  Flanders,  which  may  partly  explain  the  faster  price  evolution  in  that 
region  compared  to  Wallonia  in  the  last  20  years.  The  combination  of  those  factors 
helps  to  explain  why  house  prices  have  increased  over  the  years  since  demand  has 
been fostered by structural features while supply has not kept pace.  

On top of these drivers, government policies have supported house  price  growth. In 
the 2000s, the government incentivized households to invest through several measures 
such  as  a  reduction  of  registration  fees  in  Flanders  (2002),  Brussels  (2003)  and 
Wallonia  (2009),  a  tax  amnesty  with  part  of  repatriated  capital  being  invested  in 
housing73, a deductibility scheme for capital amortization and interest payments74 and 
tax incentives on refurbishment and energy efficiency works. Furthermore, cadastral 

71   Yaniz  Igal,  J.,  "The  Spanish  housing  market:  are  we  in  for  a  soft  landing?",  ECFIN  Country 
Focus,  Volume  3,  Issue  1,  Directorate-General  for  Economic  and  Financial  Affairs,  European 
Commission, Brussels, 2006. 
In Belgium, the average household size fell from 2.49 people in 1991 to 2.31 in 2008 due to an 
increase  in  single  person  households  and  independence  of  elderly  people.  This  trend  is  to 
continue. 

72  

73   The tax amnesty of 2004 (EBA/DLU) coincided with a jump in housing prices, continued in the 

years afterwards. There were continued amnesty possibilities as of 2005. 

74   This deductibility is limited in nominal terms.  

50 

 
 
                                                 
incomes – used to calculate the tax on imputed rent – do not reflect market prices75, 
leading to a bias towards existing dwellings compared to new ones. 

1.1.4.  Risk factors 

Following  the  analysis  above,  housing  prices  seem  unlikely  to  trigger  renewed 
macroeconomic  turbulences  in  Belgium,  thus  they  do  not  constitute  an  emerging 
imbalance. However, in case emerging imbalances linked either to competitiveness or 
to excessive public debt become so deep as to put at risk the macroeconomic stability, 
current  housing  prices  could  put  additional  negative  pressure  on  both  the  real 
economy  and  the  financial  sector,  which  would  aggravate  undoubtedly  a  vicious 
economic circle.  

1.1.5.  Possible macroeconomic impact 

Demand for housing remains stable as the population is still growing, annual financial 
efforts remain stable, wages grow more rapidly than repayment, interest rates are still 
low. The supply side, meanwhile, is constrained by a building sector in crisis. Still, in 
the  event  of  a  fall  in  housing  prices,  it  is  to  be  expected  that  the  macroeconomic 
impact will be less important in Belgium than what other EU countries (e.g. Ireland or 
Spain)  have  experienced  since  the  beginning  of  the  crisis  because  the  increase  in 
house  prices  has  not  gone  hand  in  hand  with  an  excessive  increase  in  the  interest 
burden  of  households76  or  growth  of  housing  supply.  The  vast  majority  of  property 
being  owner-occupied,  a  house  price  correction  would  only  trigger  limited  wealth 
effects on consumption since housing is mostly seen as home and not as investment. 
For the same reason, a fall in house prices will not affect in itself the capacity to repay 
loans  for  a  vast  majority  of  households.  Furthermore,  the  default  rate  on  mortgage 
loans is at a historically low 1.1%. The absence of remortgaging practice in Belgium 
will  also  limit  the  effect  on  consumption.  On  the  supply  side,  the  impact  a  price 
correction would have on housing investment would be limited since the construction 
sector in itself has remained stable in size, at around 5% of GDP, despite the surge in 
prices, indicating that the price elasticity of home building is low in Belgium.  

75      The  assessed  value  of  properties  is  based  on  1975  values,  which  have  been  indexed  to  the 

development of CPI since 1991. 

76   Household  debt,  although  still  lower  than  the  EU  average  of  99%,  reached  a  level  of  88%  of 
disposable  income  in  2011,  a  record  for  Belgian  households.  This  should  not  represent  a  major 
risk since the net worth of households is very high and represents 324% of incomes.  

51 

 
 
 
 
 
 
                                                 
4. 

POLICY CHALLENGES  

The  analysis  in  sections  2  and  3  indicates  that  macroeconomic  developments  in 
the areas of external  competitiveness of goods and the implications for the  real 
economy  from  the  high  level  of  public  debt  are  the  main  challenges  of  the 
imbalances  in  Belgium.  It  should  be  recalled  that  these  challenges  were  identified 
under the MIP in the first IDR last year and relevant policy responses were reflected 
and integrated in the country-specific recommendations (CSRs) issued for Belgium in 
June  2012.  The  assessment  of  progress 
those 
recommendations  will  take  place  in  the  context  of  the  assessment  of  the  Belgian 
National  Reform  Programme  and  Stability  and  Convergence  Programme  under  the 
European Semester. Against this background, this section discusses different avenues 
that could be envisaged to address the challenges identified in this IDR.  

implementation  of 

the 

in 

Concerning  the  challenge  of  improving  external  competitiveness,  a  number  of 
different avenues can be considered as regards: 

Cost competitiveness and labour costs: The analysis in this IDR has pointed to the 
importance  of  cost  competitiveness  for  the  export  performance.  A  key  aspect  to 
safeguard competitiveness is to ensure that wage cost developments do not contribute 
to an erosion of the external position. As also shown, in the case of Belgium there is 
furthermore a case to regain lost wage cost competitiveness in comparison to the main 
trading partners. There are different issues that can be considered. One key element is 
the  role  of  the  'wage  norm'  and  how  it  takes  into  account  developments  in  labour 
productivity  and  competitiveness.  It  should  be  recalled  that  CSR  No  4  from  2012 
called  for  wage  growth  to  better  reflect  developments  in  labour  productivity  and 
competitiveness,  by  ensuring  the  implementation  of  ex-post  correction  mechanisms 
foreseen  in  the  'wage  norm'  and  promoting  all-in  agreements  to  improve  cost-
competitiveness  and  facilitating  the  use  of  opt-out  clauses  from  sectorial  collective 
agreements to better align wage growth and labour productivity developments at local 
level. 

Against  this  background,  the  adjustment  capacity  of  the  labour  market  would  be 
increased  and  the  reallocation  towards  more  dynamic  firms  and  sectors  would  be 
facilitated  if  wage  growth  would  better  reflect  trends  at  local  and  sectorial  level. 
Moreover, cost competitiveness would be enhanced if the wage norm would not only 
be based on expected but also take into account past wage developments, a road the 
Belgian  authorities  have  announced  to  consider  as  of  2015.  The  performance  of  the 
system  might  be  further  enhanced  by  broadening the  scope  through the  inclusion of 
more trade partners in the comparison. 

It  should  be  noted  that  a  number  of  reforms  have  been  introduced  recently.  These 
should contribute to making the index used for wage indexation more representative 
for  actual  consumption  patterns,  thereby  somewhat  tempering  the  effects  of  price 
increases (see further below on role of energy prices for indexation). Nevertheless, the 
current  index  mechanisms  are  automatic,  implying  that  second-round  effects  or 
exogenous  shocks  would  translate  into  faster  wage  growth  also  in  comparison  to 
neighbouring countries. Additionally, wages will be frozen in real terms in 2013 and 
2014.  

52 

 
 
The overall cost competitiveness of the Belgian economy could also be enhanced by a 
further  shift  in  the  tax  burden  from  labour  to  other  sources  of  revenue.  Indeed,  last 
year's CSR No 5 called for a tax shift from labour to less growth-distortive tax bases. 
Some measures have been taken in the 2013 budget in order to reduce the tax burden 
on labour, such as a reduction in employers' social contributions for specific sectors 
and groups. Different additional avenues for progress in this area could be considered 
so as to further reduce overall labour costs to be more in line with average European 
levels. This reduction may be funded by increasing environmental taxes (e.g. transport 
fuel taxes) and by increasing VAT efficiency (e.g. via limited use of VAT exemptions 
and  reduced  rates),  by  restructuring  property  taxation  and  by  improving  tax 
compliance. 

Cost  competiveness,  other  elements:  The  analysis  above  has  also  pointed  to  the 
importance  of  general  cost  pressures  for  competitiveness,  beyond  wages.  In  this 
context, policies aiming at tackling the inflationary pressure resulting from surges in 
the  prices  of  energy  and  commodities  in  order  to  address  the  loss  of  cost 
competitiveness  of  the  economy  overall  would  play  a  role.  A  CSR  in  2012  was 
calling, for example, for strengthened competition in network industries.  

Energy  prices  remain  more  elevated  in  Belgium  than  in  many  other  EU  countries 
though.  A  better  functioning  of  energy  markets  would  exert  downward  pressure  on 
energy  prices  and  hence  improve  cost  competitiveness.  While  important  steps  have 
been taken recently, such as enhanced mobility on the energy market with a view to 
fostering  competition  between  energy  providers,  a  continued  enhancement  of 
competition and supervision of the energy sector is a valuable goal in order to realize 
permanent  gains.  Competition  in  the  wholesale  market  could  benefit  from  a  more 
stable framework for investment.  

A reduction of the weight of energy products in the price index would also temper the 
effect of the automatic indexation system in times of high imported inflation in order 
to  leave  more  scope  to  adjust  wage  growth  in  line  with  productivity  and 
competitiveness as discussed above. Here, a price observatory has been granted extra 
powers and prices for end-users have been made more transparent, breaking the link 
with  the  international  oil  price.  Distribution  costs  in  Belgium  account  for  a  large 
proportion of the domestic and SME consumer bill and would need to be reviewed. A 
proper and independent regulatory oversight, endowed with the necessary resources, 
could ensure that all network tariffs reflect efficient costs and are incentive-based. 

In addition, and as pointed to in the analysis, the fact that Belgium's core inflation is 
higher  than  in  the  neighbouring  countries  points  to  a  lack  of  competition  in  other 
networking  industries  (telecom,  postal  services  and  transportation)  and  the  services 
sectors, including the retail sector. A revision of still existing regulatory barriers and 
an  enhancement  of  competitive  pressure  in  these  sectors  would  benefit  economic 
agents  and  contribute  to  a  moderation  in  general  price  pressures.  The  announced 
reinforcement  of  the  Competition  Authority  is  useful  in  this  regard  and  might  be 
usefully complemented by action at the administrative level.   

Non-cost competitiveness: the analysis has also pointed to the important role of non-
price cost competitiveness issues to explain the external performance and the fact that, 

53 

 
 
 
Belgium would benefit from a further transition towards higher technology exports in 
which input costs play a smaller role.  

In this context, a further stimulation of investment in R&D and ICT could increase the 
technology  content  of  products  as  well  as  total  factor  productivity.  Indeed,  while 
public  R&D  spending  is  foreseen  to  rise  across  the  different  entities  despite  narrow 
budgetary margins, business R&D intensity is stagnating, implying that further efforts 
are  required  to  reach  the  2020  target  of  3.0%  GDP  spending  on  R&D.  In  order  to 
increase  the  R&D  intensity  of  the  economy,  the  federal  government  allows  a  75% 
payroll tax exemption for researchers, and regions and communities have developed 
strategic  innovation  approaches  covering  major  aspects  of  a  successful  innovation 
strategy.  While  the  orientations  taken  by  research  and  innovation  polices  in  recent 
years  are  appropriate,  becoming  more  demand  driven,  answering  to  major  societal 
challenges  and  focusing  on  promising  sectors,  efforts  need  to  be  reinforced.  In 
particular, further development of the support to clusters and better conditions for the 
growth  of  innovative  firms,  as  well  as  the  further  development  of  entrepreneurship 
education and culture, are required. There is also a case for the national and regional 
research  and  innovation  policy  to  integrate  more  systematically  demand-side  policy 
tools, such as innovative public procurement. Besides, it could be ensured that better 
coordination  and  overall  coherence  among  the  various  R&D  policies  undertaken  at 
federal,  community  and  regional  levels  are  fully  exploited.  It  is  also  necessary  to 
attract more young talent into science and engineering studies in order to avoid skill 
shortages  which  may  deter  future  private  R&D  investments.  A  stronger  coherence 
between  regional  education,  training  and  employment  policies  while  continuing  to 
invest in cooperation between regional authorities to boost interregional labour force 
mobility  might  lead  to  a  better  match  between  skills  and  labour  market  demand.  At 
the  same  time,  stronger  incentives  to  work  more  and  an  increase  in  the  effective 
retirement age would lead to a better utilisation of the full potential of the available 
labour force. Some of the 2012 CSRs were calling for such reforms. 

With  regard  to  geographical  orientation,  Belgian  goods  exports  are  still  mainly 
oriented towards the largely saturated European market. A reorientation towards more 
dynamic  regions  would  therefore  allow  a  faster  growth  in  the  volume  of  goods 
exported and a more diversified export portfolio. Conditions in emerging markets are 
often  more  challenging  for  doing  business.  Hence,  Belgian  companies,  especially 
smaller  ones,  would  profit  from  customized  support  from  public  authorities  to  enter 
into new markets.  

Concerning  the  challenge  linked  to  the  high  level  of  public  debt  and  the 
implications for the real economy, a number of issues could be considered:  

Controlling  risks  from  high  public  debt  levels:  the  economy  as  a  whole  would 
benefit  from  a  continued  implementation  of  measures  aiming  at  a  consolidation  of 
public  finances  in  a  sustainable  way,  putting  the  public  debt  on  a  determinedly 
declining path, in line with the commitment in the Stability and Growth Pact. A 2012 
CSR suggested to address the implicit debt associated with an ageing population by 
curbing  age-related  expenditure  in  order  to  prevent  a  new  increase  of  the  debt  level 
after  an  expected  initial  stabilisation.  Since  Belgium  belongs  to  the  group  of  EU 

54 

 
 
countries with the highest tax levels, little scope is left to increase taxes which points 
to the need for structural expenditure cuts. 

Over the past year, the Belgian authorities have also implemented budgetary measures 
aiming  towards  a  correction  of  the  excessive  deficit.  Amid  a  worsening  macro-
economic environment since the government agreement of end-2011, the government 
closely monitored the budget execution as to keep the 2012 deficit below 3% of GDP, 
albeit  partly  through  additional  one-off  measures.77  The  average  structural  effort, 
measured  as  the  change  in  the  structural  balance,  only  amounted  to  0.3%  of  GDP 
between  2009  and  2012.  The  2013  draft  budget  contains  additional  consolidation 
measures in order to keep the deficit in line with  the Stability Programme. In 2012, 
the  public  debt  is  expected  to  rise  to  almost  100%  of  GDP.  Under  the  current 
projections, the public debt ratio is not expected to stabilize before 2014.  

Interlinkages  between  the  banking  sector,  the  sovereign  and  the  private  sector: 
the  large  contingent  liabilities  stemming  from  the  guarantees  given  to  financial 
institutions  remain  a  risk  for  public  finances.  By  recapitalizing  Dexia  in  late  2012, 
Belgium could prevent the activation of state guarantees granted to this group. Two of 
the  biggest  banks,  Belfius  and  KBC,  are  restructuring  their  activities  following 
nationalization  (Belfius)  and  state  support  (KBC),  which  should  allow  them  to 
continue to play their role as financial intermediaries in the Belgian economy.  

Risks  from  an  increase  in  interest  rates  and  spreads  are  not  to  be  discarded. 
Between November 2011 and January 2013, the spread between Belgian and German 
10-year  bonds  decreased  from  360  basis  points  to  less  than  100  points  due  to 
measures taken by the ECB and the progress towards a Banking Union, the reduced 
political  uncertainty  in  Belgium  and  the  consolidation  strategy  presented  by  the 
government.  Even  if  interest  rates  on  Belgian  debt  instruments  are  currently 
historically  low,  the  steep  rise  in  interest  rate  spreads  in  the  second  half  of  2011 
showed  that  such  a  situation  can  change  rapidly.  This  would  not  only  endanger  the 
sustainability of the public debt, but could have spill-over effects to the real economy 
due  to  the  large  exposure  of  domestic  financial  institutions  and  households  to  the 
Belgian  sovereign.  Such  an  interest  rate  hike  would  also  affect  mortgages:  variable 
mortgage rates are legally linked to interest rates on Belgian Treasury certificates and 
3 to 5 year bonds (though with a legal cap) so that an increase in bond rates leads to a 
loss  in  disposable  income  for  house  owners  with  a  loan.  While  fixed  interest  rates 
predominate  for  new  mortgage  contracts,  the  rates  offered  in  new  contracts  tend  to 
follow bond rates.  Hence, a shock in lending costs for the Belgian sovereign can filter 
through to the housing market. 

Lastly, putting the debt on a downward path would not only reduce the risk associated 
to  sovereign  debt,  but  will  also  provide  the  authorities  with  more  latitude  to 
implement a fiscal policy aimed at improving the competitiveness of the country, as 
well as to face unexpected developments in other economic sectors such as financial 
markets.

77   There is a risk that the budgetary impact of the Dexia recapitalization (0.8% of GDP) will push up 

the 2012 deficit to above 3% of GDP. 

55 

 
                                                 
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