Ernest Hemingway famously observed that debtors go bankrupt in two ways – gradually, then suddenly.
The good news is that, for now, Belgium is still going bust gradually. Government debt is high and creeping up, but the situation is not yet catastrophic.
The bad news is that amid economic stagnation, institutional gridlock and relentlessly rising spending demands due to demography, defence and debt interest, the country’s polarised political system seems unlikely to put public finances on a sustainable footing unless a crisis suddenly strikes.
Drift, not crisis
Crisis is an overused word. It means an unstable and dangerous situation that requires urgent attention. By that definition, Belgium does not have a debt crisis.
What Belgium faces instead is more slow-moving and insidious: a debt drift. This is a steady build-up of borrowing that can continue for a long time until it ultimately becomes unsustainable.
This debt drift is well-documented, triggers repeated warnings from both economists and EU institutions, and is widely debated by politicians. But it is not yet pressing enough to prompt decisive corrective action. Until a crisis eventually forces their hand, politicians typically prefer to postpone inflicting pain. As Saint Augustine said, “Lord, give me chastity and continence – but not yet!”
Fiscal and political arithmetic
Consider the league table of eurozone government debt. Belgium’s debt ratio is high: it reached 108% of national output at the end of the last year, 20 percentage points higher than the eurozone average of 88% of gross domestic product (GDP). And it is rising: it is set to top 110% this year, and the European Commission sees it nearing 113% next year.
But Belgium’s debt ratio is still only the fourth-highest in the eurozone. It is well below Greece’s (146% and falling) and Italy’s (137% and rising), and slightly below France’s (116% and rising). All of which makes the Belgian situation seem bad but not alarming.
More troubling is the fact that Belgium has the biggest budget deficit in the monetary union. Government borrowing was 5.2% of GDP last year, fractionally above France’s 5.1%. That is well above the 3% deficit ceiling normally permitted by EU fiscal rules.
Belgium has been subject since 2024 to the EU’s excessive deficit procedure, which is meant to force errant borrowers to mend their ways, yet the deficit continues to rise. The Commission sees it edging up to 5.4% next year as defence spending and debt interest costs increase. Given the pressing need for Europe to rearm, EU fiscal rules now have a big loophole: they allow governments to borrow freely to boost defence spending.
Optimists point out, rightly, that Belgium had much higher public debt in the 1990s, and that the federal government eventually got to grips with it. From a peak of 139% of GDP in 1993, this fell to 87% in 2007.
But circumstances were different back then. Belgium’s economy was more dynamic and its society younger, while public finances benefited from a peace dividend after the end of the Cold War.
Above all, there was a compelling political drive to get debt down in order to qualify to join the euro at its launch in 1999. That commitment, in turn, slashed government borrowing costs, as Belgian interest rates converged downwards towards Germany’s.
A divided political system
In contrast to the nineties, Belgium's 21st century economy had been sluggish even before the Iran war dealt it a further blow. That makes the economics of fiscal consolidation trickier, since spending cuts and tax rises risk a recession. It also makes politics poisonously zero sum. Whereas in a growing economy, budget belt-tightening is compatible with everyone still gaining somewhat, in a stagnant one many people actually lose.
Meanwhile, the number of pensioners is soaring, and with them healthcare and social costs. Defence demands and interest costs are rising too.
And the country’s divided political system has many other priorities, while neither EU fiscal rules nor international bond markets are yet fearsome enough to enforce fiscal discipline.
To be fair, Prime Minister Bart de Wever does seem serious about putting public finances in order. But he leads an unwieldy five-party coalition government that spans Flemish nationalists, social democrats and Christian democrats, together with Francophone liberals. Their differences are not just ideological; they also represent different linguistic, regional and economic interest groups, none of whom wishes to pay for budget cuts.
Last year De Wever brought his government to the brink of collapse in order to pass a budget involving substantial savings – a heroic effort that merely slowed the rise of the debt ratio somewhat. (The government’s biggest achievement, a bold pension reform that halves the long-term fiscal costs of demographic ageing by 2070, scarcely curbs its deficit today.)
The National Bank of Belgium estimates that a deficit of around 3% of GDP would be needed to stabilise the debt ratio. That remains a distant dream.
Muddling through
Even so, Belgium may continue to muddle through like this for many years yet.
It remains a wealthy country with risk-averse savers: Belgian households have net financial wealth equivalent to 231% of GDP, much of it held in government bonds and bank deposits that indirectly fund the state (since Belgian banks are big buyers of government bonds too).
Its fissiparous political system still just about functions: politicians do eventually tend to patch together budget deals – unlike in France where the government lacks a parliamentary majority and repeatedly struggled to pass a budget.
Although interest costs are rising, they remain bearable. Government borrowing costs shot up after their Covid-era nadir when rates went negative. They have risen again recently since the Iran war sparked fears of higher inflation. On 14 July Belgium had to pay 3.68% to borrow for 10 years, up from 3% before the war. But by historical standards, interest rates remain low: borrowing costs hit 5% in 2011 during the eurozone crisis and topped 10% in 1990. Moreover, the risk premium above German borrowing costs that Belgium needs to pay remains much smaller than France’s.
As a small country that does not stand out from the eurozone pack, Belgium is not front of mind for international bond-market investors. It has bigger concerns, notably about how the US Federal Reserve and the European Central Bank (ECB) will respond to inflationary pressures. Insofar as they worry about the sustainability of eurozone government debt, they fret more about bigger countries such as Italy, which has much higher debts than Belgium, and France, whose politics is more unstable.
That could change, of course, if Belgium did something egregiously reckless. Despite its domestic wealth, it does depend on foreign finance: it runs a current-account deficit, which means that it is a net borrower from the rest of the world.
Moreover, unlike the United States or the United Kingdom, which issue debt in their own currency, Belgium borrows in euros, a currency that its national authorities do not control.
But the risk of a run on Belgian bonds is much lower than it was during the 2010–12 eurozone crisis, because Europe’s monetary union is a more solid construction now.
In 2012, the then ECB President, Mario Draghi, stopped the panic that threatened to destroy the eurozone by pledging to do “whatever it takes” to hold the euro together. And in 2022 his successor, Christine Lagarde, further committed the ECB to act to stabilise “unwarranted” risk premia that are “not justified by country-specific fundamentals”.
These stabilisation measures are desirable. But their downside is that they diminish the pressure on Belgian politicians to curb public borrowing.
End game
With luck, Belgium’s debt drift will resolve itself without a crisis. Growth may pick up if EU politicians get serious about completing the single market and seizing the productivity gains from artificial intelligence (AI). Interest rates may fall if inflation worries recede. Belgian politicians may do just enough, incrementally, to stabilise the debt ratio.
But Belgium’s good fortune may also eventually run out. If growth remains sluggish, global interest rates rise, Belgian banks get into trouble or a political crisis focuses attention on the country, the prevailing narrative about Belgian debt may shift from it being “high but manageable” to “rising unsustainably”.
In short, if Belgium’s debt ratio grinds gradually higher each year, bond markets may at some point suddenly take fright.
