- We at Fitch Solutions believe that divisions within the ruling coalition will complicate policymaking, likely leading to a collapse in 2023, as consensus on policy beyond pandemic management remains allusive.
- We expect rising inflation to provoke popular discontent, while forcing the fractious issue of wage indexation into the political debate, leading us to lower Belgium’s Short-Term Political Risk Index score from 61.3 to 59.4, with a revision to the social stability component from 65.0 to 57.5.
- Immigration remains a perennial risk to the continuity of Belgium’s ruling coalition, with the positive treatment received by Ukrainian migrants highlighting more difficult access for non-European migrants.
We at Fitch Solutions believe that divisions within the ruling coalition will complicate policymaking, likely leading to a collapse in 2023. The current coalition under Prime Minister Alexander De Croo formed on October 1 2020 as the pandemic forced a resolution to the impasse which had left Belgium without a government for two years. The coalition has passed pandemic policy cohesively, successfully navigating frequent anti-lockdown protests, and finding consensus amidst potentially polarising topics such as mandatory vaccines. However, the coalition agrees on little beyond Covid-19 policy and we believe the H122 withdrawal of most restrictions will make it more difficult for the coalition to find consensus. Belgium's low Short-Term Political Risk Index (STPRI) score of 59.4 reflects our skepticism of the continuity of the coalition until the 2024 election, potentially collapsing over such areas as fiscal policy in response to rising inflation or migration.
A Low STPRI Score Reflects A Troubled Outlook For The Governing Coalition
Europe - Short-Term Political Risk Score
Elevated inflation will lead to protests in 2022. Inflation in Belgium typically peaks higher than the eurozone average, partly owing to a high degree of wage indexation throughout the economy (see chart below). The Belgian Federal Planning Bureau’s CPI projections indicate 2.0% (compounded) pay increases for the public sector are to be enacted in each of: April 2022, June 2022, January 2023, and June 2023 (with indexation occurring for social benefits in the prior month and in the private sector to follow). While we expect these pay rises to somewhat preserve purchasing power, we ultimately expect inflation to prove demand destructive, prompting protests in response to a potential cost of living crisis. Indeed, 5000 teachers protested on March 29 and we believe continued protests will push further assistance to the public onto the political agenda, providing a potential area of disagreement for the coalition. In response to inflation’s destabilising impact, we have lowered Belgium’s STPRI score from 61.3 to 59.4, with a revision to the social stability component from 65.0 to 57.5.
The Belgian Economy Typically Runs Hotter Than Other Euro Markets
Belgium - Eurozone Harmonised CPI Comparison, % chg y-o-y (1997-2021)
We believe coalition parties will maintain high wage indexation, however, continued high inflation may cause the policy to split the coalition. The threat of continued elevated price pressures (especially given Belgium’s lack of monetary policy autonomy owing to its use of the euro) has pushed indexation back onto the political agenda. The mechanism has long been considered sacrosanct in Belgian politics and there remains little appetite for ending the policy. However, we see potential for the government to implement an ‘index jump’ (a one-off skip of the automated wage increase), which was last used in 2015 to temporarily overrule the mechanism to prevent a wage spiral.
In January, politicians voiced their support for maintaining full indexation in January – including Socialist Party leader Paul Magnette and liberal Reformist Movement leader Georges-Louis Bouchez – while De Croo avoided taking a stance, confirming only changes could be made only ‘at a later stage, if there is a majority in favour’. Continued rising prices and pressure from businesses may encourage a change in approach with our belief of a stance change most likely from Bouchez. However, the wide ideological spectrum present in the current government combined with elevated unrest risks imply that an index jump will be difficult to pass, which could add to fractures within the coalition.
Rising Prices To Provoke Discontent
Belgium – Harmonised CPI With Component Contributions, % chg y-o-y & pps (2021-2022)
Immigration remains a perennial risk to Belgium’s coalition, with the Socialist Party and Ecolo (left-wing Walloon parties) taking a particularly pro-migration stance while right-wing Flemish Christian democrats, and the Open Flemish Liberals and Democrats, take more nuanced approaches, being pro-migration in some instances, but also skeptical of open borders within Europe. While the government has agreed to accept up to 200,000 Ukrainian refugees, we believe fractures will continue to derive from the much smaller number of non-European nationals. In March, Belgium rejected 1500 of 1925 asylum applications, with one-third of the rejection being Afghans and Belgium may deport the failed applicants back to Afghanistan if they view the security situation as more stable. The differing treatment of refugees raises risks of fractures in the coalition, with Socialist Party and Ecolo potentially threatening to quit the government, as they did in response to a migrant-hunger strike in July 2021.
A softening of rhetoric from the Greens on the planned phase out of nuclear power alleviates a threat to the coalition. A 2003 law committing the country to the closure of nuclear power plants by 2025 caused fractures within the ruling coalition, with ecology-minded parties supporting the legislation while the French-speaking liberals were in favour of keeping the two newest reactors in service. Russia’s invasion of Ukraine led to a reversal from the Greens, with the Green energy minister calling for a ‘reassessment’ of the planned phase out on March 7. A key report was released on March 18, concluding planned gas stations would not have sufficient output to guarantee energy security. The government confirmed on March 18 that it would extend the operating life of the two reactors by ten years, and also agreed to EUR1.1bn of new sustainability investment, thus removing one source of tensions within the government.
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