Transcript of a Conference call with Luc Everaert, Mission Chief for Belgium in the European Department of the International Monetary Fund, on the 2005 Article IV Consultation for Belgium

March 1, 2006

Washington D.C.
March 1, 2005

MS. MBOTO FOUDA: Good morning everyone, and thanks for joining us. I'm Lucie Mboto Fouda, Senior Press Officer with the IMF, and I would like to welcome all the participants to this conference call of Luc Everaert. Luc is Division Chief in the IMF's European Department and Mission Chief for Belgium.

Luc is here today to discuss the 2005 Article IV Consultation Report for Belgium, which as you may know was discussed by the IMF's Executive Board on Monday, February 27, 2006. We also have with us today here in Washington, D.C., Abdessatar Ouanes, Assistant Director in the IMF's Monetary and Financial Systems Department. He is participating in the call to respond to questions that you may have related to the Financial System Stability Assessment for Belgium.

The Public Information Notice summarizing the Board's discussion, the Staff Report, the Financial Systems Stability Assessment, as well as the Selected Issues Paper were posted on our password-protected Media Briefing Center yesterday, and I trust you have had a chance to review them.

Before we begin, let me go briefly over some ground rules. This is an on-the-record conference call and Mr. Everaet will have a few remarks. We will then take questions. Indeed, Mr. Everaert's remarks as well as all the papers posted on the Briefing Center yesterday are embargoed until 9 o'clock a.m. Washington time today. Mr. Everaert, you have the floor now for your opening remarks. Thank you.

MR. EVERAERT: Thank you. I would like to begin by highlighting the main points of this year's assessment before taking questions. The Fund's overall view of Belgium's economic performance and its economic policies is positive, but at the same time there is a need for further economic reforms to successfully deal with the main issues facing Belgium, and that main issues are of course population aging and the related pressures on growth and public finance.

For this, the budget needs to move into surplus and job creation needs to pick up. Those are our two main recommendations. Both of these need to be accomplished through structural reforms.

On the economic outlook, the Fund's staff believes with the Belgian authorities that growth is going to increase in 2006. We see it at 2.1 percent for GDP this year, and possibly a little bit higher. There may be some downside risk as always, mostly from the external side, oil prices, possible euro appreciation against the dollar, and possibly weaker than expected growth in Germany.

The Fund's main macroeconomic concern about Belgium right now is about external competitiveness. In our view, the 2005-2006 interprofessional wage agreement will allow wages in Belgium to grow faster than those of key trading partners. This may of course help demand in the short-run, but it could adversely affect export performance and investment in the long-run. Therefore, the staff as well as the Board of the IMF urge labor unions and the employers federations in Belgium to agree on modest wage increases to make sure that any erosion in competitiveness is reversed.

How do we view fiscal policy? There is no doubt that the achievement of balanced budgets over the five past years has been very beneficial for the Belgian economy. Public debt has fallen as have interest rates and the interest bill. Households have gained confidence that the budget situation is firmly under control, and at the same time, tax cuts have helped stimulate job creation and investment.

However, I think we are now arriving at a crucial movement. That is, time has come to build up budget surpluses to allow savings on the interest bill from declining debt to be set aside the cost of aging. This strategy will work only under two conditions. First, reforms have to increase employment rates to what is known as the Lisbon Targets. Second, fiscal surpluses need to built up early enough and sustained for a long enough period of time to be able to solve this problem. In this context, the staff and the Board believe that achieving the medium-term objectives as specified by the Belgian High Finance Council will be sufficient to do this, of course, provided that there is no further increase in the cost of aging.

We are, however, not convinced that policies are in place to achieve these targets. First of all, too much of the savings on the interest bill have already been used for higher spending and tax cuts, and the full effect of these tax cuts has not yet been felt. Second, there have been one-off measures, and most of these one-off measures will imply future expenditure. Without more durable measures to curb spending, we see a tendency for deficits to emerge again, and with a lot of spending determined by entitlement programs and social transfers, there is a need to actually reduce discretionary spending in real terms.

The third point is that the political economy of achieving surpluses is also not straightforward. Therefore, the advice from the Board in addition to pursuing nominal budget targets is to adopt a medium-term spending framework, or at the minimum, to shift the focus of budget management to primary surpluses rather than overall deficits. In this way, any decline in the interest bill would automatically lead to budget surplus.

It will be essential for the High Finance Council to resume its traditional role in assessing developments in public finance and providing recommendations on the fiscal outlook. It will also be important for the High Finance Council to make sure that the cooperation agreements on the budgets between levels of government are adhered to.

Finally, I think Directors believe that a comprehensive approach to tax reform is necessary and desirable. In this context, tax amnesties and quickly designed ad hoc increases in taxes on specific products such as life insurance and mutual funds are not seen to be very helpful. Similarly, securitization of tax arrears is only an accounting device that trades off lower revenues tomorrow for higher revenues today. Nonetheless, the Fund continues to support a shift of the tax burden away from labor as has been going on, but in the context of comprehensive reform.

Success in dealing with the aging problem will require a better functioning of the labor market. Labor market rigidities will need to be removed, and reliance on budgetary resources to promote job creation diminished. The IMF sees the Generation Pact as an important step towards high employment rates but, again, more is needed. The core of the problem lies in the tendency of wage bargaining in Belgium to focus on maximizing wage increases for those who already have jobs instead of creating jobs for those who have none. We would strongly recommend that social partners begin to focus on job creation. To help this process, we think that future agreements should be of the all-in variety and ultimately that indexation needs to be abandoned. Quite clearly, in the context of monetary union, indexation is a clear anachronism and it tends to lead to an erosion of competitiveness as we are seeing in this current two-year period.

Further, with unemployment still relatively high, I think it's important that the duration of unemployment benefits be limited and job search requirements strictly enforced. Generally, there is a need to dispel the remaining notions that the quantity of work is fixed, and we firmly agree with Prime Minister Verhofstadt when he said "jobs create jobs." In this context, I think earlier retirement regimes will need to be phased out, provided of course that the conditions are in place to allow older workers to be employed in good circumstances.

Finally, this year, the regular consultation was accompanied by a thorough assessment of the financial sector which was conducted by Mr. Ouanes and his team. This assessment found that Belgium's financial sector was stable and resilient, but at the same time that it is necessary to maintain the high quality of banking supervision and to raise insurance and pension supervision to the same quality. Adequate capacity should be devoted to the oversight and the prudential regulation of the Payment and Security Settlement System, and it's very important that all the entities involved seamlessly coordinate their work.

This ends my introductory remarks, and I am now ready to take questions.

QUESTION: What are your concerns about the Belgian housing market?

MR. EVERAERT: We have looked at housing prices which have increased quite steadily over the last 5 to 6 years and have reached the levels that are similar in other countries in Europe where there are high house prices. The risks of houses I think are twofold. One is, of course, the impact on the macroeconomy of sharp increases and decreases in house prices. In this context, our view is that house price increases in Belgium have helped households in the past few years to keep their consumption up even when real disposable income was falling. The mechanism, however, was indirect because there are high transaction costs in Belgium and it is not easy to withdraw equity from the house as is the case in Anglo-Saxon countries. This diminishes the risk that house prices could sharply fall at once.

Our concern, therefore, is that over time in the next few years, we are likely to see a decline in the rate at which house prices are increasing, and that might reduce a little bit growth, but otherwise, we think that the risks are confined and we don't see any major consequences on household consumption.

The other side of the risk of course has to do with the financial sector. Mr. Ouanes may clarify some points on this.

MR. OUANES: I think on the financial sector we have looked at the portfolio of the banks when it comes to mortgages. We have noted the increased amount of mortgages in variable rates and we have in fact done a stress test on the financial system on the assumption of a major decline in housing prices, and we were comforted by the result. So we do not see that as a major concern for the banking system as a whole at this time.

QUESTION: Can I come back to that? Am I right in concluding that you don't see a major concern neither for the banking, for the financial sector, as for the economy as a whole in the rising house prices and this sharp rise in these variable mortgages?

MR. EVERAERT: Yes, that's correct. Now of course, at this moment we don't think there are any important risks. That doesn't mean that we should not keep monitoring the developments in the housing market, and we have given some recommendations which you can probably also pick up from our Selected Issues Paper. There is a need to improve the information for households, there is a need to collect more data on loans, on the housing market, and there's of course for the supervisors, a need to continue to do their regular job of closely monitoring whether banks practices are still consistent with the regulations that they have in place.

MS. MBOTO FOUDA: If we have no further questions, I would like to thank all of our participants for being with us today to discuss the 2005 Article IV Consultation Report for Belgium. Once again, the conference call and the material posted on the Media Briefing Center are under embargo until 9 o'clock Washington time.


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