Transcript of a Teleconference Call on Belgium's 2006 Article IV Public Information Notice, Staff Report, and Selected Issues paper

March 6, 2007

With Mr. Luc Everaert, Division Chief and Mission Chief for Belgium
Washington, DC, March 5, 2007

MS. GAVIRIA: Good morning. I'm Ángela Gaviria, with the External Relations Department, and I'm happy to welcome you all to this conference call based on the Public Information Notice, the Staff Report, and the Selected Issues Paper of the 2006 Article IV Consultation with Belgium. These documents were posted yesterday at 3:00 in the afternoon under embargo in our Online Media Briefing Center. I hope some of you had the chance to look at them. Here with me is Luc Everaert, Mission Chief for Belgium, and a Division Chief in the European Department. He will be making some introductory remarks, and then he will be happy to take your questions. I should say at this point that the documents I mentioned and the contents of this conference call will be under embargo until 10:00 a.m. today. Luc?

MR. EVERAERT: Participants, my name is Luc Everaert. I am the Mission Chief for Belgium. The IMF has just finished its annual assessment of Belgium's economic policies, and I hope you had the chance to look at some of the related papers. We would like to begin by highlighting the main points of this assessment quite briefly, and then I will allow time for questions.

The Fund's overall view is positive both about the economic outlook at about the economic policies that the government has been pursuing. For some time the Fund has been saying that policies are moving in the right direction but that reforms need to accelerate. Now I think the time has come to act and the elections provide a good opportunity for further reform, an opportunity which should not be missed. As you all have seen, the Fund is therefore calling an early and decisive policy response coordinated across all levels of government. I will discuss some of the key policy actions in a minute.

First, on the outlook, you will have seen that the recent release of fourth-quarter GDP growth has brought the annual growth rate for 2006 to 3 percent. The commentators observed that this was somewhat below their expectations, but in fact from our perspective it was slightly better than what we had expected because you can see that in the papers in front of you we had a 2.9 percent growth rate. If this flash release is confirmed, we will obviously upgrade our estimate also to 3 percent. But the implications for this is that we are quite comfortable about the forecast for 2007, namely, a growth rate of about 2.2 percent. I think that it is in line with the potential growth for the economy. It is obviously lower than last year which was an exceptionally good year, and this slower growth reflects a number of factors, somewhat higher interest rates, some slower growth in advanced countries, some fiscal tightening in Belgium, and what we expect is a slight softening of residential construction later in the year.

The competitiveness of the economy I think needs to be strengthened. From this perspective we found that the wage agreement reached by social partners was a positive step, but it is not sufficient to cover the recent erosion in competitiveness. One important symptom of this is that the unemployment rate in Belgium is not moving down fast enough, and it is falling slower than in neighboring countries even though the Belgian economy is growing quite fast.

On the budget, we find that the target of a surplus for 2007 is quite appropriate, but we anticipate that there may be some need for some further measures in the context of the usual budgetary controls to make sure that this target is achieved. For the medium-term, we think that the fiscal targets need to be a bit more ambitious. I think ideally we would suggest a path that increases the surplus every year by about 0.3 percent of GDP until we have about the 2-percent surplus. This is key to safeguard people's pensions and access to good quality health care.

Turning to the policy challenges, I think there are three important ones. The most important and the most urgent one is a modification of the fiscal federalism arrangement in Belgium. The objective of this reform should be to make all the entities more accountable for their spending decisions to avoid duplication of responsibility and to make sure that economic policies are coordinated. In this context, fiscal institutions like the High Finance Council should retain their independence and they should avoid introducing political considerations in their advice.

The second key reform that is necessary is to adopt a specific medium-program to reduce public spending. That should probably go a little bit beyond what is needed to achieve the surpluses because we also feel that the tax burden especially on labor should be further reduced.

Which brings me to the third essential reform which is a comprehensive reform of the labor market. It is true that the Generation Pact was positive and an important step, but it is insufficient. Belgium's employment rate is still lagging far behind many other advanced countries and far behind what is needed to safeguard Belgium's Social Security system. So there is need to work simultaneously on a number of issues. I think this would include a reduction in taxes on labor and benefits to increase labor supply. By the way, there is no advanced country in the world that has no limit on the duration on unemployment benefits except Belgium.

The second aspect of this would be to completely phase out early retirement schemes, again, to increase labor supply. The third one is to improve education and training. Finally, the Central Wage Bargaining Framework in Belgium which has served Belgium well will need to become more effective in creating jobs because otherwise I think its existence will increasingly be put into question.

This finishes my introduction and I am now happy to take your questions.

QUESTIONER: I wanted to ask about the forecast, I think it was 2.2 percent and you said you were comfortable with that forecast for 2007. I have conducted a little bit of research and I cannot quite ascertain exactly what the forecast is or has been. It is a confirmation of the 2.2 percent or is it a new forecast?

MR. EVERAERT: I can confirm that it is in fact the same forecast that we have had for the last several months, so we have not changed this forecast.

QUESTIONER: Am I right in saying that you have produced this report and I think you are planning to meet Prime Minister Verhofstadt next week on Tuesday, or perhaps, if not you, at least somebody from the IMF will be meeting the Belgian government? I guess what I'm saying is you've got three suggestions for improvement. How realistic do you think they are in terms of being implemented, whether it be over the short-term or longer-term?

MR. EVERAERT: I just would like to clarify that on this report we have already met with Prime Minister Verhofstadt at the end of our mission. This was way back in November. I am not planning to meet with the government again, so the meeting next week may be about a more technical report that some people are doing in the field which covers one of the important issues.

And you asked how realistic it is for them to be implemented. I think the reform of the fiscal federalism arrangement is going to be implemented pretty soon. I think everybody in Belgium is beginning to realize that it is important in the context of these elections to make some changes so that fiscal sustainability can be improved.

The second suggestion about the specific plan on spending reductions, it is hard to gauge how strong the support for that is going to be. I think it is simply going to be necessary and once the first item has been successfully changed, I think there is no doubt that there will be some more medium-term oriented spending programs.

The issue on labor market reform is much more complex. I think it is going to take much more time to build consensus among social partners before we actually are going to tackle some of those issues.

QUESTIONER: I was interested about the labor market. There are particular suggestions for improvement that you've put forward. I wonder how the Belgian market (inaudible) with others, let's say the German market, in terms of the flexibility, because I think there are some similar issues which affect other economies across Europe?

MR. EVERAERT: I think that the Belgian labor market is in practice quite flexible, and it has also shown the possibility to generate very high labor productivity. But there are some issues which have to do both at the end of the young and the low-skilled in the labor market which are pretty much the same across a lot of European countries with relatively high minimum wages, high benefits, it is very hard for these people to enter into the job market and it is a problem that needs to be solved I think by a combination of reducing taxes on labor benefits, but also improving education and training.

Then on the opposite specter of the labor market, Belgium is notoriously worse putting all the people to work. There is a strong legacy of early retirement regimes that are now slowly being reduced, but given the aging problem, I think they need to be completely out and Belgium needs to catch up there much stronger.

The third component where Belgium stands a bit out from some of the other countries is the wage bargaining framework. That framework does not really allow the economy to deal with productivity shocks very easily because it ties wages to neighboring countries without taking into account productivity, and it is also still a system that is based completely on price indexation which is also a little bit anachronistic given the current monetary arrangements within the Euro area.

QUESTIONER: The one point that you mentioned there which is about the legacy of early retirement, I can see that that would be a problem from a budgetary point of view because obviously these people are not paying into the welfare state. But is there not then a risk if you end these early retirements that you have an even greater pool of unemployed people as opposed to employed people?

MR. EVERAERT: I think that there is a tradeoff, but I think that in general what happens is that the generosity of these early retirement schemes is such that the employers and the employees together find it a very easy solution to problems of company restructuring and so on just simply to say to these people we will pay you some extra money for a couple of years and then you can go into early retirement. I think that a lot of these people have a good experience and they have been shown to be able to hold onto jobs and I cannot see why they should not be able to do that for another 2 or 3 years. So I think that the risk of creating more unemployment is very small.

QUESTIONER: You indicated that the wages can rise 5 percent of the next 2 years. Do you think that that is too much compared with the neighboring countries?

MR. EVERAERT: The short answer to that question is, yes, it is too much, not so much compared to what is happening in neighboring countries right now because I think the forecast of this wage increase is pretty much correct. But the problem is that there has been some erosion in the past. I am sure you are familiar with work that has been in Belgium and where they show that there is at least 1-1/2 percent excess wage growth in Belgium that needs to be recovered, and this arrangement only recovers about one-half a percent and that is one-third of that.

QUESTIONER: So 4 percent was more appropriate?

MR. EVERAERT: Four percent would have been the number to achieve the correction in 1 year. Now I can personally understand that because of the uncertainties involved, you may not necessarily want to do the whole collection in one goal, but half a percent is a bit small in terms of recovering the past erosion.

MS. GAVIRIA: If we don't have any more questions, we end the conference call here. I would like to thank everyone who called in and participated.


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