The nature and magnitude of the financial and economic crisis

1.1 The origins and immediate effects of the crisis

Several hypotheses exist for the triggers of the financial and economic crisis in Europe. One hypothesis is that the main source was loose fiscal discipline:

fiscal optimism led to economic overheating, which, in turn, led to wage and price increases, reducing competitiveness and finally inducing an imbalance in the balance of payments. Another hypothesis is that the economic crisis was triggered by the crisis in the banking sector: increasing private sector expenditure was financed by the banking sector, but the credits were used suboptimally. In a context of low interest rates, consumers and companies consumed and invested upfront, speculating on future growth. At the same time, the banks did not manage the credit risk in a prudent way (Constâncio, 2013). However, the banking crisis was also partly a result of the global crisis in financial markets.

1.2 Government responses to the crisis

A number of European banks had substantial balance sheet exposures to the housing market in the United States. Faced with losses on several of their assets, banks rebalanced their portfolios by increasing their holdings of so-called safe government bonds. However, in the meantime, some banks risked failure, forcing their governments to step in and recapitalize these banks to protect citizens' savings; this at a time when public finances were already under huge pressure because of the recession-induced collapse in tax revenues (Constâncio, 2013). This also happened in Belgium. The Belgian Government made almost

€21 billion of capital injections in the banking sector between 2008 and 2009 (De Leeuw, 2010). In addition, the government guarantees the saving deposits of Belgian citizens up to €100 000 per person. Because of the imminent failure of several banks, the government decided to inject fresh capital into the sector, hoping for a recovery in the economy. The conditions imposed were mainly limited to (a higher) representation on the board of directors of the bank. The funds came from regular government receipts, collected through direct and indirect taxes, capital taxes and non-fiscal receipts.

1.3 Broader consequences: how well prepared was Belgium for an economic shock?

The impact of the global financial crisis on Belgium's gross domestic product (GDP) was similar to the impact in other countries. The impact became apparent in mid-2008 and in the first semester of 2009, when the GDP per capita was 4% lower than the year before. The economy recovered slowly, and

by 2012 had reached a GDP level of barely 0.1% above the level of mid-2008 (Eurostat, 2013a). Total government revenues increased between 2008 and 2012, from 48.7% of GDP to 51.0% of GDP. At the same time, the level of expenditure increased markedly from 45.9% in 2008 to 51.6% in 2012, leading to an increasing government deficit.

The average increase in government expenditure was 2.6% from 2002 to 2014:

1.3 percentage points higher than GDP growth. Social security expenditure started to increase at a more rapid rate from 2009 onwards. Almost one-third of social security expenditure consists of pensions. The real increase in pensions accounted for 3.4% in 2012. Sickness and disability insurance benefits also increased because of the broadening of welfare measures.¹ This growth in social security expenditure was tempered by the moderate or even decreasing trend in other types of social security expenditure. For example, annual average health care expenditure per capita (which represents almost one-third of the total social security budget) grew by only 0.6% in real terms between 2009 and 2011, much less than in previous years (the annual average growth rate between 2000 and 2009 was 3.7%) (Eurostat, 2013a; OECD, 2013c). Measures that contributed to this tempering of health care expenditure included savings on physician fees and drug reimbursement measures (see section 3.3).

While the government's deficit as a percentage of GDP or gross debt had been decreasing since 2000, it started to increase again in 2007 (when it was 84% of GDP) and in 2012 stood at approximately 100% of GDP (Eurostat, 2013c) (Table 1.1). The increase of the debt ratio was the result of the country's worsening economic prospects, the capital injections the government administered to ailing financial institutions and also from exogenous factors such as the European Union's (EU) financial measures to support Greece, Ireland and Portugal. In terms of the Belgian Government's sovereign credit worthiness and borrowing capacity, the average 10-year government bond rate generally remained solid, despite some fluctuations, throughout the previous decade, even with the impact of the economic crisis. The average 10-year government bond rate decreased between 2000 and 2005 to reach its lowest level before the crisis in 2005, at 3.4%. The situation worsened afterwards and interest rates started to increase until 2008, reaching 4.5%. However, between 2008 and 2010 trust was regained, particularly after the formation of the new federal government and its budgetary agreements, and this was reflected in a decline in the interest rate. In 2012, Belgian bond rates approximated those of the strongest European countries, at 3% (Eurostat, 2013b).

1 For example, the eligibility period for receiving the invalidity pension after the pensionable age was equalized between men and women, and greater numbers of people with psychiatric disorders and locomotor or connective tissue diseases became eligible for invalidity benefits.

Table 1.1Demographic and economic indicators in Belgium 2003–2012, or latest available year 2003200420052006200720082009201020112012 Population levels (thousands)a10,35510,39610,44510,51110,58410,66610,75310,83910,95111,035 People aged 65 and older (% of total population)a17171717171717171717 Dependency ratio (%)b,*53.0953.2052.8652.5052.2252.0252.1352.5952.8653.27 GDP per capita (US$ current prices and PPP)c29,10030,60031,10033,00036,20037,40036,80037,80038,200– Real GDP growth (%)c1.12.61.53.02.81.0−2.72.01.9– Government deficit (% of GDP)d−0.1−0.1−2.50.4−0.1−1.0−5.6−3.7−3.7−4.0 Government consolidated gross debt (% of GDP)d98.494.092.087.984.089.295.795.798.099.8 Total unemployment rate (%)d8.28.48.58.37.57.07.98.37.27.6 Unemployment, male (%)d7.77.57.67.46.76.57.88.17.17.7 Unemployment, female (%)d8.99.59.59.38.57.68.18.57.27.4 Long-term unemployment (% of all unemployed)a46.349.651.751.250.447.544.248.848.444.7 Long-term unemployment (% of active population)c3.74.14.44.23.83.33.54.13.53.4 Notes: PPP: purchasing power parity; *The dependency ratio is the ratio between the total number of people younger than 15 years of age or 65 years and older and the number of persons of working age (from 15 to 64). Sources:aOECD, 2014; bBelgian Federal Government, 2013; cIndex Mundi, 2014; dEurostat, 2013a.

The net borrowing of the Belgian Government quadrupled in absolute values between 2008 and 2009. As a percentage of GDP, Belgium's net borrowing level was better than the average for the EU27 (27 Member States at January 2007) in the period 2005–2011. However, it could not maintain this position in 2012 (Eurostat, 2013c). In view of these economic conditions, the federal government introduced an economic stimulus plan in the middle of 2012 (Federal Planning Bureau, 2013). In 2013, a social agreement was established for the non-profit-making sector in Belgium. This agreement foresaw €40 million earmarked towards financing the costs of 800 additional full-time equivalent positions in the health care sector; other actions related to the health care sector are described in section 3.

At the household level, price index data show that inflation has not been as high in health care (i.e. cost of health care services) as in many other sectors in Belgium. Only communication services have had a lower inflation in the period from 2003 to 2013 (Eurostat, 2013d).