Belgium Remains Mired in Political Crisis as PM Resigns

In an unexpected move, troubled Belgian Prime Minister Yves Leterme handed in his resignation to King Albert II yesterday. This is the third time in 11 months that Leterme has thrown in the towel, twice as leader of the negotiations to form a new government after the June 2007 election (23 August 2007 and 1 December 2007) and now as prime minister just four months into his term. King Albert II has not yet commented on Leterme's latest move.

Regional Autonomy an Insurmountable Obstacle

Leterme’s latest resignation has been motivated by his failure to gain agreement for a draft government document on reform of the Belgian state that would hand greater regional autonomy to Flanders by his self-proclaimed deadline of mid-July. As the deadline approached with no agreement in sight, proponents of the reform plan hinted at an extension of the deadline until late July in order to save face. However, this only revealed the weak grip Leterme had on the issue. The final straw for the consensus-seeking Leterme was a decision by the Constitutional Court regarding eligibility for housing in Flanders (see Belgium: 14 July 2008: Belgian Constitutional Court Rules Only Dutch Speakers Eligible for Housing in Flanders).

The root of the problem for Leterme has been an election promise that was attractive to Flemish voters but hard to accept for the Wallonian electorate: greater devolution. Flemish constituents have become increasingly resentful of the transfer of tax receipts to the less affluent Wallonia; rather, many businesspeople have called on deputies in the Flemish parliament to boost investment locally and thereby solidify the potential for even greater economic growth in future. Subsequently, the run-up to the 10 June 2007 general election was marred by bitter exchanges between Flemish and Wallonian contestants over greater fiscal and administrative autonomy for Flanders, with Leterme at the centre of the controversy with his derogatory remarks regarding French-speaking Wallonians and his mocking of the federal state. The campaign earned Leterme's party, the Christian, Democratic and Flemish Party (CD&V), 18.51% of the vote in the fiercely contested poll. Against this background, none of the winning parties expected negotiations to form a coalition government to be swift. Yet, Leterme and his party dug themselves into a hole that was difficult to climb out of. Subsequent bending of the constitution ensured that an interim government was turned into an emergency cabinet and equipped with rights preserved for regular governments (see Belgium: 28 December 2008: Belgian Emergency Cabinet Embarks on Brisk Reform Agenda). Meanwhile, emergency cabinet leader Guy Verhofstadt helped broker a deal between the quarrelling victorious parties, and thereby ensured the inauguration of the "Leterme I" government in March 2008 (see Belgium: 21 March 2008: Deadlock in Belgium Finally Ended as Permanent Government is Sworn In).

The Wallonian government parties—the Wallonian Reform Movement-Democratic Front of Francophones (MR-FDF), the Humanist Democratic Centre (CDH), and the Socialist Party (PS)—cannot see how greater devolution would benefit their electorate. With the capital, Brussels, already based in Flanders, Wallonian politicians worry that regional autonomy would see the predominantly French-speaking zone of Brussels-Halle-Vilvoorde (BHV) turned into a department divided along ethnic lines and thus predominantly Flemish. These parties repeatedly asked Leterme to present a more balanced proposal for the reform of the constitution and devolution or else face the collapse of negotiations.

Outlook and Implications

Once again, Leterme has opted for an exit strategy as the going has got tough. Leterme knows all too well that he is not popular with the runner-up MR-FDF, led by Vice-Deputy and Finance Minister Didier Reynders, which received almost 6% fewer votes than the CD&V at the June 2007 general election. Reynders has been looking to become the first francophone prime minister in 30 years since the June election, and his chances increase with every resignation by Leterme. The francophone parties hold 41 seats in parliament as opposed to the CD&V-CDH's 34 seats, and given the low overall number of Flemish governing parties, holding just 42 of the 88 seats available, the legitimacy of the CD&V-CDH in government is in tatters. However, Leterme is banking on a stipulation in the constitution that states that the leader of the federal government must be Flemish, as the population of Belgium is 60% Flemish, while 40% are Wallonian. Leterme does not face a serious Flemish challenger, since the second Flemish party in government, the Open VLD, gained 6.68% fewer votes than the CD&V at the June 2007 poll. King Albert II now faces a very difficult choice: on the one hand, Leterme's resignation satisfies the wishes of the French-speaking Wallonian junior coalition partners and also disgruntled Flemish authorities vying for more regional autonomy; on the other, however, there is currently no-one to fill Leterme's shoes within the boundaries set by the constitution. Indeed, King Albert II may find his hands tied and may very likely reinstate Leterme—bar a constitutional or political miracle at the last minute.

In the short term, the five main parties will continue to grapple with the most important and divisive issue, regional autonomy. The country is due to hold regional elections in 2009, and the outcome of these may help the executive committees of the five ruling parties make up their minds. The leaders of the governing parties fear nothing more than a snap election that could see them ousted from government. Consequently, they will refrain from calling for an early ballot any time soon, and will look to resolve the crisis internally. However, Global Insight does not believe that the current coalition government will progress on the most pressing points of its joint agenda, and we are thus downgrading Belgium’s Political Risk Rating from 1.75 to 2.00 until the ruling parties present a joint declaration on regional autonomy.

As with other stable market economies, the ongoing disputes within the Belgian government do not affect the day-to-day administrative and business activities in the country, not least thanks to the passing of the 2008 budget in February this year. The economy has experienced healthy growth, with only a minor slowdown seen recently; indeed, economic activity in Belgium remained robust in the first quarter of this year, although annual growth eased to 2.2% from 2.9% in 2006-07. However, economic activity will deteriorate in the coming quarters as a result of the global credit crunch, slower global demand, the recent financial-market turmoil, record high oil prices, and a markedly stronger euro since late 2007. Furthermore, purchasing power remains an important concern for Belgians, and consumer confidence fell to a three-year low in June. Striking trade unionists may remind the ruling parties later this year of the need to resolve the issue of purchasing power or else face another raft of protest marches and strikes.