Belgium froze 1.3 billion euros ($1.7 billion) in spending after the European Union warned that a weaker-than-projected economy would push the deficit above the new government’s targets.
“It’s a purely administrative suspension to give us time to conduct the budget review,” Budget Minister Olivier Chastel told L’Echo newspaper. He defended the government’s budget math, saying it will squeeze the deficit down to 2.8 percent of gross domestic product in 2012 as planned.
The EU’s prediction of a higher deficit weighed on Belgian bonds yesterday, pushing the extra yield over German debt up by 6 basis points to 278 basis points, the most since a six-party government took office on Dec. 6 with a pledge to cut the budget.
Belgium, saddled with Europe’s fifth-highest debt, is battling to prevent a surge in borrowing costs amid domestic economic hardships and investors’ broader skepticism about the euro area’s response to the two-year-old debt crisis.
Belgium’s first-half economic prospects range from “very anemic growth” at best to a contraction of 0.5 percent at worst, said Luc Coene, head of the Belgian central bank. He called for budget cuts and steps to boost the nation’s “meager” employment level.
“It is very important to make this commitment to reassure the markets and reduce our interest burden,” Coene said in a joint interview with La Libre Belgique newspaper and RTBF radio.
Formed after 18 months of wrangling that led to speculation that Belgium might break apart, Prime Minister Elio Di Rupo’s government now faces an earlier-than-foreseen test of its economic management and fidelity to the EU.
EU Economic and Monetary Commissioner Olli Rehn said on Jan. 5 that, while immediate cuts of as much as 2 billion euros would be a “first-best solution,” he would let Belgium buy time with a spending freeze until a scheduled budget review in February.
Rehn’s letter, published by De Tijd newspaper on its website, set up Belgium as a test case of new rules that allow the EU to intervene in national taxing and spending. It estimated Belgium’s 2012 deficit at 3.25 percent of GDP, above the euro area’s 3 percent limit.
The EU gave Belgium until Jan. 9 to respond and will issue its opinion on Jan. 11.
Di Rupo’s team responded quickly to previous international pressure. It took the six parties negotiating the new government less than 24 hours to reach a budget deal after Standard & Poor’s Ratings Services on Nov. 25 lowered Belgium’s credit rating one step to AA with a negative outlook.