Belgium, the Netherlands and Luxembourg call on old and new strengths to jump-start growth.

Author: Vanessa Drucker

Making Headway

Each Benelux country has unique challenges. The Dutch economy struggled with two recessions in 2008, as well as a burst housing-market bubble that left households highly indebted and exposed. Today, home prices remain 35% below pre-crisis levels but are improving, albeit from a low base, as confidence picks up.

In general, Holland is more trade-oriented, with Belgium more directed toward industry and production.

~ Luc Strybol, consulate general of Belgium in New York

“Some people are even concerned about a new bubble, at least in Amsterdam,” says Jessica Hinds, European economist at Capital Economics. While cautioning that high indebtedness may yet crimp the recovery, her firm offers hope that the housing resurgence may be sustainable, as disposable incomes and mortgage lending are both on the rise, and the government is planning a fiscal boost for Holland’s housing market in 2017.

Belgium, meanwhile, was been shadowed for years by an unusual political morass that followed the 2010 elections, when it was unable to form a government for 18 months. Although the country functioned, it could not pass a budget. “Simply renewing the old budget was not enough to address fiscal issues,” says Francesca Peck, economist at global consultancy IHS. Economic sentiment finally improved in early 2015, as Peck suggests, “because it took less than a year this time to form a government.”

The new Belgian government has introduced reforms aimed at improving competitiveness, including ending the policy of indexing wages to inflation. With the highest labor costs in the Benelux, Belgium will reduce employers’ share of social security taxes from 33% to 25% of salaries from 2016 to 2018. New taxes on alcohol, cigarettes and diesel will finance the cuts, says Strybol. 

Calmes, Arendt & Medernach: Luxembourg City’s daytime population doubles as French, German and Belgian workers cross borders for their jobs.

Smaller social contributions by employers should help retain important industrial companies. “One of the biggest Ford plants in Europe, with several thousand workers, moved in 2014 to Valencia, Spain,” Vanden Houte recalls.

All three Benelux countries remain vulnerable to external trade and geopolitics. The Dutch rely heavily on re-exporting products, such as German or US goods ultimately destined for China. But most Dutch exports flow to the eurozone, where demand remains sluggish and currency fluctuations are neutral. “If France or Germany is hit by disappointing GDP numbers, that immediately feeds into Dutch trade figures,” Peck notes. Or if, hypothetically, the UK should vote to leave the EU, Benelux would immediately feel the pain.

Belgium’s lack of competitiveness, combined with weak import demand from the eurozone, looks likely to restrain growth. Capital Economics forecasts GDP growth of a paltry 1% from 2015 through 2017, which will keep pressure on its 100% debt-to-GDP ratio. That compares with a ratio of 69% for the Netherlands and 20% for Luxembourg.

Dutch GDP is also modest, seen at 1.5% this year and 1% for 2016. Luxembourg’s GDP, on track for about 1.8% this year, is actually outperforming most of its European peers. And unemployment continues to bedevil the group, standing at 8.7% in Belgium and 6.8% in the Netherlands.

The Benelux region is still recovering from a difficult period, but it appears to be turning a corner. Finally, the language of austerity is giving way to a different message: One of reviving national economies, defense and security spending, combating unemployment and starting new business enterprises.

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