By Frances Robinson
BRUSSELS--Large guarantees for rescued banks, principally Dexia SA (>> DEXIA) will continue to pose a risk for heavily-indebted Belgium, the European Commission said when issuing its winter forecasts for the 27-nation bloc Friday.
"Large contingent liabilities (around 15% of GDP) stemming from guarantees given to financial institutions represent an additional risk," the European Union's executive arm said in the forecasts. "The impact of the recapitalisation of Dexia on the debt (0.8% of GDP) has been offset by the reimbursement of a loan by KBC NV (>> KBC)."
Debt is set to rise to 100.8% of gross domestic product (>> Goodrich Petroleum Corporation) in 2013 and 101.1% the year after. A decision by EU statistics body Eurostat on how to account for the 2.9 billion euros ($3.84 billion), which is 0.8% of GDP, recapitalization of Dexia late last year is still pending.
Belgium's budget balance is "projected to wobble around the 3% of GDP threshold," according to the forecasts. Belgium missed its target of 2.8% of GDP in 2012, coming in right on the EU limit of 3%. Still, as the country makes reforms, the commission reduced its deficit forecasts for the coming years.
In 2013, it forecasts 3.0% of GDP, compared with 3.4% in the last round of commission estimates. In 2014, the deficit is expected to rise to 3.2% of GDP--previously 3.5%--, despite the better growth outlook. This is partially due to relying on one-off measures, it said, with the new deterioration in 2014 "due to the rising trend of a number of expenditure categories, assuming no policy change."
The commission also said nominal wage growth will slow this year due to recent measures aimed at containing nominal wage dynamics. Belgium is one of the last countries in Europe to automatically increase salaries every year based on formulae linked to inflation--a practice criticized by National Bank of Belgium Governor Luc Coene earlier this week.
"These high wage costs are mainly based on the enormously high fiscal burden placed on labor in Belgium...in the end this is a political decision," he said. "There are a number of problems in this country which have to be tackled and one is the fiscal and parafiscal burden on labor...that is why we plead for a tax review."
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