A Curious Economic Riddle

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From most of its economic data post financial crisis one would be inclined to think Belgium is a peripheral Southern European eurozone economy.

The Dutch economy on the other hand is one of the most competitive in the world.

Yet for most of the post-financial crisis period, the Belgium economy performed considerably better on growth, the labor market and household consumption.

We look at the data and will try to make sense of this seeming puzzle.

We'll also look at what can be gauged from this for the relative outlook of the countries' bond markets.

Here we two eurozone economies. Economy A is characterized by:

  • Consistently high public deficits (3%+ of GDP)
  • Very high and rising public debt (106%)
  • Basically zero productivity growth
  • Continuously rising labor cost above its main trading partners

Then we have economy B:

  • It has the biggest current account surplus of the euro area
  • It's ranked the fifth most competitive economy in the world
  • It had moderated public deficits (now even a surplus) and falling public debt

One would be inclined to think that economy A is one of the Southern periphery countries and economy B is Germany. One would only be close with the latter guess as economy B is the Netherlands. The bigger surprise might be that economy A is Belgium.

But perhaps the biggest surprise is that Belgium fared considerably better compared to the Netherlands during much of the eurocrisis.

For people like us who basically look at the world in search of data and stuff that comes close to 'natural' experiments, to tease out policies and institutions that work, these counterintuitive results are a marvel.

First, we have to show that Belgium indeed did fare better during much of the eurozone crisis compared to the Dutch economy, at least until 2016:

The Netherlands fared particularly badly in consumption and labor force participation:

Curiously, Belgium scored much better on both dimensions. In the age of doubt about economics, can this be explained? Well, here are a few clues.

  • Fiscal policy
  • Housing market and private sector debt

Fiscal austerity

In fact, the differences between the Netherlands and Belgium aren't so difficult to explain. Belgium has had a governance problem as it's a particularly difficult country to govern (two major languages and a cultural rift to boot is short-changing a full explanation, but it's at the heart of it).

As a result, it even went without a functioning government for over a year and never really embarked on the type of austerity that was imposed on much of the rest of the eurozone, including the Netherlands.

The downside of this is that Belgian's public debt, already much higher than the Dutch one, kept drifting higher and its deficit didn't shrink as the Dutch did. The Netherlands is now even basking in a public surplus after economic growth has returned to the country.

So there are some take-aways for both sides of the austerity debate. The Netherlands sacrificed growth for austerity, but got their reward in the end in the form of much healthier public finances (although we have to keep in mind these were much healthier to those of Belgium to start off with).

One could also argue that austerity hasn't been nearly as savage in the Netherlands and they never had the loss of competitiveness as a result of capital inflows that plagued the eurozone periphery, so they never got on the kind of vicious cycle austerity were it was sapping so much growth as to make public finances worse, not better.

Housing boom and bust

The other major difference between the two countries is household credit and the housing market. Both countries experienced housing booms, but there are several major differences

  • Belgian's housing boom started from a much lower level
  • Belgian's housing boom never reversed after the financial crisis, house prices kept going up
  • Belgian's housing boom is not financed by excessive credit to the private sector, unlike the Dutch boom.

Dutch household debt as a percentage of GDP is the second highest in the eurozone, while the Belgium equivalent is really rather modest.

The Netherlands did (until recently) badly because they experienced a house price decline of over 20% from the pre-financial crisis top and since households are leveraged up to the hilt with houses as the main equity, this increased precautionary savings substantially.

Mortgage debt is three times as large relative to GDP compared to Belgium, one of the main causes is that mortgage debt is completely tax deductible still in Holland, the last country in the eurozone where this is the case (apart from some minor recent adjustments).


The differences in economic performances between the two countries, surprising at first, are not difficult to grasp. We have always interpreted the post-financial economic development in terms of deleveraging, and invoking this framework does the trick pretty well.

Belgium has high public leverage but fairly low private leverage, while the Netherlands shows exactly the opposite picture.

The Netherlands fared considerably worse compared to its Belgium neighbor because of a combination of private and public sector deleveraging. When house prices returned and austerity ended, growth returned, it's really as simple as that and it's also as simple economics would have told you.

For peculiar reasons, Belgium never experienced neither public nor private sector deleveraging, hence its growth record has been substantially better, until recently.

Investment implications

Given the small home markets and international perspective of most listed companies in both countries, we don't expect too much difference in the share performance.

Take the iShares MSCI Netherlands ETF (NYSEARCA:EWN):

Compare this to the iShares MSCI Belgium Capped ETF (NYSEARCA:EWK)

Belgian shares still outperformed Dutch ones, at least in their ETF incarnation (which is more relevant than the indexes because US investors have no exposure to these).

Things in the bond markets should be considerably more interesting though. Given the state of public finances, going forward, Belgium public bonds are liable to be a much worse bet compared to Dutch bonds.

The difference is actually rather minor and not really trending. Both countries 10 year yield have gone down substantially after Draghi's 2012 "whatever it takes" and even more so after the ECB started its asset purchasing program in 2015.

That program is reducing from 80B euros to 60B euros a month from next month onwards, and scheduled to expire at the end of the year. This, of course, is looming over the markets.

The Belgians might have enjoyed higher growth and better labor market performance, the Dutch, have managed to put their public (although much less so their private) finances in order and this is likely to lead to a growing divergence of their bond markets.

There exist bond ETFs for both countries:

We took the tickers for London, but they are also listed on the Euronext and Frankfurt exchanges. They are fairly unadventurous products with little variation. In three years time the Dutch ETF returned a little over 10% and the Belgium one did a little better with nearly 15%.

The backdrop is of course what will happen to bond yields in general, which is not really the topic of this article but the looming end of ECB buying and upward trend in inflation suggest bond yields will be rising.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.