Money Talks - Economic Factors in Belgium?s

UNCLAS SECTION 01 OF 02 BRUSSELS 004149

SIPDIS

SIPDIS

STATE FOR EB/IFD, EUR/ERA AND EUR/UBI
TREASURY FOR OASIA/ICN - Atukorala
USDOC FOR 3133/USFCS/OIO/EUR

E.O. 12958: N/A
TAGS: ECON EFIN ETRD BE
SUBJECT: Money Talks - Economic Factors in Belgium?s
Federal-Regional Power Struggle

REF: (A) 04 Brussels 5395 (B) 05 Brussels 4442

(C) Brussels 3952 (D) Brussels 3681


1. (SBU) Summary. Belgium?s federal-regional
negotiations in spring-summer 2007 on the division of
political competencies will have major economic
implications. If the federal government cedes
responsibilities to the regions, regional demands for
direct taxing authority and fiscal autonomy will grow.
Such demands for autonomy strike a chord in Dutch-
speaking Flanders, which many Flemish Belgians believe
supports too generously its poorer French-speaking
counterpart, Wallonia. Although Walloon nationalists
favor more autonomy, economists and the Walloon
government emphasize the financial benefits of remaining
a federal state. While some politicians actually argue
for recentralizing some powers that had been devolved to
the regions back to the federal level - arms sales and
export controls is a prime example - the history of
interregional rivalry portends greater fiscal autonomy
for the regions. Economic growth, jobs and investment,
and how to get them, are a major focus of regional and
federal leaders as they prepare for upcoming
negotiations and the federal elections that will precede
them. End Summary.


2. (U) The Federal-Regional negotiations scheduled to
follow the 2007 federal elections will play a
determinative role in Belgium?s economic future. While
overtly a negotiation about furthering the political
devolution of power that began with the 1990
Constitution, critical economic issues will be decided
as well. Post outlined previously the diverging
economies of Belgium?s Flemish north and Walloon south,
in both industrial character and economic performance
(refs A and B). Those differences are having an impact
on many political decisions, such as European Space
Agency contracts that support Belgium?s aerospace
industry (ref C).


3. (U) The key issue in the negotiations will be the
distribution of federal and regional responsibilities.
As originally conceived, the division of competencies
was based on the most effective and responsive level of
implementation: those issues that touched citizens most
directly ? environment, education, social programs -
would be principally overseen by the regions.
Overarching national concerns such monetary and fiscal
policy, foreign affairs, national defense, employment
policy and public health were kept at the federal level.
Since 1990 there has been a trend towards granting
greater authority to the regions, to include areas like
foreign trade and investment promotion, arms sales and
export controls, and technology and investment policy.
The Federal government has shifted some programs to
diminish its budgetary obligations, and some national
politicians have pressed for transfers of powers to
regional jurisdictions to demonstrate their regional
loyalty.


4. (SBU) As the regional role grew, so too grew the
battle over economic levers and sources of revenue.
At present the federal government wields the power to
levy income tax, corporate tax, VAT, and mandatory
contributions for social entitlement programs; the
regions are limited to inheritance taxes and property
taxes. Pressure is mounting in the regions for them to
have direct taxing power, rather than depend on federal
revenue sharing. In 2005, the Federal budget
redistributed 59.8 percent of fiscal revenues to the
regions or communities for public administration.
Federal authorities face a watershed choice if they
agree to further devolution of power, as the center of
gravity of economic decisionmaking shifts further out of
federal hands.


5. (SBU) Yves Leterme, President of Flanders and leader
of the center-right CD&V party, has generally been
calling for more economic competencies (labor, economy,
transportation and justice) to be given to the regions.
His views are shared by many, though for different
reasons. Flemish conservative parties complain that 8.5
percent of Flemish GDP is sent to support Wallonia each
year without thanks or any indication that the Walloons
are trying to move away from such dependency. The far
right Vlaams Belang party claims Flanders pays 64

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percent of all Belgian taxes ? above their 58 percent of
the population. Leading Flemish region politicians
complain that the francophone Socialist Party dominates
Walloon public administration, leading to corruption and
wasted tax monies such as those revealed in recent
scandals (ref D). Some Walloon politicians also support
greater fiscal autonomy for the regions, but want
greater control over money disbursed in the region
without severing the ties that grant them significant
transfers for so-called economic adjustment. Greater
autonomy would improve accountability and facilitate
oversight, some claim.


6. (SBU) Others in Belgium want to reverse the trend of
devolving power to the regions. They question the need
for multiplying the administrative burdens and costs
that accompany duplication of functions in several
regions entails, as well as the effectiveness of regions
in providing some services. Generally the VLD (Flemish
Liberals) are profiling themselves as defenders of
returning money and powers to the Federal Government.
After a recent trip to South Amerca, Foreign Minister
De Gucht (VLD) openly pleaded for more coordination (if
not recentralization) between the several foreign trade
promotion services. (Currently Flanders, Brussels and
Wallonia each have their own.) Stating that Belgium had
to increase its exports to the expanding Asian and
developing world markets from 20 to 50 percent, De Gucht
was concerned that regional entities could not deliver
the trade growth needed. Separately, officials from all
three regions have informally remarked to embassy
officersthat the export control authority devolved to
the regions in 2004 requires technical ability and
foreign policy guidance that are easier found at the
federal level, and saps resourcestheir region would
sooner spend for other ends.


7. (SBU) The Federal-Regional negotiations also touch on
other fiscal interests of the regions. Who
gets aerospace contracts, who sets employment and
unemployment policy, whether (federal) corporate taxes
should be lowered so that (regional) subsidies to
attract and retain companies are no longer needed, how
to support R&D and who pays - all these issues are bound
up with the power struggle between the regions and the
federal government. This is why the recent political
dispute over Belgium?s contribution to the European
Space Agency (ref C) arose: national science policy was
seen by one region as overwhelmingly benefiting another
region?s industries.


8. (SBU) Comment: Whereas ?all politics are local,?
according to former Speaker of the House Tip O?Neill, in
Belgium this is especially true, given the immediacy
with which any decision at any political level evokes a
response from every Belgian. A continuation of the
trend towards regional responsibilities and purse
strings is likely at the spring negotiations; the
question is whether a threshold will be crossed that so
changes Belgians perceptions of their country that it
leads to the dissolution of the Belgian federalist
state.

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