Investment Climate Improving, Still Work To Do

UNCLAS BRUSSELS 000598 SIPDIS SIPDIS STATE FOR EB/OIA, EB/ AND EUR/UBI USDOC FOR 3133/USFCS/OIO/EUR E.O. 12958: N/A TAGS: EINV EFIN ENRG BE SUBJECT: Investment Climate Improving, Still Work To Do Ref: (A) BRUSSELS 228 ¶1. Summary. At a working breakfast on the eve of his departure from Belgium, Ambassador Korologos reviewed progress and priorities on Belgium's investment climate with representatives from the Belgian Employers Federation (FEB/VBO),American Chamber of Commerce, and U.S. companies from the sectors with which post has worked most closely. The group rejoiced that its concerted efforts appear to have reaped real progress over the past three years to improve the climate for U.S. investment. For example, the GOB has introduced tax incentives, signed an updated bilateral tax treaty, and appeared more open to dialogue. All of Belgium's political parties, including the Socialists, now publicly recognize the need to attract foreign and domestic investment to ensure Belgium's future, which in itself is a mark of progress. Ongoing objectives remain reducing labor costs and the weight of social programs on employers, and fostering innovation and entrepreneurship through better private sector-academia- public sector cooperation. The group also highlighted challenges related to energy costs and climate change, as well as the need to keep economic issues before the voters and politicians in the approach to June 10 Belgian federal elections. End summary. -------------- IMPROVING CLIMATE -------------- ¶2. On February 1, Ambassador Korologos hosted a breakfast roundtable of leading business community representatives, including executives from the Belgian Employers Federation (FEB/VBO),American Chamber of Commerce, and U.S. banking, pharmaceutical, express mail, and energy companies. Ambassador opened with a review of the progress that had been made, noting the introduction of the so-called notional interest deduction for companies that use their own funds for capital investment in Belgium. Once President Bush and Prime Minister had agreed in early 2006 that it was a priority, the negotiation and November 2006 signature of an updated bilateral tax treaty closed out an agenda item pending over a decade. Under steady pressure from the Embassy and the business community, the GOB also eliminated some of the most egregious tax and regulatory burdens such as the "clawback" tax whereby the pharmaceutical sector was required to fill in gaps in the Belgian Federal health care budget. ¶3. Business leaders expressed strong appreciation for the support they received from Ambassador and Embassy over the years, and acknowledged that real progress had been made. The fact that political leaders of all stripes and at all levels have now begun to voice the need to attract more foreign - and domestic - investment to spur job creation was a marked success. AmCham President Leonard Schrank called 2006 a good year for U.S. companies in Belgium. FEB/VBO President Jean-Claude Daoust noted that while it was not easy for Belgium to change as fast as businesses would like in order to keep up with globalization, the most recent collective bargaining agreement, which in Belgium is negotiated trilaterally at a national level by the FEB/VBO, the Belgian federal government, and unions, was a step in the right direction toward a better consensus among Belgians of how to achieve economic growth. ¶4. A number of U.S. companies talked about their long-term plans in Belgium. Some, including 3M and Pfizer, have completed sizable investments in R&D and manufacturing in the past year. While those investments were under consideration for some time, the positive recent developments helped local managing directors sell their viability better to headquarters back in the U.S. -------------- WORK TO DO -------------- ¶5. At the invitation of Ambassador, business leaders provided their views on where future efforts should be focused to make Belgium more business-friendly. Belgium's labor market remains one of Europe's most expensive and most rigid, business leaders believe. FEB/VBO representative Thomaes joked that Belgium's economy is like a train driving with its brakes on. Partly from linguistic and regional tension, partly from social tradition, labor mobility in Belgium is still too low. The tradition of automatic wage increases should be halted, because otherwise competitiveness suffers. Further, the fiscal pressure on business due to labor costs and social contributions dampens new job creation and investment. FEB/VBO argued that decreasing the cost of Belgium's public sector by 7.5 billion euros should be an objective, even though it would require 30,000 civil service positions to be eliminated. Controlling the costs of government entitlement programs would be determinative. A banker said the banking sector is also too fat - too many banks, too many workers, repetitious services and inefficiencies - although the three U.S. banks that still remain (down from 12 years ago) have found profitable niches. Better worker re-training programs and education to respond to changing demand would keep people working longer, give them skills businesses need, and reduce wage pressures by increasing the supply of talent most sought by industry. ¶6. While innovation has been a Belgian strength in the past in the science and cultural fields, an unpredictable tax and regulatory environment and heavy "social charges" have limited companies' resources for innovation. Belgium also ranks poorly on EU lists of enterprise formation; few young Belgians exhibit entrepreneurial spirit and anticipate starting a business. 3M's Managing Director for Belgium stressed the need for more collaboration among private sector, university researchers, and government; good synergy achieved in such contexts elsewhere have stimulated innovation, business, jobs, and growth. ¶7. A third major focus of participants was on energy and the challenge of climate change. They pled for U.S.- European cooperation on environmental issues. As a major logistical hub, Belgium is particularly sensitive to the soaring costs of transportation ? road, sea, and air. Renewal of Belgium's logistical infrastructure to minimize costs is essential. If carbon emissions quotas are not divided judiciously, compliance imperatives could well dampen economic activity. Belgium also has to come to grips with its own energy policy, FEB/VBO representatives emphasized. The previous intention to phase out of nuclear power, which provides 55 percent of the country's needs is not viable. A serious plan for Belgium's energy future will give business confidence, and help check electricity costs that deter investment. -------------- IT'S THE ECONOMY, STUPID -------------- ¶8. Summing up, EconCouns noted that keeping Belgian political leaders focused during coming election campaign and federal-regional negotiations would be essential. The big questions remain spurring innovation, cultivating labor skills, and reforming healthcare to address Belgium's demographic challenge. For both the short-term and long- term, educating Belgians about energy needs and options is crucial. The Ambassador thanked the assembled representatives and CEOs for their support during his tenure in Brussels, and encouraged their continued interaction with his successor: the Embassy-Business partnership is key to improving the investment climate. Imbrie