By Ambrose Evans-Pritchard at The Telegraph
Belgium is creeping back onto the eurozone's danger list as economic woes spread deeper into the EMU-core, and protracted slump poisons debt dynamics.
Fitch Ratings has issued a downgrade alert, warning that the country's primary budget surplus is evaporating. It said public debt will reach 106.9pc of GDP next year.
New accounting rules known as ESA2010 have revealed that Belgium is poorer than previously thought, lifting the debt ratio by 3.3pc of GDP overnight. This is in stark contrast to the upgrade for Britain, Ireland, and Finland, all deemed to be richer and therefore less troubled by debt.
The agency placed Belgium on negative watch, deeming it ever further out of line among its AA-rated peers worldwide. The median debt ratio is 37pc. "Public debt dynamics have deteriorated owing to weaker real GDP growth and worse fiscal performance," it said.
Yields on 10-year Belgian bonds have fallen to an historic low of 1.07pc - sliding in lockstep with German Bunds - but it is unclear whether this can last if markets start to focus on the economic fundamentals of EMU once again.
The country is caught in a debt compound trap, much like southern European states. The toxic mix of near-zero growth and very low inflation is automatically causing the debt trajectory to ratchet upwards. The ratio was 99.7pc in 2013.
Belgium has so far failed to reach "escape velocity" after stagnating for almost three years. The European Commission has cut its growth estimate to 0.9pc this year and in 2015, too low to stabilize the debt. Belgium has been in consumer price deflation for the last eight months, when adjusted for taxes.
The Commission said the debt ratio will reach 107.8pc by 2016, and warned that it could spiral much higher if there is a deflationary shock. Indeed, it came out worse than Italy in the stress test scenario.
Belgium weathered the early phase of the Great Recession in better shape than much of Europe. It is one of the few eurozone states to have surpassed its pre-Lehman peak in output, yet there has been a slow rot beneath the surface.
"The economy has been losing competitiveness due to higher labour cost and lower productivity growths than peer countries," said the International Monetary Fund in its most recent 'Article IV' report on the country.
Belgium had a current account deficit of 1.7pc of GDP last year despite flat consumption and a drastic 10.3pc contraction in public investment. It has almost completely halted purchases of military equipment, running down its old stock of tanks, aircraft, and communications equipment.
The IMF said Belgium's unit labour costs have been rising faster than those of France, Germany, or the Netherlands since 2005. This is partly due to "gaps in innovation and education", and to slippage in the "knowledge-intensive sector". New patents have been declining since the late 1990s.
What is striking is that maths and science scores in schools have been deteriorating, even compared to other EMU states, let alone East Asia. Belgium has the highest "implicit tax on labour" at 42pc and higher electricity costs than Germany or France. The effective retirement age is very low at 59.
Fitch said Belgium still has deep strengths and has lengthened the maturity of its debt to 7.7 years from 6.0 in 2010, creating a margin of safety if rates spike. It has ample household savings and a net international investment position (NIIP) above 30pc of GDP.
However, the budget deficit will overshoot its agreed EU target by 0.6pc of GDP this year, ending at 3pc. Earlier hopes of a primary surplus have come to nothing.
The clear risk for Belgium is that it will run down it stock of wealth from past economic success, drifting into a slow crisis as debt ratios reach a point of return. It is looking ever more like Europe's trial run for a "Japan" scenario, but without its own central bank to mitigate the effects.