Banking crisis over, Iceland's economy

In this small Icelandic village, sailors are making double their pre-crisis pay, haddock sales to places like Boston and Brussels are booming and unemployment is almost zero - signs of this island's surprisingly rapid rise from the ashes of banking ruin.
While much of Europe wallows in recession, the economy of this volcanic island in the mid Atlantic is growing at a clip that has surprised many people, thanks to a currency fall - in which the crown lost almost half its value to the euro - an export and tourism boom as well as growing consumer confidence.
"This is probably one of our best years," said Arnthor Einarsson, a fisherman readying his boat for his next catch as seagulls circle huge piles of fishing nets on a rocky peninsula about one hour south of the capital Reykjavik.
Only a few years ago, a banking boom in which the sector's assets grew to 10 times the country's GDP lured many of Iceland's 320,000 population from traditional industries into the world of finance. Fisherman got into banking and sailors speculated on booming real estate.
Those heady days have gone. Gas-guzzling Land Rovers have been replaced with fuel-efficient Volkswagens, a sign perhaps of a more sober consumer mood in which economic growth is based on a steady expansion of exports rather than flash-in-the-pan speculation.
The wounds that sparked massive street protests against the financial elite are slowly healing. Even the then prime minister has been tried by a special court, closing one chapter.
Granted, there is still a long way to go, but many see Iceland as offering a lesson particularly to European countries such as Greece and Spain, stuck with shrinking economies and lacking the option of devaluing to boost their international competitiveness.


Iceland's GDP growth estimated at some 2.6 percent this year will outshine even powerhouses like Sweden.
"These are among the highest numbers in Europe," said Finance Minister Steingrimur Sigfusson. "Sometimes it is easier to turn a small boat around than a big ship."
Currency depreciation though is only part of the picture.
Capital controls, progressive taxes and a careful phasing-in of austerity measures were also key to getting the country back on track, bringing a more than 10 percent fiscal deficit back to a near balance.
Iceland also did what other parts of Europe haven't dared to do - let its banks go under. It took some of the cost itself but forced foreign creditors to take the biggest hit.
Lauded by some economists for taking unorthodox measures to fix its broken economy, others see it as a one-off example that would be hard to replicate.
"The lessons don't transfer directly because of the relative size of the old banks in relation to the economy. What we were left with was quite manageable," said Jon Bentsson, senior economist at Islandsbanki.


Back to basics 
Three years after its near meltdown, Iceland looks healthy on many measures. It successfully finished an IMF bailout program and has already made one early repayment. It expects the sale of assets from failed bank Landsbanki to cover its $5 billion in debts to Britain and the Netherlands.
In February, Iceland recovered its investment-grade rating from Fitch, which praised the country for restoring macroeconomic stability, adding to investment-grade ratings from Standard and Poor's and Moody's Investors Service.
Icelanders are getting work, going shopping and their house prices are rising again.
And while the penthouse of a gleaming new skyscraper in downtown Reykjavik sits empty, Icelanders are piling into a hip new restaurant on the ground floor called the Hamburger Factory.
Car sales doubled in the first quarter. Jon Olafsson, who runs an auto dealership on the outskirts of Reykjavik, expects to sell almost 1,000 cars this year, having sold less than 100 cars in 2009.


"This is a high volume day for us," he says, pointing at a shiny row of cars just rolled out on his lot. His customers are back en masse, hunting for leaner, greener cars, and he is recruiting staff to meet demand.
While signs point to recovery, many remain cautious about the future and bitter over the past.
Household debt exceeds 200 percent of GDP. The government must deal with the issue of capital controls, imposed after the crisis but which are seen by some economists as denting foreign investment confidence.
There is little trust in government three years after the fall of ex-Prime Minister Geir Haarde. Parliament has the support of only 10 percent of the public, polls show.
Pall Matthiasson, chief executive of mental health services at the National University Hospital of Iceland, flips through slides on his iPad showing the five stages of grief.
He says Icelanders remain in a state of depression.
"There is cohesive guilt, because only so much anger can be directed at the bankers," he said. "It's like looking in the mirror and asking 'did I do that'? It comes back to haunt us."
Close the trenches 
Many just want a clean slate.
That can be seen no more clearly than in recent polls which show a surprisingly strong lead for presidential candidate Thora Arnorsdottir, a fresh-faced mother who is due to give birth to her third child at the end of May.
In an election due at the end of June, the 37-year-old goes up against President Olafur Grimsson, who is running for a fifth four-year term having a few years back cheered on those who drove the country's banking expansion.
Haarde's trial, she says, was difficult for the nation.
"Instead of being a step towards reconciliation, it has been more an opening up of wounds," she told Reuters, curled up on a sofa in her suburban home and peeking out of her window every few minutes to check on her children.


People told her they couldn't bear to watch the news anymore.
"I feel that we can get through this without taking out the daggers," said Arnorsdottir, a journalist who also has her own quiz show. "My hope is to use the influence of the presidency to close the trenches."
Haarde, the world's only political leader to be tried for crimes related to the global crisis, was found innocent of major charges of gross negligence but guilty of failing to hold dedicated cabinet meetings ahead of the collapse.
In the months ahead, Iceland will bring former banking executives to stand trial, so the pain is not over.
Icelanders will meanwhile get on with their recovery.
"Did Icelanders have an identity crisis? Yes," said Egill Helgason, one of Iceland's best-known television commentators. "They thought they were financial wizards, but it was all an illusion ... Now it's back to books, music, and well, fish."

Icelandic Economy Bounces Back From Brink

Iceland’s economy suffered a meltdown in 2008, with its banks defaulting on $85 billion. In 2009 its citizens took to the streets and demanded action from the government against those they saw as responsible for the crisis. The government responded, putting people before markets, and now Iceland’s economy is outgrowing the euro one and, on average, the developed world.

Bloomberg reported that after it was determined in October 2008 that the banks could not be saved, the government intervened. It ring-fenced domestic accounts and shut out international creditors. Iceland’s central bank prevented the sell off of krona through capital controls, and new banks were created that were controlled by the state. Then the government and the state-controlled banks agreed that amounts in excess of 110% of home values would be forgiven on mortgages.

The country’s supreme court also ruled in 2010 that debts indexed to foreign currencies were illegal, which saved households from having to cover losses resulting from drops in the value of the krona.

An Icelandic Financial Services Association report cited by Bloomberg pointed out that the country’s banks have forgiven loans amounting to 13% of Iceland’s GDP. That lessened the debt load of the population.

In addition, the government is investigating, and prosecuting, numerous prominent figures from the meltdown. Currently more than 200 face criminal charges and a special prosecutor has said as many as 90 may be indicted.

Lars Christensen, chief emerging markets economist at Danske Bank in Copenhagen, was quoted saying, “You could safely say that Iceland holds the world record in household debt relief. Iceland followed the textbook example of what is required in a crisis. Any economist would agree with that.”

The result? According to the Organization for Economic Cooperation and Development, Iceland’s economy is in line to expand 2.4% both this year and next, after growth of 2.9% last year and in the wake of shrinkage of 6.7% in 2009. In contrast, the OECD estimated in November that the euro area will only expand by 0.2% and the OECD area by 1.6% in 2012.

Not only that, but the cost to insure against an Icelandic default is about the same as to insure against a credit event in Belgium. And Icelanders are no longer eager to join the eurozone. Most would rather stay solo. Housing as an element of the consumer price index is only down about 3% from what it was in September 2008, just prior to the collapse.

Fitch Ratings just last week also conceded that Iceland’s approach has worked, raising the country’s rating to investment grade with a stable outlook. At the time it said that Iceland’s “unorthodox crisis policy response has succeeded.”

Thorolfur Matthiasson, an economics professor at the University of Iceland in Reykjavik, was quoted saying, “The lesson to be learned from Iceland’s crisis is that if other countries think it’s necessary to write down debts, they should look at how successful the 110% agreement was here. It’s the broadest agreement that’s been undertaken.”

According to Christensen at Danske Bank, “the bottom line is that if households are insolvent, then the banks just have to go along with it, regardless of the interests of the banks.”

Central African Republic Economy

The Central African Republic’s economic freedom score is 50.3, making its economy the 145th freest in the 2012 Index. Its overall score is 1.0 point higher than last year, primarily because of improvements in monetary and investment freedoms. The CAR is ranked 31st out of 46 countries in the Sub-Saharan Africa region, and its overall score is lower than the regional average.

The Central African Republic has pulled itself out of the “repressed economy” category. However, the country performs poorly in many of the four pillars of economic freedom and needs to build stronger momentum for reform. In particular, the foundations of economic freedom remain fragile because of pervasive corruption and a deficient judicial system, which undermine equity and erode the effectiveness of government.

Despite overall progress this year, regulatory efficiency continues to be poor and unfavorable to the development of a more dynamic climate for entrepreneurial activity. The informal economy provides a large number of jobs for relatively unskilled labor. Existing policies aimed at promoting and sustaining open markets have been undercut considerably by a lack of determined implementation.


BACKGROUND
A December 2008 agreement between General François Bozizé (who overthrew the civilian government in 2003), opposition leaders, and some rebel groups established a consensus government. Elections scheduled for April 2010 were postponed, and Bozizé and parliament remained in office beyond the expiration of their terms. These elections were completed in March 2011. Bozizé was re-elected to a second term, and his party won 61 out of the 100 available legislative seats. Rebel groups remain active, and unrest in Sudan and the Democratic Republic of Congo continues to affect the CAR’s security. Despite abundant timber, diamonds, gold, and uranium, the CAR is one of the world’s least-developed countries. The majority of the population is engaged in subsistence farming. China is preparing to explore for oil.


RULE OF LAW

Protection of property rights is weak. Most of the country’s territory is not under central government control, and there is a high risk of renewed violence in rebel-controlled areas. The judiciary is subject to executive interference. Because of inefficient administration, the courts barely function. Misappropriation of public funds and corruption are widespread.


LIMITED GOVERNMENT

The top income tax rate is 50 percent, and the top corporate tax rate is 30 percent. Other taxes include a value-added tax (VAT), with the overall tax burden amounting to 8.7 percent of total domestic income. Government spending is equivalent to 15.4 percent of total domestic output. The budget balance has been in deficit in recent years, and public debt stands at 41.9 percent of GDP.

REGULATORY EFFICIENCY

Establishing a business has become less time-consuming, but other regulatory requirements remain burdensome and opaque, increasing the cost of conducting business. The minimum capital required to start a business is over four times average annual income. The underdeveloped labor market continues to hinder employment growth. The government influences most prices through the public sector, subsidies, and price controls.

OPEN MARKETS

The trade weighted tariff rate is 13.6 percent. Myriad non-tariff barriers add to the cost of trade. Foreign and domestic investors are treated equally, and all sectors of the economy, including real estate, are open to foreign investment, typically without screening. The financial system is underdeveloped, and access to financing for businesses remains very limited. Less than 1 percent of the population has access to banking services.

Bermuda Economy and Industries

People in Bermuda get one of the highest pay scales in the world. Yes that's true. Bermuda economy still enjoys one of the highest per capita earning in the world. 

In 2009, the average annual salary of a serviceman in Bermuda was over $56,000. And many earn much much more than that. So happy to know this? Thinking of a job in Bermuda?

Now hear this out. Bermudians have world's one of the highest cost of living. Yes, they have to spend a lot to survive.
That's because virtually everything in Bermuda is imported. Bermuda has no natural resources like oil, gas, gold or anything. Due to lack of adequate farming land, agriculture in Bermuda is also very limited. Almost 80% of the food has to be imported. And there is heavy import duty levied on all goods that are imported. So prices are often quite scary. 

In spite of that, Bermudians earn enough to have a healthier life style compared to people in many other countries.

Living Standards in Bermuda 
Although there is no sales or income tax in Bermuda, the cost of goods including food is pretty high. It forces Bermudians to earn a minimum pay which is far higher than anywhere in the world. Although there is hardly any poverty in Bermuda, the low income line is around $27,000 per year. If one is below this earning line, one is said to be poor in Bermuda and will struggle to survive without an aid. Check out cost of living to know what it takes to be living in Bermuda. 

In 2007, only 11% of the Bermudians were below the low income line. This band mainly consist of single parents with no full time job, senior citizens or the disabled persons. By the way, Bermuda unlike other countries in the world, makes no concession for the disabled or the senior citizens, and life is quite hard for them. UPDATE June 2011: Senior Citizens to get a three per cent pension increase from August 2011.

Many of the Bermudians hold more than one jobs in the island to maintain their living standards and to pay off their home loans. See Life in Bermuda to know what one of my friends in Bermuda had to say on her own life. She by the way runs a well known boating tours in Bermuda along with her husband. 

Real estate in Bermuda 
If you hear the average price of a house in Bermuda, you will think that they are only meant for the millionaires. While that's largely true, many average Bermudians still make it by slogging out their initial life with more than one jobs. An average house costs close to a million dollar in Bermuda. 

While there is no sales or income tax in Bermuda, there does exist a fairly heavy property or real estate tax. So if you look at an average Bermudian life style, a couple would typically take up two jobs each. They will save every penny they can to buy a land over a period of few years. Once they have the land, they will get good loans by mortgaging their land property and start building their own house while still living in a rented apartment.

Finally when the house is built, they will rent that out so that the loan liabilities can be paid off from the rentals itself. In about 15 years or so, they will clear out all their loans and shift into their own proud home. Looks simple? No, it's a lot of hard work!! 

Bermuda Industries 

So what are the main industries in Bermuda? The two top industries that continue to control economy of Bermuda are the International Business and the Tourism Industry. 

While the international business in Bermuda has been on the rise with over 15,000 international companies having set up their operations in Bermuda, the tourism industry has been going through some rough patches over the last few years. Tourism had always remained the second most important industry in Bermuda. Between International business and Tourism, Bermuda receives over 70% of its total foreign currency earnings.

The international business is mainly around insurance, re-insurance (i.e. insuring another insurance company), captive insurance, and fund and trust management. Bermuda runs the third largest re-insurance in the world and second largest captive insurance domicile. To know more about the this sector, checkout Bermuda's Insurance Industry. 

This sector has spent an estimated $2 billion in Bermuda and provided large number of jobs. International business contributes 24% of the total GDP of Bermuda as per 2009 reports.

Over the years, prudent financial management of Bermuda has made it a global magnet for the international business. An independent body called the Bermuda Monitory Authority (BMA) has gained control of all the supervisory and regulatory rights from the Bermuda Government. BMA oversees the international business with complete transparency, coordinates with US and international community, and ensures that there is no money laundering, fraud or other financial crimes. 

A recent report from KPMG has stated that the island's legislative framework is almost fully compliant with international standards. Bermuda has recently received a Sovereign rating of AA+ from Fitch which a global credit rating agency. Check out Bermuda Sovereign Ratings for details.

Coming to Tourism in Bermuda, it has shown some declining trends, mostly compounded by the global recession. A little over 550,000 tourists arrived in 2009, a decline of over 100,000 people compared to 2007. Hotel occupancy rates have also decreased in 2009 to close to 51%, down from 59% in 2008. See Bermuda Hotel Occupancy Rate in 2009/2010 for more updates. 

Visitors contributed an estimated $330 million to the economy of Bermuda in 2009, down from $402 million in 2008.


Jobs in Bermuda 
Bermuda had always followed the trend of US economy as well as the global economy.

For example, in early 1990s due to economic downturn, about 2000 people lost their jobs in Bermuda because many work permits were not renewed. There was a similar impact in 2001-02 as well, although to a far lesser degree.

Although International Business used to be the top employment provider in Bermuda, it's no longer so.
Estimated jobs in 2009 in International Business has been about 4,400, down from about 4,750 in 2008. Whereas wholesale, retail and repair services provided about 4,750 jobs and Hotels & Restaurants about 4,700 jobs in 2009. Bermuda Government is the largest employer in the island. As per 2009 estimates, average job salary in Bermuda was $56,000 per year and an annual pay of less than $27,000 means that one is below the poverty line. 

2012 Update on Bermuda Jobs: Department of Statistics in Bermuda released the Labor Market Index (LMI) report. As per the report, in 2011 there were a total of 37,399 job holders compared to 40,213 in 2008. The average annual gross earning in 2011 is $59,364 which shows an increasing trend over the previous years.

2011 Update on Bermuda Jobs: The economy has been harsh on the People of Bermuda. A study showed that around 3,000 jobs have been lost between 2009 and January 2011. The most affected sectors are telecommunications, construction, international business and retail. The age bracket between 55-64 have been most impacted. Despite such figures, the insurance and reinsurance sectors are offering average annual salaries ranging to $200,000 per annum even in such economic conditions. Additionally the 22 major companies in the insurance/reinsurance sector have pumped in close to $1 billion into Bermuda's local economy. This sector employs about 1,700 people out of which 34% are non-Bermudians or expats. 

Bermuda Import and Export of goods 
Bermuda virtually has no natural resources. Almost all the manufactured goods and foodstuff are imported. In 2009, import was to the tune of $1 billion. Items that Bermuda imports includes food, clothing, household goods, machinery, transport, chemicals, live animals and miscellaneous items. 

Much of the import is from US (about $800 million). The other major supplying countries to Bermuda includes UK, Canada and some parts of the Caribbean Islands.

Import in Bermuda has been rising over the years. Duties on import has been a major source of revenue for Bermuda. In financial year 2009-2010, the import duty constituted 24% of the revenue amounting to about $225 million.

Such heavy import duty has its impact on the prices of the goods in the island. Although there is no additional sales tax, you will still find the prices fairly high in Bermuda compared to the other countries like US or even UK. 

Bermuda's exports has been quite limited and has been shrinking over the years. In 2009, only $25 million worth of exports has been done. One of the major items of Bermuda export is the fragrance from Easter Lilies that are used in making perfumes. Other items of export includes pharmaceuticals, semitropical produce and light manufactures.

Other areas of economy in Bermuda 

Bermuda Agriculture products 
Agriculture, which was a major industry in 1920s, was given up slowly. Fertile land for cultivation in this already tiny little island was becoming rare to get. However, agriculture does exist in Bermuda in a small form and includes mainly bananas, vegetables, citrus, flowers, dairy products and honey.

Bermuda GDP 
Know about the Gross Domestic Product (GDP) of Bermuda, the sectors that contributed to the economy, the major economic trends and more: Bermuda GDP

Immigrants to Bermuda 
Over the years, many people from different countries have migrated to Bermuda to take advantage of best of both the worlds - great economy and fabulous place to stay. As per the 2000 census, 79% of the population are Bermuda born. Here is the breakup for the rest:
28% U.K. immigrants
20% from US
15% Canada,
12% Caribbean, and
10% Portugal/Azores
15% from various other countries

Bermuda Budget 2011 
In February 2011, Premier Paula Cox announced the 2011 financial budget of Bermuda. Here is a snapshot with the salient points: 2011 Bermuda Budget

Others 
Annual inflation rate (January 2010): 3.2%.
Natural resource: Limestone, used mainly for building.

Regeneration of Bermuda’s economy

KEY ISSUE — GOVERNMENT’S FINANCIAL POSITION


Government’s current and near-term financial position has a strong and direct impact on Bermuda’s national economy. Government certainly must continue acquiring revenue. However Government’s need for revenue must be very carefully balanced against the more pressing need to avoid further damage and to regenerate Bermuda’s national economy. Wrong handling of Government finances can push the economy to the third hourglass consequence. Bermuda needs the fourth hourglass outcome.


Government’s Financial Policy

In layman’s terms, and consistently using $100 as the typical revenue, this was the generic situation ten years ago in 2002/03:

Government ‘s revenue $100

Government spent this on personnel $46

Spent this on Debt Service Costs ($0.126b Debt) $2

Government had this left over for everything else $52 (actual spending out of what was available was $48, and Government was paying down Debt out of this)

No borrowing. Government was paying down Debt $0

Government actually spent $96 on everything while Government took in $100. Government ended that year with a generic $4 surplus.

That pattern of Government spending held until 2004. In 2004 it changed. This is what has been budgeted to happen in 2012/13. Take note of the major impact that the huge increases in Debt Service and Personnel costs have had:

Government ‘s revenue $100

Government plans to spend on personnel $57 (no pension payment)

Must spend more on Debt Service Costs ($1.4bn Debt) $13 (six times higher!)

So Government will have this left over for everything else $30

But this is not enough so Government will borrow $19 (total of $49 spent on everything else, but this is actually less than in 2002)

In 2012/13 Government plans to spend $119 even though it expects to take in only $100 in revenue. Government is planning to end the year with $19 more Debt.

This pattern of overspending and borrowing commenced in 2004. It is now in its ninth consecutive year. It must change. We have said and we have shown what will happen if this pattern of Government overspending does not change. What, exactly can and must change? For 2012/13, here is what we believe should have happened and still should happen immediately:

Government‘s revenue $100

Government spending on personnel (reduced 25%) $43 (real personnel cost cut)

Must still spend on Debt Service Costs ($1.4bn Debt) $13 (cannot be cut)

Cutting 18% here means this is left over for everything else $44 (total spent on everything else and still much less than in 2002)

No Government borrowing at all. $0

Meaning that this time Government will spend $100 after taking in only $100. Government will end with a ‘balanced budget’ where spending = revenue.

This is the “X” point that must be reached if the debt service cost is to stop steadily eating its way up into revenue as it has been doing every year in the nine years since 2004. After the “X” point, debt service cost can either be maintained at today’s level, and increased revenue can provide funding to pay down Debt, thereby allowing for an increase in spending on everything else.

The key issue? Government must cut spending. The first real cut should have been made sooner and could have been much smaller. Since a real cut has still not been made, the first cut must now be far deeper and much harsher.

If cuts are not made, and if Government revenue continues to flatline or decrease, the third hourglass consequence is inevitable.

Call to Action

What must be done? How can Government (and Quango) personnel costs be cut? Here are five options:

1. Cut all Government (and Quango) salaries/wages by 25 percent or cut all working hours by 25 percent, going from a 35hr/37.5hr paid work week to a 26.25hr/28.25hr paid work week

2. Cut all pay:

— persons paid over $120k a year get a 30 percent reduction

— persons between $70k — $119k take a 25 percent reduction

— persons paid under $70 receive a 20 percent reduction

3. All personnel work four days and take every fifth day off, unpaid or all personnel work four weeks and take the fifth week off, unpaid.

4. Every person who is eligible to retire must retire, thus coming off the Consolidated Fund and going onto the Public Service Superannuation Fund (PSSF)

5. For now, retain all Government employees who wish to stay. Once the economy regenerates, encourage Government employees to consider migrating to the private sector; thus reducing the overall size of the Civil Service, while getting the Civil Service/Quangos back to optimum size — probably around 6,000. This 6,000 will be about 24 percent down from the current 7,855. It will free 1,855 Bermudians to take jobs in an expanding private sector. It will take a lot of the pressure off the underfunded PSSF.

Personnel cost cuts of the magnitude recommended will result in taking at least $120m off the current need to spend. Cuts made in the ‘spending on everything else’ category should provide savings of another $70m — $75m making overall cuts up to approximately $190m of real cutbacks. These overall cuts of $190m will move spending down to the “X” point.

Many businesses and operations in the private sector have already made deep and harsh cuts of this magnitude, and the private sector began cutting back, and has been cutting back, since 2007. Several private sector operations have gone out of business.

Without a dramatic rise or regeneration in the economy, cuts of this kind — or harsher — will inevitably occur.

By not cutting now, and thereby delaying the first real cut, we believe that Government spending policy is actively pushing the national economy towards the third hourglass consequence.

If you disagree with this call for action, then just as clearly and just as precisely, dealing with this call, get involved and say what the alternative or different action should be. Let us know what you see as the alternative or action that will avoid the oncoming reality and that will move Bermuda forward.

Discuss this with your family, friends, workmates, and MPs until a clear national decision is reached and implemented; after which Bermuda can start moving forward again. Saying nothing or dissolving into a massive public shouting match is the same as taking no action. But to take no action will ensure the outcome shown by the third hourglass. Bermuda needs the outcome shown in the fourth hourglass, it is what we owe to this and future generations.

Belgium is world’s fourth most open economy

In Ernst & Young’s Globalization Index 2011, Belgium ranks in an excellent 4th place. Only Hong Kong, Ireland and Singapore perform better.
The annual Globalization Index examines the world’s 60 biggest economies, considering factors like trade, investments and capital flows, technology, foreign employees and cultural integration. Compared with the 2010 Index, Belgium moved up two spots.


         
Belgium scores particularly well for its export-driven economy and investment attractiveness. According to Ernst & Young, its small size and limited internal markets are the main factors behind the strong export culture in Belgium. Moreover, due to its well-developed infrastructure, good living standards, central location and highly-skilled workforce, Belgium is also praised by foreign investors. “These two indicators have always had a key impact on Belgium’s high scores in the Globalization Index,’ says Rudi Braes, partner with Ernst & Young Belgium.
An open economy also means a great reliance on global economic and trade networks. However, small, well-concentrated and export-dependant economies, being highly connected with the world’s markets, are also much more susceptible to the global economic situation, slowdowns and crises included. Belgium is no exception. The government has recently revised Belgium’s expected economic growth forecasts in 2012 from 0.8% to 0.2%. Moreover, Belgium’s economic decision-making remains strongly influenced by external forces such as the European Union or rating bureaus, both of which impact national policy-making processes.
Compared with 2008 and 2009, when the globalization of the world economy seemed to be slowing down, since 2010 onwards, it has been once more in full swing. It means that the world’s biggest economies are again becoming gradually more interconnected. Yet, more than 50% of CEOs are expecting a new wave of recession – a second economic shock (‘double dip’) – at the end of 2012, as reported in Ernst & Young’s survey on the 1,000 company leaders worldwide.
Such a crisis would inexorably oblige both governments and companies to introduce more efficient operational strategies in order to better secure national economies and markets respectively. Nonetheless, around 90% of respondents claim that when the double dip occurs, world governments will introduce more protectionist measures designed both to maintain sound budgetary policies and put rising national debts on hold. At any price.

AmCham Belgium’s position
AmCham Belgium welcomes Ernst & Young’s Globalization Index 2012, which once more confirms Belgium’s strong position in the global economy. Notwithstanding its small size, Belgium was and remains one of the key economic players worldwide, being very well connected with global business and commercial networks. Yet, there is still room for better performance, particularly in the area of public finances and wage policies, where automatic indexation, high social charges and a low employment rate are the main obstacles for companies to invest and create jobs. If Belgium addresses these issues, it can use its extraordinary strengths and easily regain a leading position in foreign investments. More on foreign investment trends and forecasts in Belgium can be found in the Chamber’s US Direct Investment Report in Belgium 2011.

Albania showing critical signs of economic crisis

Though the government largely refuses to acknowledge it, a number of economic indicators are showing critical signs of decline in the Albanian economy for the first quarter of 2012, following a slowdown in economic growth over the past two years.

Inflation reached 0.6% during February, according to INSTAT, marking the very limits of deflation, also confirming serious hits in both demand and consumption. There are declines in private and public investment. The construction and industry sectors , in particular have been among the hardest hit.

Albanians consumed less, as imports fell for a number of categories and exports fell by 21% during the two first months of the year according to INSTAT.

Remittances, one of the main sources of income in the Albanian economy from emigrants working abroad, were down by 9% last year compared to 2010.

Shkelqim Cani, former governor of Central Bank of Albania, says the government should have accepted the crisis a long time ago. "The government did not take any measure and now we are suffering the consequences of their lack of knowledge, manipulation of reality, and their inaction," Cani told SETimes.

He predicts this year will be even more difficult. "The debt cost was extremely high and has now reached disturbing limits." He added that with 2013 being an election year, debt levels will soar further. Debt levels reached the maximum limit of round 60 % of GDP.

Gjergji Filipi, director of research at the Agenda Institute, a think tank, is also concerned.

"Consumers and the biggest investor in the country, the government, visibly spent less in 2010 and 2011, and data from these first months of 2012 confirmed that the country is immersed into crisis," he told SETimes.

But Sherefedin Shehu, an MP representing the ruling Democratic Party, has a different take on the matter. A member of parliament's Committee for Economy and Finance, he told SETimes "Consumption setbacks are caused by another direction, the saving trend," suggesting saving is a psychological response to international crises.

"The crisis is not caused by Albanian factors. Albania is only influenced by the crises; we are having growth deceleration, not a drop in economic growth," he stressed.

The Central Bank has been lowering several time the interest rate for Lek, to the actual lowest historic rate of 4. 25% in attempts to increase consumption, but the market reaction was quite weak. "Monetary policy could have been more aggressive. Central Bank could have realized an aggressive reduction of interest rates, within a trimester with 1 %," said former Central Bank Governor Cani.


In terms of solutions, Shehu suggests one way out of economic slowdown would be "government partnership with the private sector" to boost investment and employment.

Cani thinks reforms aimed at institutions, public administration, infrastructure, human capital, and good governance would offer a way out, as well as support for small and medium enterprises and agriculture.

Filipi says structural problems must be addressed, as opposed to "cosmetic" interventions. He acknowledged however that "Deep reforms might be painful and unpopular, but their delay enlarges the problem."


The IMF is projecting an economic growth rate of 0.5 % for Albania this year, slightly lower than the regional level of 0.7 %. Ever optimistic, the Albanian government projection remains 4.3 %.

The Netherlands economic overview

According to the Macro Economic Outlook 2012 (MEV 2012), published by CPB Netherlands Bureau for Economic Policy Analysis today, the Dutch economy is projected to grow by 1½% during 2011 and by 1% during 2012. The economic growth is largely attributable to exports. At this moderate rate of growth, unemployment will not decrease any further and is projected to stabilize at an average of 4¼%. Purchasing power will decrease in both forecast years. The forecasted budget deficit is diminishing rapidly, from 5.1% of gross domestic product (GDP) in 2010 to 2.9% of GDP next year. This relatively gloomy picture is considered the most likely scenario based on current information, and hence the picture on the basis of which the budget has been prepared (the ‘baseline’).

These figures have taken into account the recent turmoil in financial markets, although not the possibility of a new financial crisis. The risk of a new financial crisis is nonetheless very real. The turbulence in financial markets indicates the existence of great uncertainty and the likelihood of a negative outcome is considerable. The Macro Economic Outlook 2012 therefore includes an alternative scenario in which the possible effects of a new financial crisis are illustrated. The uncertainties are too great and diverse for this to constitute a detailed scenario, however. It does give an indication nonetheless of the possible outcomes in the event a new shock, which has not yet been factored in at this moment, is delivered to the financial markets - whether in Europe, the United States or elsewhere.


The signals are flashing red for the global economy. In the highly developed economies, the slowdown of the growth rate was most pronounced in the first half of 2011 due to the increased uncertainty on the financial markets, budgetary reorganisation, the high oil price and the earthquake in Japan. These are compounded by the fact that the growth in imports in emerging markets is declining due to monetary tightening and capacity bottlenecks. Global GDP is projected to grow by 3½% during 2011 and 2012, compared with 4¾% during 2010. This will result in a substantial slowing down of the export growth rate for the Netherlands.

The Dutch economy
The most recent insights suggest that GDP in the Netherlands will grow by 1½% during 2011 and by 1% during 2012, significantly below the average of the previous 20 years (2¼%) and also below the potential growth rate of 1¾% forecast in the Economic Outlook 2011-2015. GDP in the Netherlands will not return to pre-credit crisis levels until the second half of 2012, meaning that the economy has merely been marking time for a period of almost four years. Dutch economic growth is dampened somewhat by the austerity measures and tax increases introduced by the cabinet (in particular in 2012), but is affected chiefly by the impact of the worldwide slowdown in growth that commenced in early 2011. The estimate has taken into account the impact of the substantial turbulence in financial markets that erupted at the beginning of August. The possibility of a new financial crisis has not been taken into account in the baseline, although such a scenario certainly cannot be ruled out.

Growth comes from exports
Economic growth in the Netherlands will come largely from exports in 2011 and 2012, with domestic expenditure only making a limited positive contribution to growth of ¼ to ½% point per year. Dutch consumers are feeling the after-effects of the crisis (loss of purchasing power, lost assets) and overall will not make any contribution to economic growth during 2011 and 2012. Public spending will inhibit the GDP growth rate next year. In the past four decades, public spending has only made a negative contribution to growth on one previous occasion, in 2004. The negative impact of public spending is not surprising given the extensive austerity measures introduced by the cabinet. Following a sharp decline in 2009 and a further decrease in 2010, business investments are projected to recover well in 2011, with a growth rate of 9¼%. This will not go all the way to offsetting the loss sustained in the previous years, however. Due to the fall off in economic activity in 2012, a decline in the growth of investments to 3¼% is once again anticipated for the coming year.

Government finances are improving, partly due to policy.....
In spite of a renewed slowing of growth, the public deficit will diminish further next year, chiefly due to austerity measures and tax increases. The deficit will decrease from 5.1% of GDP in 2010 to a projected 2.9% of GDP in 2012. This means that the deficit will have halved compared with the level in 2009 and will be below the ‘Maastricht’ ceiling of 3% of GDP for the first time since 2008. A relatively large part of the austerity measures will affect social security expenditure next year. Healthcare costs will continue to increase, albeit at a lower rate than in previous years. The tax and premium burden will increase in the projection period, from 38.8% of GDP in 2010 to 39.2% in 2012. This increase is entirely due to the effects of government policy and contributes to the reduction of the deficit.

The European debt crisis does not have any noticeable direct impact (for the time being) on the public deficit in the projection period. The bilateral loan to Greece is financed by the issuing of Dutch government bonds, thereby resulting in more interest payments for the Dutch Treasury. However, these additional interest payments are more than compensated by the interest payments made by the Greek government on the bilateral loan. Indirectly there are effects, both positive and negative, on the public deficit. The turbulence in Europe has led to investors taking refuge in bonds of strong eurozone countries, such as Germany and the Netherlands. This has resulted in downward pressure on the interest payments by the government and hence to a reduction of the public deficit. The increased uncertainty also puts pressure on economic growth, however, which is bad for government finances.

.... purchasing power in 2012 is deteriorating due to policy
Inflation, which at 1.3% was still limited in 2010, is projected to be 2¼% in 2011 and 2% in 2012. The increase in inflation during 2011 is largely due to higher import prices. In 2012 domestic factors, such as rising housing rents, gas prices, indirect taxation and unit labour costs, in particular will push up the general price level. The increase in contract wages in the private sector is forecast to rise from 1.0% during 2010 to 1½% in 2011 and to 2% in 2012. Contractual wages develop with a lagged response to the increase in inflation and the reduction in unemployment.

During 2011, purchasing power will decrease by an average of 1%, mainly because wages lag behind price movements. As a result of austerity measures and tax increases (and in the case of pensioners, the non-indexation of supplementary pensions), purchasing power will deteriorate during 2012 by an average of 1%. A change of -0.4% in 2010 means that the median purchasing power will then have decreased by roughly 2½% since 2009. This is the first time since the early 1980s that purchasing power has decreased in several successive years.
Source: Macro Economic Outlook 2012; CPB Netherlands Bureau for Economic Policy Analysis