Is Belgium about to split?

There's another big crisis looming in Europe, and it's not to do with debt on the periphery. It's Belgium's political split, says Simon Wilson.

Isn't Belgium safe and a bit dull?

Not any more. Financial analysts are paying it close attention, convinced that it could be the next Greece. Three months ago, the research house Independent Strategy warned that the market was radically underestimating the risks associated with the fractious state.

It appears irretrievably divided between the well-off, Dutch-speaking north (Flemish) and the poor, French-speaking south (Walloons). Belgium's sovereign debt is above 100% of GDP; only Greece and Italy have higher debt ratios within the eurozone. It is also uniquely and brutally exposed to foreign creditors.

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What's happened since?

A general election. The last government collapsed (again) over intractable differences relating to the Flemish/Walloon divide. Now a wobbly coalition administration has given way to an even wobblier caretaker one, upping the political risk associated with the country. Belgium still has no permanent government and the election results have heightened the sense of impending divorce. The now-largest Flemish party (voters in Flanders and Walloon vote for separate parties by law) is the openly secessionist New Flemish Alliance (Nieuw-Vlaamse Alliantie, N-VA), which has been gradually gaining support since its foundation in 2001.

Who are the N-VA?

They are populist bruisers who deride the Francophone Walloons as scrounging "dependents". This relatively centrist, pro-EU party, favours a democratic, evolutionary transition to Flemish independence. And it is now the biggest party not just in Flanders, but in Belgium as a whole. The N-VA is popular because it reflects an increasing feeling among ordinary Flemings that the Belgian state no longer serves their interests. That feeling has historic, cultural and nationalistic roots (for a detailed look at the history of Fleming-Walloon antagonism, have a look at Bedlam Asset Management's recent report: Google "Farewell Flanonia"). But NV-A support is also grounded in simple economics: Flanders is fed up subsidising what they see as the welfarist socialists to the south.

Could Belgium split up?

Some say never, because neither side will ever give up the prize of Brussels, a predominantly French-speaking enclave fully within Flanders. But that presumption might be wrong. The Flemish identity is far stronger than the Walloon. Until the middle of the 19th century (and the Belgian authorities' policy of forced Frenchification), Brussels was a Dutch-speaking town. Certainly, there is no way Flanders would give up Brussels. But then Flanders is a viable stand-alone nation, with a strong historic identity. Wallonia, on the other hand, is not.

If Belgium breaks up, it is more than likely that Wallonia would itself dissolve: part of it joining Luxembourg and part joining France. The German-speaking eastern fringes annexed by Belgium after World War One would return to Germany.

Is that really likely?

Europe's borders have been shifting for centuries and continue to shift. In the past two decades alone there are several examples of post-imperial European states 'artificially' created by the great powers of the day, just like Belgium in 1830 disintegrating either peacefully (Czechoslovakia) or bloodily (Yugoslavia). In Belgium, where linguistic and cultural differences make the rancour between Catalans and Spanish nationalists look positively decorous, the crunch is likely to arrive sooner rather than later.

As Independent Strategy put it: "Unlike the Greeks, who seem to like being Greeks and being in Greece, Belgium is a country with a dearth of nationals proud to be Belgian and where growing swathes of the population want to be in another state of their own creation." Unlike Spain, where the Catalans are richer but far less numerous than the rest of the country, Belgium's wealthier region, Flanders, accounts for the majority of the population (60%).

What does this mean for investors?

This troubled backdrop is not going to help tough decisions on public debt at the national level or bring forward the necessary political compromises that would enable such decisions. According to Bedlam's analysis, there is a growing risk that a faster-than-expected unravelling of Belgium will result in a sovereign default. "With net government debt of e400bn, it is hardly a huge world borrower in absolute terms. Yet default could occur almost entirely by accident and the ripples be far greater that its size warrants, because of its position as the de facto federal capital of the EU." The problem? "Belgium's hastening car crash is not in current bond prices or exchange rates."

A new European shock looms.

The rise of the Flemings

From the creation of Belgium in 1830 until the mid-20th century, the Walloons were in the ascendant over the Flemings. Southern Belgium was one of the first regions in Europe to industrialise, and the wealthy south, backed by the Francophone monarchy, dominated the Belgian state and Frenchified the Flemish city of Brussels.

Since World War Two, the economic balance of power has reversed: Flemings enjoy a per-capita income that is 118% of the EU average; Walloons a meagre 85%. That trend has been accompanied by a Flemish renaissance (the Vlaamse Beweging) and a gradual separation into two parallel states. Almost all institutions, including political parties, universities and the media, are segregated on linguistic lines. Each community enforces laws banning the use of the other's languages.