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Further lack of reform in Belgium (AA-/Stable) runs the risk of leaving unaddressed growing structural economic and fiscal pressures, including low productivity growth and the rising cost of looking after an ageing population. This will increasingly weigh on Belgium’s public finances. France (AA/Stable) has made more progress in tackling structural challenges in recent years and faces less-challenging demographics.

“Belgium and France both need to undertake structural reform to raise their economies’ growth potential, but progress in France has outpaced that of Belgium over recent years, leading to divergence in medium-term economic and fiscal prospects,” says Thibault Vasse, analyst at Scope.

France has been one of the euro area’s most reform-intensive countries in recent years, ranking high in the OECD’s index measuring countries’ progress on the implementation of structural reform in 2017-18. President Emmanuel Macron government’s extensive supply-side reforms to lower wage costs, reform corporate taxation and broaden the tax base could support higher potential growth (see earlier Scope research, Reforming France: Supply-side “Macronomics” strengthen growth potential). Such reform continued over 2019-20, improving equity as well as the quality of education, reducing labour market segmentation and enhancing the competitiveness of the French economy.

At the same time, Belgium is the OECD country in which reform progress had slowed the most since 2015-16. In this respect, Belgium was also one of the least reform-intensive economies in 2018.

One area where the economic consequences of the lack of reform is most crucial is coping with the rising burden of ageing-related costs. Belgium’s pensions and healthcare expenditure as a share of GDP is among the fastest increasing among EU countries, based on data and forecasts for 2016-70, estimated at 3.3pps of GDP. Conversely, France will see its equivalent expenditure drop by 2.8pps of GDP over the same period despite similar demographic dynamics.

“Politics clearly play an important role in our credit outlooks for the countries,” says Vasse. “The prospect for decisive reform in Belgium looks highly uncertain given the potential instability of the current multi-party coalition government, a reflection of the country’s fragmented and complex political system,” says Vasse.

“In France, there is continuing reform momentum, though, less than a year away from elections, polls suggest that support for Macron and his République en Marche party is draining away to the populist National Rally party, led by Marine Le Pen, among other opposition parties.”

Reform prospects are more encouraging in France than in Belgium. Macron’s early success in implementing crucial reforms underpins Scope’s view that the country can reap economic dividends longer term provided the government keeps up reforms and there are no adverse policy shifts after the 2022 elections. Risks of policy inertia in Belgium remain a key credit constraint given the country’s fragmented politics and a persistent regional divide between Flanders and Wallonia.

On 28 May 2021, Scope left France’s AA ratings unchanged with a Stable Outlook while it downgraded Belgium to AA- with a revision of its Outlook to Stable.