VZCZCXRO6287
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHBS #4149/01 3491158
ZNR UUUUU ZZH
R 151158Z DEC 06
FM AMEMBASSY BRUSSELS
TO RUEHC/SECSTATE WASHDC 3879
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUCNMEM/EU MEMBER STATES COLLECTIVE

UNCLAS SECTION 01 OF 02 BRUSSELS 004149 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EB/IFD, EUR/ERA AND EUR/UBI 
TREASURY FOR OASIA/ICN - Atukorala 
USDOC FOR 3133/USFCS/OIO/EUR 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD BE
SUBJECT:  Money Talks - Economic Factors in Belgium?s 
Federal-Regional Power Struggle 
 
REF: (A) 04 Brussels 5395 (B) 05 Brussels 4442 
 
(C) Brussels 3952  (D) Brussels 3681 
 
¶1. (SBU) Summary.  Belgium?s federal-regional 
negotiations in spring-summer 2007 on the division of 
political competencies will have major economic 
implications.  If the federal government cedes 
responsibilities to the regions, regional demands for 
direct taxing authority and fiscal autonomy will grow. 
Such demands for autonomy strike a chord in Dutch- 
speaking Flanders, which many Flemish Belgians believe 
supports too generously its poorer French-speaking 
counterpart, Wallonia.  Although Walloon nationalists 
favor more autonomy, economists and the Walloon 
government emphasize the financial benefits of remaining 
a federal state.  While some politicians actually argue 
for recentralizing some powers that had been devolved to 
the regions back to the federal level - arms sales and 
export controls is a prime example - the history of 
interregional rivalry portends greater fiscal autonomy 
for the regions.  Economic growth, jobs and investment, 
and how to get them, are a major focus of regional and 
federal leaders as they prepare for upcoming 
negotiations and the federal elections that will precede 
them.  End Summary. 
 
¶2. (U) The Federal-Regional negotiations scheduled to 
follow the 2007 federal elections will play a 
determinative role in Belgium?s economic future.  While 
overtly a negotiation about furthering the political 
devolution of power that began with the 1990 
Constitution, critical economic issues will be decided 
as well.  Post outlined previously the diverging 
economies of Belgium?s Flemish north and Walloon south, 
in both industrial character and economic performance 
(refs A and B).  Those differences are having an impact 
on many political decisions, such as European Space 
Agency contracts that support Belgium?s aerospace 
industry (ref C). 
 
¶3. (U) The key issue in the negotiations will be the 
distribution of federal and regional responsibilities. 
As originally conceived, the division of competencies 
was based on the most effective and responsive level of 
implementation:  those issues that touched citizens most 
directly ? environment, education, social programs - 
would be principally overseen by the regions. 
Overarching national concerns such monetary and fiscal 
policy, foreign affairs, national defense, employment 
policy and public health were kept at the federal level. 
 Since 1990 there has been a trend towards granting 
greater authority to the regions, to include areas like 
foreign trade and investment promotion, arms sales and 
export controls, and technology and investment policy. 
The Federal government has shifted some programs to 
diminish its budgetary obligations, and some national 
politicians have pressed for transfers of powers to 
regional jurisdictions to demonstrate their regional 
loyalty. 
 
¶4. (SBU) As the regional role grew, so too grew the 
battle over economic levers and sources of revenue. 
At present the federal government wields the power to 
levy income tax, corporate tax, VAT, and mandatory 
contributions for social entitlement programs; the 
regions are limited to inheritance taxes and property 
taxes.  Pressure is mounting in the regions for them to 
have direct taxing power, rather than depend on federal 
revenue sharing.  In 2005, the Federal budget 
redistributed 59.8 percent of fiscal revenues to the 
regions or communities for public administration. 
Federal authorities face a watershed choice if they 
agree to further devolution of power, as the center of 
gravity of economic decisionmaking shifts further out of 
federal hands. 
 
¶5. (SBU)  Yves Leterme, President of Flanders and leader 
of the center-right CD&V party, has generally been 
calling for more economic competencies (labor, economy, 
transportation and justice) to be given to the regions. 
 His views are shared by many, though for different 
reasons.  Flemish conservative parties complain that 8.5 
percent of Flemish GDP is sent to support Wallonia each 
year without thanks or any indication that the Walloons 
are trying to move away from such dependency.  The far 
right Vlaams Belang party claims Flanders pays 64 
 
BRUSSELS 00004149  002 OF 002 
 
 
percent of all Belgian taxes ? above their 58 percent of 
the population.  Leading Flemish region politicians 
complain that the francophone Socialist Party dominates 
Walloon public administration, leading to corruption and 
wasted tax monies such as those revealed in recent 
scandals (ref D).  Some Walloon politicians also support 
greater fiscal autonomy for the regions, but want 
greater control over money disbursed in the region 
without severing the ties that grant them significant 
transfers for so-called economic adjustment.  Greater 
autonomy would improve accountability and facilitate 
oversight, some claim. 
 
¶6. (SBU) Others in Belgium want to reverse the trend of 
devolving power to the regions.  They question the need 
for multiplying the administrative burdens and costs 
that accompany duplication of functions in several 
regions entails, as well as the effectiveness of regions 
in providing some services.  Generally the VLD (Flemish 
Liberals) are profiling themselves as defenders of 
returning money and powers to the Federal Government. 
After a recent trip to South Amerca, Foreign Minister 
De Gucht (VLD) openly pleaded for more coordination (if 
not recentralization) between the several foreign trade 
promotion services.  (Currently Flanders, Brussels and 
Wallonia each have their own.) Stating that Belgium had 
to increase its exports to the expanding Asian and 
developing world markets from 20 to 50 percent, De Gucht 
was concerned that regional entities could not deliver 
the trade growth needed.  Separately, officials from all 
three regions have informally remarked to embassy 
officersthat the export control authority devolved to 
the regions in 2004 requires technical ability and 
foreign policy guidance that are easier found at the 
federal level, and saps resourcestheir region would 
sooner spend for other ends. 
 
¶7. (SBU) The Federal-Regional negotiations also touch on 
other fiscal interests of the regions.  Who 
gets aerospace contracts, who sets employment and 
unemployment policy, whether (federal) corporate taxes 
should be lowered so that (regional) subsidies to 
attract and retain companies are no longer needed, how 
to support R&D and who pays - all these issues are bound 
up with the power struggle between the regions and the 
federal government.  This is why the recent political 
dispute over Belgium?s contribution to the European 
Space Agency (ref C) arose: national science policy was 
seen by one region as overwhelmingly benefiting another 
region?s industries. 
 
¶8. (SBU) Comment: Whereas ?all politics are local,? 
according to former Speaker of the House Tip O?Neill, in 
Belgium this is especially true, given the immediacy 
with which any decision at any political level evokes a 
response from every Belgian.  A continuation of the 
trend towards regional responsibilities and purse 
strings is likely at the spring negotiations; the 
question is whether a threshold will be crossed that so 
changes Belgians perceptions of their country that it 
leads to the dissolution of the Belgian federalist 
state. 
 
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