By Carolyn Henson Of DOW JONES NEWSWIRES
BRUSSELS (Dow Jones)--As the World Cup kicks off in South Africa, Belgians are pointing to their own big match at home: Belgique vs. Belgie.
National elections on Sunday pit the French-speaking south, Wallonia, against the Dutch-speaking north, Flanders. While regional tension isn't new in this small kingdom of 10 million inhabitants, Europe's sovereign debt crisis has added a critical new element.
The deep divisions within the country led to a nine-month delay in forming a new government after the last election three years ago. But such indulgence is impossible this time. The financial markets will demand decisive action to reduce accumulated public debt that broke through 100% of gross domestic product this month at around EUR340 billion and is rising rapidly.
"The situation is dramatic," said Lode Vereeck, a senior member of a small Flemish political party LDD. "We have to save EUR22 billion by 2015 to balance the budget. That's a large saving for a small country."
Financial markets have shown signs of nervousness over the budget deficit in recent weeks, with the Belgian government forced to pay higher interest rates on its bonds in order to attract investors.
The premium investors demand to buy Belgian government bonds as opposed to benchmark German bunds has doubled since April 12 and so have five-year credit default swaps, a form of insurance against default.
The new government that emerges from Sunday's polling will be expected to take action to reduce the public deficit, but that isn't going to happen unless some accord can be reached between Flanders and Wallonia.
The two culturally distinct regions disagree on everything from road safety and public health care to foreign policy towards the former Belgian colony of Congo, Vereeck said.
Add to that a transfer of funds estimated at between EUR5 billion and EUR10 billion a year to Wallonia from wealthier Flanders and the friction escalates.
Vereeck pointed to road safety as an example of both the money transfers and the disagreements. Flanders has 1,500 automated speed guns, but in Wallonia, where the speed controls are seen as repressive, there are only 10. Even so, fines paid by drivers in Flanders go into national funds that help pay for Wallonian debt.
Belgium is like a bad marriage, Vereeck added. The husband and wife want to live apart but there is a common child--Brussels--that neither one wants to give up.
Indeed, Sunday's elections became a necessity when Prime Minister Yves Leterme resigned on April 26 after failing to solve a bitter and long-standing dispute over linguistic boundaries on the outskirts of Brussels--another instance of disagreements between the regions.
The latest polls in what are effectively two elections show the electorate turning away from traditional parties in Flanders and put a grouping of former Flemish separatists--the N-VA, led by plain-speaking populist Bart De Wever--out in front.
In the south, the Socialists have the lead. But around 25% of voters remain undecided. The two biggest parties from both regions will have to broker a coalition agreement between them.
Flanders has 60% of the Belgian population and produces 70% of the country's gross domestic product. For that reason the role of prime minister has almost always gone to a Flemish speaker.
A few weeks ago the N-VA toned down its separatist language and campaigned instead for increasing power in the regions to something in line with the Germany Laender or the U.S. states.
Bringing the French speakers on board, however, is far from assured. De Wever said earlier this week that, in the case of an N-VA win, he would be willing to cede the post of prime minister to a French speaker if that meant they would move towards a system that features stronger regions.
Socialist leader Elio di Rupo has said he is ready to "take a step towards our Flemish colleagues" but another round of long, drawn-out coalition talks could be in the cards.
"The best thing the political world can do is for the winners of the election and the major parties to declare on Monday morning that they will cut the budget in the same way as Germany has done, and give a signal that the debt situation is in hand," said Herman Matthijs, professor of public administration and finances at the Free University of Brussels.
The parties will then have until the end of August when stock market players return from vacation to make a workable coalition, Matthijs said. If not, new elections must be called.
Once a coalition is formed, the momentous task of cutting the budget deficit--which stands at 5.1% of GDP--can begin.
The first reduction of 1.5 to 2 percentage points can be made relatively painlessly, according to a senior government official who declined to be named. This could be achieved "through some moderate measures, such as blocking the growth in health-insurance spending and some small tax increases," he said.
To cut the deficit to the European Union's cap of 3% or below, however, more controversial measures such as pension reform or a tax on carbon dioxide emissions might be needed, he said.
The average retirement age in Belgium is just 57, below the EU average of 60 and a full decade below Denmark's 67 and as the population ages, there are no reserves to pay for increasing demands on the state purse.
But details are sketchy and the French-speaking parties have steered clear of any talk of budget cuts.
With Belgium due to take over the six-month rotating presidency of the EU next month, other member nations are also eyeing the imminent election with concern.
In Brussels, though, most remain sanguine. There is a permanent European president now in Herman Van Rompuy, who is himself a Belgian, so the role of the rotating presidency has become mainly administrative.
"Belgium has some extremely good, experienced officials, especially European officials," said one senior EU diplomat speaking on condition of anonymity. "They will put caretaker ministers in place."
The fact they won't have a big national agenda can only be a good thing, he added.
Wall Street Journal