Economic outlook. Are we getting out of the mess? Brussels, February 03 2011 .

1. Economic outlook.Are we getting out of the mess? Brussels, February 03 2011. Freddy Van den SpiegelChief Economist

2. 2007: starting problems in US housing market and “toxic” financial products. 2008: major banks fail in US and EU, global economy into recession. 2009: global recession. 2010: sovereign risks. 2011: currency and trade wars or gradual normalisation? History of the crisis

3. But surprising economic recovery Changing forecasts:

4. 1. Economic outlook: focus on the consensus view. • US: Growth is back but quid sustainability? • Corporate sector healthy. • Consumer sector fragile. • Government sector supportive beyond reasonable levels. • External balance deteriorating again. • Banking sector: deleveraging going on but still a long way to go. • CONTINUOUS RECOVERY GOING ON BUT REMAINS VULNERABLE • SUSTAINABLE FOR HOW LONG?

5. 1. Economic outlook: focus on the consensus view. • EMU: Growth is back but slower than US. • Corporate sector healthy. • Consumer sector hesitant. • External sector pulling economy. • Government debt levels increasing but still under control. • Banking sector stabilised, but vulnerable. • Monetary and Economic Cohesion at risk. • SUSTAINABLE GROWTH BUT FINANCIAL AND POLITICAL UNCERTAINTY

6. 1. Economic outlook: focus on the consensus view. • Belgium: strong performance within EMU • Corporate sector healthy. • Consumer sector strong. • Government sector the Achilles’ heel. • External sector pulling economy. • Banking sector oversized and vulnerable: ongoing need to deleverage. • Nice profile with political and financial weak spots.

7. 1. Economic outlook: focus on the consensus view. • Russia: sustained growth. • Activity supported by oil prices. • Consumer sector benefitting from lower unemployment. • Government sector: room for expansion. • External sector: comfortable balance. • Tighter monetary policy due to inflation. • Long term potential.

8. 1. Economic outlook: focus on the consensus view. • Asia: Continued growth and apparent stability. • No fundamental problems with crisis (banks and government debt). • But based on massive government support. • But still focused on exports which is unsustainable. • But inflationary pressures building. • And not only a China story

10. 1. Economic outlook: focus on the consensus view. • Asia: Continued growth and apparent stability. • No fundamental problems with crisis (banks and government debt). • But based on massive government support. • But still focused on exports which is unsustainable. • But inflationary pressures building. • And not only a China story • Growth can continue at high speed, but increasing dangers of conflicts with major clients and internal bottle necks.

11. 1. Economic outlook: focus on the consensus view. Summary.

12. Economic outlook: the consensus view. • Are we getting out of the mess: overview of developments in risk areas.

13. 2. Are we getting out of the mess? Overview of risk areas. • Banking health. • Confidence stable. • Lending to private sector recovers. • Profitability back but still vulnerable • Stress tests reassuring but controversial. • But exposure to risky assets remains significant. • But funding gap remains wide. • But new regulations create uncertainty. • But many weaker banks remain dependent on ECB in some countries. • BANKS ARE RECOVERING BUT STILL VERY VULNERABLE, A LONG WAY TO GO

14. 2. Are we getting out of the mess? Overview of risk areas. • Central Banks balance sheets. • Massive support during the crisis and no serious exit yet. • Leading to inflation? • Conclusion: no hurry to exit, but what when M3 wakes up?

15. 2. Are we getting out of the mess? Overview of risk areas. • Government finances. • Deficits and unsustainable debt levels. • Deficits are structural: no easy way out. • Conclusion: • Governments cannot continue to support the economy but have no other option in case of (unexpected) further slowdown. A dangerous potential dilemma.

16. 2. Are we getting out of the mess? Overview of risk areas. • Economic divergence within EURO zone. • Diverging performance. • GDP growth: from top performers to PIGS. • Unemployment. • Government deficit. • Government debt. • Current account. • Competitiveness.

17. 2. Are we getting out of the mess? Overview of risk areas.

18. 2. Are we getting out of the mess? Overview of risk areas.

19. Government Finances / Sovereign Debt crisis in Europe Divergence within EU: the EURO crisis. Crisis as a consequence. Political reaction Rescue package National Austerity Programs. Reform of Economic Governance. 2. Are we getting out of the mess? Overview of risk areas.

20. Government Finances / Sovereign Debt crisis in Europe Divergence within EU: the EURO crisis Crisis as a consequence Political reaction. CONCLUSION: PROBLEMS ARE UNDER CONTROL FOR THE TIME BEING BUT THE FUNDAMENTAL ISSUE OF COMPETITIVENESS IS FAR FROM RESOLVED; MARKETS DO NOT BELIEVE THIS IS A SOLUTION, ESPECIALLY FOR GREECE THIS ISSUE WILL CONTINUE TO WEIGHT ON EU ECONOMIES POLITICAL REACTIONS UNCREDIBLE SO FAR 2. Are we getting out of the mess? Overview of risk areas.

21. Inflation/deflation Inflation on the rise worldwide. Pressures from commodities and monetary expansion. Core inflation remains low for the moment. Inflation expectations remain in check for the moment. A REMAKE OF THE 2007-08 SCENARIO WITH INFLATION SURPRISE AS A TRIGGER FOR CRISIS? 2. Are we getting out of the mess? Overview of risk areas.

22. 2. Are we getting out of the mess? Overview of risk areas. • Global imbalances and geopolitical tensions/ protectionism. • Imbalances in trade flows.

23. Current Account Balances

24. Current Account Balances

25. 2. Are we getting out of the mess? Overview of risk areas. • Global imbalances and geopolitical tensions/ protectionism. • Imbalances in trade flows. • Financial imbalances.

26. 2. Are we getting out of the mess? Overview of risk areas.

27. 2. Are we getting out of the mess? Overview of risk areas.

28. 2. Are we getting out of the mess? Overview of risk areas. • Global imbalances and geopolitical tensions/ protectionism. • Imbalances in trade flows. • Financial imbalances. • AS A CONSEQUENCE TENDENCY TO NATIONALISM AND PROTECTIONISM: THE END OF GLOBALISATION?

29. 2. Are we getting out of the mess? Overview of risk areas. • Banking health. • Central Banks balance sheets. • Government finances. • Divergence within EMU – future of EURO. • Inflation / deflation. • Global imbalances and geopolitical stress / protectionism. • THE BIGGEST RISK: INTERCONNECTEDNESS AND POTENTIAL CHAIN REACTIONS.

30. 2. Are we getting out of the mess? Overview of risk areas. DRAMA Example of chain reactions. Double dip Government finance(Sovereign risk) Deflation Banking trouble Euro crisis

31. Conditions to support economic integration Common culture Neighbourhood Complementarity Political willingness EU – RUSSIA ECONOMIC INTEGRATION HAS A HUGE POTENTIAL 3. Globalisation and EU – Russia relationship

32. Thank you.