BRUSSELS (Reuters) - This is a European country riven by ethnic tensions. Its public debt is almost as big as its total annual output and it’s in the middle of a political crisis so deep that this week it passes Iraq as the modern-day state whose politicians have taken the longest to form a government.

A worker in the non-profit sector, which includes nurses and social workers, throws his shoes onto the steps of the stock exchange building, during a protest in Brussels, March 29, 2011. REUTERS/Thierry Roge

Yet the buses run more or less on time, the garbage is collected twice a week, exports of pharmaceuticals, steel cord, chocolate and beer are uninterrupted -- and it can still take about a month to get a new telephone line.

Governing is never easy. In the past year or so, it has sometimes seemed impossible. Just ask North Africa’s rulers who, after a long period of stability, not to mention repression and abuses, have faced popular uprisings demanding their ousters. In the United States, the big two parties have fallen victims in different ways to the upstart populist Tea Party movement. In Europe, governments in Britain and Ireland have been kicked out in the aftermath of the financial crisis. This month, the government in Portugal collapsed.

Meantime in Belgium, whose Dutch- and French-speaking parties can’t agree on what powers should be devolved from the center to the regions, the absence of government is hardly commented on. More than nine months after a June 2010 election, talk in bars and cafes strays only occasionally to the country’s political predicament. “We’re not really following it anymore,” says a bartender in the Flemish town of Mechelen with a shrug.

“It’s a crisis without an audience,” says Carl Devos, politics professor at the University of Ghent. “It’s a bit absurd.”

In a world of upheaval, the fact that one of its oldest democracies has kept ticking over without validated political leadership is remarkable, even if its citizens don’t see it.

Belgium managed the whole of its six-month presidency of the European Union last year with a caretaker government. That same government has laid out a 2011 budget and dispatched fighter jets to play their part in guaranteeing the no-fly zone over Libya. In the first three months of 2011 it’s reached almost half its target for this year’s bond issues.

Would some countries work better without a government? Could the world learn something from Belgium’s experience?

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One thing’s for sure, having no government can be cheaper. New administrations bring new projects -- and new costs.

“One consequence of not having a working government is that the cost of public spending is not so high,” says Philippe Ledent, economist at financial services company ING Belgium. “In the short-term, there is no real negative effect. I thought there would be on confidence, but in the end it’s been rather limited.”

Financial markets were rattled by Belgium’s political paralysis at the end of November and early January, but since the start of February they seem to have calmed. Government 10-year bond yields are a little above 4 percent, about 1 percentage point more than benchmark German equivalents.

That compares with spreads of nearly 7 percent and over 9 percent respectively for EU bailout recipients Ireland and Greece. This year could have been a challenge with around 26 billion euros of Belgian bonds due to mature, but heavy issuance in 2010 allowed the debt agency to buy back a third of the maturing paper ahead of time.

Even though Belgium’s public debt is well above the euro zone average, it has not carried out austerity measures like those seen in other European countries, because there’s no fully fledged government empowered to enact them.

“I have heard it said that a caretaker government is the best you can have, as it is most unlikely to raise taxes,” says Rudy Andeweg, political science professor at Leiden University.

Business confidence is at its highest level since July 2007. In February, consumer confidence too was also at a 3-1/2 year high, although surging oil prices dragged it down a little in March.

There have been hiccups: Belgium’s business federation says some IT companies reliant on public sector contracts have been hit by the fact that the government can only roll over small payments, and can’t launch new tenders. Smaller banks would likely have benefited from an adjustment to banking taxation, which the financial community backs, but which cannot be enacted until a government is in place.

But being in the euro has sheltered the country from the most dramatic consequences. Since 1999, Belgium’s monetary policy has been determined by central bankers in Frankfurt.

OLD DIVISIONS

One of the secrets to Belgium’s stability is force of habit. Like the Netherlands next door, the country of nearly 11 million is used to having caretaker governments for extended periods.

Proportional representation -- which gives parties parliamentary seats based on their share of the vote rather than handing all power to the overall winner -- makes it usual for governments to rule in coalitions, and coalitions take time to form.

It’s not an uncommon set-up in Europe: Austrians, Italians, Finns or Germans are pretty sanguine about a gap between an election and a new government taking power. In Germany, a “grand coalition” of the main center-left and center-right parties took two months to form in 2005 and in Austria four months were needed in 1999-2000 for the Christian Democrats and the far-right Freedom Party to forge an alliance.

In countries with a winner-takes-all system, single-party rule is the norm and the prospect of a coalition can be more alarming. Britain is a good example: last year, the threat of protracted wrangling between the three main parties rattled financial markets before May’s election, causing a sell-off of government bonds, or gilts. In the end, the Conservatives and the Liberal Democrats forged a coalition just five days after the vote, but not before the pound had slid, British shares had fallen and gilts had underperformed their German counterparts.

Belgians are used to long drawn-out discussions. The cause of the latest political row dates back decades, to the creation of separate linguistic areas in 1962 which laid the ground for the country’s current structure.

That in itself was years in the making. Now, despite fresh suggestions that the country should split itself in two along ethnic lines, Belgian leaders seem happy to keep talking.

“As complex as the situation is at the moment, it is still much simpler than the problems that would arise if we decided that the Belgian state must be dissolved,” says Karl-Heinz Lambertz, premier of Belgium’s small group of German speakers, who are mostly viewed as neutral in the stand-off between Dutch- and French-speakers.

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One requirement for any country considering a spell without an elected government is a functioning bureaucracy. Belgians like to carp about the size and cost of theirs -- the business federation says it has 7 more civil servants per 1,000 citizens than its nearest neighbors, at an extra cost of 5 to 6 billion euros a year -- but it keeps things working, which may be a cost worth paying for now.

“It may have faced criticism, but our government administration is certainly functioning,” said Ghent University’s Devos. Unlike in some countries, such as the United States, senior civil servants in Europe are generally not elected or appointed by ruling parties, which makes any period of transition smoother.

On top of that, many players besides politicians have pivotal roles. “The system is less dependent on a dominant leader. You have unions and employer groups, controlling agencies,” said Keukeleire, of the University of Leuven and College of Europe. “The European Union, international organisations and international agreements also determine the limits of government.”

In fact, central government in Belgium doesn’t actually have all that much power at all. It’s restricted to managing public finances, the army, judicial system, foreign affairs and certain other issues such as social security and nuclear power. That makes leadership a less coveted prize than in more centralized countries.

It’s a similar story in the Netherlands, next door.

“In some countries, the president can appoint ministers, judges and people in administrative functions and in the army,” says Jan Tuit, a senior adviser at the Netherlands Institute for Multiparty Democracy. “If you look at for example the power of the Dutch prime minister, it’s really very limited. He cannot even reshuffle the cabinet.”

And the longer Belgium’s caretaker government has been in charge, the more powers it is assuming, or being given.

“Of course it’s better to have a government with full competence, but it’s possible as a caretaker government to take many decisions and we are doing that,” acting Finance Minister Didier Reynders told Reuters.

The country’s constitution has nothing to say on caretaker governments. In theory, a stand-in government would just cover a month or two before a new administration is sworn in, but the prolonged deadlock means the unwritten rules are changing.

“As time goes by, the scope of decisions taken by the government is widening. You could not have imagined six months ago that the government would nominate a new director of the national bank. Now they have done so,” said Rudi Thomaes, chief executive of the Federation of Enterprises in Belgium.

Having a monarch has also helped. As head of state, King Albert II has been busy appointing mediators, but he has also demanded the caretaker government revise the 2011 budget, a highly unusual intervention.

NOT ONE, BUT MANY GOVERNMENTS

And despite the vacuum at the top, Belgium has plenty of government to keep it ticking over. The country has five federated regional governing bodies, not counting provincial and local authorities. “You cannot say that Belgium is stuck,” says Ghent University’s Devos. “We have many other governments running the country.”

There are separate administrations representing the regions of Wallonia and Brussels, for French speakers and for German-speaking minority and a joint one covering the province of Flanders and Dutch speakers.

In a series of reforms since 1970, the powers of the regions and language communities have grown and those of the federal state shrunk. That’s at the heart of the current impasse: Dutch-speaking Flemish people, who make up about 60 percent of the Belgian population, have voted for parties seeking yet more control for the regions and fewer subsidies for French-speaking Wallonia, where the unemployment rate is double that of Flanders.

Yet in some ways it’s a boon: already, culture and education are the exclusive preserves of the language communities. The regions control a wide range of policy areas including the economy, employment, agriculture, housing, energy, transport and foreign trade.

Lambertz, premier of Belgium’s German speakers, says the federal system has helped in the present crisis. “The current system isn’t all that bad. Otherwise, it would have collapsed or the country would have found itself in crisis and that is not the case. Whoever travels through Belgium doesn’t notice much of the current difficulties,” he said.

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Federal states from Australia to Switzerland might also benefit from their multiple layers of government in the absence of a national administration.

But in most places, and especially in the developing world, strong political leaders are needed to fill the hole created by a lack of bureaucracy. In Iraq last year, for example, nine months of political limbo delayed investments to rebuild the war-torn country and left people short of basic services such as water and power.

Even in developed democracies, being without political leadership can be crippling. The lack of a plan to manage its debts has sent Portugal’s bond yields to new highs this week, inflating the cost of borrowing and increasing the chances the country will need an international bailout. Portugal faces a political vacuum of at least two months, if a snap election is called, with a caretaker government reduced to basic management of public affairs.

“It’s a pretty messy situation,” says Ken Wattret, chief euro zone economist at BNP Paribas. “In the Belgian context that may be fine, but Portugal has a pressing need to deliver a credible consolidation program.”

And even Belgium has had to put important decisions on hold. Analysts and economists say it needs to reform its pensions system and its labor market, reduce energy consumption and determine what to do with asylum seekers. It’s muddling along with unresolved questions about the future of nuclear power. These are decisions for the long term that a caretaker government simply cannot take.

“The longer these items are unresolved, the more costly they become. We have a fire brigade to put out fires, but we cannot renovate the building,” said Ghent University’s Devos.

The business federation says a government is urgently needed to rein in the debt and tackle the rising cost of an aging population. Its chief, Rudi Thomaes, said the deadlock really began four years ago at the 2007 election, as disputes over the future of the country stalled progress elsewhere.

“If I make the comparison with other countries I see a huge difference,” Thomaes says, poring over a chart listing the budgetary efforts of six countries - France, Germany, Italy, the Netherlands, Spain and the United Kingdom.

Yet Devos and others say that Belgium might need a crisis such as this to force through change acceptable to its Dutch and French speakers. It may indeed look back on nine month or even a year of political deadlock as a price worth paying.