With the collapse of the Green vote ending the country’s so-called “Gambia” (blue, green, red) coalition, Luxembourg’s financial sector is seen to stand to benefit from the near-certain return of the exiled Christian Socialists to governing. There’s an emerging consensus that a prime minister Luc Frieden would be good news for the financial sector and would also make finding solutions to problems besetting the country more likely.
This scenario became even more plausible Monday evening with Luxembourg head of state Grand Duke Henri naming Frieden, who held several cabinet positions between 1998 and 2013, as formateur, the politician who leads coalition talks and is historically likely to become the next prime minister.
With the Green Party losing half of its support, the major players in the legislature are the Christian Social People’s Party (CSV), the Democratic Party and the Luxembourg Socialist Workers’ Party (LSAP). While the parties negotiate behind closed doors on the makeup of the new government, calls are being made for a right-facing CSV-DP coalition or a more centrist CSV-LSAP one. Both combinations would make a majority in the 60-seat parliament of the Grand Duchy. CSV won 21 seats, DP 14 and LSAP 11.
The voters have opted to move the country to the centre-right from the centre-left, argued Paul Schonenberg, the chairman and CEO of the America Chamber of Commerce in Luxembourg in a Monday LinkedIn post. “In all likelihood, Luc Frieden will be prime minister with a mandate to strengthen the economy and ensure Luxembourg’s prosperity during a difficult period in the history of Europe.”
‘Sensible back to basics’
Schonenberg said there’s a good chance Frieden “will lead a sensible back to basics government which cuts taxes for business and the middle class.”
The uncharitable view of Luxembourg’s Bettel government extends even into academia studying the financial centre.
“Luxembourg has being been falling behind relatively, so we are still gaining market share, for example for funds and ETFs, but we’re not as good as Ireland,” said Benjamin Holcblat, a University of Luxembourg researcher focussing on data science, econometrics and asset pricing. He allocated blame for this squarely on Luxembourg’s recent government.
Perceived need for agility
“For this kind of fund, we think if we’re losing ground to Ireland, it’s probably that Luxembourg has not been as agile in terms of regulation and striking deals as it has been in the past.”
Holcblat said with the return of the CSV, possibly in coalition with the DP, things could improve in this area. “Maybe they’ll improve in a certain way the landscape to make it so that we stop losing ground relatively.” He underlines that in absolute terms, Luxembourg has not lost ground. “But we are not anymore the first financial centre people would think.”
Housing as business issue
Holcblat identifies the main problem facing Luxembourg as housing, saying that it is one of the main problems that has topped the political agenda.
“It’s very important for the country, but also for the financial industry,” he said. “Because when you hire new people,” he added, “you should know that your employees are going to spend quite a significant proportion of their salary or wages on housing. It means that in the end, they are paid less.”
According to Holcblat, Frieden “is known to be somebody who gets stuff done.” He also said that the last government, which was a coalition of three parties, might have found it more difficult to act.
The financial sector is one of the pillars of Luxembourg, but its citizens have an ambiguous feeling toward it. “They are happy to get the benefit of it, but they are also a bit ashamed.”
Happy side, not shame side
Holcblat sees the CSV as being “more on the happy side, not on the shame side”, but he doesn’t expect any dramatic changes.
One area he said that the CSV could promote the financial sector is to change it from being heavily back-office dependent. “One of the challenges of Luxembourg is to climb the technical ladder,” he explained.
“We can expect that someone like Luc Frieden will be more proactive and using the university and continuing to attract people and startups and so on, but also build up other skills that we do not necessarily have in large quantity currently,” he said.
Avoiding blacklisting
The origin of the Bettel government was in the wake of the then-CSV government led by then-prime minister Jean-Claude Juncker getting negative press due to the LuxLeaks scandal.
Hocblat recalled hearing Bettel speaking about this. “He is right that being agile is good, but when your agility becomes a way that you end up black-listed that’s bad.”
He credited Bettel with ensuring Luxembourg is no longer at risk of being black-listed. Luxembourg was officially grey-listed in 2009 by the global Financial Action Task Force, which then triggered a decade of changes to bring the Grand Duchy back into line with globally accepted practices. The FATF recognized these improvements in a recent report.
“I guess the Christian Democrats were not happy to be black-listed. Probably they underweighted the risk. I hope they’ve updated their information set” and can find a way to avoid such risks while still being proactive.
Related articles on Investment Officer Luxembourg:
- As Luxembourg votes, talents and taxes feature on finance’s agenda
- Amundi shifts €6.57 bln in Luxembourg ETFs to Ireland
- Lux PM Bettel: ‘Taxes are poison’