The contribution of the Luxembourg financial center to the European economy
Luxembourg has developed a particular cross-border expertise in financial services that differentiates it from other financial centers in the EU. Thanks to this unique specialization in international financial services and products, the Luxembourg financial center benefits European businesses and citizens and contributes to the European economy.
Attracting capital and boosting liquidity in Europe
As the second largest exporter of financial, insurance and pension services in Europe (after the UK) and Europe’s largest investment fund center, Luxembourg offers a solid platform for international investors to access diverse investment opportunities. With 3.9 trillion euros AuM and funds distributed in over 70 countries, Luxembourg attracts investment into Europe from other parts of the world, and in turn, delivers the capital that is needed for households and businesses to borrow, invest and grow.
Investment funds inject finance into the real economy by investing in European equities and corporate debt. In 2016, Luxembourg-domiciled funds held a total of 1,422 billion euros in debt and equities invested in Eurozone and a further 358 billion euros in other EU Member States. In other words, by purchasing 1,780 billion euros in assets in EU economies, investment funds provided companies with working capital for significant capital expenditure and helped governments to deliver essential public services and generate economic growth.
The presence of investment funds on such large scale in Luxembourg also means that large volumes of deposits are made with banks in Luxembourg. Subsequently, these banks provide the liquidity that is needed within their group to issue loans to businesses and households throughout Europe, making Luxembourg central to the functioning of the European and global financial system.
Ensuring the efficient allocation of resources to European governments and businesses
Not only Luxembourg investment funds and banks play a vital role in the European financial system. In fact, European businesses have a range of options through which they can access capital. These include issuing bonds or shares, as well as various forms of bank loans.
For businesses across Europe, bonds represent a vital source of finance. Raising debt helps to make them less vulnerable to external shocks as in the last financial crisis. In 2015, non-financial corporations raised 186 billion euros in external finance through bonds listed on the Luxembourg Stock Exchange. The major users were companies operating in the service sector, such as Carrefour and McDonald’s, which issued 93 billion euros in bonds. Second and third were the utilities (for example, Eni) and manufacturing sectors (such as Daimler and Heineken).
Local and national governments, as well as supranational bodies also use bonds for long-term investments in public services, school refurbishment, new motorways, defense equipment, or refinancing of existing debt. In fact, governments in the EU funded 72% of their debt finance through bonds in 2015. In the same year, eight Member States, as well as supranational bodies like the EU and the European Stability Mechanism (ESM), raised debt finance through bonds listed in Luxembourg.
Funding investments in infrastructure
Infrastructure funds provide the opportunity to invest in essential public assets, such as roads, airports and rail facilities. Given the nature of infrastructure projects, these loans tend to be long-term.
For example, the new airport in Zagreb is financed by the Luxembourg-domiciled Marguerite fund. It tackles problems of outdated airport infrastructure and insufficient capacity. Improvements in air infrastructure helps to boost productivity, making Croatia a more attractive place to do business and to visit.
The Marguerite fund is also supporting major investment in virtual infrastructure. Over the next five years, it is helping to finance the development of the broadband network in rural Alsace in France that will see as many as 380,000 households and businesses provided with high-speed fiber connections.
Large-scale investment funds that invest cross-border can be very complex to set up and manage: options within Europe for the establishment of such specialized funds are therefore limited. The Marguerite fund was set up in Luxembourg in 2009 as a joint initiative by the leading public sector financial institutions of six European countries and with support from the European Commission. It was decided to domicile the fund in Luxembourg because it offered the necessary know-how to set up and administer the fund as well as a comprehensive toolbox of investment fund vehicles, including structured/layered and multi-compartment funds.
Supporting innovation and R&D in Europe
Tech companies, more than most, tend to make use of equities over debt finance as a means to raise money, reflecting the inherently riskier nature of their businesses, by comparison to, say, utilities or pharmaceutical companies.
In this context, careful investment management and a diversified portfolio (for example, combining equities of more resilient healthcare and logistics robotics companies in a fund with other types of firms) are important to providing investor confidence.
Pictet recently launched its Luxembourg based Robotic Fund, which is a pure equities fund that invests in companies at the forefront of robotic technology, such as driverless cars or surgical robots. The fund has invested in many diverse and innovative companies, including KUKA, a German manufacturer of industrial robotics.
For asset management companies such as Pictet, the use of the reputable and trusted Luxembourg UCITS fund structure there – for not only provides investors with an opportunity to invest in relatively early-stage innovative companies, but also offers a high degree of regulatory protection and information transparency, thus reassuring investors.
Financing sustainable development in Europe and beyond
For the past ten years, the number of asset managers that invest in sustainable projects such as renewable energy, water and green infrastructure has increased significantly. These specialized asset management companies choose Luxembourg not only for its international offering, but also for its financial services ecosystem.
For example, AIM Luxembourg is an impact investor that has raised private equity to fund a total of 32 solar, wind and renewable projects in France and elsewhere in Europe. A relatively small operator such as AIM Luxembourg needed the ability to externalize many functions (accounting, custodian, legal services) to make the fund cost efficient: something which Luxembourg’s highly developed fund ecosystem was able to provide.
For similar reasons, the Luxembourg financial center plays a leading role in the micro-finance fund sector. It hosts a large share of the world’s micro-finance funds and established the first fund label dedicated to micro-finance funds in 2006. Micro-finance funds are able to finance institutions in less stable markets, which is critical to economic development in developing countries. Without these kinds of funds to provide loans, local banks or micro-finance institutions would struggle to raise the money needed to support the local population.
Providing cross-border solutions for European citizens and households
Around a quarter of Luxembourg’s financial center earnings comes from the provision of products directly to individuals and families, These products help them access loans and plan for their financial future by offering savings and investment products, including life insurance and pension products.
In insurance, for instance, Luxembourg provides European residents with a wide choice of policies in terms of cost, coverage and alignment to individual needs. In addition to the portability of the Luxembourg life insurance product, the country offers strong protection to policyholders and has a unique range of measures in place to protect policyholders’ interests in the event that a life insurance company goes bankrupt.
Thanks to a wide range of Luxembourg investment funds, European citizens saving up for their retirement are able to access different asset types, investment approaches, and sectors, such as high-tech or green energy, that might not otherwise be open to them. The large choice, available in this way, allows investors to spread risks by diversifying their portfolio, across geographies, currencies and sectors.
It is therefore not surprising that virtually every major fund manager has set up fund ranges in Luxembourg: representing 68% of all EU cross-border fund distribution, Luxembourg allows the fund industry to overcome the fragmentation of the EU market, in turn enabling investors to benefit from pan-European economies of scale.
Oxford economics Study
This article provides a summary of the recently published report, “Luxembourg financial center’s contribution to the European economy”, Oxford economics, June 2017.
The study sets out to explain the connection between the activities of the financial center and the European economy and how governments, businesses and citizens benefit from its cross-border financial services.
For more detailed information, please consult Oxford economics’ website: www.oxfordeconomics.com or visit luxembourgforfinance.com
Communiqué par Luxembourg for Finance