On deck during the storm

An unprecedented crisis required unprecedented measures in a very short time. This is how Pierre Gramegna, Luxembourg’s Minister of Finance since 2013, sums up the decisions he helped shape both at national and at European level. As the virus threatened, the foremost priority was to manage and minimize the risk it posed to the health of citizens by ordering a partial economic lockdown (banks and insurance companies as well as other essential services not being included) that will have saved many lives, even if the magnitude of the economic consequences remains to be determined and will project global economies into an era of uncertainty.

Weathering the storm

As we talk to the Minister, Luxembourg had recently entered the second phase of easing restrictions on 11 May, with shops and secondary schools opening doors. As he points out, partially shutting down an economy is easier to do than opening it up again.

Nevertheless, Luxembourg had several advantages as it entered into the sanitary crisis.

First of all, sound public finances documented by a consistent AAA rating on the basis of its very low public debt. This in particular allowed the government to react not only very rapidly but also very forcefully to support the economy. In total, the different measures adopted by the government add up to a whopping 17.5% of GDP, placing Luxembourg among the top 3 EU countries in terms of support measures. The Restart Luxembourg program announced on May 20th adds another 800 million euros of measures to the initial package of measures. In terms of direct expenditures and deferrals, Luxembourg even ranks first in relative terms in the EU. The main aim of this support is to secure jobs and thus consumption and livelihoods. Luxembourg’s generous partial unemployment scheme which compensates 80% of furloughed workers’ pay, introduced during the global financial crisis of 2008 to help avoid unemployment in certain sectors, was extended to the entire economy. In addition, the government increased the scope of beneficiaries of family leave in order to allow parents to mind their children during the closure of schools. This creates a solid social buffer, says Minister Gramegna.

To help companies weather the storm, besides a range of direct aid schemes, the government introduced loan guarantees whereby the State covers 85% of the loan risks. Minister Gramegna underlines that banks also did their fair share by taking on 15% of that risk, going beyond the 10% minimum that revised European rules would have permitted. Overall, he lauds the financial industry for its very constructive attitude in this crisis, which he sees as being part of the solution. To him, this goes to show the very nature of the financial industry and its core function in our economies, i.e. supporting economic activity by providing the funds companies need to support their activities and thus generate growth and create jobs. The Minister expresses great satisfaction in underlining that banks have approved more than 95% of requests from companies for payment holidays on existing loans, thus freeing up valuable liquidity for these firms. This sort of partnership has proven a great asset in getting the country through the initial stage of the crisis.

A second advantage that has allowed Luxembourg to fare relatively well is the share of the financial sector in its economy. Deemed essential under the state of emergency, the financial industry was able to continue to work remotely. Indeed, a vast majority of the staff of Luxembourg banks, asset managers, insurance companies and other financial institutions have been working remotely over the first nine weeks of the lockdown, allowing economic activity to continue. This obviously was not easy, acknowledges the Minister, expressing appreciation to all those who helped in this effort. A number of issues had to be resolved and here Minister Gramegna is very grateful to his counterparts from Belgium, France and Germany for their flexibility in suspending currently applicable rules on taxation and social security for commuters, avoiding a bureaucratic headache on top of the already difficult situation. How much of this remote working will remain in place is not yet clear but it will have impacted mentalities and encourage companies to further explore its potential.

European solidarity

As regards action at the European level, Minister Gramegna rebuffs any overly critical voices. Obviously, more could or even should have been done but then again, politics is the art of the possible. Europe has shown solidarity by agreeing on a comprehensive support package, the importance of which should not be underestimated. The first three pillars agreed in April and entering into force by June of this year are worth 540 billion euros, composed of credit lines made available through the European Stability Mechanism of up to 240 billion euros for health sector related expenditures, the SURE scheme making funds available to combat unemployment and a 25 billion EIB guarantee fund to make up to 200 billion euros available to support companies. Added to this, will be a recovery fund that is being negotiated and which will be worth at least 500 billion euros, thus bringing the total of European support to over 1 trillion euros. This overall package shows that Europe did step up to the plate, says the Luxembourg Minister of Finance.

Minister Gramegna would like to see more common action, after the regrettable initial reactions by most governments for instance when closing borders. While it is understandable for countries to take action nationally and thus in an uncoordinated fashion in the heat of emergencies, Europe should now work together to address the remaining short-term and medium-term issues and reflect on the importance of deepening the single market. If Europe cannot act together to face external events like this, one should not be surprised if citizens question the role of the EU, the Minister admonishes.

Recovery under headwinds

Looking ahead as to what the crisis will mean, Minister Gramegna, ever the optimist in normal times, predicts strong headwinds. While acknowledging he does not have a crystal ball, he considers that even the best-case scenario of a V-shaped recovery, where a 6% dip in Luxembourg’s GDP would be followed in 2021 by a 7% increase, would essentially mean that Luxembourg, used to consistent growth above EU average for the past ten years, would experience little or no growth over two years. Europe and the world is entering an era of economic uncertainty, he remarks darkly.

There are however also positive consequences he sees emerging from this ongoing crisis with an acceleration of two trends in which Luxembourg was already very strongly engaged.

First, in the last ten weeks, digitalization will have made several years’ worth of strides in its normal evolution. Whether in remote working and client interaction, video-conferencing, online shopping, payments and many other ways, the crisis has abundantly shown that we are far from exploiting the full potential of technology. One aspect, which also has been central in allowing Luxembourg to manage the crisis, was the quality of its digital infrastructure, which sustained traffic three times that of normal times without any problems. Investments in this area have proven their value.

Second, also dear to his heart, the importance of the transition towards a sustainable economy and how financial services will help financing this transition is taking a completely new dimension. Luxembourg has not waited for this crisis to commit but the crisis has certainly added to the government’s resolve to push this issue very high up its agenda and that of the EU. In particular, Minister Gramegna thinks this crisis will have extended the focus from environmental issues to address a larger spectrum of sustainable and social issues, such as housing and healthcare. This reflects also the trends seen by the growing number of listings for such bonds on the Luxembourg Green Exchange. Overall, governments will become more sensitive to these considerations and screen their investments and will, at the very least, reward companies for integrating them in their activity through incentives and awarding of government contracts. For the Luxembourg fund industry this will soon translate into a reduced subscription tax for qualifying investment funds, the Minister announces. Minister Gramegna invites the financial industry to submit ideas to identify and develop new sustainable financial services and products.

Making progress on sustainable finance is not a choice, it is a must, Minister Gramegna concludes as he rushes off to his next appointment, a video-conference with the Chairman of a major Japanese bank, one way to help him feel the pulse of the global economy and stay in touch with leaders from the global financial services industry, who are key to the international financial centre of Luxembourg.

LEO Mag May 2020, Luxembourg for Finance
Photo © SIP / Yves Kortum