A lunch conference in the Abbaye Neumünster on “Risky growth: why Luxembourg is doing better than the eurozone” was organised by Statec on Friday 3 June. Maison Moderne

A lunch conference in the Abbaye Neumünster on “Risky growth: why Luxembourg is doing better than the eurozone” was organised by Statec on Friday 3 June. Maison Moderne

On 2 June, Statec organised a conference on the theme of risky growth at the Abbaye Neumünster.

Speakers included Ferdy Adam and Bastian Larue from Statec, the national statistics bureau, and Božena Bobková and Bořek Vašíček from the European Commission’s economy and finance directorate general (DG ECFIN). Afterwards, a panel discussed the findings and reflected on Luxembourg’s projected growth levels and what risks growth faced in the context of increasing global political uncertainty.

Statec: current and future economic perspectives

Larue first presented some results on the current economic situation.

Confidence in the Eurozone is coming back, especially economic sentiment, but it should also be noted that there is a convergence between member states on this indicator, he stated.

Optimism in stock markets is also heading in the right direction, though it is still much lower than in Japan or the US.

The sectors that presented the most growth were non-financial services. These include information and communication, and services to companies. There has also been growth in the financial sector.

The weak points are household consumption and business investment, according to Larue.

Looking to the near future, Adam argued that we should be more optimistic. With almost 5% growth projected for 2017 and 2018, he nevertheless cautioned that this is probably the high point of the economic cycle and he expects growth levels to fall to 2-3% in 2019.

Economic uncertainty

The two emissaries of DG ECFIN explained how uncertainty can impact the economy.

There are four main classes of uncertainty: financial indicators, news-based indicators, survey-based indicators, and macroeconomic data sets and forecasts.

It seems that there is a big gap between political uncertainty indicators and all other indicators in 2017. Economic policy uncertainty was rising: Brexit and the unpredictability of the current US president all contribute to that.

There is a negative relationship between uncertainty and economic growth but the causality is unclear, explained Vašíček. Studies in the US on the effect of uncertainty on real economic growth show that real economic activity drops, then overshoots once uncertainty is resolved.

Bobková explained that uncertainty spreads across borders, and that it can have an adverse effect on international capital market flows, especially in emerging economies. However, when they applied the same model that was used in the US to the Eurozone, there was limited evidence of the impact of uncertainty on real economic growth.

In the European Commission’s spring forecast of 2017, it was found that uncertainty affects investment more strongly than consumption. Therefore, it seems that households pay attention to different factors than firms do.

She concluded by stating that uncertainty is one of the key drivers to disappointing economic developments--especially in the Eurozone. The continued economic weakness, especially in investments, makes it more likely that cyclical downturns could turn into a permanent loss of output, and there is a danger of hysteresis in the EU.

Prudence and caution

Serge Allegrezza, director of Statec, said that whenever economic stats were good, they made statisticians uncomfortable. He was afraid of the Minski moment, that catastrophe could strike any moment. He argued that we didn’t know what we didn’t know. He pleaded for more resilience and preparedness. On the other hand, while one should prepare for uncertainty, one should also enjoy the present. Nevertheless, he argued that if one looked closer at purchasing power statistics, they were going down. National revenue minus the earnings which go abroad only comes to 65% of GDP.

Franz Fayot, the LSAP MP who chairs the economic committee in parliament, was also worried about the boom and bust phenomena and wondered how to get out of that cycle. He argued that financial markets had not learnt the lessons from the subprime crisis as they were still the same actors and people who were working in those financial markets. He favoured more diversification of the economy and less dependence of the financial sector in Luxembourg.

Yves Kuhn, group chief investment officer at Banque internationale à Luxembourg, argued that there would be a problem if deregulation happened in the US. However, at the moment, Luxembourg’s fund industry was not too exposed to the US market.

Luxembourg and Ireland

A question from the audience on comparing Luxembourg to Ireland raised several issues.

Bořek Vašíček told Delano in an interview after the conference in a personal capacity:

“it’s difficult to compare Luxembourg to Ireland because of the housing market. The two countries are just so different. The reasons for the sharp increase in the housing prices is a bit different: here it’s about the limitation of supply, the regulations, the territory is very small. In Ireland and other countries, it was very much driven by the banks who gave credit to anybody. It was very much pushed by the demand. In the US and in Ireland there was a very sharp downwards correction in housing prices, whereas in the context of Luxembourg, the prices are pushed up by objective factors.”

Future economic perspectives

The moderator Thierry Raizer from Paperjam (published by the same outfit as Delano) asked which of the top three lists Luxembourg should strive to get into again, Patrick Wies, a partner at KPMG, wondered whether that was the objective. Both Wies and Kuhn argued for business to have an open mind to the outside. Because of Luxembourg’s small size, it needs more public-private partnerships, and businesses needs more alliances, said Wies. Businesses also need more innovative spirits and invest in R&D. He wondered whether digitisation and the circular economy are defined like what we want it to be, not necessarily of what it could potentially mean.

Allegrezza joined that argument and posited that such a small country should seek collaborations, should focus on competences and detect opportunities. However, he warned that one should be realistic of what a country of 600,000, or 780,000 with cross-border workers included, can achieve.

A debate on the housing crisis could naturally not be avoided. The risks to growth naturally included housing, schooling and transport/infrastructure. With an annual population growth of almost 3%, these issues will only become more pressing, warned Allegrezza, Fayot and Wies.

Diversifying risk

When asked about why Luxembourg was doing so well, Božena Bobková said in a personal capacity that:

“Luxembourg is like a capital, like a country-city. You cannot compare Berlin to the rest of Germany. Everything works very well and everything is concentrated in Luxembourg. You avoid many of these problems by having a small country. The geographic position of the country is perfect, it’s clearly an advantage--being close to Germany, Belgium, the Netherlands.”

Vašíček stated:

“In most countries, you have a differentiation of the regions; some are remote with bad transport connections and so there is higher unemployment. You then have some diversification of the economy.”

However, he added that the Luxembourg economic model is potentially dangerous.

Bobková explained that the government tries to diversify the risk:

“If for example another financial crisis hit the economy, Luxembourg would be hit quite hard, so maybe they try to have some backup solutions.”

Vašíček added: “But we’re talking here about diversifying to some services, with high added value, because it’s the only thing you can do in a country with very high labour costs.”