In mid-July, Fitch Luxembourg’s triple A rating. It is the highest rating for confidence in the markets, coupled with sound management of public finances. This is what attracts the world’s most prestigious financial institutions and their clients to come to Luxembourg. Thanks to this, our banking industry has a volume of assets under management of more than $921bn, which is constantly growing. And the fund industry has €5.9trn in assets, making Luxembourg the second largest fund administration centre in the world after the United States. Because of this, the financial sector contributes 25% to national GDP, which has enabled our economy to get .
However, the competitiveness of the financial centre remains under constant threat. In March, the well-known Global Financial Centres Index of its 23rd place, moving it to 27th place worldwide. As a result, the country is now only in 10th position in Europe, far behind London, Paris, Frankfurt and Amsterdam. Such a downgrading of Luxembourg’s competitiveness could well affect its ability to attract new asset flows and new entrants to the market. According to the European Central Bank, Luxembourg had in 2021, down from 141 in 2017. According to KPMG data, last year the banking sector registered one new player and five left.
The fact that the banking industry is losing momentum is all the more worrying as some industry representatives claim, off-the-record, to have lost the ear of political leaders. This discrepancy reflects the dichotomy between finance and the economy of the country. For example, of the 125 banking institutions in the market, barely seven address their offers to the country’s retail population. In addition, 70% of the remaining banks come from the rest of Europe, 18.55% from the Asia-Pacific region, 7.26% from North and South America, and 3.23% from the Middle East, according to KPMG data. In addition, only 82 of the banks have legal personality in Luxembourg, the remaining 43 being branches of international banking groups.
The problem was latent, it is accelerating
The challenges faced by the Luxembourg financial centre in maintaining its influence are a reality. Because Luxembourg is not a place like others, due to its particularity of producing mainly financial products, it was already struggling to recruit niche talent. Now, the phenomenon of the ‘Great Resignation’ in the United States is coming to Europe and could be accentuated in Luxembourg by the problems of teleworking for cross-border workers, who are massively active in finance. More and more French cross-border workers are resigning in favour of employers in Paris. Even if they are based in Lorraine, Paris is only two hours away by TGV. This is not a handicap with four days of teleworking per week. On the German side, the phenomenon is starting to spread with competition from Frankfurt.
Others are thinking of moving to other locations, while a small but growing number are simply considering becoming self-employed to work with one or more clients across the Atlantic, fully telecommuting and in the time zone of their choice. The labour market is going global. Skills are exported, but not the workplace.
With the number of employees , the shortage of workers in the financial sector, combined with the exodus of some, makes debates about wage increases and look poor. Not to mention the state of public finances, which remain at the mercy of the headwinds of the war in Ukraine, already battered by the covid-19 pandemic, which could eventually impact the confidence of foreign investors in the market. In the end, all the issues are linked and the attractiveness of the Luxembourg financial centre is surely the lowest common denominator, because Luxembourg without its financial sector would not be able to offer the high quality of life we enjoy today.
In view of the current and future crises, it is in the interest of the candidates for the 2023 legislative elections to take up the subject without further delay, at the risk of losing talent, players and assets.
This article was published for the Paperjam + Delano Finance newsletter, the weekly source for financial news in Luxembourg. . Read the original French version of this editorial on the site.