POLITICS & INSTITUTIONS - ECONOMY

Pierre Gramegna: “We ain’t seen nothing yet”



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Pierre Gramegna, Luxembourg’s finance minister (DP), poses for a portrait during an interview with Delano at the finance ministry, 27 January 2021. This interview first appeared in Delano’s March 2021 magazine. Photo credit: Mike Zenari 

Finance minister Pierre Gramegna (DP) reckons sustainable investing is the future of Luxembourg’s financial sector. Delano sat down with Gramegna to take stock of the past decade, look ahead to 2031, and ask about the impact of the pandemic on public finances.

Aaron Grunwald: Let’s talk about the budget if we can. Given the pandemic recovery spending, there’s a growing budget deficit and public debt is expected to go up by 7.4% of GDP. Do you anticipate submitting a revised budget this year or are we on track to handle the crisis with what you already got approved from parliament?

Pierre Gramegna: First, before answering about where we stand in terms of public finances, I would like to really make a few [points] on some things that do not get enough attention. Now, let me start by saying that, obviously, this pandemic has caused an economic downturn, and has obviously worsened public finances, everywhere. My first priority, since the beginning of this pandemic, has been the health of the people. This was an absolute priority, which goes before anything else. And we’ve proved that by spending more than €200m in expenditures, investments in reinforcing medical personnel and doing the large scale testing, being the country that is doing the most tests, which has allowed us to have a second lockdown that was less deep than in other countries. So the most important thing is health. The second most important thing, I would say, is not only to focus on numbers, and we’ll get to numbers in a minute, but to realise that in this very deep pandemic, which has put our lives upside down, there’s lots of rays of hope....

The first one that I would like to mention is that we have seen increased solidarity between people in the country of Luxembourg, increased solidarity in Europe, and a wake-up call towards climate change. Now, solidarity between people because in the face of hundreds of deaths, in the face of the incredible commitment of the medical personnel, we have had a society here in Luxembourg that holds together. If I compare that to other countries, [Luxembourg has demonstrated] a lot of common ground, a lot of solidarity.

At European level, many would have anticipated before this crisis that if such a thing would happen, Europe would not be present, would not rise up to the challenge. Exactly the contrary happened. And as early as April at the level of [EU] finance ministers and then later in July at the level of prime ministers, we agreed a bunch of measures equalling more than a trillion, one thousand billion, euro that really go much farther than any solidarity we’ve ever had in Europe. And who would have expected that the [European] Commission would be allowed to lend on behalf of the EU countries?

And then I mentioned the wake-up call for climate change. I think that this crisis and the lockdowns in many countries have proven one thing that climate sceptics had always contended. And that was that climate change was not due to human activity and economic activity, it was due to natural phenomenon. Now we’ve had a life-size test, because the lockdowns show that when we reduce human activity, the planet is faring much better.

And [now] we can talk about numbers, which was your question. Yes, so, we’ve adjusted the numbers. The deficit for last year, 2020, was expected to be around €5bn. And the deficit for the time being looks being around €2.4bn-€2.5bn. And there’s still lots of expenditures that are going to be added in the next three months that are still going to be accounted for in 2020. So we’re going to have a higher deficit in 2020. But it will be lower than the €5bn that was anticipated [last year].

Now for next year [2021], we have anticipated €2.7bn. This is the most recent number. There’s no reason to change that, we do not think of revising that in any way, in the months to come. I think we’ve been very prudent in the numbers with which we’ve built the budget. And I think that’s where we’re going to land. In terms of debt, as it stands, at the end of 2020, our public debt will be around 26.5% of GDP. And even this year, 2021, the debt level will be below 30% of GDP. Now, obviously, this is quite an increase compared to 2019, where we had a surplus in the budget, as we had in 2018. But still we are the country in the EU and Eurozone that has had the lowest percentage increase since 2019. And we will stay below 30%, even this year, which is the national goal that this government has given to itself. And knowing that at European level 60% is allowed. And when you see how much the debt is increasing in other countries, I think we have been doing reasonably well, despite the fact that we’ve spent whatever [is] needed to be spent in terms of health. And also despite the fact that we were the country that per capita has spent most to support the economy, close to €5,000 per inhabitant. And this investment in preserving jobs, in supporting small and medium sized companies, even larger companies, was the right answer in this very sudden crisis that has been triggered by the pandemic.

It’s going to take a while to get everyone vaccinated. So do you expect to keep a lot of the economic support programmes going for the rest of the year? When will they be cut?

We’ve had a very pragmatic and step-by-step approach.... For the time being, some of these support measures go until end of March. But we are already discussing to extend it to end of June. And if necessary, well, we will extend it again. And I think the step-by-step approach is the right one to have. Because you also do not want companies to get addicted to support. Now, with all due respect, for some companies and enterprises, it is extremely difficult now, especially for those who have to remain closed. But even for those who can only function with strict limitations and constraints, it’s a very hard time. But obviously, this oxygen that we need to give to the to the economy is limited in time. And so we have promised, and we will keep that promise, that we’re going to support the companies as long as there are restraints and constraints. But then after that, we need to get again in a normal economic functioning.

You’re not worried, though, that if the support programmes are wound up too quickly, maybe it’ll be a bit of a shock? Companies will still need a little bit of time to return to ‘normal’ otherwise they could have a cash crisis, kind of like in the beginning of the crisis.

Well, I think this is part of the crisis. The immediate aftermath of the crisis, the weeks that follow, for me, are still like the immediate consequences. The goal of the support measures is neither to be stingy, neither to put our economy on a permanent oxygen lifeline. Finding the right balance is what we need to do here and we are committed to also organise the transition.

The government has spent quite a lot of money to pay for this support. Are our taxes going to go up?

This is a very legitimate question. And I think that now is not the right time, neither to already make suggestions nor suppositions [about what] that could look like. I think what we now need to ensure is that we’re going to mobilise the necessary amount of money to help companies and to help save jobs. So, help people keep their purchasing power. So even talking about tax rises now would not be smart and would not be appropriate. I said that already six months ago, and six months ago some people said ‘yes, but you need to deliver and act in the next couple of months and take decisions’. I said, ‘we don’t know when the pandemic will be over. And when the immediate economic consequences will be finished.’ We still don’t know that. We now have light at the end of the tunnel. But it will take time, it will take months, many months, to conclude vaccination programmes. So as long as the pandemic is not solved, one should not discuss tax increases or changes in tax structures, on the one hand, and second, we should also make sure we have enough funding to cope with the immediate difficulties of people and companies. And thanks to the very accommodative monetary policy of the European Central Bank, we can now [borrow] at a very low rate. Luxembourg has experienced that now a couple of times as we are borrowing at negative rates. And let’s not forget that talking about raising taxes would really hurt the confidence of consumers and hurt the confidence of companies whom we need for the recovery. So the main focus now is recovery. There’s plenty of time to then see, when we’re at the end of this tunnel, how we will deal with that.

Last year, there was some talk about changes to estate, property and wealth taxes. You still have two-and-half years or so on your mandate. Can you tell our readers: are you planning to change these taxes during this government?

The answer is no. Inheritance tax and wealth tax are not in the government programme for the next two and a half years because they’re not in the five-year coalition programme. So that’s very clear. This is not on the agenda.

Pierre Gramegna poses for a portrait during an interview with Delano at the finance ministry in late January. Photo credit: Mike Zenari
Pierre Gramegna poses for a portrait during an interview with Delano at the finance ministry in late January. Photo credit: Mike Zenari

Looking back at the past ten years, from your point of view, what’s changed the most in Luxembourg’s financial sector?

I would highlight three things.... One is we have embraced transparency, exchange of information, with not only with EU countries, but with the rest of the world. And that was one of the first moves of the new government back in 2013-14. And I remember that this move was criticised by quite a few experts, and quite a few players. And today, I think there’s a general recognition that it was the right thing to do. And, on top of it, if you look at the financial sector today, it is healthier. And I would say more prosperous, and more competitive than it was before.

So that brings me then to the financial sector itself, where I want to say two things. One is if you look at the fund industry ten years ago and today, two things happened. The alternative investment fund industry really took off, and we’re very well positioned in that. And the second thing is.... [in the funds sector] we’re at around €4.74trn-€4.8trn in assets under management and ten years ago, it was half [of that amount]. And the same goes for private banking, where assets that are being managed here are double of what they were ten years ago.

And the third thing I would like to highlight is all the innovation that has taken place in the financial centre, and there I would like to highlight fintech, digital and green. Now fintech, we launched the Luxembourg House of Financial Technology back in 2017. And thanks to this private-public partnership, we’ve been able to attract dozens and dozens of companies.... obviously fintech brings you to digital. So these two things are very close. And we’re very well positioned there.

Also in the context of Brexit, we’ve seen that we’ve been able to attract payment companies, regtech companies, insurtech companies to Luxembourg, and insurance companies at large. We have had a life-size test with Brexit, [to see] if we are attractive or not. And without changing our legislation, we’ve been quite successful in making Luxembourg the hub for e-payment in Europe. And also I would say the hub for insurance in Europe next to London, which remains the largest place.

And last but not least is obviously green and sustainable finance, which I’ve really put a lot of effort in, and where we have a lot to show.... the Luxembourg Green Exchange is the largest such dedicated stock exchange in the world. I mean, they are listing more than half of all the green bonds worldwide. Very few people realise that. The IMF, World Bank and European Commission, institutions like that use it, but investors from the US, from Asia use it.

Luxembourg may have 50% of the green bonds in the world, but green bonds are a very small percentage of the global total. If you look ahead ten years, could you guess how much bigger sustainable investment can really get?

I think we, if I may use this American expression, we ain’t seen nothing yet. In the sense that now green bonds are 2%-3% [of the overall world total]. 20% of ESG investing [editor’s note: 20% of global responsible investment funds, by assets under management] is taking place in Luxembourg, but the overall amount is still too little. So that’s why I’m saying we ain’t seen nothing yet. I think we will have an acceleration here that will be spectacular. And I think the pandemic will really boost that. Boost that, because we will have a recognition that to reach the ambitious goals of the Paris accord--and you know, Europe has committed itself be carbon-neutral by 2050, and we’ll reduce it by 55% in 2030—[and] to achieve that, there’s only one thing that needs really to happen: sustainable finance. If we do not achieve sustainable finance models that will help what you call the real economy to transform itself, then we’ll never reach it.

What do you think the Luxembourg financial sector will look like a decade from now?

It is difficult to guess how some things are going to accelerate. But building on what I just said, I think that the pandemic is just boosting those things that already had wind in the sails.... I think that we’re going to see a tremendous acceleration of digitalisation in financial services. And fintech is that. A considerable chunk of financing will build on two things; on the very low interest rates that we have now and which is going to last for quite some time. And the taxonomy of the European Union, which gives us a solution of what is green, what is climate compatible, and what is not, will give Europe a kind of competitive advantage and Luxembourg is at the centre of all this.

You think the EU taxonomy for sustainable activities will be like Ucits [the type of retail investor funds that forms the backbone of Luxembourg’s current investment industry]?

Exactly. I use that in my speeches. I say that the Ucits story can be a forerunner of the taxonomy story. I really believe in that.

The other thing is--I think we’ve been able in the last couple of decades, but especially in the last [several] years--to strengthen the international attractiveness of Luxembourg to American banks and Asian banks. And that is key. This is our strength in Luxembourg. We are really open to the rest of the world. In the same way as [today] our Ucits are used from Hong Kong to South America, green finance with the EU taxonomy is going to be used from Asia to America and maybe to Africa tomorrow.

And what about you, Mr Gramegna? Where do you see yourself in 2031?

I am going to switch from sustainable finance to sustainable agriculture. Because I would like to grow olive trees and make wine in a sustainable manner.

Here in Luxembourg?

Well, the wine you can definitely do here. The olive is more difficult.

What kind of wine do you want to make?

Great organic wine!