POLITICS & INSTITUTIONS - ECONOMY

Forecast

Recession ‘a window of opportunity for Luxembourg’



Prof Christos Koulovatianos of the University of Luxembourg says that the grand duchy needs to present itself as a key player in sustainable investment to attract investors and ride the stagflation wave.  Photo: Maison Moderne archives

Prof Christos Koulovatianos of the University of Luxembourg says that the grand duchy needs to present itself as a key player in sustainable investment to attract investors and ride the stagflation wave.  Photo: Maison Moderne archives

The banking crisis, the sovereign crisis, the pandemic and the Ukraine war--the stress on the EU economy has been too much for too long, and the union is likely heading towards stagflation. But if the grand duchy plays its cards well, this recession could turn into an opportunity, says Professor Christos Koulovatianos.

Could Luxembourg be heading towards a recession in the coming year? “The short is yes--a recession is likely in Europe and consequently in Luxembourg,” says Koulovatianos, a professor at the University of Luxembourg who is trained in macroeconomics.

Although the OECD and the European Commission in November 2022 forecasted a slowdown in GDP growth to +1.5% for 2023 for the grand duchy, the recession will hit neighbouring countries like Germany (-0.6% in 2023). This in itself will already impact the country, but the other issue, according to Koulovatioanos is that “the economic situation cannot be studied by the models [we have]. We don’t have models to study stagflation.”

Back to 1979

Existing forecasts are unreliable, says the professor, as “this is a recession related to a regime switch. We have to redefine the energy sources and policies of Europe. It affects every sector--private or public.” Next year’s scenario will be more like the European and world recession that took place between 1979 and 1985, rather than more recent cases, estimates the professor.

“In this regime switch of stagflation, we will have on top of everything, high inflation, high unemployment and high interest rates. The latter could cause trouble for Luxembourg because Luxembourg specialises in the financial industry, and some of these rises in interest rates can push non-performing loans of other countries, the riskiness of other investments, risks of bankruptcies in other countries,” explains Koulovatianos. For him, the housing bubble could also pop, adding more fuel to the fire.  

An opportunity for Luxembourg

Whether the grand duchy will be able to mitigate the impact of surrounding countries’ economic situation will depend on its next steps. “There is no easy solution,” but on the middle and long term, “Luxembourg can have a window of opportunity: it should convince that in the regime switch in energy policies in Europe, it will play a leading role in sustainable finance through the sustainable finance market and in becoming the financial centre for green investments.”

Investors in other countries are likely going to be frustrated with the economic situation and will be looking to invest in a safe place to invest their money. “Let Luxembourg be that place.”

Staying alert on the short term

For 2023, though, expectations for sustainable investments should be kept low, according to Koulovatianos. The country should instead “try to protect itself from risk by siding with other EU countries in trying to put a cap on energy prices” to help reduce inflation without “creating dangerous rates”. It should also remain alert to the rise of populism, witnessed during the 1979 crisis and, in recent times, in countries like France and Italy, and work on a plan to become a key player as an investor in green technologies and sustainable finance.

On the middle and long-term though, “Luxembourg should attract more investments. That’s the only way out.”  Of course, says Koulavatianos, even this stagflation prognostic is to be taken with a pinch of salt, as the war in Ukraine--when or whether it will stop--has a large impact on the EU economy.