The UK is Luxembourg’s 5th trading partner in terms of exports. Over the past 10 years, trading links have decreased. The goods Luxembourg exports mostly to the UK are metals and metal construction (about 25% of the total between 2010-2015), plastics and rubber products (17%) and machines and appliances (16%).
But the service sector is where the trading links are greatest: Luxembourg exported €14bn to the UK in 2015 (that is 7 times the value of exports of goods). Half of that €14bn is geared towards the financial sector. In 2015, the exports to the UK represented 16% of Luxembourg’s exports, putting the UK in second place after Germany. That share has been growing continuously since 2000.
Luxembourg has a trade deficit in financial services with the UK. However this trade deficit is largely compensated by the positive balance in non-financial services, such as corporate services. These operate mostly in the e-commerce sector in Luxembourg and export to the UK, and represented ¾ of the total non financial services.
Concerning the financial sector in Luxembourg, 7 out of 141 credit establishments are British. In the investment fund sector, 17.2% or €600bn worth of net assets come from the UK. In 2015, the UK represented almost 17% of total investments in Luxembourg abroad and 15% of total investments of foreign investments in Luxembourg.
Risks, but also opportunities?
Studies forecasting negative impact on the British economy after Brexit are numerous (see here, here and here). Considering the close economic ties between Luxembourg and the UK, Brexit could also have a negative impact on the Luxembourg economy, especially for financial services exports to the UK).
Statec has simulated how Brexit can affect Luxembourg’s economy. In case of a hard Brexit, which seems to be the most likely, this would result in a loss of 2.5% for financial services and 1% of GDP by 2020. It would also lead to up to 1,600 job losses, 600 of which in the financial sector, according to the projection. This exercise does not take into account positive externalities, whether in activities or employment.
There can also be opportunities if the UK loses its EU passporting rights. City operators would have to move parts of their services to financial centres. Luxembourg could have a good hand in this game, as it is specialised in investment funds, especially in wealth management.
Many funds from the UK already have a subsidiary in Luxembourg, where funds are conceived and registered before they are managed elsewhere, primarily in the City. Luxembourg could reinforce this subsidiary position and become the entry point to the European market.
However, Luxembourg faces stiff competition from other financial centres such as Dublin, Paris, Frankfurt and Amsterdam.