Euro zone: The Grand Duchy’s finance minister has rebutted comments that Luxembourg’s financial sector is too big for the country.
Luxembourg’s finance minister has fired back at accusations that the Grand Duchy’s financial sector is dangerously oversized, saying it operates at a European level.
“Luxembourg is convinced of the importance of the smooth and unhampered functioning of the single market, including for financial services” and “will therefore not adhere to policies that intend to renationalize elements of the single market,” Luc Frieden (photo, right) has said.
Politicians in several fellow euro area countries have long been disapproving of Luxembourg’s large financial sector, but criticism increased this week in the wake of the financial crisis in Cyprus. While Cyprus’s banking sector is estimated to be eight times larger than its domestic economy, the figure for Luxembourg is reckoned to be about 20.
In a joint interview with the Financial Times and Reuters published on Tuesday, Jeroen Dijsselbloem--the Dutch finance minister who recently took over from Luxembourg prime minister Jean-Claude Juncker as head of the Eurogroup--was asked what the bank bailout in Cyprus said about “other countries in the euro zone that have very highly-leveraged banking sectors, Luxembourg, Malta even?”
Dijsselbloem (photo, left) replied: “It means: deal with it before you get in trouble. Strengthen your banks, fix your balance sheets, and realise that if a bank gets in trouble, the response will no longer automatically be we’ll come and take away your problems. We’re going to push them back. That’s the first response that we need. Push them back. You deal with them.”
In a separate interview with Reuters, Joachim Poss, deputy leader of the opposition Social Democrats in Germany’s lower house of parliament, said of the Grand Duchy’s financial sector: “In the long term no business model can be tolerated in a market economy that circumvents fair competition. Of course Luxembourg belongs to the group of problem countries.”
Luxembourg’s business model
“The business model of the financial sector in Luxembourg [is] quintessentially an international one within the euro area, acting as an important gateway for the euro area by attracting investments and thus contributing to the general competitiveness of all member states,” Frieden said in a memo distributed to press on Wednesday.
“The proportionality of a financial sector cannot be determined by relating the size of a financial sector to the GDP of a country.” The Grand Duchy’s financial sector should be evaluated in proportion to the entire euro area and single European market, he argued.
Frieden added that: “It is precisely also in this spirit that Luxembourg has agreed to establishing a fully fletched banking union in the euro area, starting with common supervision, but inevitably leading to guarantee deposits and a common resolution mechanism.”
The Grand Duchy is one of just four euro zone countries--with Finland, Germany and the Netherlands--that has kept its top-notch AAA rating from all three major global credit ratings agencies, Fitch, Moody’s and Standard & Poor’s.