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03 August 2016

Luxembourg's opportunity? 

By Quentin Vercauteren, Head of Wealth Management, Luxembourg, KBL epb

There were few cries of joy here in Luxembourg, one of the six founding members of the European Union, when Britain voted to exit the EU.

The Grand Duchy has long embraced European integration, including the free movement of goods, services and people. Brexit has made that ideal – and our union – less strong. 

That matters tremendously in this country of 575,000, where over 40% of the population is foreign-born. An additional 150,000 frontaliers make the daily commute from Belgium, France and Germany. 

Reflecting the polyglot reality of life in Luxembourg, children here emerge from the public school system fluent in at least four languages, including Luxembourgish, German, French and English. 

While deeply rooted in traditional values, the country is open to new ideas and outside influences. I couldn’t help but smile the other day when I spotted an opening-soon banner in my own little village: “Taco Tikka,” offering both Mexican and Indian fare, sounds like the kind of place you would expect to find in Britain, but not so much in Bridel (population: 2,700).

Given that outward orientation, it’s no surprise that more than three-quarters of Luxembourg residents believe that the Grand Duchy is stronger inside Europe. 

Consider not just the demographics but also the fact that the country hosts so many EU institutions – including the European Investment Bank and European Court of Justice – that the European Union is the country’s second-largest employer. 

Financial services is another major employer, accounting for roughly one-third of GDP. Home to some 150 banks, with total assets of nearly €800 billion, Luxembourg is specifically a private banking hub, managing over €300 billion and generating more than €3 billion in annual revenues. 

Private banks here, both foreign and domestic, operate alongside extremely vibrant asset management and insurance sectors in an environment characterized by an extraordinarily high level of political stability, drawing upon an oversized pool of skilled, highly productive professionals.

It’s worth noting that, with over €3 trillion in net assets under management, the Grand Duchy is also the largest investment fund center in Europe and the second-largest in the world, after only the United States. 

In the most recent ranking of global financial centers – led, to no one’s surprise, by London – Luxembourg placed 14th overall and first in the eurozone, ahead of metropolises like Frankfurt, Munich, Paris and Amsterdam. 

London’s top ranking is now clearly at risk. According to a recent PwC study, Brexit could lead to the loss of up to 100,000 financial services jobs in the UK over the next three years, as global firms turn elsewhere to access Europe’s single market.

Some of those jobs, primarily in the City of London, may disappear forever. Most, however, will be relocated across the Channel, including at least some, in all likelihood, to Luxembourg. 

In the immediate wake of the Brexit vote, pundits began handicapping the race to replace London as Europe’s premier financial services hub. James B. Stewart, the Pulitzer prize-winning American journalist, was among the first to rank the competition, using criteria such as English-language facility, regulatory environment, infrastructure, schools and cultural offerings. 

Stewart’s widely noted list of the top nine cities was topped by Amsterdam (thanks to a very high level of English fluency, robust cultural life, and excellent airport, rail network and schools), followed by Frankfurt, Vienna and Dublin. 

Luxembourg was ranked sixth overall – recognized for its sophistication and quality of life, but deemed too small to absorb large numbers of formerly London-based bankers.   

There’s truth to that assertion: over 360,000 people are employed in the financial services sector in the British capital, roughly equivalent to Luxembourg’s entire domestic workforce and nearly 10 times as big as the financial services sector here. 

While size matters, a number of leading international firms have already said they are eyeing opportunities to shift their European operational hubs from London to the Grand Duchy. More are likely to make similar plans over the coming months and years. 

As it has for so long, the Grand Duchy will welcome such companies and their staff with open arms. At the same time, the country feels no sense of schadenfreude in London’s possible decline in global status.

Luxembourg’s residents enjoy an extremely high standard of living; according to the OECD, the country’s sense of community and level of civic participation are among the most robust in the developed world. 

Those things – the country’s strengths – are in many ways a consequence of the project of European pluralism, integration and solidarity. Here, we do far better without borders.