“The financial centre has changed considerably”

The interview first appeared in Luxemburger Wort’s supplement Classement des Banques in June 2022 (interview by Thomas Klein).

Luxembourg’s new Finance Minister Yuriko Backes is facing a battery of challenges.

No sooner was she in office than she had to deal with geopolitical crises and the resulting budgetary challenges. In addition, the financial centre is heading into a crucial year with the planned global reform of corporate taxation, EU initiatives such as the Unshell proposal and the FATF Evaluation in the autumn.

Yuriko Backes, it has now been roughly six months since you took up office – time for an initial stocktake! The financial centre has work in progress on many fronts. Do you wish you’d had a quieter start?

When I started, I was aware that I was coming on board mid-stream, so to speak, and what that entailed. I had to hit the ground running but by now I am used to the pace. I had to get in gear quickly as so much was happening, especially the war in Ukraine and the explosion in energy prices.

As Finance Minister, I was certainly pleased that we as a country got through the pandemic well and I was able to start work on a solid footing, especially in terms of the public finances, as from the beginning we had to tackle the issues that were starting to have an effect on people and businesses day-to-day. The government has come up with a far-reaching response to these short-term challenges by introducing the first and second package of measures to mitigate the impact of surging energy prices, known as “Energiedësch” and “Solidaritéitspak”. Furthermore, we had to continue work on quite a number of dossiers in recent months – national, European and international – and implement the EU sanctions against Russia.

No sooner had the global economy recovered from the pandemic than the next crisis came along. Unlike the financial crisis, Luxembourg banks are doing very well so far. Will that continue in your view?

For years the Luxembourg financial centre has accounted for one third of our GDP and generates most of our tax revenue. Therefore, I am pleased that Luxembourg banks are doing well. That said, we have to maintain and boost the attractiveness of the location. The financial sector has also weathered many crises – I am thinking of the 2008 crisis – and learned from them, often contrary to dire predictions. These days, the European financial industry is more resilient even if achieving this may have meant additional costs in the short term. Luxembourg’s financial centre remains one of the foremost financial centres in the world. Luxembourg has always known how to evolve and build up expertise in new fields, a recent example being alternative investment funds. At any rate, based on regular engagement with representatives of the financial centre, I am full of confidence about the future.

The Banker’s Association ABBL argues that financial firms in Luxembourg are not making enough profit, especially compared with their US competitors. What do you think is the reason? Are banks in Luxembourg and Europe too small? Do you expect consolidation to continue?

The low profitability of banks affects not just Luxembourg, but Europe in general. Negative interest rates certainly did not help and the volume of regulatory requirements is a major challenge for many banks. On this front, Luxembourg has always been in favour of intelligent rules at EU level, so that the EU financial sector remains competitive beyond national borders. In addition, many banks are having to invest in digitalisation to maintain healthy competition with, for example, the FinTech sector, so the costs are persistently high.

As far as consolidation in the banking sector is concerned, this is a natural process that has been going on for decades. However, I would like to stress that both the balance sheet totals and the number of employees in the Luxembourg banking sector have remained relatively constant in recent years.

According to the Global Financial Centres Index, Luxembourg’s ranking has slipped four places and its rating is down 12. What do you think is the reason?

We shouldn’t set too much store by such rankings – a few places up or down doesn’t mean much. Objectively, our financial centre is no less attractive this year than it was last year. One indication of this is companies’ decisions to locate here. 95 companies have come here since Brexit. In the past year, private equity AuM has grown 30% and the CSSF and the CAA (“Commissariat aux Assurances”) have granted 77 new licences. In addition, there are 220 FinTechs in Luxembourg. So, the statistics speak for themselves.

Is Luxembourg financial centre gradually losing its competitive edge?

That is not generally the case in my view. Quite the contrary. Recent years have seen a number of additional banks come to Luxembourg, especially from third countries such as the US and UK. But we are also seeing banks from EU countries such as Portugal and Spain take up business here. These banks find Luxembourg attractive – and this is something that I have been told on recent finance missions in Spain, Sweden and the UK. Many have assured me that they plan to expand their activities in Luxembourg. Of course, we have to keep trying to target and attract the right talent, move up the value chain and develop new skills.

Luxembourg is striving to establish itself as a global centre for sustainable investment. At the same time, criticism of the ESG concept is mounting. Is Luxembourg perhaps backing the wrong horse? How can ESG be prevented from becoming just another label?

ESG is actually mainstream these days, and quite rightly so in my opinion, as the societal challenges are enormous. I am very proud of the fact that our financial centre is today home to more than 40% of the sustainable funds in Europe and the number of sustainable bonds on the Luxembourg stock exchange has risen by 50% in the past year to 1,200 at this moment in time – making Luxembourg a leader in the field. Trustworthiness, awareness and the growing success of ESG products are making the approach attractive. To ensure that ESG does not lead to greenwashing, however, we need clear rules and definitions that fit the bill. Governments, both national and at EU level, are working on this.

So what is Luxembourg doing on the sustainability front?

Luxembourg has a long track record as a pioneer in sustainability with an exemplary partnership between public and private stakeholders. For example, we are a leader in labelling, thanks to LuxFLAG, which we initiated more than 15 years ago. Our stock exchange, too, took a stand back in 2016 by setting up the Luxembourg Green Exchange.

More recently, we have launched further initiatives to guide the financial sector in its efforts to become more sustainable. A good example is the Luxembourg Sustainable Finance Initiative, which offers finance workshops and self-assessment tools for financial institutions, among other things. Then there’s the International Climate Finance Accelerator, which has so far supported 18 innovative fund managers in the area of climate finance. Luxembourg has also made a statement with its climate finance platform, set up in conjunction with the European Investment Bank. This platform invests in climate funds and aims to mobilise private capital. Just recently, I announced a new initiative, the aim of which is to help to direct private investment into the green transition and environmental protection in emerging markets.

Luxembourg likes to position itself as a gateway to Europe, for instance for Chinese and Russian banks. Are the geopolitical conflicts going to complicate things in the future?

The Russian invasion of Ukraine is illegal under international law and cannot be justified in any way whatsoever. This war certainly complicates the geopolitical situation and all the stakeholders operating in Luxembourg must follow applicable law and implement all existing rules. That goes for sanctions as well. Of course, it is regrettable that China has not unequivocally condemned Russia’s invasion of Ukraine and does not support sanctions. These issues have to be addressed at a political level and dialogue with China must continue.

As an ardent Europhile and proponent of multilateralism, I am very much in favour of Luxembourg remaining open and against the continent of Europe becoming “fortress Europe”. Societal challenges like climate change can only be overcome at a global level. We therefore need multilateral solutions, as geopolitical conflicts create unrest and foster uncertainty. We have to prevent this by engaging in open dialogue with no topic off the table but also having due respect for the sensitivities of the other party.

A Global Minimum Tax rate was supposed to be adopted in the summer for companies in the EU, but Hungary has blocked it. The US is also stalling. Is the project doomed?

The agreement reached in October 2021 on international tax reform is a historically important step towards greater tax fairness, which the government supported and I personally wholeheartedly welcome.

Only at the beginning of June I was at the OECD Ministerial Council Meeting in Paris and, of course, one of the things we spoke about was reform implementation. I regret that we did not come to full agreement at EU level but still I am confident that we will achieve implementation in a timely fashion and ensure a global level playing field.

When global minimum tax is introduced, what consequences will there be for Luxembourg? Are non-tax benefits still one of the reasons why companies decide to locate in Luxembourg?

Global minimum tax has been on the cards for years but in all this time we haven’t seen an exodus of international investors out of Luxembourg. I am confident that Luxembourg will remain an attractive country, especially since other factors – such as the central location, well-educated multilingual employees, its triple A credit rating and political stability – will play an even greater role in the future. These are also the reasons why companies come here. Of course, on this positive footing, we have to maintain and increase the attractiveness of the country for companies and also for employees.

Is it a disadvantage for a small country like Luxembourg with a small internal market not to be able to compete with other countries on the tax front?

International tax reform means the same framework will apply worldwide. Even if tax competition is not eliminated, taxation will probably play a lesser role overall in the future. However, this won’t necessarily put Luxembourg at a disadvantage. International companies will continue to need the services, investments instruments and the know-how available in international investment centres such as Luxembourg to centralise their cross-border finance activities.

Another EU initiative is the Unshell proposal. According to a report by the International Monetary Fund, in 2019 there were more than 45,000 companies in Luxembourg that, depending on how you define them, could be called letterbox companies. Would tax neutralisation of these shell companies have implications for the financial centre?

This initiative is certainly one of the upcoming challenges in the tax arena, but I welcome the good dialogue that is under way with the EU Commission on this. It allows me to present our views better, as it is certainly not at all my intention to protect so-called letterbox companies. The draft directive goes far beyond this matter, raises a lot of fundamental issues and, all told, could ultimately harm Europe’s own interests. In particular, the scope is so broadly defined that this could have an impact on many companies. The potential implications of the Commission’s proposals for our jobs and tax revenue should not be underestimated and caution is therefore warranted.

Luxembourg’s triple-A credit rating is always cited as one of the advantages of the location, especially in the finance sector. At the same time, due to inflation and crises, pressure on the government to spend more money is growing. How difficult it is for you – especially in coalition – to fend off your ministerial colleagues’ spending demands?

When a government is formed, the coalition programme for government sets out the policy framework and the targets under the coalition agreement are clear: to comply with the medium-term budgetary objectives and to stabilise the national debt below 30% of GDP. On top of that, of course, situations arise, such as the pandemic and now the war, which we cannot predict. Our colleagues in government are understanding of this and their demands take account of the circumstances. We have collective responsibility for our policies. As a government we want to lead the country forward and govern responsibly.

You said that you have put together a catalogue of more than 30 potential tax measures, one reason being to promote the location’s competitiveness. Can you give an example of what you have in mind?

The government is currently working on a bill to reform property tax, introduce a national tax on speculation on land and an unoccupied housing tax. In addition, a major parliamentary debate on tax is slated. In general, huge uncertainty remains, including about the financial framework. However, we are seeing initial quite positive signs about the resilience of our public finances, as long as we don’t go into recession. Therefore, if the financial situation permits, I will certainly emphasise increasing the attractiveness of the location for business and find solutions that also tackle the societal challenges. In general, however, the same applies as for budget negotiations: political priorities come first, then we check the financial possibilities and then a decision is made.

Luxembourg’s FATF evaluation is scheduled for autumn. Do you think the country and the location are well prepared? What consequences would a poor result have for the financial centre?

Under the aegis of the Ministry of Justice, Luxembourg has done a great deal in recent years to prepare in the best possible way. The financial centre, together with the various stakeholders, has changed considerably and the country is no longer on any grey list.

As we meet all European and international requirements, I am quite confident about the upcoming FATF evaluation. However, I don’t want to speculate either, as it’s also a question of assessing the effectiveness of our system, and that goes above and beyond the FATF evaluation in November of this year.