Gilles Roth, the construction sector has been stagnating since the rise in borrowing costs. The ECB has now cut interest rates a bit – so, are there any signs of an improvement?

The ECB has indeed lowered its benchmark rate, but even as Minister of Finance, I can’t simply tell Luxembourg’s banks to pass it on to their customers by reducing their lending rates. Obviously, I would welcome such a move - not only would it help those already repaying loans, but also people who want to take on new projects.

However, we mustn’t forget that the government, for its part, has brought in a series of measures to support the building sector. We’ve raised the tax allowance on loan interest and also increased the tax credit for notarial deeds (“Bëllegen Akt”) for people wishing to purchase their first home. Additionally, by the end of the year, the tax rate for realized capital gains on property sales will be reduced to one quarter of the global applicable rate. If the proceeds from the sale of a property are reinvested in a different property for social renting or a property in a high-energy efficiency category, capital gains from the sale are not subject to taxation. The banking sector and the construction sector are both reporting that a slight upturn appears to be underway. Obviously, I hope it will continue.

The Chamber of Commerce and the OECD think the pension system is unsustainable. Will this eventually affect government finances and therefore the country’s triple-A rating, too?

The triple-A rating depends primarily on the development of the public debt situation. Debt can’t go on soaring in the way it has in recent years, mainly as a result of the pandemic, but also because of other factors. In other words, we will need to see a leveling out of the public debt curve. This is precisely what the government and the Minister of Finance are aiming to deliver. For this, we need economic growth – because the more economic growth we have, the flatter the curve.

As for pensions, we are facing a significant problem, and in Luxembourg, we’re taking a foresighted approach. As announced in the coalition agreement, we’ll therefore be leading a wide-ranging conversation on the future of the pension system with the aim of achieving social consensus. We’re all familiar with the issues involved. For example, the European Commission has found that, while the Luxembourg retirement age is 65, many people actually retire much earlier in practice. This results in a shedding of specialist expertise for many firms. At the same time, I welcome the fact that women account for a growing proportion of the workforce. That’s extremely important and a good thing for the economy as a whole – as well as something I support as Minister of Finance. After all, the public budget cannot simply be managed in a strictly accounting manner, but is a policy tool that should be used in the general interest of citizens and the challenges of our time.

You mentioned the lack of skilled personnel. The Luxembourg Bankers’ Association (ABBL) says firms are having to look as far away as India in order to find staff. Can we make it easier for skilled personnel to move here?

We need competitive firms and an attractive financial center. Social spending accounts for 47% of Luxembourg’s budget. We need specialist personnel if we are to continue funding these high standards but also to boost the spending power of our citizens.

Luxembourg’s financial center focuses mainly on highly structured products – and that’s why we need highly skilled people. We need to attract talented individuals from Luxembourg, the Greater Region, and beyond – and that includes decision-makers. That’s why I will probably propose some tax measures before the summer break to attract expats to Luxembourg. It’s important to remember that we’re up against huge competition from the likes of Milan, Paris and London. We need to go on the offensive because simply telling people how good Luxembourg is won’t cut it.

We also need the Greater Region, which is vital to us, and that’s why we’ve got to find a solution to the issue of the overtime tax. I’m aware that 20,000 out of the 60,000 or so commuters who cross the border from Germany every day work overtime.

Are there talks about overtime regulations?

Yes, we’re having talks at the moment, but it’s a complex issue that requires an overall solution for all cross-border commuters. We’re getting there, and I think we’ll have something on the table by mid-July.

Will the EU’s capital markets union really be to the benefit of Luxembourg’s financial centre? And why is the project taking so long?

The situation in the European Union is this: People have saved up, and there’s a lot of money around. But as amatter of fact their savings are often invested in other regions of the world rather than being used in Europe to finance EU companies.

In addition to statutory retirement insurance, we also need a supplementary pension regime – a second and third pillar – in the mid to longer term. Here too, available savings could be used to provide the capital needed by European companies – the proceeds would in turn go to support second and third-pillar pension insurance.

So, it’s a question of mobilizing private capital in addition to public funds. Luxembourg’s financial center can play a leading role here.

And why is it taking so long?

The CSSF – our financial supervisory body – is internationally recognized and has tremendous expertise. We’re the European Union hub for financial institutions that are based outside the EU. Companies from China, Switzerland, the UK and the US all use Luxembourg to do business within the European Union.

A debate on centralizing supervisory powers with ESMA – the European Securities and Markets Authority – in Paris won’t get us very far in terms of deepening the EU capital markets union, however. It won’t contribute to the further mobilization of private capital and won’t bring in a single additional euro for the European economy. Instead, it merely delays the debate on the measures necessary for deepening the EU capital markets union. It doesn’t make sense.

Luxembourg is in competition with other financial centers such as Dublin. How is Luxembourg positioning itself in this respect?

Ireland and Luxembourg have a good and very friendly relationship. Yes, we do compete with one another and Luxembourg doesn’t want to lose its competitive advantage in the fund industry. That’s why we need to take action on the tax front. For instance, I think tax incentives for actively managed ETF funds would be one solution.

You’ve got a 10-point action plan for sustainable finance. Is that how you see the financial center continuing to grow in the future?

We need growth, we need private capital, and we need to press ahead with the energy and digital transitions worldwide. Interpretations differ as to what the concept of sustainable finance really means.

Luxembourg’s policy on sustainable finance is as follows: We’ve got the expertise with our fund business but also in the capital markets space, and we’re aiming to develop it into a specific sector, in terms of sustainable finance. That would be great for Luxembourg as a cutting-edge financial center.

Sustainable finance is requested, and in Luxembourg, we have the expertise to mobilize private capital. Our focus here is on blended finance, meaning the public sector invests in a number of projects in order to cushion the investment risk and attract private capital. We are in a situation where we need to reach a European consensus on the definition of sustainability, including its social aspects. And we should do so relatively quickly.

ING Bank hit the headlines when it terminated bank accounts en masse and exited the retail business. Do you anticipate a trend in that direction?

ING’s decision to give up its retail business is their own, and I can’t comment on that. However, it’s fair to say that communication on the part of the bank could have been better. I say that because the reputation of the Luxembourg financial center is important to me. That’s why I’m glad that five banks – Spuerkeess, BGL BNP Paribas, BIL, Raiffeisen and Post Finance – immediately stepped in to take on these retail customers and can do so quickly.

However, the fate of Luxembourg’s financial center doesn’t hinge on the question of “retail or no retail”. It is much more the case that its future depends on its ability to offer future-oriented financial products. That will require skilled professional staff, specialist expertise and rapid, full implementation of European rules.

It also means having an answer to new markets – including sustainable finance, but also a modernized blockchain law, as well as pragmatic financial supervision and regulation.

How do you see the future of Luxembourg as a financial center?

We need to continue strengthening Luxembourg as an anchor for the European business of financial institutions from outside the EU. That means not just banks but also insurers and reinsurers. For example, Taiping – one of China’s top ten insurers with 500,000 employees worldwide – announced that it intends to set up its European HQ in Luxembourg.

The future of Luxembourg’s financial center is founded on our skills, excellent reputation, stability – including political stability within the country itself – and specialist expertise. That’s why I’m not worried about our future as a venue for finance and insurance. It does, however, mean that we need to reassess our approaches on a daily basis. If we don’t, we fall behind – and our plan is all about moving forward.

The interview originally appeared in Luxemburger Wort’s supplement "Classement des Banques" in July 2024. For additional interviews featuring leaders in the banking sector, please refer to the supplement.