Brexit – Entering uncharted territory !

All eyes are on Britain. The burgeoning OUT claims by Eurosceptic backbenchers or politicians pursuing “hidden agendas” have not only fed the looming threat of EU fragmentation, they have also been sapping investors’ confidence and led them to postpone their strategic decisions over the past few months. I am neither going to comment on the likelihood of a Brexit, nor will I try to quantify its impact on the Luxembourg economy – which is impossible anyways, due to the multifaceted links between our two countries and because we simply don’t know how the trade relationships between the EU and the UK would look like post-Brexit.

Reading existing analyses does not make the picture much clearer. According to Bertelsmann Stiftung, Luxembourg would be the 2nd most impacted EU member state right behind Ireland, facing a GDP contraction that could amount to 0.8% by 2030 in the worst-case scenario – that is if the UK would lose all trading privileges previously held under EU membership. At the same time, Luxembourg has been ranked 14th in terms of exposure by the British advisory firm Global Counsel, exposure being merely “significant” but not “high”. Hence, there’s an array of potential outcomes and outlooks. If one thing is certain, it is the naked fact that the UK and the EU would enter uncharted territory. No EU member state ever made use of article 50 of the Treaty on the European Union. Nobody has so far dared to let that genie out of the bottle.

As one of the six founding members of the EU and one of its three capitals, Luxembourg is truly concerned about the idea of a British departure, which would herald an extended period of uncertainties. The Brexit is indeed not the end destination: it would trigger complex and heavy negotiation rounds with the remaining 27 EU member states – if only as regards trade agreements and further access to the Single Market. You will probably find very few countries that are less divided regarding the merits of European integration than Luxembourg: 30 years ago, Luxembourg was the first – and only up until today – population to be awarded with the international Charlemagne Prize that is traditionally conferred to distinguished personalities for their exceptional work within the scope of the European integration process.

Today, 77% of the population (against an EU average of 58%) are convinced that the country will be better off in than out of the EU[1]. During its 12th Presidency of the Council last year, the Grand Duchy has once more made proof of European courage, not only by guiding the Union through the stormy weather (remember the significant worsening of the refugee crisis as well as the Paris attacks on 13 November), but also by showing its genuine political willingness to fiscal transparency and cooperation[2], the latter being the ultimate evidence of its EU commitment. The feedback received so far has been largely positive; recently, Pascal Saint-Amans, Director of the Center for Tax Policy and Administration at the OECD explicitly referred to Luxembourg as a role model of a country that was doing poorly yesterday, but much better today.

Anyone who has worked, lived or stayed in Luxembourg will tell you how the friendly EU-Luxembourg relationship translates into action. Foreign workers (cross-border workers from our 3 neighbouring countries as well as foreign residents) account for no less than 72% of our total workforce. This has proved highly beneficial for the economy: the mix of multilingual and multijurisdictional expertise is hard to beat. Our large and multitalented pool of competency profiles support a value added supply chain of lawyers, accountants, IT specialists, finance analysts, researchers, industrialists, retailers, craftsmen, etc. They in turn help develop new niche markets and launch innovative start-ups.

Besides, the EU absorbs 84% of Luxembourg’s exports. Free movement of goods and services has thus become the very heartbeat of the EU. The Luxembourg key to success: the unique blend of its cooperative culture, its capacity to identify game changing European legislation and its strong ambition to become a pioneer in the financial industry, in ICT and in the field of logistics. This has earned Luxembourg its reputation as a first mover.

Talking about gains – the EU is currently depriving itself from a potential gain of € 1.6 trillion – that’s roughly the GDP of France, s’il vous plaît – which could derive from deeper (Single) market integration. Representing 13% of the EU’s population and 17% of its GDP, the exit of the EU’s 2nd economy would be a major setback and would undermine the foundation of our 500 million+ internal market. This would of course also be an impediment to growth for export champion Luxembourg. The UK is our 2nd EU partner for exports of services and 1st for imports of services, the first EU-investor in Luxembourg as well as our top destination for investment flows. In addition, the UK accounts for 16.4% of all net assets under management in Luxembourg and is 6th in terms of bank representation – the interplay between Britain and Luxembourg is striking, especially in the financial industry and this leads to the question whether Brexit-induced bank relocations would eventually benefit Luxembourg.

According to a recent PwC study, withdrawal could cause a loss of up to 100,000 jobs in financial services in the UK by 2020. It didn’t take long until the first financial companies expressed their flirting with the idea of shifting certain activities to Luxembourg in case Brexit were to materialise. Member of the euro area with a multilingual and experienced workforce, just a stone’s throw away from London, Frankfurt and Paris, with Luxembourg’s future Fintech incubator about to take off – the conditions are fulfilled. We would indeed be happy to welcome new experts with a strong finance, investment and fintech background. The objectives we’ve set ourselves in terms of economic diversification are ambitious. Attracting and retaining new talents is at the top of Luxembourg’s agenda.

But all that glitters is not gold. If the flipside of the coin is a fragmented Europe with less geopolitical counterweight to the American, Chinese and Russian economy, the tactical gains that appear attractive at first sight become rather insignificant at a second glance. Short time gains are thus clearly outweighed by the long-term impact of no longer having the UK within the EU. The Britons may be against the concept of an ever closer Union, but we should not forget that the UK is, strategy-wise, our closest ally in Brussels when it comes to financial services and an efficient development of the Single market for financial services. Losing one of the most liberal voices would not suit our constant striving for an unhampered functioning of the single market. Re-nationalising the Single market does not sound like a Luxembourgish claim.

Besides, our competitors are not twiddling their thumbs. HSBC has announced that it might transfer 1,000 jobs from London to Paris and Deutsche Bank’s #1 choice would be, of course, Frankfurt. But even if all London-based financial institutions making their own Brexit were equally shared between the three “candidates”, how could Luxembourg cope with the demographic shock and with the resulting pressure on public infrastructures and housing prices, the latter figuring among the top three Luxembourgish challenges that were identified by the European Commission in February: while an average of 8,000-10,000 foreigners have joined the Luxembourgish community during the period 2000-2014, the market has only provided between 2,500 and 3,000 housing units.

As consequence, residential property prices have almost doubled from 2000 to 2014. In 2014, they were about 14% higher than they were in 2008 and last year, prices were 5.4% higher than in 2014. The trend is thus likely to continue if we do not manage to address the struggle on the supply side properly. Only, last week, Luxembourg was ranked 50th among 61 countries for its competitiveness in housing prices in the IMD World Competitiveness Yearbook 2016. That is far from brilliant.

Also, what lies in store for the 2,200 Brits working in Luxembourg and the roughly 500 British EU civil servants? What to expect for Luxembourg if other member states asked for a special deal? The list of questions goes on and on.

The bottom line is that a Brexit would weaken the EU as a whole. But rather than speculating about the degree of nastiness of the potential divorce, we should address the EU’s current shortcomings. Why has the EU become such a difficult sell? Avoiding British departure is good. But not good enough for an EU comeback: Rather than having a case for not leaving the EU, British nationals will need one for remaining an EU member state. That is the only way to avoid what is currently referred to as the “Brexit neverendum”, a further drifting away of the UK, even beyond the referendum. The British referendum can be a starting point for a more efficient questioning of the way the EU is run. On 23 June 2016, Luxembourg will celebrate National Day. Hoping that the day will end on a European note…[3]

(Cet article a aussi été publié sur l’édition en ligne du “The Guardian“)

[1] European Commission (2014) : Special Eurobarometer 415 “Europeans in 2014”

[2] France Info (11 April 2016) :

[3] A slightly different version of this article was published online by Guardian in its series “EU voices” including statements by each of the 27 EU states outside the UK to describe how they see the EU project in the run-up of the British referendum:

One thought on “Brexit – Entering uncharted territory !

  1. c est une honte .mr junker veut garder les fonctionnaires veut meme engager 1 nouveau commissaire britannique.out is out.les britanniques n ont plus rien a faire dans l executif europeen.

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