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With an annual GDP of approximately $57 billion Luxembourg has a substantially larger economy than all the other fund domiciles except for Ireland. And it has one of the highest GDP per capita’s in the world. At $81,000 it is ranked third worldwide.
But Luxembourg, too, has been hit by the economic downturn. According to the Economic Intelligence Unit (July 2009) Luxembourg’s year-on-year GDP growth fell from 5.2% in 2007 to 0.9 per cent in 2008, with the economy expected to contract by 5% in 2009. In 2010 the Luxembourg economy is forecast to stabilise. The EIU estimates that inflation averaged 4.1% in 2008, will fall to 0.5% in 2009, and rise to 1.2% in 2010. The unemployment rate is projected to be approximately 8% until 2010. This is an increase of approximately of about 35% over the last two years.
The Luxembourg government has been working on a package of economic and social measures to combat the financial crisis, with infrastructure projects that had been scheduled for 2011-2012 being brought forward. The package is valued at just over 3% of GDP and would result in a 25% increase in public spending. These measures are likely to result in a Luxembourg record budget deficit, but this is still only expected to be around 1% of GDP for 2009.
With the boom over the last 20 years in the international asset management industry financial services have become the main driving force of the Luxembourg economy. 27,269 people were employed in Luxembourg’s financial services business in September 2008. The financial sector accounts for about 28% of Luxembourg’s GDP. A proportion of the people that work in the Grand Duchy’s financial sector, however, do not live in Luxembourg. This domicile is unique in that significant numbers of people cross the border every day to work in financial services (and other areas of the economy). They come from Belgium, France and Germany.
Governmental and political system
The Grand Duchy of Luxembourg is a constitutional monarchy. Political power is exercised by the Chamber of Deputies although some legislative functions are also entrusted to the advisory State Council. Executive power is vested in the Grand Duke of Luxembourg, but is normally exercised by the Council of Ministers, led by the head of the government. The Grand Duke appoints ministers, but they are responsible to the legislature.
The main political parties are the Christian Social Party (CSV - Christian Democrats), the Luxembourg Socialist Workers Party (LSAP), and the Democratic Party (PDL - Liberals). The CSV has consistently been the largest party and has provided the Prime Minister for 64 out of the last 69 years. Luxembourg’s parliamentary elections on 7 June 2009 resulted in another victory for the ruling CSV led by Prime Minister Jean-Claude Juncker. The CSV increased its vote and won two more seats, leaving it with 26 seats in the 60 seat parliament. The new CSV-LSAP coalition government was sworn in on 23 July 2009. Jean-Claude Juncker remains Prime Minister and Minister of State, and has taken on the role of Treasurer.
The Minister for the Treasury and Budget is Luc Frieden. He has said several times that he believes Luxembourg has the ability to withstand the crisis better than other countries.
Stability and infrastructure
Luxembourg is as stable a fund domicile as it is possible to find – from both an economic and political perspective. Whilst its financial services businesses are suffering from the downturn the economy of country as a whole is somewhat cushioned in that not all of those that are employed in the sector live in Luxembourg. The Grand Duchy’s economy remains exceptionally solid. Even with its recently announced (and substantial) increase in public expenditure its budget deficit is forecast to rise to just 1% of GDP.
Equally the infrastructure in Luxembourg is excellent, as one would expect from a country at the heart of the EU.
Threats to this domicile
There are no serious threats to this domicile. The one possible concern, however, would be its cost base.
Luxembourg is in the euro-zone and much of the new business that it is seeking to attract is from the alternative fund sector. (And the majority of the mainstream fund groups are of course also from the Anglo Saxon world.) Many of the new fund managers that have come to Luxembourg are from the alternative fund sector and the base currency of the overwhelming majority of hedge funds, private equity funds etc is either dollars or pounds. In addition, salaries in Luxembourg are high, relative to other domiciles – as are fixed costs. If this domicile faces any real threat it is from lower cost fund domiciles (both those in the euro-zone like Ireland and Malta) as well as those that are outside.
But being part of the EU is also a distinct advantage. Luxembourg is the largest base for UCITS funds which are now distributed all over the world. The AIFM Directive should also provide a boost for the Grand Duchy’s fund industry.