“We need to think long-term – and that’s exactly what we’re doing”

Together with your Polish counterpart, you recently wrote a joint letter to the Financial Times in which you said the EU needs to learn the right capital markets lessons. But the question is, how would a capital markets union benefit the average person in the street?

The aim of the capital markets union is to create financial flows that are able to play a central role in managing the many challenges we currently face. With Brexit, the pandemic, and obviously the war in Ukraine as well, the capital markets union project has had to take a bit of a back seat in European policy terms. However, it is still very important. The capital markets union – an initiative set up by the European Commission in 2015 – aims to create an EU-wide internal capital market for all member states.

The idea behind it is to promote growth and employment within the EU. We’ve seen Europe lose some of its competitiveness since the financial crisis. Through a common internal market for capital, companies in the EU would, on the one hand, be able to obtain better access to various sources of finance; on the other, investors and savers would have additional opportunities to invest their money profitably – regardless of which EU country they’re based in. A capital markets union will help diversify the financing opportunities for the economy. This should result in lower financing costs, as in the future companies will no longer have to finance themselves via bank loans – as is normally the case in Europe today.

All in all, a capital markets union will promote cross-border financing, which is very important for the Luxembourg financial centre. At the same time, the aim of developing a capital markets union is to drive the digital – and essentially green – transition of the economy. That’s why my Polish counterpart Magdalena Rzeczkowska and I wrote an open letter setting out our shared vision aimed at providing further food for thought on how to proceed with the deepening of the capital markets union. The guiding principle here is “united in diversity”. We are convinced that only a polycentric capital markets union will enable the EU to tackle the challenges that lie ahead.

On the one hand, you call for a common capital and banking market but at the same time, you reject the notion of a centralization of supervisory powers. Isn’t there a bit of a contradiction here?

I think a centralization of the supervisory powers would be counterproductive, but that doesn’t conflict with the capital markets union. A centralization of the supervisory powers would deprive market participants of access to the crucial interlocutors that we currently have at local level. In our view, the relevant national authorities that are really best placed to ensure that products and financing tools meet the requirements of local companies and investors alike.

In view of the increased risk of loan defaults, there have been calls for tighter control of the banks. Don’t Luxembourg’s Ministry of Justice and the CSSF (the financial market supervisory authority) need more staff?

The CSSF has been given a very large number of additional tasks in recent years; however, it has actually hired a lot of new staff during this period. In 2016, it had 670 employees, whereas today the figure is nearly 1,000. As far as I know, the Ministry of Justice has likewise increased its headcount. We need to make sure we’re properly equipped and staffed – and that’s what we’re doing. However, it’s obviously a situation that’s constantly evolving.

From COVID support packages to cost-of-living support packages, how can Luxembourg continue to afford them?

Merely six weeks into my tenure, we found ourselves unexpectedly embroiled in a war within Europe. After more than two years of the pandemic, governments across Europe had no choice but to agree additional support packages. In close cooperation with business and trade unions, Luxembourg’s government adopted a support package aimed at mitigating the effects of the surge in energy prices and specifically support household purchasing power as well as the competitiveness of businesses. Support packages don’t come cheap, that’s true. Yet they have given us stability, predictability, and the lowest inflation rate in the EU. As such, I’m convinced that they’re necessary as well as the right thing to do. Despite these measures, we’ve never exceeded the 30% debt to GDP threshold set out in the coalition agreement.

We also need to maintain this responsible approach. I believe in the importance of maintaining stable government finances over the long term, as this makes a vital contribution to Luxembourg’s positive economic development. Without neglecting the strategic investments essential to the environmental, energy and digital transition, we need to ensure in financial policy terms that the country is also able to successfully withstand future crises.

How do you see the future of the financial center as a major employer and taxpayer? The number of banks in Luxembourg has fallen significantly.

The number of banks is not necessarily decisive or indicative. A consolidation has taken place in the banking sector in recent years – a process that is still continuing. Although we used to have a larger number of banks, the banking center now provides more jobs: the 200-plus banks we had in the 1990s employed 17,000 people, while the 120 banks we have today employ an additional 10,000 people. The balance sheet total of the banks hasn’t decreased.

In the corporate banking segment, we see more and more new banks becoming active in Luxembourg – particularly from the US and the UK. We’ve got a very broad line-up of services here in Luxembourg: from family offices and asset managers, through investment services, to private banking. We also offer unique expertise in everything related to cross-border products and services. Obviously, the banks also benefit from this overall environment.

Where can the financial center still gain ground?

Brexit has led 15 international insurers to choose Luxembourg as their EU headquarters. Since then, more than 90 players have expanded and beefed up their activities in Luxembourg. So, the financial center is growing. If you look at the international ratings, Luxembourg always features among the leading financial centers: We’re always among the top three most open financial centres; as for green financial centres, we’re among the top five. 40% of all globally traded sustainable bonds are listed on the Luxembourg Green Exchange. In addition, 40% of all European ESG funds were launched in Luxembourg.

Speaking of sustainable finance, gender finance is another important area. This includes gender equality in the financial sector: a large number of companies have signed up to the Luxembourg “Women in Finance” charter, which aims to improve gender diversity in the Luxembourg financial centre. Several gender bonds are now listed on the Luxembourg exchange. The Ministry of Finance, in collaboration with the stakeholders of the financial sector, can play a pioneering role in this area. I’m convinced that this is a good thing not only for women, but also for men, for the economy and for its competitiveness. We’re always bemoaning the lack of talented individuals – not just in Luxembourg – and often overlook the fact that we have very highly trained women. Studies also show that companies led by women have a smaller environmental footprint. I’m therefore convinced that the Luxembourg financial center can play a major and positive role here.

Digitalization is another factor that is key to the development of our financial centre. We now have over 220 fintech firms in Luxembourg. Clearly, it's crucial that we develop and encourage innovation in the financial sector. That’s what we’re doing with the House of Financial Technology (LHoFT), which supports fintech companies in the Luxembourg market as well as financial institutions in their digitalization efforts. As a government, we’re aiming to create the right supportive environment. For example, we’ve changed the legal requirements and made explicit provision for the use of DLT and blockchain in relation to the issuing and transferring of securities – and more recently for financial collateral, too. HSBC recently decided to set up its global platform for digital assets in Luxembourg, while the European Investment Bank (EIB) has issued its first digital bonds under Luxembourg law. Our competitors aren’t asleep, so we need to continue to make sure we remain in a strong position and to diversify. I think we’ve done that very well so far. Obviously, we need to continue doing so.

When were you informed that Credit Suisse was in such trouble that it had to be saved virtually over a weekend?

I think the situation around Credit Suisse shows how important market confidence is for running banking operations. Once investors no longer have confidence, things can get difficult very quickly. Responsibility for the supervision of Credit Suisse Luxembourg lies with the CSSF, which was in contact with its counterparts on the Swiss side all along. We were kept informed of developments on a regular basis.

At the same time, we were seeing the collapse of banks in the US and there were worries that history was about to repeat itself. But then, the domino effect failed to materialize.

Events in the US and Switzerland confirmed two things. Europe’s banking sector is very resilient today, in part thanks to high capital adequacy and liquidity requirements. Since the 2008 financial crisis, all European banks have been subject to the same rules, irrespective of their size. This creates trust and stability. Obviously, I discuss these issues with my European counterparts to ensure that banking regulations continue to apply to all banks including the subsidiaries of larger banks and banking groups. As far as deposit protection is concerned, we doubled the EU requirements at the end of 2015 in Luxembourg: rather than 0.8%, Luxembourg’s Deposit Guarantee Fund represents 1.6% of the total covered deposits of member institutions. This shows that the necessary reserves are there, and so is the confidence.

Will the increase in ECB interest rates have an effect on inflation? Or will it cause another sovereign debt crisis?

This is another of the topics we discuss within the Eurogroup. As Minister of Finance, I won’t comment on the ECB’s decisions. We can see that the measures decided by the central bank are already having an effect. If we look, for example, at inflation rates for the two biggest economies in the Eurozone, price trends have already stabilized there. This gives consumers and businesses much needed relief. But international institutions – such as the Commission and the International Monetary Fund (IMF) – however, rightly point out that countries shouldn’t borrow too much to counter the risks created by interest rate developments. I think we learned the lessons from the last financial crisis. We need to think long-term and gear our financial policies to successfully master the challenges ahead.