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Focus: Luxembourg - At the centre of regulatory change and European realignment

by OMFIF Analysis

Focus: Luxembourg - At the centre of regulatory change and European realignment

Europe’s financial services sector – of which Luxembourg is a major hub – directly contributes 6% to European Union GDP and employs 6.4m people across the continent, making it one of the most important sectors of the European economy.

Following the British referendum vote to leave the EU, the Grand Duchy is in the forefront of initiatives to capitalise on a reshaping of European finance and banking. No one knows for certain how the City of London’s future links with the EU will look, but in the realignment of continent-wide financial services, Luxembourg will surely play a major role.

The EU has a trade surplus in financial services with non-EU countries of over €70bn, a big factor behind the EU current account surplus. Financial services have a significant impact on the real economy, with efficient funding and investment channels allowing companies, businesses and households to save, invest, borrow and expand, contributing to effective intermediation between savers and borrowers, higher growth and greater efficiency.

The sector is undergoing a period of change as global financial regulations since the 2008-09 crisis continue to affect operations and costs. Worldwide competition with the US and in particular Asia has increased. European banking union has strengthened banks’ underlying business framework in some ways, while exposing weaknesses in other spheres – reflected in a smaller share of international services such as project finance and export credits, and also generating desire for consolidation in many countries. The European Commission’s initiatives on capital markets union and the European Investment Plan are being implemented.

All these factors are coming under renewed scrutiny in the light of Britain’s EU decision. Risks and opportunities abound. In a series of Focus reports, OMFIF is assessing the prospects for the main financial centres. Global and European financial trends overlap, producing a kaleidoscope of influences on financial centres wishing to maintain a leading role.

The growing economic power of east and south Asia and the Middle East – including important changes in the Chinese economy and the opening up of Iran – provides significant opportunities for customer expansion, new product development and service delivery, catering to the needs of emerging economies.

The growth of multicurrency and thematic investment products, including renminbi activities, green bonds and infrastructure finance, requires sophisticated and adaptable market structures, and a spirit of innovation by participants.

New technologies in many spheres, including blockchain – a form of distributed database comprising a constantly growing list of data records – are creating new possibilities as well as threat of disruption for financial services firms, supervisors and regulators alike.

Luxembourg provides a crucible for and a reflection of these manifold influences on Europe’s economic and financial framework.

For the pdf of the Focus report please click here