For several years the government has been stepping up its campaign to make Luxembourg more competitive and to develop a long-range plan. Some of the country's decision-makers comment on the economy and propose strategies and scenarios for the country's future.

The Luxembourg Government and more particularly the Ministry of Economy and Foreign Trade have assumed the role of developing the competitiveness of the national economy. This followed the Lisbon objective set out in March 2000 to make, "The European Union become the most competitive and dynamic knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion (European Council, Lisbon, March 2000)."

In the 20th century Luxembourg was fundamentally a monolithic economy, first with steel (industry) and then with finance (services). Diversification and the drive for competitiveness have become the new buzzwords. Luxembourg, regularly touted as one of the richest countries in the world, has recently witnessed the under 25s protesting because of unemployment. Over 40% of the workforce are cross border workers who commute daily on increasingly congested roads, and (like other countries) Luxembourg has a demographics and pensions time bomb waiting to explode. The country enjoys a high standard of living but has a serious lack of affordable housing, a skilled labour problem and an economy that still relies heavily on the financial sector, which is at risk of losing some of its niches.

paperJam asked a group of high-ranking experts, including executives from the Big Four and leaders from a cross section of some of the most active and prominent professional associations to respond to a series of questions on the management and strategy of Luxembourg.

Is Luxembourg a follower or a leader, opportunistic (or fixed)? Jean-Jacques Rommes is Director of the ABBL, one of the leading associations in the financial sector. Its main objective is to organise the majority of banks and other professionals and to maintain Luxembourg"s role as a financial centre of world renown. Rommes sees the country as both a follower and a leader. "Luxembourg is a niche player that is defining its niches and therefore it is a leader, although there are others who leave niches open which means that we could be seen as a follower."

Like the other participants in this dossier, he praises how, up until now, Luxembourg has been very efficient, flexible, and quicker than other countries. "Where we have been real leaders thus far is in legal answers to the problems we"ve had." This has helped to define the banking centre in the middle of the EU, first with the euro bond market, since the 1980s with the Private Banking Centre, and again since the 1990s with administration of investment funds. "All this has been due to the legal environment and the follow-up."

But this advantage could quickly be eroded. "If we want to continue to reach this level we have to act," Rommes says. "The financial centre grew because we had an advantage over our neighbours, but now there is Ireland, Dubai and Singapore. There is also Eastern Europe, even if it might take five or ten years to develop."

More specialisation than we see today

Despite the government"s efforts to promote diversification and develop new niches in other sectors, Rommes says that the Luxembourg financial centre is much more diversified than it was, and that Private Banking and Investment Funds will continue to grow.

These areas will see some changes but how will they change? Mimicking the component outsourcing methodology as reported in this dossier"s IT section (see page 166), as with companies, "The simpler areas of business in Luxembourg will be outsourced to other countries. We must find the sophisticated activities to stay on top. These could possibly be structuring in private banking or developing new vehicles in private banking. But there is activity there for the future and we will see more specialisation than we see today."

As Director of the Luxembourg Chamber of Commerce, Pierre Gramegna has a vested interested in Luxembourg"s economic strategy. "We are a leader.... sometimes," he says. He points to diversification successes which prove that, "We can be leaders and we can be opportunistic," such as SES Global, Cargloux and Arcelor/Mittal, which he says, " has to be considered a success, if you look at the steel industry, which did not make so much money and suddenly made a lot of money and attracted a foreign buyer." He applauds the Fund Management Industry - #2 in the world - and the regulatory framework that goes with it.

Trans-regional corporations are another area where he says we are the leaders. "Look at Saar-Lor-Lux, culture (2007), the Chambers of Commerce. For example, Luxembourg led a Greater Region Chambers of Commerce tour of Turkey."

But he does not deny that we are sometimes fixed. With inflexible business and shopping hours, Luxembourg loses out on opportunities. He also feels we are more cumbersome and a less regulatory free country than we used to be, and that was one of our attractions. "We need to simplify the administration more because the complications can be a deterrent to people setting up businesses or managing companies."

He also says that Luxembourg was late with e-commerce. "We were opportunistic when we did start attracting e-commerce, but we were late with transposing it into applicable models."

Luxembourg"s small size within the European Union can inhibit its ability to be a leader. Paul-Michael Schonenberg, Chairman and CEO, American Chamber of Commerce (amcham) notes however that for a small country, the number of areas in which Luxembourg is either, "a world or the world leader" is astonishing. "Skype was born and nurtured in Luxembourg. In the financial sector, both Clearstream and EFA have been highly innovative leaders and indeed, the aggregate of the financial and insurance sectors have demonstrated strong innovation and leadership. In smaller companies we also do rather well. Kneip Communications is clearly a "best of type" company and several automotive parts suppliers have found terrific market niches with automotive manufacturers. So, for its size, Luxembourg clearly punches above its weight."

Does size matter?

Small can be an advantage. "Small countries can test innovations and experience faster," says Marc Saluzzi, Partner at PricewaterhouseCoopers. Because of Luxembourg"s small size, it has flexibility and agility, which are assets. "For example, a firm in Luxembourg is different than in a larger country where it is more difficult to test new ideas. Such was the case with PwC ACADEMY. We came up with the concept and could test it at a fast pace. We didn't have to convince hundreds of partners, regional offices or go through government administrations. Yet at the same time Luxembourg is very international, so testing in Luxembourg does not mean designing for Luxembourg only. Because of the small size of our local market, most of the solutions we come up with have to be exportable."

Success is also capitalising on opportunities

Most of the participants in this dossier agreed that because Luxembourg is small, it follows that it cannot lead in everything. But as Saluzzi puts it, "There is no shame in following. Even as a follower, we can add value." At the same time, we can develop valuable partnerships (this works at macro and micro levels). Saluzzi suggests that we could, for example, develop a better relationship with London. "There are 100,000s of people in London with more experience, who are more innovative and who have lots of ideas - but who do not have the flexible regulation. The objective is to find a way to leverage the innovation of London."

In September 2006, net assets under management in Luxembourg funds reached 1,733.030 billion euros. One of the objectives of ALFI (Association of the Luxembourg Fund Industry) is to defend and improve the competitive position of Luxembourg as a centre for the domiciliation, administration and distribution of investment funds. Its success has made it a model that other sectors would like to emulate. Tom Seale, CEO of European Fund Administration (EFA) and President of ALFI says that Luxembourg is a leader in the Investment Fund arena due to the size and importance of the sector, but he attaches a caution to that statement.

"In terms of investment funds, we are a follower/ leader. We do both. Success is also capitalising on opportunities that present themselves. Who could have foreseen September 11th or the stock market crash of 2001-2002, or the boom we"ve had in the last couple of years? To be a leader you have to have a strategy and you have to be able to react. For example, 18 months ago we realised the importance of promoting our sector to specialists. We recognised that the specialists all lived outside of Luxembourg. That analysis made us realise that we needed to go out and market the country. This was a strategy, and a reaction. Also, being a leader means that we must continuously reinvent ourselves. What we did 15 or 20 years ago is not what we are doing today."

"Luxembourg has often assumed a leadership position, despite its size," says Maurice Lam, Managing Partner at Deloitte. "Outstanding examples are investment funds, communications, satellites, and more recently VAT in e-commerce. In other sectors the government has been more wary."

"Luxembourg has developed a very specific business model and its competitiveness stems from its unique size, independence and cultural neutrality," says Marios Paras, Managing Director at Rowlands (Vedior). "Luxembourg S. A." as the Economist has called our country, is a dedicated niche player. Luxembourg has a very elegant way of institutionalising the exploitation of loopholes. Just think of the tax breaks, the VAT policy, the ship register, the credit to audiovisual productions..."

Tax and regulation arbitraging

But is Luxembourg at risk of losing its leadership in some of these niche areas? Lam (Deloitte) says, "With continuing harmonisation on the legislative level it will get harder and harder to differentiate a national economy by purely fiscal means. As tax niches will tend to disappear, it is important to develop the entrepreneurship of local companies."

"We are an opportunistic leading follower," (smart follower) says Raymond Schadeck, CEO at Ernst & Young, Luxembourg. "20 years ago banks were speaking about currency or interest "arbitraging." Now we would speak about "tax and regulation arbitraging" - knowing the time frame to catch niches is getting smaller & smaller. For example, we were a follower when Luxembourg realised that we could play a part in private equity. But we were a smart follower when we developed the SICAR. Then we were even smarter to sell this Europe-wide - this is how we became a niche player."

Schadeck says that smart means innovation - going that one step further." Also, we can't live forever on SICARS, real estate funds etc...we need to innovate. Some pre-existing ideas that he feels reflect this search for new niche areas are E&Y"s Islamic Finance, Micro Finance and the aforementioned Observatoire de la Compétitivité du Grand-Duché.

"Luxembourg"s future could potentially be an "économie du savoir" (know-how economy)," he adds. Thus we would need life long learning, on the job training. "Luxembourg has made inroads with the Luxembourg School of Finance and the new University but we have to develop/invest heavily in education and develop R&D and innovation."

What will the market look like in five years? In ten' Is the market supporting business growth and developing talent? Will there be not enough work or not enough candidates?

"We can pretty much predict that the economy will still depend on financial services," says John Li, Chairman, KPMG Luxembourg. He sees investment funds continuing to grow, and the reinvention of private banking, as well as development of the insurance area. "Markets are volatile, yes, but people will always need to save, there is a growing global wealth, and there will always be a need for financial services with a growing demand for sophisticated products."

He does add that for Luxembourg to succeed, a smart strategy is required that includes lower taxes so companies can be more competitive, and real pragmatism - therefore, a regulatory framework that is sound and friendly. Also, better employment law. Another often-made point in this dossier is that Luxembourg needs to improve the legal framework to make things easier for people (non EU and qualified and educated) to get work permits, as well as overtime laws.

Indeed, Schonenberg (AMCHAM) says that employers are having to look far afield for certain skilled profiles and would appreciate faster and simpler work permit approvals. "Also, employers would like more flexibility to move employees where they are needed and to make agreements with employees who want to work longer hours. All of these labour flexibility issues are addressed in a recent AMCHAM white paper on labour flexibility in the Grand Duchy."

"The growing importance of the financial centre is a challenge for Luxembourg," says Rommes (ABBL). He warns that the economy should not get too far from the Luxembourg people. The population is made up of different cultures, different financial elements, and different politics. The civil servants have the voting power. The foreigners doing sophisticated business have no political value or power while the normal work force of Luxembourg is made up of workers of which a large percent do not live in Luxembourg, and many that are not Luxembourgers.

He is also concerned that with growth we will have not enough skilled people and too many unskilled. "The Luxembourg Paradox is that we will have not enough work AND not enough people," he predicts. "The talent gap is a global problem. Luxembourg cannot escape it. The labour shortage is slowing down growth. This is a problem today and a challenge for the future."

The Luxembourg Paradox

The widening gap between the economy and the local people was witnessed in the actions of the young protestors against Law 5611. Luxembourg creates 3-4% new jobs on average annually. The students are protesting unemployment. "Are the people - the real Luxembourg people on the market - trained and prepared for the jobs that will (are) be available'" Gramegna (CC) asks.

Seale also recognises this problem in relation to the Fund Industry - a world-class industry. "The local population does not have an "appreciation' of the risks and values of this industry. How do you attract local people to the Fund Industry'"

"We must do everything we can to make Luxembourg the domicile of choice for investment funds as compared to Singapore, Dublin or Dubai. How do we service those people? We are having trouble. I would like to see the government do more to support a talent pool. Political choices need to be made."

He says there are multiple sides to the problem. We need to train people. We need to market to people the importance of the sector. We need to do a better job at managing the problem for the Greater Region - Thionville, Metz etc are all part of the economic fabric of Luxembourg.

The lack of a talent pool is one of he biggest challenges to growth in Luxembourg and Parras (Rowlands) feels there is only one answer. "There will be enough work, but a lack of qualified candidates. Every company who intends to employ somebody wants to have the best one, and not the second choice. The demographics of Luxembourg show that the number of ageing people will be far higher in 20 years than the young. The only way we can overcome our lack of candidates is by opening the borders. This will also avoid a continuous salary pressure in various sectors. Qualified people will always find a well-paid job, wherever they come from!"

There is no such thing as a "growth industry", says Schadeck. "Industries grow only through innovation and imagination. For example HNWIs. What else can we do with them' Our message now is, "come and save on your taxes," but the niches are getting thinner and thinner. The percentage of tax reduction is decreasing. We need to change the message in serving wealthy individuals. For example; Luxembourg is a beautiful green area to live in. Why are we not marketing messages like this? Other services to HNWI might comprise real estate opportunities, private schools, yachting, and jets."

"At any rate," he says, " there is certainly no room for panic. Even if some sectors are declining, overall the economy is booming. I am positive we are moving in the right direction, and it is clear that more and more we are thinking about moving together, in a combined effort."

Does the real economic influence come from inside or outside of Luxembourg? Is Luxembourg more dependent on the EU, the US or is it independent?

"In the investment fund industry there is an EU influence," Seale (ALFI) says, "But we are increasingly affected by events outside the EU, as investment fund sales are larger and larger outside Luxembourg and this will continue into Asia, Japan, and Latin America."

Is independent the right model ?

Lam (Deloitte) says that increasing numbers of decision centres lie outside of Luxembourg. The trend is for non-resident decision-makers and headquarters of international groups to gain increasing influence over local business operations. Thus in a globalised world it is inevitable to be influenced by foreign economies. "No more than every other European country, Luxembourg is not independent. In Luxembourg there is a high dependence and interchange with neighbouring countries. We clearly observe an increasing dependence on the EU and on the US. Luxembourg is attractive for US clients looking for efficient legal and tax solutions for their businesses."

Seale says that Luxembourg is clearly not independent. "In our sector,independent is not the right model. We are in a network. We have people outside Luxembourg who use it as a base, most notably in investment funds, and economic actors who have clients outside of Luxembourg. Right now we are in a great position. The challenge is always to be the preferred path of supplier to the client through Luxembourg."

Schonenberg says that, as Luxembourg is not self-sufficient, any disruption of cross border trade would have a very serious impact on the economy of Luxembourg and the quality of life of its inhabitants. "At the same time, any closing of the borders would deny Luxembourg the workers needed to run the enterprises within the country. So clearly Luxembourg is dependent on its neighbours, the EU and the rest of its trading partners."