Luxembourg’s finance minister Luc Frieden talks to Brian Caplen about solving Greece’s financial problems, the prospects for a European banking union and the need to find balance in financial regulation. 

Q: A new deal on Greece was put together by eurozone finance ministers and the International Monetary Fund [IMF] in November 2012. What are its chances of success?

A: We have to see this as a process of making sure the eurozone remains a stable monetary union. Instability is always bad, whether it be political, monetary or economic, so our goal is to make sure there are no major casualties in either the eurozone or the EU. That is the main goal.

The second goal is to make sure that at the end of this process Greece will again be able to access financial markets. Achieving this is very difficult and that is why it takes so much time. We want to keep Greece in the eurozone, to keep the IMF on board and to make sure we have a credible solution for the public financial markets in the long term.

We can achieve this by making sure that by 2020 or 2022 Greece will have sustainable debt levels, while closing the financing gap that will be there for the next few years. What we have achieved may not be perfect, but it is positive – all 17 eurozone members plus the IMF have agreed to a certain path. Even more important is that Greece has committed to quite a number of structural reforms that now have to be implemented. It is not the end of the story.

Q: How can the Greek economy be put back on a growth path?

A: The most important thing for creating growth in the long term is having sound public finances and carrying out structural reforms. Greece is a good example of a country undergoing structural reforms that are absolutely necessary. Such structural reforms are necessary in a number of European countries both in and outside the eurozone.

If you do not have the right business-supporting framework in place, you will not have growth. You need to reduce the deficit and the debt, while making sure that you create growth through taxation, labour laws and liberalisation of professions that are not market-oriented. Most of the time these reforms are painful and politically very difficult, but the crisis pushes us to take on these reforms. You see that in Italy and other European countries. If we implement these reforms, we have good prospects for the medium and long term in Europe.

Q: What will a European banking union achieve?

A: A banking union in itself is certainly not enough. We need to integrate further because European countries are very interdependent. One of the lessons of this crisis is that events in one part of the world impact on the rest. We saw how the collapse of Lehman Brothers in New York had an impact; and the problems of the Irish banks had an impact on the UK and other countries. With the Icelandic banks it was the same. We can no longer look just at our own countries.

There is a need for further integration in Europe and in the eurozone, and the banking union is only a small part of that. As well as supervision, there must be an agreement on resolution if something goes wrong. So supervision must be seen together with resolution and the proposals of the commission are not yet complete. We might see in the course of the next few months some rules for the supervisory mechanism [this interview took place shortly before the announcement of the single supervisory mechanism in December], but that is certainly not what I understand as a banking union. A banking union is something broader and must be seen together with more fiscal and economic integration. All this will take time, but the direction is correct.

I think that the banking union should not divide Europe. We should make sure that the single market continues to work well and that we do not have two standards of supervision – the eurozone and the non-eurozone – with differing levels of quality. Let’s make sure we have the same rules applied in the same manner to ensure that the single market with 500 million consumers and 22 million companies continues to go well. That’s important for growth, that’s important for financial services.

Q: How will the banking union work?

A: The banking union should be efficient and we should make sure that we do not build a bureaucratic monster far removed from the problems of those being supervised. It depends to a large extent on what powers we will give to the European Central Bank (ECB). If those powers are far reaching and involve daily supervision by the ECB then it will not work for all 6000 banks, but if there are some broad rules supervised by the ECB, while most of the other tasks are done at the national level under the supervision of the ECB, then I think you can include more banks.

My final decision on that will depend on the exact delineation of powers given to the ECB and those remaining at the national level. I am very much in favour of having common European rules, but also making sure that on a day-to-day basis there is efficiency in supervision. It is all about building trust, both in supervision and in the banks. I think national supervisors do a very good job and the argument for the ECB’s involvement is to have a common resolution framework if something goes wrong for cross-border banks and to make sure that the rules are not interpreted differently from one country to another. So there is still some work to be done.

Q: How do we get the balance right with financial regulation, especially for a financial centre such as Luxembourg, which wants to attract investment?

A: It is a daily challenge. You have to have discussions with the financial industry and understand its development strategy. Luxembourg supports the development of an internationally oriented services centre and, in close partnership with the financial institutions, I am always trying to find the right balance in regulation.

After the crisis of 2008, we need well regulated financial products and institutions, otherwise investors lose confidence. But it should not be bureaucratic. A lot of financial products must be developed with investor protection as the key element, but without holding up business development. Sometimes finding the right balance is very difficult. That is why I think that financial centres such as London, Luxembourg and Singapore, have to work together because, as well as being competitors, we are all extremely internationally oriented.

We must make sure that this new regulation is not abused to protect national markets. It should be there to protect the investor, but in an international dimension. We should join forces, discussing issues together to make sure the European single market continues to function, but also that we can sell our financial products in an internationally regulated world. Competition is something positive, but it should be between financial centres that are well regulated. The time of unregulated products and financial centres is gone.

Q: There have been press reports about the large state-owned Chinese banks moving some operations from London to Luxembourg because of tighter regulations in London. Does this mean Luxembourg’s regulations are looser?

A: We all apply international standards. What characterises Luxembourg is that it is a European capital and a lot of international companies have chosen Luxembourg as their European hub. Luxembourg is home to an impressive number of European institutions, such as the European Court of Justice, the European Investment Bank and the new European Stability Mechanism.

What we see develop in the public sector very often applies to the private sector. Luxembourg is perceived as a gateway to the eurozone, and that is why international companies and international banks choose to locate there. The fact that the government has developed a clear strategy for Luxembourg to be the headquarters of European banks and companies also plays a role. As with London, we are very open to foreign investors and that is quite important, but we are not differently regulated.


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