Finance nation.lu: Isn't finance too serious a matter to be entrusted only to financiers?
Luc Frieden: I think that finance is an extremely important element in our society and it has a technical aspect that has to be managed by financial actors; but it also has practical and regulatory aspects that have to be dealt with by financiers, politicians, and, I would add, by citizens. We need finances to survive. Those who organise the financial world must always keep in mind that finance has a purpose which is not only to make money, but to support economic and social development, and that is a task in which more than one category of people must participate.
Finance nation.lu: What is the most difficult task in your relationship with the financial community?
Luc Frieden: I don't think that the finance community is one block which thinks in the same way. There are people, and probably the majority, who share the view that we need financial products to support the rest of the economy. There is, however, a small minority who think that one can just do anything to make a maximum amount of money. I have the impression that the first group represents the majority in Luxembourg, and that probably explains why the country has managed to develop as a serious financial centre where excessively risky transactions did not take place.
Finance nation.lu: Do you have a political, economic or financial who inspires your missions, daily work and decisions-be they political or regarding the financial centre?
Luc Frieden: I have no role-Model who inspires me in my decisions. I am a pragmatic person in this context. My goal is to make sure that the service sector-of which the finance industry represents the vast majority-can be developed with strong government support. This means that I try to listen to the needs of the financial centre, I try to anticipate international developments and to make sure that the right legal framework is in place to offer an attractive environment for innovative products.
Finance nation.lu: The future success of the financial centre will be to realise that the world is global, that there are a lot of new ideas that should build the basis of further development in our country. It is a task for the minister of finance to make sure that this framework is in place and this should be in close cooperation with financial actors. Is an economic crisis not ultimately the most challenging situation that a finance minister of a country hosting a financial centre could dream of?
Luc Frieden: It was a challenge to be minister of finance during the crisis, but I think that the crisis puts everything in a new perspective: with regard to the role of the state vis-a-vis the economy and with regard to the attitude of business people vis-a-vis risky transactions and the effects of these on the rest of society. The financial crisis requires that we redefine the role of finance in a modern and developed world. Not by demonising financial actors, but by trying to identify what went wrong during the crisis and what can be improved, as well as by making sure that in future the world of finance remains competitive and trustworthy. That is a challenge for Luxembourg.
Finance nation.lu: What vivid memories remain from the moments of urgent meetings, negotiation and decision-making regarding the rescue of Fortis and Dexia by, among others, Luxembourg's government?
Luc Frieden: In retrospect I am very proud about what we achieved in this context because our main purpose was not to rescue the banks as such, but to save the clients' assets deposited in them as well as the jobs of those working in these important institutions. It was probably the single most important decision I had to take as a minister in charge of the financial centre.
What impressed me most was the speed at which we had to take those decisions. There was no time for extensive analysis. Action was required, and realising that no private actor would jump to the rescue, we had to take responsibility. It could have gone wrong, but it became a success and I think that was a sign that governments can take actions that probably no other actors in society would take. It was also proof that governments can work together, because the co-operation between the Luxembourgish, Belgian and Dutch governments in the case of Fortis, as well as the Luxembourgish, Belgian and French governments in the case of Dexia, was extremely constructive and successful. It was a common success. From a personal point of view, the teams built up at that time, with the representatives of our government, remain very special and unique.
Finance nation.lu: And what were your feelings when you had to take such decisions as a matter of urgency, knowing that these would have long-term social, economic and political impacts on Luxembourg as well as on the financial centre?
Luc Frieden: I felt, right from the beginning, that I had to take on all these responsibilities, because the risk for the societies concerned would have been bigger if we had not intervened. Therefore I was resolved to take dramatic action. The decision made over the weekend to provide a rescue package of 2.5 billion euro was a step that had to be taken. Indeed it is quite an impressive amount of money for a Luxembourg finance minister. I do have to say that at this moment I couldn't tell whether everything would go well, but I only knew that the alternative would have been worse. That is why I proposed taking this action.
Finance nation.lu: Did you feel alone in this final decision-making process?
Luc Frieden: I could count on the strong support of the Prime Minister for all those important decisions.
Finance nation.lu: How would you summarise those two years of economic and financial crisis?
Luc Frieden: I am relieved that all the actions we took, both at the European and national level, led to a quite substantial improvement in the situation. That is true for the banks, but it is also true for the stabilisation of the eurozone. Of course the two go hand in hand, because without the financial crisis the crisis in public services, and therefore in the single currency zone, would not have occurred.
I know that we are on the right path. I am optimistic about the future, but we must of course realise that the reorganisation of the financial world is not yet complete. A lot of work still has to be implemented. A lot of political decisions have been taken, but have not been fully implemented. Moreover, the critical situation of the banks in some countries as well as of public finances, with too high debts and deficits, will have a serious impact on the years to come. So we are far from having overcome all of the problems and our energy has to be 200% dedicated in the coming years to make sure that Europe remains an attractive place where people want to invest.
Finance nation.lu: During this sensitive period, which of your political principles and personal convictions were questioned, and which ones did you give up?
Luc Frieden: My political purpose was to do the best for the public interest, which by the way is the main reason for doing politics. Before entering government I used to work as a lawyer; there you serve one or more clients. As a minister you work for the entire society and as a finance minister, particularly during a crisis, you have to take into account the interest of various groups in the country. Everybody in a society, whatever their income is, needs banks and therefore a developed society without a financial sector cannot exist any further. Hence, I did not need to give up any principles, but I had to focus on the goals which were to make sure that the financial system and the trust in the financial system would remain intact. That is also my main concern for the future: people must have trust in the banks, in which they deposit and from which they borrow their money. Moreover, the higher deficits, as well as the higher debts, which we accepted during the crisis are a deviation from my traditional principles of sound public finance, but to my mind they should remain a temporary solution with a time-limit. In other words I think that a small country, which ought to have a strong economy, needs sound public finances. I never gave up on those fundamental principles, but if I allowed any deviation from those during the crisis, I don't accept such exception in the medium and long-terms, because that would play against the interests of our country.
Finance nation.lu: Does it mean that the most difficult tasks of your mandate are still ahead?
Luc Frieden: I think that the rescue of the banks and the stabilisation of the euro were extremely heavy duties, but they were understood by the majority of people. The reduction of the public deficit and debt will be an exercise that will take time and will be extremely difficult for citizens to accept. But that is a part of the finance minister's job, which has to be taken seriously. I would be more popular if I said 'I don't mind if we have high deficits'. But my interest is that those who will take this office in the future will not be left with problems to fix. It is now that we have to solve them, so that the economy can create jobs in the future. Therefore, as difficult as the task may become, I am ready to assume the job in the future.
Finance nation.lu: What lessons do you draw from the multiple pressures put on Switzerland and Liechtenstein to loosen their bank secrecy? Could Luxembourg have been the next on the list?
Luc Frieden: We have an international financial centre and therefore it is clear that we must adhere to international rules and listen carefully to recommendations and criticisms as we are doing business with other places in the world.
Finance nation.lu: Does it mean that they are always right and we are always wrong?
Luc Frieden: The contrary does not necessarily apply either. So we are willing to discuss new rules on financial regulation, including tax rules. What we would like to have are just vertical and constructive discussions. Although we cannot exclude new waves of pressure, I must say that we have had constructive discussions with our neighbouring countries on those issues in the past 12 months, and I am hopeful that this will be so in the future. We need a discussion on how to combine efficient taxation and privacy rights. Both are, in my view, important elements in this discussion and for our citizens.
Finance nation.lu: What do you expect from the new European financial supervision architecture?
Luc Frieden: As we have cross-border activities, I think it is good for Luxembourg and Europe to set up some institutions that can efficiently act in times of crisis at a European level. All the instruments, such as the European Banking Authority and the European Systemic Risk Board, are useful to prevent new turmoil. I think that our country can only benefit from such structures. It also encourages trust in the financial centre of Luxembourg, because the supervision becomes more European, and at the same time we manage to keep an efficient onsite supervisory authority with the Commission de Surveillance dv Secteur Financier (CSSF) and the Commissariat aux Assurances. A global world requires that one exerts sovereign rights. That is what we did here, and therefore I am optimistic that these new institutions will also strengthen Luxembourg's financial centre.
Finance nation.lu: How can Luxembourg differentiate within these new regulatory contexts?
Luc Frieden: I think it can. I would like the financial centre to develop further in the coming years. Hence, I would like to fully support the introduction of serious new financial products with the appropriate legal framework. I will do the utmost to help the financial centre to acquire new clients from new countries. That is why I will increase all efforts in the targeting of new markets such as the Gulf States, Latin America and Turkey, without neglecting our traditional markets, of course, but bear in mind that the financial world is much broader than it was in the past.
I will also try to build on the existing strength in the private banking and fund businesses to make sure that we are fast in implementing new legislation and in involving them in a business friendly manner, and finally I will discuss how to improve both the attractiveness and competitiveness of our financial centre with the financial community. All those combined elements will make sure that Luxembourg remains a leading financial centre in Europe. That is my priority goal and I will not be satisfied with just keeping the existing ones. I am therefore ambitious to improve the expansion of the financial centre in its activities and importance.
Finance nation.lu: What would the financial centre become without Luc Frieden?
Luc Frieden: Everybody can be replaced, but I like to do this job because it is about creating prosperity and jobs for this country, and it is my duty to remind people that this country would not be as prosperous as it is without this financial centre. I do realise that the general public opinion in the world has become sceptical towards banks, due to the financial crisis and to what went wrong among banks, but as Luxembourgers we shall always remind ourselves that we have a strong interest in developing the financial centre and that we should undertake no action that will remove the financial centre from our economy. A small economy needs a strong service sector. What we built up over the past 30 years needs to be further strengthened and therefore I do see myself as a spokesperson for the thousands of people working in this sector, but also as an advocate for the broad, serious and well-predisposed international financial sector of Luxembourg. This sector opens the doors of our country to the world and allows us to have a high quality of life in this land. Bringing all of this together is a huge challenge, which I am happy to face.
Finance nation.lu: It seems that a sociological identification gap remains between Luxembourg's society and its financial sector. How do you work on this?
Luc Frieden: I think that the financial sector is part of our society and I think people do realise that it plays an important role. Maybe it is true that we do not manage to push young people in sufficient numbers to be interested in the financial sector and that too many of them want to work for the public sector. Maybe a better mix of foreigners and Luxembourgers in the financial sector would be an advantage from a sociological point of view. Therefore we must better explain the opportunities that this industry can offer.
Finance nation.lu: Could the financial sector anchor more strongly into Luxembourg's society like the steel industry did in the past?
Luc Frieden: I think that the sector is quite well anchored into our society and that the people of the various sectors live quite close to each other, because of the size of the country. We probably have to make sure that Luxembourgers and non-Luxembourgers discuss more and together about the issues and the challenges the financial sector is facing.
Finance nation.lu: What could Luc Frieden become without the financial centre?
Luc Frieden: I could imagine doing a lot of things, but so far, next to my strong interest in constitutional issues, my life as a lawyer and as a politician has been closely linked to the financial centre-ever since I came back from university. So I think, for the foreseeable future, that my life will remain closely related to the financial centre.
Finance nation.lu: Is it true what they say: that you might be Luxembourg's next Prime Minister?
Luc Frieden: Provided that it will be for my party to held that position, the Prime Minister and my party will decide that when the question arises. This is not an issue for the moment. Luxembourg's actors or legislation are regularly subject to violent criticism from abroad.
Finance nation.lu: Don't you think that the silence, the refusal to co-operate or sometimes the bad faith with which the government and the financiers respond to those criticisms might have a negative impact on the country and for its financial centre?
Luc Frieden: Negative publicity is always bad for a country and we must certainly openly discuss those issues, not only in Luxembourg, but also with the other countries. I do think that a lot of things happened, mostly within the banks and within our legislation. I think that privacy rights and bank confidentiality will remain important, but I also realise that some rules, which apply in our country, are not acceptable for the international community. I therefore think that we will find a way to keep bank confidentiality, and to communicate about this more actively, while at the same time making sure that appropriate mechanisms are in place to prevent abuses leading to tax frauds. This will be a difficult path to travel.
We will also have to make sure that banking confidentiality remains among the many attractive tools that the private banking industry has to offer. I think that the banking community is aware of that issue. The traditional banking secrecy has already changed over the last two years and this has not led to major changes in the financial centre. I have no intention of changing the current legal dispositions within the next few years.
The banks should use the coming years to modify and continue modifying their strategy vis-a-vis their clients, and we will make sure at a European level that Luxembourg remains a place where international private banking can be done with a tight intention to revitalise the European private banking market.
Finance nation.lu: The criticisms of Luxembourg about banking secrecy were only addressing banks and mostly the private banking industry. Some say that audit, accountancy or even legal professionals can be the next targets. Do you think that Luxembourg can come under attack again?
Luc Frieden: I think that the success of Luxembourg will always create jealousy and therefore quite a number of successful sectors in this country may come under attack. But I am not afraid of those possibilities. What we have to improve is to better communicate about the reality of Luxembourg. It is not an easy task due to the fact that the world is big and Luxembourg is small. Nevertheless, I will spend a large part of my time in the future going abroad and explaining what Luxembourg is in order to eliminate a number of prejudices that exist about the country based on the past. Interview by Marc Auxenfants