Luxembourg’s Two Wars.

A Summary Translation Of “Les Deux Guerres du Luxembourg ».

Luxembourg has been under assault recently for its banking secrecy and its practices as a tax haven. Luxembourg’s defense and denials have triggered some heated exchanges, including insults with neighbors, a real war of words. The article shows the uselessness of this war, as Luxembourg will have either to comply with OECD standards or live with sanctions, an unthinkable option.

One War May Just Hide Another One.

Instead of wasting its energies in a battle around the tax haven accusation, which is a lost cause, Luxembourg should do a lucid evaluation of its situation in the world generally and its situation as an important financial center in particular, and prepare for things to come. There will be more to come, and recent history should be a lesson.

A Predictable, Self-Inflicted Defeat.
From a strictly Luxembourg point of view of self-interest, which assumes defending the now indefensible banking secrecy – tax haven tandem, the defeat came gradually through 4 distinguishable phases:

- The claimed unilateral abandoning of banking secrecy in the 90’s, under the condition that other jurisdictions, such as Switzerland would do the same. It was based on the assumption that it would never happen.
- The 2001 introduction of a new US “long arm” regulation, the “Qualified Intermediary”, which in essence poked a hole into all offshore jurisdictions’ secrecy. For Luxembourg and others it constituted in fact a willful but self-interested abandoning and violation of their own banking secrecy laws.
- The European Savings Tax Directive caused another dent in Luxembourg’s attractiveness as a tax haven, as it started obliterating tax shelter loopholes.
- Came finally the OECD - G20 episode of April 02, 2009, when long wearing negotiations came to a dramatic resolution under the fallout of the financial crisis, and the mere logic of the balance of power.
Luxembourg has the right to be egocentric as all the others do. But in that sense, it didn’t play its cards too well. It did not anticipate enough the threat to its interests, which were conflicting with those of larger entities. I believe it lost an opportunity to exchange banking secrecy over the years for concessions from its partners in other fields, as the demise of tax havens was fully announced.
Did Peace Break Out?
It seems that all the gesticulations and insults post - April 02 have now stopped. The first Luxembourg war seems to be over. It was useless and took place mostly in the minds of pre-election political leaders.
Luxembourg has promised and seems to endorse OECD standards. But some egos remain bruised, some agendas are not yet fulfilled, including legitimate and egotistic ones. The second war looms.
Prepare For The New War Without Preparing For The Last One.
“Never let go a good crisis go to waste” said Rahm Emanuel, Chief of Staff of the White House. This might be good guidance for Luxembourg in the near future. It is known to be a good student of everything European. It should be possible for it to become the best student in new standards for global finance.
One first signal was out there recently with the creation of «The Luxembourg Institute for Global Financial Integrity”. Unfortunately there might be a number of flaws in the concept, and the young initiative will have a very delicate beginning, as it seems almost exclusively dominated by the stakeholders in the financial center of Luxembourg, and as its application fees are prohibitive for many of the critics of international financial abuse such as NGOs. The credibility of such an institute can only be guaranteed by the diversity of its members and their sensitivities.
Luxembourg should anticipate the future battle to come, be at the forefront of the global regulatory changes, and be on its guards to defend the legitimate substance of its financial center. Failing to do so is a planned disaster. But elections are around the corner. Those are always delicate times, though not in Luxembourg.
Finally a quote on the following blog address from Jaimini Bhagwati, the Indian Ambassador to the EU, Belgium and Luxembourg has written in the Indian Business Standard this blog:
http://leconomistamascherato.blogspot.com/2009/05/banking-secrecy-laws-attract-illicit.html
This defines the mood out there, which will give the impetus to the coming renovation.