Brexit Represents Both Boon and Bane for Luxembourg

After the United Kingdom shocked the world last June with the results of the Brexit referendum, the guessing games commenced as to what the consequences would be, as much for the United Kingdom as for countries it trades with, the EU and the world as a whole. So far, the fall-out has been reasonably restrained (compared to the prophesies), however several studies are indicating that this position will not be maintained once the process is initiated though while the negatives seem to be defined simply as a question of degree for the UK, there are some possible upsides for other countries, including Luxembourg. 

A study just published by Institut national de la statistique et des études économiques (STATEC) took a look at what might be expected to happen both for Britain and Luxembourg depending on whether the UK ends up taking a so-called hard or soft Brexit. 

There seems to be almost no good news in it for the British. Even as their GDP continues to grow over the next few years, which is expected, that growth will be restrained by the limited markets and opportunities available to it. 

Therefore, according to a range of studies carried out on the likely effects of Brexit, short term (two to four years) growth is expected to contract by 4.7% in pessimistic accountings, and by 2.2% even in the more positive ones. 

In the longer term (up to 2030), the results indicate an impact on UK GDP averaging -5.4% under pessimistic scenarios and -1.2% in optimistic scenarios. 

 It should be noted that these figures represent contractions in the rate of growth, not of growth itself, which is nonetheless expected. 

Britain’s expected growth for 2017 has been halved from 2% to 1% by the IMF, OECD and EU Commission. 

That contraction will infect the EU too, Britain’s primary trading partner, where growth predictions have been revised down as a function of Brexit and a fall in GDP for 2017 in the range of 0.25% to 0.5% has been predicted.

With Britain the second largest exporter of services in the world, largely focused around the financial sector in the City, the impacts here are crucial. 

PwC and CBI conducted a study which showed high negative impacts in the short term, a drop of some 11% in the pessimistic scenario and almost 6% in the positive. Those impacts soften out over time as the levels of uncertainty even out.  

In the case of soft Brexit, the impact would be rather marginal. According to another study prepared by the consulting firm Oliver Wyman, the added value of the financial sector would fall by only 1%. On the other hand, in the case of a so-called hard Brexit, the loss of business would represent 6 to 8% of the added value of the UK financial sector, and some 30 000 jobs. In addition, in the event that banks move some of their non-EU activities outside the UK to achieve economies of scale, the loss of value added could be expected to reach a total of 12-15% with an equivalent loss of some 70,000 jobs.

Shared interests, particularly in the financial sector, adds to Luxembourg’s exposure to the fall-out from Brexit, but also to a possible benefit. Meanwhile, Britain’s importance as an export market has been declining. 

The United Kingdom is Luxembourg’s fifth most important market for goods exports, representing 4% of exports in 2015, and our seventh largest source for imports, at just 2%. Luxembourg’s goods exports amounted to about €12 billion for 2015. 

Over the past 10 years, the UK's weight in Luxembourg's trade has fallen, mainly in favor of non-European markets. Metals and metal products account for about 25% of total exports to the UK for the period between 2010 and 2015, followed by plastics and rubber materials and products, 17%, and machinery and equipment, 16%.

Luxembourg's total exports of services in 2015 amounted to some €85 billion of which around €14 million was directed to the UK (16% of the total), half of which were financial services. This makes the UK the second largest market for Luxembourg services after Germany. 

Conversely, 18% of Luxembourg’s service imports come from the UK, though that jumps to 22% if looking at financial services alone. 

Simulation exercises examining the likely fall-out for Luxembourg’s financial sector, based on the analyses carried out on the British financial sector carried out by PwC/CBI, predict a drop of 4%, some €350 million, in Luxembourg’s financial exports by 2020. The associated loss of jobs would amount to 1,600 people, including 600 in financial services. 

However, this simulation exercise does not take account of possible positive outcomes in terms of activity and employment produced by Brexit, both for the Grand Duchy and its finance sector. In particular, if the UK loses the European passport which allows any banking or financial institution, as well as a management company, to pursue its activities throughout the European Union, City actors are likely to shift their centres of activity to the Continent. 

Luxembourg, with its history of investment and asset fund management, would then be in a strong position, albeit in competition with other financial sectors, in particular Frankfurt, Dublin, Paris and Amsterdam. 

But, as with so much with Brexit, much remains to be seen.