Luxembourg Parliament Adopts 2010 Deficit Budget Amid

UNCLAS SECTION 01 OF 02 LUXEMBOURG 000402 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON PGOV COM LU SUBJECT: Luxembourg Parliament Adopts 2010 Deficit Budget Amid Broader Concerns ¶1. (SBU) Summary - On December 9, Luxembourg's coalition government adopted Luxembourg's 2010 budget. The (negative) economic growth of -3.5 percent in 2009, and an expected deficit of 4.4 percent in 2010 led the GOL to borrow 2.2 billion USD to cover the anticipated shortfall. - Director of Defense Jean-Jacques Welfring told Pol/Econ Chief December 17 that the tripartite committee meeting (consisting of the GOL, employers and employees with union representation), tentatively scheduled to be held in March 2010, could result in a civil servant salary and Luxembourg minimum wage freeze or reduction. Rumors have circulated that many German banks might move out of Luxembourg in the coming year due to the economic downturn. If Welfring is correct that salaries of civil servants (approximately one third of the work force) will shrink, there may be a larger financial challenge ahead for Luxembourg than was previously expected. ¶2. (SBU) Budget Adopted Amid Financial Crisis - Luxembourg's 2010 budget was adopted in Parliament on December 9 by the two majority parties, the Christian Social People's party (CSV, PM Juncker's party) and the Socialist Party (LSAP, FM Asselborn's party). After an era of economic progress ending in 2007 with a 6.7 percent growth rate, Luxembourg experienced a serious economic slowdown recording zero percent growth in 2008 and a decline of 3.5 percent projected for 2009. Weak economic performances in the neighboring economies of France and Germany, which absorb more than half of Luxembourg's exports, negatively affected Luxembourg's economy. Strong uncertainties also remain in the financial sector, which has been the engine of Luxembourg's national economy for at least the last decade. While the financial sector previously created jobs each year, a total of 780 jobs were cut in the financial sector between September 2008 and September ¶2009. The number of banks also declined from 152 to 146 during the same period. The GOL is expecting a total of about 2,500 job losses in the financial sector for 2009. The economic decline of 3.5 percent in 2009 and an expected deficit of 4.4 percent in 2010 led the GOL to borrow 2.2 billion USD to cover the anticipated shortfall. ¶3. (SBU)Banking Secrecy - Luxembourg's tradition of banking secrecy has come under renewed pressure caused in part by the global financial crisis. After the OECD published a "grey" list of non-cooperative jurisdictions in the framework of the G-20 London Summit, the GOL agreed to ease its banking secrecy regulations. With the current restructuring efforts in some large financial groups, the impact on the Luxembourg subsidiaries remains uncertain. ¶4. (U) Future Tax Increases Not Ruled Out - The CSV also suggested the GOL needed to reduce public administration costs. Finance Minister Luc Frieden did not rule out the financing of future social costs through either sharp increases in social security contributions and other tax rates or drastic cuts in benefits or other public services. The Socialist Party (CSV's coalition partner) strongly opposed any reform of Luxembourg's generous welfare system and announced that they were not opposed to tax increases on international financial transactions. ¶5. Criticism from Opposition Leader - Liberal opposition leader Claude Meisch criticized PM Juncker for stating that the GOL should wait for the results of tripartite negotiations before introducing any substantial reform. Meisch said he was alarmed that Juncker's newly elected government was playing merely an intermediary role between the social partners instead of submitting its own future growth strategy for Luxembourg. ¶6. (SBU) Reduction of Civil Service Salaries Possible - Director of Defense Jean-Jacques Welfring told Pol/Econ Chief December 17 that the tripartite committee meeting (consisting of the GOL, employers and employees with union representation), tentatively scheduled to be held in March 2010, could result in a civil servant salary and Luxembourg minimum wage freeze or reduction. Rumors have circulated that many German banks might move out of Luxembourg in the coming year due to the economic downturn. LUXEMBOURG 00000402 002 OF 002 German Ambassador to Luxembourg Hubertus von Morr lent credence to these rumors when, during a December speech in Trier, Germany, he predicted widespread departures of German-affiliated banks during ¶2010. Von Morr later "clarified" his remarks, arguing that his statements were made in the general context of the international financial crisis. ¶7. (SBU) Shortest Budget Debate In Anyone's Memory - Despite the economic crisis and the need to fund a budget shortfall, the political debate on the 2010 budget law lasted only seven hours, the shortest in recent memory - likely reflecting the uncertainty the GOL and opposition parties share over the financial situation. Plans to continue the expansion of the Army with a slight increase in the defense budget for 2010 remain on track, although the bulk of the funds will be utilized to finance restoration works of Luxembourg's military headquarters. ¶8. Comment(SBU): - If Welfring is correct concerning a possible reduction of salaries for civil servants, (approximately one third of Luxembourg's work force),there may be a larger financial challenge ahead for the GOL than previously expected. German banks represent almost one-third of the total banks in Luxembourg (more than twice as many as the next highest total, including Luxembourg's own banks),so further departures could have a chilling effect on an already struggling economy. - Welfring's concerns may be tied to the rumors of German bank departures/closures, but they could equally be attributed to the rise in unemployment and the budget shortfall. The unemployment rate has risen steadily over the past three quarters and is now at an historic high of six percent - a number that would be even higher if not for the government's subsidizing some companies to cover training for employed workers who otherwise would be laid off. ¶9. Comment cont'd (SBU): - As the Afghan roll-out continues, Post anticipates instruction from Department for repeated demarches to GOL over next several months. Post presents this report to highlight that while Luxembourg has proved financially generous in recent memory and will likely continue to do so, its financial footing has not been immune to the crisis. As cash-strapped as Luxembourg is, Post still expects GOL will step forward when asked, only perhaps at a reduced level. Evans