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DE RUEHLE #0402/01 3580838
ZNR UUUUU ZZH
R 240837Z DEC 09
FM AMEMBASSY LUXEMBOURG
TO RUEHC/SECSTATE WASHDC 0019
INFO EUROPEAN POLITICAL COLLECTIVE

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