Hotel Hilton, Luxembourg
Monday 8th October 2001
Ladies and Gentlemen,
Let me once again express my deepest sympathy and condolence for the terrible events that shocked your country and the world nearly a month ago.
You might have heard it many times, but I believe that faced with such horror true solidarity cannot be limited to the initial aftermath.
So, let me reassure you that Luxembourg, as small as its contribution may be, will make every possible effort to help the American people to overcome this shock and to fight the terrorism that is at its origin. I wish to say this as a Member of the Luxembourg Government as well as a private Luxembourg citizen.
The military actions that are being undertaken since yesterday are a necessary response to a state, which clearly assists terrorists responsible for tragedies around the world.
My thoughts are with each innocent civilian that will die for the errors of the taliban regime. A regime that has already put civilians, and especially women, at the threshold of mere survival.
As in most of Europe, Luxembourg and its people have not forgotten what our American friends did to free us twice during the last century from the terrible occupation we were suffering. That’s why help and relief from all parts of our society are spontaneously being organized.
This being said, Ladies and Gentlemen, let me once again welcome you to this meeting.
Unfortunately for you, the more pleasant part of this working luncheon, namely the lunch, is over and we must now turn to the work. I will now share with you my thoughts about the Luxembourg economy and the outlook for its future.
In light of my introductory remarks I must now make the effort not to reason as a person deeply affected by the terrible human tragedies that happened on September 11th and start to reason as an analyst who has to view the Twin Towers tragedy solely from the economic side.
You are certainly familiar with this dismal aspect of economics which is however necessary if we are to examine problems objectively and does not in any way represent lack of personal feelings or opinions.
My speech from today is necessarily very different from the one I intended to deliver when I was first approached by your president for this conference.
In the globalized world all economies will be affected by the tragedy of the World Trade Center.
Let me tell you however that I will certainly not present you a pessimistic outlook. I will not share the collective confidence loss that we’re observing in many forecasts issued these days. On contrary, I will show you that despite the recession in the US and the economic consequences of the WTC crisis, we have many good reasons to be optimistic about the future of our economy.
Personally, I think that many economic analysts as well as entrepreneurs and consumers, or should I say public opinion in general, is right now still suffering from what I will call the CNN effect of the Twin towers tragedy.
This is unfortunately a negative side effect of the information society we’re living in. Every one assists quasi live to tragedies all over the world and gets influenced in his day-to-day business and in his private choices. People become more risk averse after such a tragedy, they stop traveling although it is certainly much safer right now to take a plane than a month ago.
And here we are at the first part of my speech, the short term outlook after the events of September 11th. These events will obviously affect the economic conjuncture of the US economy and thus the European economies and Luxembourg as well.
But let me right away make it clear that the main part of my speech will not deal with short term problems. Instead I will concentrate on the structural aspects and their impact for the long term economic outlook for our national economy. This is the reason why I promised you some optimistic outlook.
Over the past five years Luxembourg has known an exceptional expansion, culminating in record growth of 8,5 % in the year 2000. I’m convinced that the members of your organization contributed to this very good result and share with me the feelings of proud over this achievement.
However, the international situation, which was already deteriorating before the tragic events in the US seems to cast serious risks over the outlook for our economy.
Let us begin with a more precise picture of the starting point. Our economic performances over the last five years were so good that some economic analysts speculated that the Luxembourg economy was growing beyond its potential, thereby fuelling inflationary risks. These risks were exacerbated by the automatic indexation of wages to inflation which still exists in Luxembourg.
Those of you who know me will anticipate that I do not share this opinion.
If inflation in Luxembourg is high this is due mainly to the fact that crude oil prices in Europe have tripled between 1999 and early 2001. This evolution was due to the combined effect of the oil price increase and the weakening of the Euro during this period.
Add to this a sharp increase of food prices in Europe, a supply shock generated internally by the BSE crisis and the outbreak of food and mouth disease.
Inflation in Luxembourg may well be at the origin of wage increases through indexation. However, I do not agree that this is leading automatically to a deterioration of the competitiveness of our economy.
Second round effects will equally arise in those countries where wage discussions between social partners have to take into account the evolution of the oil price.
In addition, the limited delay between the increase in prices and the adjustment in wages does not represent a competitive loss for Luxembourg. On contrary, the social frictions generated by wage negotiations in other countries might even be at the origin of a competitive loss for those countries.
May I at this point remind you that the oil price is down again and that the latest data on inflation credits Luxembourg with the third lowest rate in Europe!
Thus, two supply shocks hit the European economies:
* during the second half of 2000, the oil price crisis
* and during the first half of 2001, the food crisis.
In addition, an external demand shock has also hit the European economies in form of the US slowdown. Faltering external demand was already showing effects in Europe during the first eight months of 2001, thus before the WTC crisis.
These facts were already known in spring 2001 when national and European forecasts are produced. Nevertheless, these forecasts still tabled on a high growth for the European economies and for Luxembourg especially.
As late as in April 2001 the European Commission still thought that European growth was strong enough to off-balance the adverse effects of the US slowdown.
So their forecasts for Luxembourg were that:
real GDP growth should only decelerate slightly in 2001 and 2002 but should remain strong somewhere between 5% and 6%.
employment would grow at 3.9% and unemployment further fall to 2%
and wage and price inflation were to remain contained.
These forecasts more or less matched our national forecasts issued by STATEC.
However, only a few months later these forecasts had to be seriously revised, even before the terrorists attacks on the US.
Forecasts tabling on a V-shape return of the US economy disappeared. Now even a U-shape return seems unlikely.
The crisis of the US economy seems to be rooted in over-investment and it will require some time for the US economy to get rid of excess capacities.
Forecasts that predicted a minimal impact of the US crisis on the European economies were proven wrong.
What’s even more worrisome is that while in the past the US appeared to lead developments in the EU, this crisis comes with a quasi simultaneous slowdown at the world level.
Considering the speed at which the US recession arrived in Europe we must rule out traditional transmission channels through trade.
On the other hand, transmission to the European economic area might well have taken place mainly through financial markets. This seems to indicate that Europe could not convince these markets of its growth potentials. Especially since the EU economies were not plagued by the major imbalances evident in the US. I'm referring more precisely to the consistently low savings rate of the US households.
I’m sure that you’re aware of the succession of economic forecasts, be it the OECD’s, the IMF’s or others’, being revised downwards every other day.
One can certainly doubt, as the financial times did a week ago, about the long term consistency of such forecasts being issued under these conditions.
I'm also sure that you're aware of the first “economic” victims of the WTC attacks. Airline companies all over the world are laying off ten thousands of employees.
Let me tell you once again that I’m not as pessimistic.
Considering the airlines, I think that although deeply affected by the lack of confidence of possible clients, this might just be an opportunity for them to get rid of excess capacities and weak competitors collecting government subsidies on the way.
Some of the employees would probably have been laid off anyway. Some will be reemployed as soon as demand picks up again. And we all know that public opinion has short lived memory so this will happen. The airline sector will result even more competitive as a result.
But more generally, I still believe that the US economy will rebound in the near future and for Luxembourg as well I’m still convinced that we will achieve the 4% growth rate that’s our latest forecast for 2001. In 2002 we will even observe a further improvement.
This more or less matches the latest assumptions from the European Commission who tables on a zero growth rate (but not a negative growth) for the coming four quarters and an upswing of growth on the EU level during the third quarter of 2002.
Many small positive indices do actually point to these forecasts.
The rapid easing of monetary policy in the US and the accompanying fiscal expansion of an unprecedented scale will soon have their effect on the business cycle.
Financial markets and stock markets especially have begun to show a relative strength.
Finally, we all got the news that your president, George W. Bush just passed a 40 billion $ package through the US congress to invest in security and anti-terrorism measures.
You might not be a fan of Keynesian type policies to relaunch a faltering demand. However, in this case the extra government spending might serve as a positive byproduct of a necessary response to terrorism.
Considering the European economies, including that of Luxembourg, the answer to the current crisis is twofold. In the short term everything will depend on the developments (including the military actions) in the USA and their impact on the EU.
However in the medium term the EU economies will certainly be able to regain the positive growth path they were engaged in before the recent recession. On the EU level this requires that:
First, we continue to maintain our efforts within the Stability and Growth Pact to preserve a stable macro-economic background
Second, we continue on the path of structural economic reforms that we have undertaken during the past few years thereby convincing financial markets of the enormous European growth potential.
This policy mix has given the European economies good results in the past years and it will continue to do so in the future.
Considering the first issue, Luxembourg has always been a good pupil within the Stability and Growth Pact and will continue to be one.
However, this does not prevent the government from continuing its efforts to extend the tax reform, a reform which was criticized as a pro-cyclical measure when first announced but which right now appears to be a welcome counter-cyclical measure.
On the other hand, inflationary risks seem well contained so that the European Central Bank too (in a combined move with the Federal Reserve Board in the US) had the opportunity to ease its monetary policy by reducing its interest rates. This will certainly contribute to fight the economic slowdown and keep it as shortlived as possible.
This is especially important because contrary to the Asian crisis in 1998, labour markets have begun to react to the US recession. So far, unemployment in the European Union (and especially in France and Germany) has stopped falling but there is a risk that it started to rise again.
However, this might be interpreted as a positive sign showing that European labour markets are not as rigid anymore in their reaction to shocks. And if this logic works on the downwards side, it would also suggest that labour markets will improve more rapidly if economic developments turn for the better.
But let me now turn to the second issue, namely the program of structural reforms. My conviction is that this is the key variable that matters for the future evolution of European economies and Luxembourg’s economy in particular.
Only if we continue on the track of economic reforms driven by the creation of the single European market can we be better protected against imported economic crisis.
And the introduction of the common European currency, the EURO, in less than 100 days will certainly be an important step in this direction.
Let me state at this point that I personally believe that so far the introduction of the Euro has already been a frank success. I’m not specially worried by the Euro-Dollar exchange rate and I certainly dont believe that the evolution of the exchange rate is bad for Europe. On the contrary, every economist knows that a lower exchange rate gives European firms competitive advantages.
However, if the exchange rate does to some degree reflect the relatively low confidence of investors in the fundamentals of the European economies they will be shown wrong.
Why? Because of the same reason as to why I'm optimistic about the medium term outlook for European economies and the Luxembourg economy in particular: the economic reform path that we're engaged on.
Let me explain to you as entrepreneurs doing business here in Luxembourg why I consider of the outmost importance the structural reforms that have been undertaken and will be undertaken in the future.
For me these reforms are one of the the major mandates as minister of economy, for you they might be more reasons to continue doing good work here in our country.
At the 1998 spring European Council in Cardiff, heads of state and government of the 15 European countries clearly set structural reforms as a priority for economic policy. This strategy was further developed by the Lisbon European Council and the famous e-Europe plan.
After its election in 1999, the Luxembourg government also defined its general policy as aiming to improve the structural environment in order to maintain sustainable growth articulated around the three pillars of economic, social and environmental aspects.
Let me remind you of some major structural reforms which have already been achieved here in Luxembourg.
We have introduced competition in network industries by totally or partially liberalizing telephone, postal, electricity and gas sectors. And you might be aware of some of the positive results which this measure implied for prices of these commodities be it for industrial or private use.
We are preparing Luxembourg and its population for the information society via the e-Luxembourg plan.
The ministry of Economy has put through parliament a very comprehensive law on electronic commerce, which as yet has no equal in Europe. And yet we're already preparing a new version which will even be closer to business needs and take account of technological changes.
The Ministry of the Economy is preparing a new competition law to ensure that market forces are playing their role correctly in the economy. This new law will create a specialized entity overseeing competition problems. It will replace the obsolete law on price controls that dates from the period after world war two. This is no longer suitable to the modern framework of our economy that is integrated in the European economic area and open to international trade. However, in light of what I have said previously about the introduction of the Euro, let me tell you that this new law was deliberately chosen to be presented after the introduction of the Euro. This is due to the fact that we will closely monitor price evolutions before and in the immediate aftermath of this introduction so as to identify hidden price increases.
The Luxembourg government is closely monitoring evolutions in the banking sector and is continuously adopting new legislative measures to make sure that this important sector remains highly competitive in the globalized financial world. Looking to recent economic analyses this policy shows its results. According to the OECD, in its latest report about the Luxembourg economy, the financial sector in Luxembourg has highly specialized competences that enable it to grow further. Furthermore these competences will ensure that a correct implementation of the Feira agreement does not represent a threat to this important branch of our economy.
Through its sustained efforts to create a favorable economic environment for private firms the government is delivering its contribution to maintain the outlooks for the Luxembourg Economy.
Moreover through our flexible and open approach to all problems and challenges posed on a continuous basis to the Luxembourg economy, an approach combined with a solid basis in the European Union and the common market we are able to prepare our country for the 21st century.
Stable macro-economic conditions and favorable micro-economic conditions are the necessary conditions for growth itself but also for productivity increases and thus an increase of the potential growth.
However let me finish by reminding you that you or rather every entrepreneur here in Luxembourg are the most important partners in this. We as a government can only create the favorable conditions, it is up to you to seize the opportunities and launch your companies into this challenge too.
It's been possible in the past and we have shown it if you look at the results of 2000. I'm sure that with your help it will be possible in the future. And this, by the way is an answer to terrorism too!
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