One of the first lessons I learned in economics is that the state should intervene only in areas of the economy where private businesses cannot operate profitably or where social welfare takes precedence over economic considerations.
In many countries, it is common for water, electricity, and infrastructure companies to be fully or partially state-backed. In Luxembourg, it is expected that CFL, the national railway, is state-owned. However, it is surprising to see the state ultimately backing several companies operating in the financial sector.
Prime examples include Spuerkeess, BGL, and the Post Group, all of which provide services to the banking and fund industries. These state-backed entities compete with private-sector firms by offering similar services, while also vying for talent and prime real estate.
This is probably only an issue if these companies outcompete the private sector. However, determining whether this is the case is a nuanced matter.
Services
One clear benefit of state-backed involvement is the ability to promote social welfare. For instance, when ING recently withdrew its retail operations from Luxembourg, state-backed companies stepped in to absorb ING’s customers. This intervention helped guarantee economic stability and avoided wider economic impacts.
In addition, state-backed companies act as a catalyst for the financial sector, providing the infrastructure and foundations needed for global success. For example, Spuerkeess, in 1959, played a pivotal role in launching Eurunion, Luxembourg’s first-ever investment fund, effectively kickstarting an economic revolution.
However, strong state-backed enterprises competing in the private sector have downsides. Their lesser focus on profitability allows them to offer services at a lower cost, creating an unfair competitive advantage that could stifle private-sector growth.
Employment
State-backed companies can play a catalytic role in launching industries and attracting talent. However, they can also distort the employment market. The attractive perks and job security offered by these firms often draw talent away from private companies, which may struggle to match such conditions.
Real estate
Some of Luxembourg’s most iconic real estate is occupied by state-backed companies. Take, for example, the historic buildings owned by Spuerkeess on Avenue de la Liberté. This type of ownership preserves the country’s architectural heritage and contributes to its cultural identity.
On the other hand, when state-backed companies occupy significant portions of prime real estate, they put pressure on the commercial property market. This restricts the availability of office space, drives up rents, and forces businesses to establish themselves in less desirable locations.
International comparisons
Within the EU, countries like Germany and France have extensive state involvement in the financial sector, making Luxembourg’s level of intervention appear comparatively moderate. However, in countries like the USA and Ireland, financial sectors operate on a more market-driven basis, with minimal state intervention.
Perhaps Luxembourg could take inspiration from these models and move towards a more market-oriented approach, allowing private businesses to compete on a level playing field.
Gregory Kennedy is a columnist for Investment Officer Luxembourg. His columns appear every other week. He also works as a business development manager at Finsoft Luxembourg.
