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Cablegate: Luxembourg Parliament Adopts 2010 Deficit Budget Amid

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RR RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSL RUEHSR RUEHVK
RUEHYG
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

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