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Switzerland and Luxembourg: Complementary financial places

Updated: Jul 9, 2020

Roger Hartmann, Adjunct Professor at the University of Luxembourg and Liechtenstein

Switzerland, Luxembourg, Liechtenstein, Monaco, Singapore: what do these countries have in common?

They are small countries with a small domestic market, which has always justified naturally looking outwards, towards the rest of the world. A large domestic market like Germany, the United States or China does not have these same constraints. What you can have at home is enough to keep the machine running. In Switzerland, as in Luxembourg, we know perfectly well that we would be nothing without the foreign market. And this applies to industry, trade or the financial sector. The two financial centres know this perfectly well and that is why any competition between our two places was at best an urban legend in the 70's or 80's.

But let's analyse this a little closer. It has to be acknowledged that the biggest differentiation between the two places is in terms of historical depth. In Switzerland, we can really talk about the emergence of a banking ecosystem from the end of the 18th century, with a gradual development which led to the Swiss industrial revolution of 1880. It marks the real beginning of the golden age of Swiss banking with industrial development, coupled with major infrastructure works, the best examples of which are the boring of the various Alpine tunnels. This then very quickly brought about the internationalisation of Swiss banks, first to London, the focal point of the British Empire, then New York before the Second World War, with the opening-up of the transatlantic world which will govern the planet until at the end of the 20thcentury. In the post-war period, Switzerland also quickly understood the emergence of the Asian continent, with strong presence in financial centres like Hong Kong and Singapore. And by quickly recognizing the People's Republic of China to the detriment of nationalist China Taiwan, Switzerland showed real political and economic intelligence with the rise of Eurasia at the expense of the transatlantic links. Switzerland is therefore in a very privileged situation. Swiss banks were able to ride these various waves, actually bringing about an early internationalisation of its banking system, while combining it with particularly solid know-how. It is essential here to mention the importance of the Swiss university cluster, which contributed enormously to the development of the financial sector, in particular asset management, but also the cutting-edge skills in terms of risk management. Dual training, the privilege of the Germanic world, is not left out, because it was able to inspire the beginning of noble and virtuous skills, through advanced non-academic professional training. The combination of these two strengths remains today an essential asset of the dual education system in Switzerland. There is therefore a reason why Switzerland quickly became the world capital of wealth management, with its holistic model and being deeply focused on customers’ needs which contrasts sharply with the Anglo-Saxon “broker-dealer" model based on the transaction. This "Swiss" model has naturally become the benchmark model for most financial centres operating in asset management, such as Luxembourg or Singapore.


If we turn now to Luxembourg, its historical evolution is quite different and shows a sense of pragmatism which we will struggle to find elsewhere. As a poor country like Switzerland until the industrial revolution, with large-scale emigration towards North and South America, the Grand-Duchy, with its natural resources, otherwise non-existent in Switzerland, managed to carve out a place for itself as a world leader in the field of iron and steel. Coming from Germany, this expertise will have had a great impact on the history of the country by industrial know-how of the highest level, which will have given it the opportunity to position itself ideally as a founding member of the European Union and to provide a home as early as the ECSC for the important European decision-making centres. As a small country, Luxembourg has since the Second World War, found undeniably visionary political leaders, which is quite remarkable when considering that the pool of political talent is by definition narrow. When the steel industry reached the end of its cycle, the political and economic leaders would have successfully managed to transform the country into a leading financial centre in less than 20 years. Unlike Switzerland, everything there is new, everything was set up with agility and speed. The investment fund industry was created there because the transcription of the European Directive was done at the double. Create a competitive advantage right from the start, this advantage which others, like Ireland for example, will never be able to catch up. And this has helped build a truly global strength cluster and put the Grand Duchy in a dominant position with regard to passported investment funds, ideally recognized worldwide. Whilst not benefiting from the advantage of dual training and having acquired a university very late on, Luxembourg was able to play the qualitative immigration card to perfection. 

On the one hand, making the best possible use of the cross-border workforce from the Greater Region, who sometimes travel long distances to come to work in Luxembourg, but also an attractive hospitality policy for foreign talent, from near and far, who very quickly felt at home in this new host country. The numerous international schools in the country have played a major role in this positive development. The Grand Duchy is undoubtedly a unique example of how the foreign population has integrated and this will have largely contributed to creating the Luxembourg miracle.

If we consider the great financial and structural crisis of 2008 as a transition towards a new world, in every sense of the word, Switzerland and Luxembourg were not spared by the major ravages of a crisis which has not yet come to an end. The damage was considerable, but the messages were also well understood by the various players. Furthermore, both places have regulators particularly well equipped with skills. Our world has become one of complexity never previously achieved. 

Today there are many phenomena related to the new post-2008 normal that we are unable to understand, let alone explain. Nevertheless, in this VUCA (volatility, uncertainty, complexity and ambiguity) environment, both countries will have largely understood that the old world will never return and that it is necessary to actively contribute to the construction of the new one. It is with good reason that the two financial centres have built new skills in areas which will be strategically essential tomorrow. I will mention just a few examples: Fintech, digitalisation, blockchain, artificial intelligence, alternative investments with Private Equity in particular, Impact Investing and therefore much more than micro-finance, sustainability, corporate governance and the family office, and these are just a handful of examples. In this complex world, if you do not act, you disappear very quickly. A small country probably understands this even better, even if it is materially true that it is easier to govern a small country than a large one. Nevertheless, even though it is a long and winding road which lies ahead for everyone, Switzerland and Luxembourg are ideally positioned to ensure their continued success during this century. 

A qualified workforce, faith in all forms of education, values and ethics, discipline and rigour, competence and work, optimism and confidence in the future, humility and pride, these are words we know how to combine properly in our two financial places. This will make them increasingly complementary and certainly not competitors. Let's move forward with the confidence of those who are going in the right direction. 


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