Luxembourg sometimes resembles a criminal enterprise with a country attached.
The Grand Duchy’s appetite for other nations’ tax revenues ranges from its unusually low petrol taxes, which siphon commuters from neighbouring Belgium, France, and Germany, to its unusually generous treatment of multinational corporations.
These predations are distasteful, but they are more or less legal, at least for now. Less justifiable is Luxembourg’s role as a centre for money-laundering and outright tax fraud.
As Gabriel Zucman of the University of California-Berkeley has documented, there is a gap worth roughly $8 trillion (5 per cent) between the world’s financial assets and its financial liabilities. If that gap were randomly distributed across countries, it could be attributed to errors at national statistical agencies rather than anything sinister.
However, the discrepancy is concentrated in a handful of small countries known independently as places favoured by tax cheats, including Luxembourg. The total value of foreign investments in Luxembourg, according to the local authorities, is worth trillions of euros more than what the rest of the world’s national statistical agencies claim their citizens own in Luxembourg. The most straightforward explanation is that many foreigners who own assets in Luxembourg are underreporting these holdings to their governments.
Alphaville has covered this before in more detail, so in this post we’ll focus on another piece of evidence in the case against Luxembourg. Lorcan Roche Kelly points out that the distribution of physical euros is quite different from the official allocations set by the European Central Bank’s capital key, which is based on relative population sizes and gross domestic product.
Using the ECB’s disaggregated data on the eurosystem’s assets and liabilities, you can get a sense of which countries in the euro area are responsible for printing the most currency:
(To make this chart yourself, start with “Banknotes in circulation” under the liabilities tab, add “Liabilities related to other operational requirements within the Eurosystem”, and then go to the assets tab and subtract “Claims related to other operational requirements within the Eurosystem”. Finally, divide each country’s cash contribution by the total Eurosystem’s banknotes in circulation. The negative numbers imply that the national central banks of Austria and Portugal have ended up destroying more paper money than they have issued since the creation of the single currency.)
Roche Kelly’s focus is on Germany’s outsize role as a printer of euro banknotes, which is largely attributable to the country’s backward financial system and cultural aversion to cards.
Mentioned in passing at the end, however, is the unusual role of Luxembourg as a source of physical euros. The Grand Duchy has printed about as many euros as Belgium, Ireland, the Netherlands, and Spain combined. Only France, Germany, and Italy — the three largest economies of the euro area, together representing about two thirds of the economic output of the entire bloc — produce more of the single currency’s cash than tiny Luxembourg.
This is particularly noteworthy given the recent spike in issuance in advance of changes in bank secrecy laws.
Suppose a Belgian had stashed ill-gotten gains in a Luxembourgeois bank account to avoid attracting the attention of the authorities and paying tax. If banks in Luxembourg were soon going to be forced to report this account to the Belgian government, this villain would have both means and motive to convert his deposits into cash he could take back with him over the border. The ECB’s data imply nearly €100 billion may have avoided the tax man in this manner since the introduction of the euro.
Given who was in charge of Luxembourg during most of that period and his current position, we leave it to you to estimate the likelihood there will be significant investigative resources devoted to determining whether this sort of criminality is ongoing.
The case against Luxembourg — FT Alphaville