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Listen to our podcast on how today's society is still impacted by the 1980s, presented by Belgian business columnist Salma Haouach and enhanced by the views of Fernand Reiners, member of the Executive Committee and Head of Professional Banking.
Welcome to Résonance, the Banque de Luxembourg podcast (in French) that takes a look at the major events of the past 100 years and shares our insights into how they have impacted modern society. How can these past milestones prepare us for the financial challenges of the future?
This is part of a series of six podcasts presenting a positive analysis of the major changes born of past crises.
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Today, Luxembourg is home to almost 15,000 funds and sub-funds with total assets of around 4,400 billion euros. Fernand Reiners, Head of Professional Banking
In the 1980s, while we were singing along to Michael Jackson’s Thriller, another thriller was playing out in the economy. The decade was to have a decisive impact on economic life as we know it today. On the heels of the 1970s, which, in France, were profoundly Keynesian and a lot less glorious than the preceding Trente Glorieuses (Glorious Thirty), two major political events occurred that would change the course of history. Reagan came to power in the United States, and Thatcher in the UK. Both were strong proponents of the doctrine conceived by the Chicago School of Economics that was most in vogue at the time.
The era’s influential economists were known as the Chicago Boys and were led by renowned economist Milton Friedman. In 1970 he told the New York Times Magazine that “the social responsibility of business is to increase its profits”.
The premise was as follows: if a business created a profit, more revenue would be generated for the entire ecosystem surrounding it. This resonated with the famous theory of trickle-down economics.
That theory also led to a major shift in economic thinking, namely that the market was stronger than anything else and excellent at self-regulating. Reading between the lines, it meant markets were stronger than governments, which, at that precise moment in history, appeared to have failed in their efforts to rescue the economy. It was time for politics to withdraw from economic life. One sentence lodged in the minds of most economists: ‘No one can beat the market’.
French philosopher Michel Foucault called it ‘governmentality’, the idea that society can be regulated through the realisation of markets and competition. There was also the philosophy of Scottish economist Adam Smith, who had posited that, since individuals naturally pursue their own interests, there is no need to impose any guidelines. All of this led to the central idea of freedom: if we establish a well-funded economy, things will take care of themselves.
Neoliberalism naturally led to the emergence of major financial centres: suddenly, the markets were the best gateway to self-financing and, in turn, wealth. Privatisation and deregulation scrambled to produce a wide array of financing tools in a very short period of time. Anything seemed possible, including the impossible.
However, not all countries were on the same page. The German doctrine, for example, was much stricter, and is still discussed today under the name of ‘ordoliberalism’. Currently a hot topic, the Schwarze Null, or ‘black zero’, represents a budget orthodoxy targeting zero deficit. Sacred to this orthodoxy are all monetarist doctrines and the independence of the Central Bank. The approach is very specific and requires economics to be kept separate from money.
In France, by contrast, what mattered was the welfare state and policies that tried to correct inequalities through taxes and wealth redistribution.
The European Commission chose the middle road. To promote shared prosperity and allow as many people as possible to take advantage of the thriving financial markets, it created a European savings product called the UCITS.
Luxembourg jumped on this, with the result that investment funds are now one of the pillars of the country’s financial centre. Interview with Fernand Reiners, Head of Professional Banking.
“So how was Luxembourg’s fund industry able to expand after the 1980s? I really think it’s an excellent example of how the financial market evolved in the subsequent years.
At the beginning of the 1980s, Luxembourg had just 75 investment funds. Today, we are home to almost 15,000 funds and sub-funds with total assets of around 4,400 billion euros.
How did this success happen? Well, it started in the 1980s. In 1988, Luxembourg was the first European country to successfully transpose into national law the very first European directive for investment funds, known as UCITS 1. Today we’re on UCITS 5.
In addition, Luxembourg didn't immediately focus on the local market – which didn't exist anyway – but rather, it put its efforts into supporting international fund distribution, which gave the country an undisputed competitive advantage starting in the late 1980s.
Today there are obviously fewer regulatory differences, but Luxembourg has nevertheless maintained its competitive edge, mainly by developing over time a substantial ecosystem of investment fund expertise, comprising custodian banks, fund administrators, lawyers, auditors, and so on, all of them highly specialised. Globally, I think it is fairly unique.”
It’s a reminder of the extent to which the social conditions for our growth can influence the world of finance.
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www.banquedeluxembourg100ans.com has been specially created to mark the Bank’s centenary. The website uncovers 100 years of economic and social history, going back in time and analysing the implications for the future.
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