Trouble in paradise

The Ger­man Press Agency (dpa) released an aston­ish­ing head­line on 28 April 2010: “Uproar in par­adise – cri­sis splits Lux­em­bourg.”11dpa: Aufruhr im Paradies – Krise spal­tet Lux­em­burg, 28 April 2010.

The Grand-Duchy’s econ­o­my, already bad­ly shak­en by the bank­ing cri­sis in the after­math of the Lehman Broth­ers’ bank­rupt­cy, did not have to wait for the con­se­quences of the Greek cri­sis to learn that new unhap­py times were dawn­ing. Being accus­tomed to growth rates of 4 to 9 per­cent over the last years, always meet­ing the Maas­tricht cri­te­ria with­out a prob­lem, Lux­em­bourg now had a “par­adise lost” feel­ing. The beloved “Lux­em­bourg mod­el” seemed to guar­an­tee a nev­er-end­ing eco­nom­ic growth suc­cess story.

This famous “Lux­em­bourg mod­el” came into being in the mid-sev­en­ties in the after­math of the steel cri­sis, and the birth of the Lux­em­bourg finan­cial cen­tre is based on a tri­par­tite social con­sen­sus dia­logue between the gov­ern­ment, the great rep­re­sen­ta­tive unions and the employ­ers’ fed­er­a­tions.22François Man­zari: La crise sidérurgique au Lux­em­bourg 1975–1985,University of Mont­pel­li­er, Mas­ter the­sis (unpub­lished). Social cohe­sion and peace were pre­served by steadi­ly grow­ing state rev­enues from the finan­cial sec­tor and a unique wage raise sys­tem in Europe. In fact, Lux­em­bourg has gen­er­alised, since the 1970s, an auto­mat­ic index­a­tion of wages on the rise of liv­ing costs. The bas­ket of goods to mea­sure the evo­lu­tion of liv­ing costs includes fore­most neces­si­ty prod­ucts such as milk and bread, but also nonessen­tial con­sumer goods such as cig­a­rettes and fuel prices. The advan­tage for the employ­ers is that there is prac­ti­cal­ly no labour action nor any oth­er social unrest in tiny, peace­ful Lux­em­bourg. An index­a­tion of salaries means that wages are auto­mat­i­cal­ly adapt­ed with­out any nego­ti­a­tions if prices rise by more than 2.5 per­cent. No con­sid­er­a­tion of the actu­al eco­nom­ic sit­u­a­tion is tak­en into account. The index­a­tion was tem­po­rary put out of action in the past if infla­tion was so high that a full imple­men­ta­tion of the index­a­tion would have seri­ous­ly harmed the nation­al econ­o­my. But these most excep­tion­al sit­u­a­tions always led to polit­i­cal dis­ar­ray. For the labour unions, the “index­a­tion of salaries” is a “para­mount social acquis” and its “manip­u­la­tion” is unspeak­able.33Onofhängege Gew­erkschafts­bond Lëtze­buerg (OGBL):Jean-Claude Red­ing: Aus­ter­ität­spoli­tik und Sozial­ab­bau führen in eine Sack­gasse, avial­able at http://www.ogb‑l.lu/pdf/publications/aktuell/Aktuell_5_2010.pdf (last access: 19 July 2010); Lëtze­buerg­er Chrëschtleche Gew­erkschafts­bond (LCGB): Von der Tri­par­tite zur Lage der Nation, Sozialer Fortschritt 4/2010, avail­able at: http://lcgb.lu/uploads/magazines/4bd85f14c68262e73901e87de1d7676aa8147d25.pdf (last access: 22 June 2010).

The gov­ern­ment is well aware that times are chang­ing and that even a “par­adise” like Lux­em­bourg has to increase its eco­nom­ic com­pet­i­tive­ness to be able to cope with the most seri­ous eco­nom­ic cri­sis since World War II.44Gov­ern­ment of Lux­em­burg: Dis­cours de Jean­not Krecké, Min­istre de l’économie et du com­merce extérieur à l’occasion de l’ouverture de la Foire du Print­emps, 1 May 2010, avail­able at: http://www.gouvernement.lu/salle_presse/discours/autres_membres/2010/05-mai/01-kreckeluxexpo/index.html (last access: 19 July 2010). How­ev­er, Lux­em­bourg is the only Euro­pean coun­try to have the auto­mat­ic index­a­tion of wages in the pri­vate and in the pub­lic sec­tor. Main­tain­ing the index­a­tion of salaries is an impor­tant part of the gov­ern­ment coali­tion pro­gram; it will be very dif­fi­cult, if not sheer impos­si­ble, for the gov­ern­ment coali­tion to abol­ish this Lux­em­bour­gish speci­fici­ty. But most employ­ers or human resources man­agers – many of them com­ing from for­eign coun­tries – are not so famil­iar with the Grand Duchy’s speci­fici­ties and have lit­tle or no under­stand­ing for a sys­tem with an auto­mat­ic rise of per­son­nel costs not direct­ly linked to an equiv­a­lent gain of pro­duc­tiv­i­ty.55Busi­ness Fed­er­a­tion Lux­em­bourg (Fedil): La Fedil plaide en faveur d’un accord tri­par­tite, Com­mu­niqué, 22 April 2010. As long as the Lux­em­bour­gish eco­nom­ic fig­ures were fixed in the green zone, the employ­ers’ request for an index­a­tion abo­li­tion sound­ed like the “ceterum censeo Cartha­go delen­dam esse”66“Fur­ther­more I think Carthage must be destroyed.” of the Roman politi­cian Cato.

The most recent tri­par­tite nego­ti­a­tions should have come to a con­clu­sion before the Prime Minister’s speech on the state of the nation in ear­ly May 2010. In fact the nego­ti­a­tions end­ed in fail­ure on 27 April 2010, when the Prime Min­is­ter had to take note that no deal was possible.

Prime Min­is­ter Junck­er had iso­lat­ed prepara­to­ry con­sul­ta­tions with all mem­bers of the tri­par­tite nego­ti­a­tions copied from the “con­fes­sion­al method” used in Euro­pean Com­mis­sion nego­ti­a­tions. Although these con­sul­ta­tions were said to be con­fi­den­tial, it was clear that it would be very dif­fi­cult to find a com­pro­mis à la lux­em­bour­geoise in the way com­pro­mis­es had been found in for­mer times when Luxembourg’s “social con­sent soci­ety”77Gilbert Trausch: Dis­cours: De l’Etat à la nation, Lux­em­bourg 1989. was still work­ing per­fect­ly. Now the gov­ern­ment was in very bad shape, as it had to find a solu­tion that would take account of the dra­mat­ic finan­cial sit­u­a­tion of the pub­lic trea­sury and the con­tra­dic­to­ry demands of its social partners.

The inter­na­tion­al eco­nom­ic sit­u­a­tion, in which the microstate Lux­em­bourg is embed­ded, declined dra­mat­i­cal­ly with the Greek cri­sis linked to the Euro cri­sis. Prime Min­is­ter Junck­er, in his func­tion of Euro group leader, had to fight on two fronts at the same time: at home with the social part­ners and on the Euro­pean floor with his Euro coun­try part­ners and the finance mar­kets. Accord­ing to Finance Min­is­ter Pierre Frieden, state rev­enues from the finan­cial sec­tor will be in a free fall in the years 2012 and 2013, when the banks are sup­posed to pay tax­es for the years 2008 and 2009, years when they had no prof­its. Frieden already had to bor­row mon­ey – an unusu­al behav­iour in Lux­em­bourg – to be able to realise the pub­lic invest­ments he had to finance. He intends to bring down pub­lic debt again by 2014. It was the ungrate­ful role passed on to Finance Min­is­ter Frieden to present these cru­el pro­pos­als. Accord­ing to a gentlemen’s agree­ment, the con­tent of the tri­par­tite nego­ti­a­tions are not to be made pub­lic until the very end of the nego­ti­a­tions. This time, the OGBL (the pro-social­ist union) com­mu­ni­cat­ed the con­tent of the propo­si­tions Frieden made in the name of the gov­ern­ment to the press. The mea­sures includ­ed not only a list of reduc­tions of state aids, but also a raise in tax­es and, last but not least, a mod­u­la­tion of the index­a­tion.88The gov­ern­ment decid­ed on a list of mea­sures to increase the state’s fis­cal rev­enues and reduce its spend­ing. See also for details: http://hello.news352.lu/index.php?p=edito&id=34636 (last access: 14 July 2010).

This, eco­nom­i­cal­ly speak­ing, most dif­fi­cult sit­u­a­tion was topped by the seri­ous polit­i­cal cri­sis that fol­lowed. In an inter­view, Luxembourg’s Social­ist Labour Min­is­ter Nico­las Schmit, a for­mer career diplo­mat, declared that the “social cru­el­ties” dis­cussed in the gov­ern­ment had been pro­posed by Finance Min­is­ter Luc Frieden and had not been decid­ed by the gov­ern­ment as whole.99Nico­las Schmit Kein Beschluss der Regierung (inter­view with Min­is­ter Schmit), Tage­blatt, 16 April 2010. This PR action seemed to have been a suc­cess, since his per­son­al rat­ing in pub­lic opin­ion soared and those of the once very pop­u­lar Finance Min­is­ter were squeezed. The com­mu­ni­ca­tion pol­i­cy of the gov­ern­ment was “sub­op­ti­mal”, as Junck­er him­self con­ced­ed. After the next tumul­tuous gov­ern­ment coun­cil, Schmit had to retract and accept that the propo­si­tions made by Frieden were the propo­si­tions of the “gov­ern­ment as a whole.1010Luc Frieden: Vorschläge im Namen der Regierung, Tage­blatt, 26 April 2010. Lead­ing Chris­t­ian Democ­rats called for the res­ig­na­tion of the Social­ist Labour Minister.

In order to get out of the stale­mate, Junck­er made the last com­pro­mise propo­si­tions to the unions:1111Juncker’s com­pro­mise propo­si­tions: Alter­na­tive 1: exclu­sion of the evo­lu­tion of crude oil prices from the pan­el tak­en into account for the index­a­tion. This would be com­pen­sat­ed by free pub­lic trans­port; or alter­na­tive 2: exclu­sion of the mid­dle and high wage class­es from a ful­ly paid index­a­tion of wages. Union lead­ers refused both propo­si­tions right away. Junck­er made no effort to hide his dis­ar­ray and decep­tion. “The unions refused all com­pro­mise propo­si­tions of the Prime Min­is­ter; a dis­il­lu­sioned and angry Jean-Claude Junck­er had to acknowl­edge the fail­ure of the tri­par­tite nego­ti­a­tions.”1212Le Jeu­di: L’échec de Junck­er, 29 April 2010. A most recent pub­lic opin­ion sur­vey has sug­gest­ed a wide­spread approval of these propo­si­tions.1313Lux­em­burg­er Wort: 73% für Index-Deck­elung. Die Vorschläge von Pre­mier Junck­er stoßen auf bre­ite Zus­tim­mung, 30 April 2010.

In the mean­time, the polit­i­cal cri­sis has been shift­ing towards its cli­max. Social­ist Par­ty Chair­man Alex Bodry and the leader of the Social­ist par­lia­men­tary group Lucien Lux had main­tained that an extra­or­di­nary Social­ist Par­ty con­gress should approve or dis­ap­prove the results of tri­par­tite nego­ti­a­tions and the gov­ern­ment was to make a deci­sion fol­low­ing these dis­cus­sions. After a pas­sion­ate dis­cus­sion, the Social­ist Par­ty con­gress approved the gov­ern­ment deci­sions on tax rais­es and low­er­ing state aid pro­grams.1414Lux­em­burg­er Wort: Koali­tions­frieden auf Bewährung. Die Sozial­is­ten seg­nen Maß­nah­men­paket der Regierung zur Sanierung der Finanzen ab. Der Zusam­me­nar­beit von CSV und LSAP ste­hen stür­mis­che Zeit­en bevor, 3 May 2010. The Junck­er com­pro­mise had been pre­vi­ous­ly with­drawn from the con­gress’ agen­da. The influ­ence of the left wing union OGBL among Social­ist con­gress del­e­gates would have been strong enough to veto any deci­sion to “manip­u­late” the index­a­tion. On the oth­er hand, lead­ing Chris­t­ian Democ­rats (par­ty Pres­i­dent Michel Wolter and par­lia­men­tary group Chair­man Jean-Louis Schiltz) reflect­ed in pub­lic on plans to change the coali­tion part­ner. In the gov­ern­ment, the friend­ly atmos­phere among col­leagues seemed to have van­ished: Min­is­ter Frieden had to accept the “dic­tate” of the OGBL.1515Per­son­al inter­view with J. Putz, mem­ber of the Young Chris­t­ian Democ­rats (CSJ) cen­tral com­mit­tee, 6 May 2010. Would Junck­er be ready to cross the Rubi­con and put an end to the rul­ing coali­tion, even­tu­al­ly lead­ing to new elections?

The state of the nation speech of the Prime Min­is­ter on 5 May 2010 was expect­ed with great impa­tience. Junck­er made it very clear to all observers that there was no gov­ern­ment cri­sis in his eyes, because there was no alter­na­tive to the coali­tion in pow­er.1616Cham­bre des Députés: Dis­cours de Jean-Claude Junck­er sur l’E­tat de la Nation, 5 May 2010, avail­able at: http://www.gouvernement.lu/gouvernement/etat-nation/index.html (last access: 22 June 2010). In a non-pub­lic Chrëschtlech Sozial Vollekspartei (CSV) nation­al com­mit­tee, the del­e­gates were con­vinced that new elec­tions could only weak­en the CSV, and the Lux­em­bourg Social­ist Work­ers’ Par­ty (LSAP) would be the old and the new coali­tion part­ner any­way.1717Per­son­al inter­view with J. Putz, mem­ber of the Young Chris­t­ian Democ­rats (CSJ) cen­tral com­mit­tee, 6 May 2010.

Juncker’s speech was very clear. It put a pro­vi­sion­al end to all spec­u­la­tions con­cern­ing the pos­si­ble divorce of the coali­tion part­ners, at least until the next fall. Because Junck­er hand­ed over the “hot pota­to” to the Social­ist Min­is­ter of Econ­o­my Jean­not Krecké, known to have more bal­anced views on index­a­tion, Krecké was giv­en the mis­sion to make new pro­pos­als on how to raise the com­pet­i­tive­ness of Luxembourg’s econ­o­my before next fall.

The polit­i­cal, social and eco­nom­ic cri­sis in the “par­adise” is inter­rupt­ed, but is still await­ing a final solution.

    Footnotes

  • 1dpa: Aufruhr im Paradies – Krise spal­tet Lux­em­burg, 28 April 2010.
  • 2François Man­zari: La crise sidérurgique au Lux­em­bourg 1975–1985,University of Mont­pel­li­er, Mas­ter the­sis (unpub­lished).
  • 3Onofhängege Gew­erkschafts­bond Lëtze­buerg (OGBL):Jean-Claude Red­ing: Aus­ter­ität­spoli­tik und Sozial­ab­bau führen in eine Sack­gasse, avial­able at http://www.ogb‑l.lu/pdf/publications/aktuell/Aktuell_5_2010.pdf (last access: 19 July 2010); Lëtze­buerg­er Chrëschtleche Gew­erkschafts­bond (LCGB): Von der Tri­par­tite zur Lage der Nation, Sozialer Fortschritt 4/2010, avail­able at: http://lcgb.lu/uploads/magazines/4bd85f14c68262e73901e87de1d7676aa8147d25.pdf (last access: 22 June 2010).
  • 4Gov­ern­ment of Lux­em­burg: Dis­cours de Jean­not Krecké, Min­istre de l’économie et du com­merce extérieur à l’occasion de l’ouverture de la Foire du Print­emps, 1 May 2010, avail­able at: http://www.gouvernement.lu/salle_presse/discours/autres_membres/2010/05-mai/01-kreckeluxexpo/index.html (last access: 19 July 2010).
  • 5Busi­ness Fed­er­a­tion Lux­em­bourg (Fedil): La Fedil plaide en faveur d’un accord tri­par­tite, Com­mu­niqué, 22 April 2010.
  • 6“Fur­ther­more I think Carthage must be destroyed.”
  • 7Gilbert Trausch: Dis­cours: De l’Etat à la nation, Lux­em­bourg 1989.
  • 8The gov­ern­ment decid­ed on a list of mea­sures to increase the state’s fis­cal rev­enues and reduce its spend­ing. See also for details: http://hello.news352.lu/index.php?p=edito&id=34636 (last access: 14 July 2010).
  • 9Nico­las Schmit Kein Beschluss der Regierung (inter­view with Min­is­ter Schmit), Tage­blatt, 16 April 2010.
  • 10Luc Frieden: Vorschläge im Namen der Regierung, Tage­blatt, 26 April 2010.
  • 11Juncker’s com­pro­mise propo­si­tions: Alter­na­tive 1: exclu­sion of the evo­lu­tion of crude oil prices from the pan­el tak­en into account for the index­a­tion. This would be com­pen­sat­ed by free pub­lic trans­port; or alter­na­tive 2: exclu­sion of the mid­dle and high wage class­es from a ful­ly paid index­a­tion of wages. Union lead­ers refused both propo­si­tions right away. Junck­er made no effort to hide his dis­ar­ray and deception.
  • 12Le Jeu­di: L’échec de Junck­er, 29 April 2010.
  • 13Lux­em­burg­er Wort: 73% für Index-Deck­elung. Die Vorschläge von Pre­mier Junck­er stoßen auf bre­ite Zus­tim­mung, 30 April 2010.
  • 14Lux­em­burg­er Wort: Koali­tions­frieden auf Bewährung. Die Sozial­is­ten seg­nen Maß­nah­men­paket der Regierung zur Sanierung der Finanzen ab. Der Zusam­me­nar­beit von CSV und LSAP ste­hen stür­mis­che Zeit­en bevor, 3 May 2010.
  • 15Per­son­al inter­view with J. Putz, mem­ber of the Young Chris­t­ian Democ­rats (CSJ) cen­tral com­mit­tee, 6 May 2010.
  • 16Cham­bre des Députés: Dis­cours de Jean-Claude Junck­er sur l’E­tat de la Nation, 5 May 2010, avail­able at: http://www.gouvernement.lu/gouvernement/etat-nation/index.html (last access: 22 June 2010).
  • 17Per­son­al inter­view with J. Putz, mem­ber of the Young Chris­t­ian Democ­rats (CSJ) cen­tral com­mit­tee, 6 May 2010.

The reports focus on a report­ing peri­od from Decem­ber 2009 until May 2010. This sur­vey was con­duct­ed on the basis of a ques­tion­naire that has been elab­o­rat­ed in March and April 2010. Most of the 31 reports were deliv­ered in May 2010.

The EU-27 Watch No. 9 receives sig­nif­i­cant fund­ing from the Otto Wolff-Foun­da­tion, Cologne, in the frame­work of the ‘Dia­log Europa der Otto Wolff-Stiftung’, and finan­cial sup­port from the Euro­pean Com­mis­sion. The Euro­pean Com­mis­sion is not respon­si­ble for any use that may be made of the infor­ma­tion con­tained therein.