Luxembourg’s financial sector is calling for an EU that is more focused on competitiveness after European elections on 6-9 June. “Although the quest for regulatory freedom is understandable, it will probably come up against the imperatives of state financing”, Bruno Colmant said in an interview. Colmant is an economist and member of the Belgian Royal Academy (Académie royale de Belgique), and former CEO of ING Luxembourg, the Brussels Stock Exchange and Degroof Petercam. Greater state control of the European banking sector is inevitable, Colmant stated.
Guillaume Meyer: What do you see as the main issue in the European elections?
: These elections are crucial for Europe, at a time when the war in Ukraine and Trump’s potential re-election are influencing the global political landscape. These elections can either strengthen Europe or weaken it further by exposing political fissures. The challenge is to maintain unity in the face of three sources of dissension, not only in the East with Putin and in the West with Trump, but also within Europe itself, between extremist and moderate parties.
Where do you see the main challenges for the financial sector?
In this respect, the implications of these elections are not immediately obvious, but they are potentially significant. The European Central Bank has played a major role in refinancing governments over the last dozen years. The next step is to strengthen the European capital market, especially in the bond sector, and to deepen European banking union. These aspects are fundamental to solidifying our monetary zone.
Luxembourg’s financial sector fears over-regulation by the EU. Is this an issue in these elections?
It’s a real issue in many areas. In the field of artificial intelligence, no sooner had ChatGPT emerged than the EU was already starting to regulate these technologies. Our reflex seems to be to regulate before encouraging innovation. In the banking sector, the measures taken in the wake of the 2008 crisis were essential, but we shouldn’t push regulation to the point where it harms competitiveness, particularly when it comes to cross-border mergers and the consolidation of financial companies.
Should the focus be shifted more towards competitiveness?
I think it’s time to rebalance priorities to boost competitiveness, without going back on the achievements of prudential regulation. My experience on the Belgian stock exchange and in the banking sector has obviously left its mark, especially when we saw four Belgian banks fail in a short space of time. Faced with this failure of the banking sector, government intervention was justified.
Piketty revealed a trend that will only increase with advances in AI.
The Luxembourg Bankers’ Association (ABBL) has called for , to move from a compliance-based approach to one based on competitiveness. Do you agree?
I’m fairly cautious on this point. The taxation of capital is likely to become a major focus, in response to social and societal demands in the face of the dehomogenisation of the middle class. In this sense, increasing tax freedom could run counter to global historical trends. Overall, corporation tax has fallen significantly since 2008: it currently stands at between 20% and 25% depending on the country. It is unlikely that these rates will fall further. On the contrary, I expect corporate taxation to rise.
What can we expect in terms of capital taxation?
Capital income is taking an increasing share of global GDP, at the expense of labour income. Our current tax systems are mainly based on levies on labour, which creates an imbalance. With the development of AI and digitalisation, which are likely to accentuate this trend, we need to consider shifting some of the tax burden from labour to capital. This shift is almost intuitive and will become necessary to distribute the productivity gains generated by capital more fairly.
Do you agree with Thomas Piketty?
This is indeed a reality that Piketty had already highlighted in an almost prophetic way about ten years ago. Despite some miscalculations and debates about his methods, he revealed a trend that I believe will only increase with advances in AI.
Faced with accumulating public deficits, we are entering an era of financial repression.
Are the banks’ financing of the economy, and of the environmental transition too, undermined by all this regulation?
No, I don’t think so. On the contrary, it is likely that banks will be subject to increased government control for two main reasons. Firstly, the need to finance the environmental transition requires huge amounts of capital, which will necessitate a redirection of savings. Secondly, some countries, previously dependent on ECB funding for their public debts, now need to find new sources of finance. This situation could lead to a form of economic dirigisme in which governments direct public savings towards their specific needs.
Would you like to see this kind of state intervention?
No, I see it as inevitable. Faced with accumulating public deficits and an ageing population, which contributes to public debt, we are entering an era of financial repression. Interest rates will remain extremely low, and savings will be channelled–more or less forcibly–into government financing. In my opinion, the banking sector will become increasingly state-run, as I explain in my book “La Monnaie” [published by Fayard].
How should banks react to this prospect of a loss of autonomy?
Although their resistance is understandable, banks must recognise that they will inevitably come up against the welfare state funding model. The European economy is based on a principle of prudence and on honouring social commitments such as pensions, retirement and sickness cover. This means that banks are inevitably subject to strict regulations. The high level of supervision and control is basically the price we have to pay to avoid even greater public oversight. Even so, after the 2008 crisis, the banks escaped having a government commissioner on their board of directors…
By jeopardising their own balance sheets, the banks almost killed the currency in 2008.
The EU’s desire for greater strategic autonomy, including in financial services, is worrying the financial community. One example is the British clearing houses, which currently enjoy equivalence but which the European Commission wants to do away with as quickly as possible. What are your views on this?
I’m against the idea of strategic autonomy in financial services. This could lead to market fragmentation, reducing the liquidity and diversity of financial services in Europe. London’s financial markets are more liquid and diversified than those on the European continent, and by seeking to isolate itself, Europe risks losing competitiveness. Maintaining close links with other global financial centres is essential if the sector is to prosper.
The question of a European financial market supervisor–as part of the capital markets union–has given rise to a . Are the financial community’s criticisms legitimate?
Centralisation is inevitable for a unified capital market, as we see with the ECB and its supervision of systemic banks. Although banks may take a dim view of this centralisation, it is important to remember that through the credit multiplier, banks create money, a public good backed by the confidence of the state. Consequently, appropriate regulation is necessary to preserve this confidence and therefore the stability of the system, especially after the flaws exposed in 2008. By jeopardising their own balance sheets, the banks almost killed the currency!
You make a lot of reference to 2008. It seems like a long time ago now…
Absolutely not. The effects of the 2008 crisis are still very much with us, particularly in the perception of systemic risks. I remember a conversation with the Belgian prime minister at the time, Herman Van Rompuy, who told me that governments would never forgive the banks for the mistakes of 2008. That crisis was a turning point towards an era of increased regulation to prevent a systemic risk similar to the one we faced during that period. Crises of this nature are seminal and can redefine entire sectors for decades to come, just as the 1929 crisis did.
Originally published and translated for Delano
