The phantom giant of Luxembourg

Published in Business Spectator (Melbourne), 30 June 2011

If there has ever been a country routinely punching above its weight it is Luxembourg. And if there has ever been a politician with an influence grossly disproportionate to his country’s power, it is Luxembourg’s interminable prime minister Jean-Claude Juncker.

In terms of size and population the tiny country squeezed between Belgium, France and Germany is broadly comparable to the Australian Capital Territory. Of the European Union’s 493 million people, only 0.09 per cent hold a Luxembourg passport. The two London boroughs of Hackney and Barnet are more populous than the whole country. Yet Luxembourg is not only the seat of several EU institutions – its prime minister, Juncker, is also one of the most formidable power brokers in the euro crisis.

As the Luxembourg tail continues to wag the EU dog, its policies would deserve greater scrutiny – a scrutiny it usually escapes. Instead, Prime Minister Juncker, who has been in office since 1995, enjoys his status as the living embodiment of European unification. And he displays all the features that turn ordinary Europeans off the EU project.

When the predecessor organisation of the EU, the European Economic Community, was established in 1957, Luxembourg was one of its founding members. It soon seized its role as a hinge between the heavyweights France and Germany. Indeed, both French and German are official languages of Luxembourg, and to be extremely familiar with French and German domestic affairs has long been one of the most important responsibilities of Luxembourg prime ministers.

Luxembourg does not derive its political power from either size or genuine importance. In fact, it has none of them. But Luxembourg’s political class, its administration and its diplomacy have certainly learned how to play European politics. For a country as minuscule as Luxembourg it would look silly to engage in confrontational games. And so instead, Luxembourg has played the role of a European model student. Charmingly showing the willingness to compromise while mediating between much greater powers, Luxembourg in the end always had its way.

The diplomatic finesse of Luxembourg is legendary. There are whole Ph.D. theses devoted to finding out how Luxembourg managed to win over its far more powerful neighbours. In Punching Above its Weight? A Case Study of Luxembourg’s Policy Effectiveness in the European Union, political scientist Martine Huberty from the University of Sussex just presented the most comprehensive analysis yet of Luxembourg’s role within the European Union. One of her conclusions was that Luxembourg’s effectiveness owed much to the personality of its political leaders, not least its prime minister.

Among EU circles, Juncker has acquired the image of a fixer, someone you can rely on to bring diverging interests to an agreement when everything else fails. In this way he facilitated an agreement on the final formulation of Europe’s Stability and Growth Pact in 1996 – not that this treaty has ever been obeyed by anyone afterwards. Juncker also chairs the so-called ‘euro group’, an informal conference of finance ministers of the eurozone.

However, Juncker’s prominent role in European monetary affairs is not uncontroversial. Professor Hans-Werner Sinn, head of the Ifo research institute in Munich, recently criticised that Luxembourg could not pretend to be an impartial arbiter in the euro crisis since its financial sector was extremely vulnerable to external shocks.

According to Sinn, the balance sheets of Luxembourg banks are equivalent to eighteen times Luxembourg’s annual economic output. Little wonder, then, that Juncker was constantly pushing for a bailout of the European financial system. Few other countries would be as hard hit by a banking crisis as Luxembourg, and so for Luxembourg it is far more desirable to have that risk averted by other countries’ taxpayers.

Talk of European solidarity always sounds a bit hollow when it originates from Luxembourg. Juncker loves emphasising the value of European coordination but usually forgets to mention that his own country stands to benefit most from it. Last year, for example, Juncker was one of the most vociferous proponents of joint eurobonds. Such bonds would have bundled the default risks of all EU countries, so in effect countries with a better risk profile would have subsidised higher risk countries through a common interest rate.

It was cheeky for this proposal to come out of Luxembourg. Luxembourg hardly has any public debt and so it would not have felt higher refinancing costs on its own borrowing. Calling for eurobonds was cheaper for Luxembourg than contributing to a direct bailout mechanism. And of course it sounded much more idealistic, pan-European and noble. Just the kind of gesture politics that won Jean-Claude Juncker many of his international awards and honorary doctorates.

It is this shrewd diplomacy for which Juncker has made a name for himself. Unfortunately, his preference for backroom deals does not square with the most basic principles of democratic and transparent government that European leaders usually like to talk about. Juncker’s open admissions about his (lack of) understanding of democratic process are legendary.

After Dutch and French voters had thrown out the proposed EU constitution in referenda, Juncker boldly declared “I do not believe the French or the Dutch voters rejected the European constitution”. He suggested the two countries should re-run the referenda until they came up with “the right answer”. At the time, The Economist magazine was so impressed by Juncker’s reasoning that it wanted to award him “the Louis XVI prize, for being out of touch”.

Perhaps Juncker’s most notorious explanation of decision-making in Europe dates back to the late 1990s: “We decide on something, leave it lying around and wait and see what happens. If no one kicks up a fuss, because most people don’t understand what has been decided, we continue step by step until there is no turning back”. That’s democracy EU style.

Just a few weeks ago, Juncker made it clear that his philosophy was still the same. “I am for secret, dark debates between a few responsible people”, he told a gathering in Brussels and admitted that he often had to lie in order not to feed rumours. He must have been unaware that the meeting was recorded and a video of it soon appeared on YouTube. But at least Juncker seemed conscious of his public image: “I’m ready to be insulted as being insufficiently democratic”.

Looking at the history of the euro crisis, with its endless crisis summits and secret diplomacy, it is impossible to overlook the handwriting of euro group chief Jean-Claude Juncker. By confusing Luxembourg’s interests with an imaginary European ‘reason of state’, Juncker is one of the main culprits for Europe’s sad state of affairs, both economically and politically. The tail is wagging the dog to death.

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