How does one introduce Edmond Israel adequately? His career has been long and his achievements legion. And yet the honorary president of Clearstream International retains an eye for the financial world that takes in the analytical qualities of the philosopher and the ability to spot a gap of the physicist.

It is a potent combination that can be explained by his attitudes to change and knowledge. Israel is keen to look to the future and applying lessons learned to the formation of new thinking. The man who is as responsible as any for Luxembourg’s major role on the world financial stage proposes a new approach, which he describes as being “in opposition to the traditional economic theories which failed to anticipate the crisis in which the whole world is now plunged.” 

Uncertainty is a key issue: Israel quotes Nassim Nicholas Taleb by stating that “man does not know what he does not know,” and this is a thought that informs Israel’s view on emerging from the crisis for the world, but also for Luxembourg. He is keen to stress that there is an inbuilt uncertainty in an economic reality, just as there is in any phenomenon in nature.

The measures taken in the future will have to safeguard against this inbuilt uncertainty. But that is not all. The past is not a sufficient tool to predict the future, just as the distortion of history can warp the view of the present. He also highlights the global nature of the crisis and the necessity for an all-encompassing, holistic global effort to emerge from it, as well as trying to prevent it happening again.

Worldwide fiscal reform?

“Any link between the arbitrary colour-coded groupings of possible tax havens and banking secrecy and the crisis is preposterous,” says Israel about the grey-list, what seems like an OECD vendetta and impotent exercise in finger-pointing. From the fallout of the crisis, as well as a shift in prevailing thought, Israel believes economic policy has come around to a new way of thinking that takes a more global approach.

But what of Luxembourg’s place in the world-wide market? It plays a small part, but “an important part as far as our financial centre is concerned,” which Israel thinks is a potential reason Luxembourg provokes jealousy and is sometimes viewed by larger nations as “a very convenient scapegoat.” So bearing in mind his belief that banking secrecy as a root cause of the crisis as ridiculous, yet the small size of this nation on a world scale, what can be done? “We must not be silent, defensive or evasive. This is not the Luxembourger’s way of acting. If it was, we Luxembourgers would not exist anymore,” he says bluntly.

Luxembourg has been an economic success that transcends its own borders, and while it should make concessions where they are justified, it should also hold on to the fundamentals important to it. As an example, Israel cites taxation: “foreign customers banking in Luxembourg bring more taxes to their country of residence than if they chose to bank elsewhere and avoid taxes completely. And we should not forget that countries around the world offer tax breaks to high net-worth individuals. I am not merely referring to so called tax-havens.”

Impasse can be avoided but only through global negotiation involving all nations and their sovereign territories, and taking into account the widest range of fiscal advantages both actual and potential. But such a global negotiation cannot take place without proactivity, and Israel suggests that Luxembourg “takes the initiative and lead for a global conference aiming at an equitable and transparent tax system, under the authority of a specific international body, and dealing with a whole spectrum of taxation schemes and gimmicks.” Naturally, countries on the so-called OECD white list compiled by the G20 should also take part...

Refining the “Luxembourg Mentality”

“We have to remember the traditional values of the Luxembourg mentality: security first and security always.” What is paramount is a high level of risk awareness. He states that the crisis is “deeply rooted in the reckless way the business of banks has been conducted over a number of years: profit hunting at any cost.”

This attitude, as well as perhaps being blind to external factors, is unsustainable on a macro and microeconomic level. Israel draws a contrast between the recent cavalier approach to subprime rates in the United States and the traditional Luxembourg way to do business, and believes this is where opportunities could lie for Luxembourg in the future: the maintenance of traditional attitudes to business here, allied with risk awareness and “at the same time adapting constantly to the changes appearing on the international financial scene and fostering an entrepreneurial spirit.”

This can help Luxembourg maintain and develop in major activities in private banking, asset management and especially the investment fund industry. A key element to the crisis has been a change in mentality towards a measured approach. Things will never be the same as they were in the lead up to the current situation. They must not be. A feeling of caution should become a global norm, and this can benefit Luxembourg as a traditionally non-extreme financial centre. The expertise and spirit are both already here. As attitudes fall more into step with Luxembourg’s, the financial centre here can have an advantage. And what of the unknown? Well, that will affect everyone: as Israel insists, “life is a risky business...”