LUXEMBOURG, May 1: When the Luxembourg Central Bank opens its doors later this year it will be a bittersweet moment for a country that has had practically no influence over the value of its currency for most of its modern history. For the first time since the Grand Duchy entered a monetary union with Belgium in 1922, it will have a say, albeit diluted within the European System of Central Banks (ESCB), over credit policy.But the imminent arrival of European Economic and Monetary Union (EMU), which the central bank will herald, could paradoxically have a far-reaching impact on Luxembourg's banking industry, cornerstone of its economy.
If the European Central Bank opts to use minimum reserves, as many expect, Luxembourg's banks will lose a competitive edge they have had for decades.The indexation of wages and budgetary expenditure could also eventually be called into question, should competition hit the economy hard.
Who will head the Luxembourg Central Bank (LCB) and other key decisions, such as thelevel of the new institution's foreign exchange and gold reserves, still have to be taken.
What is clear is that Luxembourg, hitherto a minor player in the setting of monetary policy in the world's second largest economic zone, is about to become an equal partner with all the attention that will command.
It has been more than a century since Luxembourg last had a stab at setting up a central bank. That attempt was crushed by competition from commercial rival Banque Internationale a Luxembourg (BIL) over bank note issuance.The decision to have another go now was prompted by the European Union's Maastricht Treaty on EMU, which spelt out that each country must have an independent central bank to meet the currency club's entrance criteria.
Luxembourg was the first country to respond to the treaty by bringing forward draft legislation, elevating its monetary institute (IML), set up in 1983, to full central bank status.
But the legislation remained stalled in parliament and government corridors until lastyear, when it became clear that EMU was a real prospect.
The law adapting the IML's statutes was finally adopted on March 26, one day after the European Commission recommended 11 countries, including Luxembourg, launch EMU on January 1, 1999.
The law will take effect on the first day of the month after its publication, expected to be in the near future.
"It could happen on May 1, June 1 or July 1," Jean Guill, one of the IML's three directors, told Reuters in an interview. "It cannot be later than July 1," he added, referring to the legal deadline in the Maastricht Treaty for setting up the European Central Bank.
The new law's arrival will end all existing IML directors' mandates, including that of director general Pierre Jaans, 61, one of the most senior monetary figures in Europe.
The Luxembourg Central Bank will also be managed day-to-day by a three-strong executive board.
A six-member supervisory council (the IML had a seven-member council) must also be appointed. Political sources saidfurther legislation may be adopted to address concerns raised in the European Monetary Institute's EMU convergence report about this body's independence.
Whether Jaans will continue as central bank governor, or if someone else takes Luxembourg's seat on the ECB governing council, has not been decided, government officials said.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
