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Luxembourg - Economy

While Luxembourg is aptly described as the "Green Heart of Europe" in tourist literature, its pastoral land coexists with a highly industrialized and export-intensive economy. Luxembourg enjoys a degree of economic prosperity almost unique among industrialized democracies.

In 1876, English metallurgist Sidney Thomas invented a refining process that led to the development of the steel industry in Luxembourg and the founding of the Arbed company in 1911. Until the economic crisis of the mid-1970s, the steel industry remained the backbone of the Luxembourg economy. It employed a quarter of the working population and was responsible for almost two thirds of industrial production. As the main source of the country's wealth, it was at the root of the high standard of living enjoyed by the Luxembourg people during the industrial era.

Industrialisation changed the demographic and social structures of the country. The farmers of the Oesling, the northern part of the country, abandoned their land to work in the mines and factories. Local labor, however, was not sufficient. From 1890 onwards, emigration practically stopped and Luxembourg became a country of immigration. Foreigners arrived in several waves: first the Germans, then the Italians and, more recently, from the 1960s onwards, the Portuguese. In 1910, immigrants already represented 15.3 % of the total population. Today, they account for nearly 42 %.

The dependency on foreign countries regarding labor, but also capital and markets, remained a permanent trait of the Luxembourg economy. When Luxembourg had to denounce the Zollverein just after the First World War, it formed an economic union with Belgium in 1921. Originally set up for a period of fifty years, yet regularly renewed thereafter, the Belgo-Luxembourg Economic Union (BLEU) established a permanent link between the two countries. The Belgian franc became the common currency, but Luxembourg nonetheless retained its right to issue Luxembourgish money.

After 1945, the Grand Duchy underwent a remarkable economic development, which resulted in a constant improvement of living standards and ensured social peace. Nevertheless, owing to its monolithic economy, Luxembourg was severely hit by the structural crisis that befell the steel industry from 1974 onwards. Between 1974 and 1992, steel production dropped by more than 50 % and the workforce of the steel industry was reduced by two thirds. 1997 saw the closure of the last remaining blast furnace. Only a few modernised sites survived the crisis. Having foreseen this danger, the authorities implemented a policy of industrial diversification from the late 1950s onwards.

Yet in the end, it was the tertiary sector that took over from the steel industry to become the driving force of the Luxembourg economy. The 1960s witnessed the boom of the financial center. The Grand Duchy took advantage of restrictive foreign legislation and the development of the eurodollar market. A multitude of international banks established themselves in Luxembourg. Today, the financial center, which has diversified its activities, represents a fifth of the gross domestic product (GDP), a tenth of national employment and a third of the state tax revenue. The Luxembourg authorities have managed successfully to develop certain promising economic sectors, such as the financial or audiovisual sectors. This is one of the keys to Luxembourg's success.

In 2001, Arbed merged with Aceralia and Usinor to form Arcelor, which was headquartered in Luxembourg. In 2005, Arcelor acquired Canada's largest steel manufacturer, Dofasco. In June 2006, Arcelor merged with Mittal Steel to become Arcelor-Mittal, the largest steelmaker in the world. The company now produces 10% of the world's steel output. The iron and steel industry in Luxembourg comprises approximately 11% of the overall economy.

During the past few decades there has been a relative decline in the steel sector, offset by Luxembourg's emergence as a major financial services center. The overall services sector in 2005 comprised 83.3% of Luxembourg's GDP with it employing, in terms of percentage of workers, 78% of the labor force. The financial sector in 2005 continued to grow and made up 11% of Luxembourg's total labor force making it identical in size to the industrial labor force. In 2006 there were 156 banks in Luxembourg employing 24,752 people. Political stability, good communications, easy access to other European financial centers, skilled multilingual staff, and a tradition of banking secrecy have contributed to the growth of the financial sector. German banks represent the largest number, with Italian, French, Swiss, Belgian, American, and Japanese banks also heavily represented. Total banking assets in 2005 were $1 trillion. The funds industry is the second largest in the world after the U.S. with $2.158 trillion in domiciled funds.

Government policies promote the development of Luxembourg as an audiovisual and communications center. Radio-Television-Luxembourg is Europe's premier private radio and television broadcaster. The government-backed Luxembourg satellite company Société Européenne des Satellites (SES) was created in 1986 to install and operate a satellite telecommunications system for transmission of television programs throughout Europe. The first SES "ASTRA" satellite, a 16-channel RCA 4000, was launched by Ariane rocket in December 1988. SES presently operates 12 satellites. ASTRA 1H is an advanced satellite with a return channel capacity in the Ka band frequency range enabling two-way satellite communications directly to users' terminals.

Luxembourg offers a favorable climate to foreign investment. Successive governments have effectively attracted new investment in medium, light, and high-tech industry. Incentives cover taxes, construction, and plant equipment. The recent European Union (EU) directive on services supplied electronically has caused a number of companies to look to Luxembourg, with its relatively low value-added tax (VAT) rates, as a possible location for directing their European operations. U.S. firms are among the most prominent foreign investors, producing tires (Goodyear), chemicals (Dupont), glass (Guardian Industries), and a wide range of industrial equipment. The Department of Commerce's Bureau of Economic Analysis reports that total U.S. direct investment in Luxembourg (on a historical cost basis) was nearly $72 billion at the end of 2005. Foreign direct investment (FDI) data for Luxembourg must be interpreted cautiously, however, because of Luxembourg's role in financial intermediation, particularly involving Luxembourg-based holding companies.

Labor relations have been peaceful since the 1930s. Most industrial workers are organized by unions linked to one of the major political parties. Representatives of business, unions, and government participate in the conduct of major labor negotiations.

Unemployment in 2006 was 4.5%, up from 3.9% two years earlier. Luxembourg's small but productive agricultural sector employs 1% of the total labor force, a typical figure for a highly developed country. Most farms produce milk, meat, and foraging crops. Timber is another important sector. Luxembourg, being a part of the Moselle region, produces outstanding white wines.

Due to its powerful services sector, Luxembourg maintains a favorable current account balance, with a $4.63 billion surplus in 2006. Government finances have deteriorated over the past few years, with a 2006 budget deficit of $552 million.