The economy of Luxembourg

Abstract

Luxembourg, officially the Grand Duchy of Luxembourg, is a landlocked country located in Western Europe and bordered by France, Belgium and Germany. With a population of just over half a million, Luxembourg is the second smallest EU member state, with only Malta being smaller. Currently, Luxembourg registers the highest GDP per capita in the European Union (EU). Although the recorded history of Luxembourg can be traced back toRoman times, the history of the country is considered to begin in 963 as Lucilinburhuc.1 Over the following five centuries, the powerful House of Luxembourg emerged, but its extinction put an end to Luxembourg’s independence. After a brief period of Burgundian rule, Luxembourg passed to the Habsburgs in 1477 who defended their possessions against the French kings. Revolutionary France annexed Luxembourg, which became the ‘departement des forets’. After the Napoleonic wars, the Treaty of Vienna of 1815 transformed Luxembourg into a Grand Duchy in personal union with the king of the Netherlands. Following the revolution in Belgium of 1830, Luxembourg became a province of the new Belgian state. The territory was partitioned in 1839, with the French-speaking part being incorporated into Belgium while the German-speaking part remained as a Grand Duchy, but with a reduced territory, belonging to the king of the Netherlands and part of the German confederation. In 1842 Luxembourg was integrated into the Zollverein, a customs union with Germany, which offered a large market to the nascent steel industry. After the Franco-German war of 1870-1871, the German empire finally respected Luxembourg’s formal independence while tying the economy closely to German business interests. After the First World War, Luxembourg passed through a period of poli-tical crises, economic turmoil and social unrest, and it had to struggle for its survival once again. It joined into a customs and monetary union with Belgium (union belgo-luxembourgeoise) to open markets for its products, and at that time also joined the League of Nations. After the Second World War, the foundation of European institutions, including the European Coal and Steel Community (ECSC) and the European Community, in the establishment ofwhich Luxembourg was involved, led step by step to the unification of Europe. From that time on, Luxembourg became a member of the European Community (now European Union). The treaty of Rome of 1957 laid the foundation for a true internal market and the Maastricht Treaty paved the way for a true economic union and a common currency. European integration turned out to be the launching pad of Luxembourg’s economic success. This chapter is organized into six sections. Following this brief historicalintroduction, Section 2 outlines economic development in Luxembourg since the 1960s, referring to the transition from steel to finance. Section 3 discusses characteristics of Luxembourg as a small open economy, while the section that follows assesses the benefits of the economy derived from EU membership. Section 5 identifies a number of challenges faced by the economy. Section 6 concludes the chapter.