Luxembourg - Overview of economy

Since World War II, the economy of Luxembourg has been marked by high income levels and low unemployment. For most of this period, the iron and steel industry dominated the economy, accounting for as much as 80 percent of the nation's wealth during the 1960s. Banking and financial services are now the main considerations in the economy. In 1999, the unemployment rate was the lowest in Europe at 2.9 percent, and the inflation rate was only 1.1 percent. Meanwhile, the nation's GDP has grown about 5 percent per year since 1985.

Luxembourg's economic success has been due to its adaptability and the skills of its people. As the steel industry declined, the economy shifted to other enterprises, and current prosperity is based on a combination of industry, a small agricultural sector, and a growing import-export economy based on financial services. Economic diversification has resulted in the expansion of small to medium-sized companies.

The nation has one of the world's most educated labor forces , and the multilingual ability of most of the population is an incentive for foreign companies to invest or relocate there. While there are no 4-year universities in Luxembourg, there are 6 major universities in the region and 500 laboratories, and the government subsidizes those students who go abroad to complete their education. The nation's superb infrastructure also adds to its attractiveness, as do the sound relations between labor and industry.

As the steel industry declined in the 1970s, Luxembourg restructured its steel producers into a single entity, ARBED, a multinational group which is among the most important steelmakers in the world. Steel still accounts for 29 percent of the exports, 1.8 percent of the GDP, and 3.9 percent of employment. The government owns just under one-third of ARBED, and since 1974, it has set up reforms and modernization initiatives and assumed parts of the group's debt. The company is the second largest steel producer in Europe and one of the most productive in the world.

With the decline of the steel industry in the 1970s, the government undertook several programs to diversify the economy. A significant aspect of this diversification effort was the promotion of the financial sector. By the 1980s, the nation emerged as one of the world's premier banking centers, and by 1996 there were 222 banks in the country with 21,458 employees (9.5 percent of the workforce). Total assets exceed US$200 billion, with 81 percent of funds in foreign currencies. U.S. dollars and German marks are the primary denominations held in Luxembourg banks. Luxembourg's attractiveness as a financial center has prompted companies, such as Goodyear, Du Pont, and General Motors, to build factories there. The nation's investment fund sector is the second largest in the world (behind the United States) and accounts for 20 percent of Europe's total investments. This sector is at the forefront of new services, such as e-commerce . There are also more than 9,000 foreign holding companies in Luxembourg, and the European Investment Bank, the main financial institution of the European Union (EU), is located there.

Successive governments have enacted policies and adopted many programs to encourage foreign investment and attract foreign businesses. Examples of such policies include cuts in company tax, abolition of corporate capital gains tax, and tax credits for new products and services. Administrative reforms have reduced bureaucratic impediments to business, with relevant agencies and bureaus placed under one coordinating body. This arrangement hastens paperwork and permits, making it easier for new companies to establish themselves. The nation's banking secrecy laws also appeal to foreign investors, but problems with money laundering have led to efforts to compromise between privacy and the need to prevent criminal activity. The laws continue to allow Luxembourg to remain a tax haven for foreign investors. These government programs have been successful. For instance, outside of North America, Luxembourg has the largest U.S. foreign direct investment on a per capita basis.

The government has encouraged the development of audio-visual and communications sectors, and media services have become the second most significant sector in the diversification program. The government-backed company, Société Européenne des Satellites (SES), operates 5 satellites, and Radio-Television Luxembourg is 1 of the continent's leading private radio and television broadcasters.

A continuing problem for the economy of Luxembourg is energy. The nation has few sources of energy other than timber, and 95 percent of electricity is imported. The country chooses not to construct nuclear energy plants. Oil, coal, and natural gas fuels are imported. Thus, Luxembourg is dependent on foreign sources of fuel.

Luxembourg has been a strong supporter of economic integration. For 80 years, Luxembourg and Belgium have been joined under the Belgian-Luxembourg Economic Union (BLEU) which provides for an interchangeable currency and a joint customs union. Along with the Netherlands, these 2 nations also form the Benelux Economic Union which integrates cross-border trade. The most significant aspect of Luxembourg's pro-integration policies has been the nation's support for the European Union (EU). The EU has eliminated trade barriers, such as tariffs , among its member states (numbering 15 in 2000), and helped to coordinate external trade practices. Luxembourg also supports the European Monetary Union (EMU), which will replace the national currencies of the EU with a common currency, the euro.

Luxembourg is a net donor of foreign aid, to which it contributed US$160 million in 1999.

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