Luxembourg's domestic economic policy is closely tied to developments in the EU because most of the country's trade and investments are with other EU states. ARBED, Luxembourg's principal steel making company, saw its profitability fall sharply in the 1970s with the worldwide decline in steel prices. The company was forced to eliminate many of its 27,000 workers. Through restructuring and specialization in customized metals, ARBED has bounced back into profitability, and is now Europe's third-largest steel company. Nevertheless, employment at the company remains low.
With the decline of the steel industry, the government sought to capitalize on Luxembourg's strengths in developing new and viable industries. The country enjoys a central location and high educational standards. Luxembourg's leaders decided in the 1970s to make a concerted effort to develop a service economy, concentrating upon finance, banking, and insurance. Juncker, as prime minister, continued this trend. Luxembourg has low taxes, by European standards, on bank accounts and mutual funds; this draws investments from wealthy but more heavily taxed neighbors, such as France and Germany.
Luxembourg has also had strong confidentiality laws to protect investors from inquiry about their holdings. For a period of time, the laws attracted money from drug cartels, which have sent money there in order to conceal its source, then reinvest it in legitimate enterprises. The Juncker government has supported changes in Luxembourg's confidentiality laws so that judicial investigators may learn the source of investments in order to prevent criminals from profiting by using the country's banking system.
Luxembourg's economy has adjusted from the difficult days of the 1970s to become one of Europe's strongest. Growth rates have been among the highest in the EU, averaging around 5% in 1998 and 1999. Unemployment was only 1.6%, the lowest in the EU. Its economy shifted from dependence on steel to an emphasis on services, notably finance and telecommunications. Luxembourg is now among the world's top 10 financial centers and the financial sector employs approximately 10% of the workforce (20,000 people) and accounts for around one-fifth of national income.
Some Luxembourgers believe that the country's economic wealth has led to an unwanted influx of foreign workers. The EU requires that each member state open its borders and employment to citizens of other EU states. The result has been that wealthy EU states, such as Luxembourg, attract workers from poor EU states where unemployment is high. Many of these workers take low-wage jobs and send their earnings back to their country of origin. There is little evidence as yet that they displace Luxemburgers from jobs. Nonetheless, the presence of large numbers of foreign workers—one estimate places the figure as high as 30% of the population in 1994—brings a clash of cultures. A challenge for the Juncker government will be to insure that native Luxemburgers and foreign workers live in harmony.