Luxembourg is a constitutional monarchy, known formally as the Grand Duchy of Luxembourg. The nation's head of state is the grand duke, a position based on heredity. Since October 2000 the country has been led by Grand Duke Henri. The grand duke's powers are mainly formal and ceremonial, with real power resting in the hands of the prime minister, whom he appoints from among the leading party members in the elected Chamber of Deputies. The prime minister appoints a cabinet known as the Council of Ministers. There is a unicameral (single house) legislative body, the Chamber of Deputies, which has 60 members elected by direct popular vote every 5 years. Voting is compulsory. There is also a 21-member Council of State whose members are appointed for life and whose main purpose is to advise the Chamber of Deputies and the grand duke on issues such as judicial appointees. The nation's government is based on the constitution of 1868 and its subsequent amendments. Local government consists of 3 districts, which are subdivided into smaller cantons and communes. These bodies are responsible for public works, health care, and education.
The country is a member of the North Atlantic Treaty Organization (NATO). In 1998, the government spent US$131 million on defense. Luxembourg has an army, but no navy or air force. The 500-member military force is made up entirely of volunteers and its troops have served in NATO peacekeeping operations in the former Yugoslavia.
The Grand Duchy has been one of the most stable democracies in Europe. There are 3 main parties (the Christian Socialists, the Socialists, and the Democratic Party), and governments are usually formed from a coalition of 2 of the major parties. All parties, including the Socialists, have supported pro-business policies.
There is a close relationship between the nation's government and business and workers. Before legislation is passed, 1 of 3 advisory bodies is consulted. Labor legislation is discussed before 6 confederations, representing business, guilds, farmers, unions, and civil servants. The Social and Economic Council examines broad economic policies, and the Immigration Council advises the government on issues such as immigration or housing.
A strict fiscal and monetary policy has delivered a yearly budget surplus . In 2000 government revenues were US$4.73 billion, while expenditures were US$4.71 billion, making for a strong economy that allows Luxembourg to avoid significant debt while providing generous social policies. Luxembourgers enjoy the highest standard of living in the EU. Medical fees are low, and the national social security system covers sickness and maternity benefits, retirement pensions, family allowances, and accident and unemployment insurance. Each category of coverage is overseen by public institutions independent of the government and supervised by an elected board of representatives. There have been shortages of housing for immigrant workers, but government programs have been implemented to increase affordable homes.
Government policies are pro-business and favor tax reductions. In 1998, the total tax rate was 37.45, composed of a 30 percent corporate tax and municipal business tax. This system included a personal income tax , a corporate tax, a corporate capital gains tax, and municipal business taxes. Later, the government eliminated the corporate capital gains tax, decreased personal income tax by 15 percent, and plans to reduce the company tax to 35 percent by January 2002. A potential problem for Luxembourg involves EU policy that calls for the standardization of national taxes and economic policies. If adopted, these measures would force Luxembourg to levy corporate taxes that it previously did not impose. Furthermore, the Grand Duchy has already agreed to repeal laws on banking secrecy, which may lessen its attractiveness as an international banking center.
Conversely, continued EU integration offers advantages to Luxembourg. The country has supported the establishment of a common retirement fund for all EU member states and, because of its financial status, would be the likely beneficiary of such a policy. The government also advocates increased use of the Internet for business purposes and financial transactions. It has championed EU efforts to promote the World Wide Web, offering tax incentives for the creation of new Internet companies. Luxembourg was the first EU nation to meet the standards for adopting the euro, the common European currency that will make currency conversions unnecessary between member nations and result in less complicated financial transactions.