The Luxembourg Presidency of the Council of the European Union 2005

The Luxembourg Presidency of the Council of the European Union 2005

URL (Internet address) : http://www.eu2005.lu/en/savoir_lux/politique_economie/origines_diversification/

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Diversifying economic activities in Luxembourg

Barely 150 years ago, Luxembourg was one of the most impoverished regions in Europe:

  • a territory obliged to pay taxes to a foreign sovereign;
  • farmers forced to emigrate due to the poor soil;
  • a capital city used as a fortress by successive foreign masters (Spanish, French, Austrian and Prussian), and thus unable to develop as a residential, university or business centre.

Since then, a great deal of water has flown under the bridges of the Alzette, Sauer, Wiltz and Moselle. Today, Luxembourg is at the centre of one of the wealthiest and most dynamic economic regions in the world. At the heart of the economic core of the European Union, between London and Milan, Frankfurt and Paris, the country has now become a world-renowned centre of finance and technology.

Luxembourg has prospered thanks to:

Poor but sovereign nation

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In densely wooded Luxembourg, as in the neighbouring regions of the Ardennes in Belgium and the Eifel and the Hunsrück in Germany, agriculture was scarcely profitable, the soil poor and the villages small and impoverished. During the 19th century, tens of thousands of Luxembourgers were obliged to leave their homeland to seek their fortune in the New World.

The increase in national prosperity paralleled the long but ultimately successful road to national independence. Key stages in this process were the:

  • Belgian Revolution of 1830, detaching Belgium (and the Province of Luxembourg) from the Netherlands;
  • separation from Belgium of the German-speaking part of the Province of Luxembourg in 1839, establishing the King of the Netherlands as Grand Duke and setting the country’s independence and current borders;
  • Treaty of London in 1867, which sought to prevent war between France and Prussia, and stipulated the dissolution of Luxembourg’s fortifications and the country’s independence and neutrality;
  • severing of monarchical ties with the Netherlands in 1890 and the installation of an independent ruling family (the House of Orange-Nassau).

Rapid industrialisation (until 1914)

Accession to the German Customs Union in 1842, and the discovery of rich iron ore deposits in the south of Luxembourg in 1843, laid the basis for industrialisation. Established in 1834 and led by Prussia, the German Customs Union was an association of German states seeking to achieve economic union. Luxembourg’s iron and steel production rose continually, reaching 1.1 million tonnes per year by the First World War. Rail construction in the 1860s and 1870s, the influx of foreign (notably German) capital and a wave of immigration led to fundamental changes in the country. However, between 1840 and 1907, some 80,000 Luxembourgers emigrated.

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Despite foreign pressure, the government ruled in 1880 that all iron ore mined in the south of Luxembourg also had to be processed within the country. This decree, which showed the confidence of the young nation, led to an increase in the proportion of workers in industry and mining from 20% in 1870 to 40% in 1907. The population was concentrated largely in the south of the country (Canton South and Luxembourg City), where 45% of the entire population was living by 1914 (compared to 26% in 1880).

Faced with this rapid economic development, the mines and steelworks were obliged to recruit foreign engineers and workers, who came first from Germany, then from Italy. By the First World War, foreigners represented 15.3% of the population. Agriculture also benefited from this development owing to a special purification process. Phosphate-rich Luxembourg iron ore ("minette") produced a highly effective fertiliser (Thomasmehl) as a by-product which was made available to farmers.

By 1914, the road and rail network was well developed, the connection with the German economy ensured a market for the steel industry, and a series of consolidations and mergers in 1911/1912 led to the foundation of ARBED (Aciéries réunies de Burbach-Eich-Dudelange). The company would put its stamp on the economy of the Grand Duchy throughout the 20th century.

Economy in troubled times (1918-1945)

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The economic upswing was abruptly halted by the First World War, violating Luxembourg’s neutrality with the invasion of the German army. The High Command controlled the French front from Luxembourg for four years. After the defeat of the German Reich, Luxembourg withdrew from the German Customs Union and, having first been rebuffed by France, formed a customs union with Belgium (UEBL - Union économique belgo-luxembourgeoise). The disappearance of the German market and the withdrawal of German capital led to radical changes in Luxembourg’s industry and foreign trade. The steel industry was now in Belgian, French and Luxembourg hands.

During the interwar years, struggles for workers’ rights brought significant social reforms. Eight-hour working days, unemployment and sickness benefits, old age pensions, the introduction of workers’ committees (the Conseil national du travail and the Chambre de travail) and a number of collective agreements all laid the groundwork for a stable relationship between employers and workers. But the Depression in 1929, the political instability of the 1930s and the outbreak of the Second World War brought the Luxembourg economy to the brink of disaster. While average GDP in the interwar years grew by 1.6% annually, the population stagnated at around 260,000. During this period, foreign workers were a regulatory force in the labour market. Their numbers varied due to the economic situation in the steel market and industrial labour requirements.

Diversification and stabilisation (to 1975)

Luxembourg suffered heavy damage even in the last weeks of the Second World War. During reconstruction, the economy slowly began to take a new direction. Transatlantic ties made during the war led to investment and the installation of physical plants by a number of leading American firms. The Goodyear tyre company, which opened its Colmar-Berg plant in 1951, and the chemicals giant Du Pont, which has served the European market from Contern since 1962, are two of the largest companies. Subsequent investors included Astron (in Diekirch), a leader in steel buildings; Monsanto (in Wasserbillig), the biotechnology giant; Husky (in Dudelange), injection moulding systems; and Guardian Luxguard in Bascharage. The canalisation of the Mosel, the construction of an international airport and the electrification of the rail network were further developments.

Agriculture declined economically from the 1960s, with the service sector (and the civil service) representing 40% of GDP - a growing tendency.

The media concern RTL (CLT) acquired a prominent position. Having broadcast radio programmes from Luxembourg before the war, its increasing output in both French and German made it one of Luxembourg’s leading sources of tax revenue from the 1960s onwards.

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An indication for Luxembourg’s successful future as a financial centre came in the 1960s, when American banks utilised the country’s liberal legislation to play the Eurodollar market. Thus began Luxembourg’s rise to become the seventh most important financial centre in the world. 

Another decisive decision for the Grand Duchy’s economy was the government’s wholehearted support for European union. As a founding member of the European Coal and Steel Community in 1952, and the European Economic Community in 1957 (the forerunners of the European Union), Luxembourg took early advantage of the economic and political stability following these initiatives. A number of important European institutions, including several departments of the Commission, the Secretariat of the European Parliament, the Court of Justice, the Court of Auditors and the European Investment Bank, were established in Luxembourg, bringing the international dimension which would prove highly advantageous to the country’s situation.

Rise, fall and reorientation of the Luxembourg steel industry

Throughout the 20th century, the Luxembourg economy was influenced by the steel industry. Between 1950 and 1974, raw steel production rose from 2.45 to 6.45 million tonnes per year. In 1975, 25,000 people worked in mining and steel production, representing 16% of the active working poulation. By 1970, foreign immigrants formed 21% of the working poulation.

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However, the first oil crisis in 1973, the shock to the world economy and the subsequent crisis in the European steel industry suddenly jeopardised this pillar of the Luxembourg economy. The answer was a collective, national effort to save the industry. Regular meetings of government, employer and worker representatives were institutionalised (the ‘tripartite model’ or ‘Luxembourg model’), whereby all parties united to find common strategies to combat the crisis. Social programmes, voluntary redundancies, early retirements and government retraining schemes halved the workforce by the mid-eighties without significant social tensions. The last mines were closed, and steel production halved. Via the Société nationale de crédit et d’investissement, the state became the majority shareholder in ARBED, and a thorough modernisation of the plant was consequently financed. Old blast furnaces were gradually replaced by ultramodern electric steel plants, converting scrap metal into raw material.

By the 1990s, ARBED had secured its position and was again set to expand internationally. In 2002, it merged with Aceralia of Spain and Usinor of France to form the world’s second-largest steel concern, Arcelor, with its headquarters in Luxembourg.

Boom town and financial centre (1980-2000)

Emerging from the crisis, the Grand Duchy experienced a second economic boom in the 1980s. The financial sector was the driving force behind this upswing and the rapid change to a service economy. Growth rates well above the EU average brought the population greater material wealth and social security than ever before.

After the first American banks discovered the benefits of Luxembourg as a base to develop the so-called Euromarket, Scandinavian and then German banks took up significant positions in this growing financial centre in the 1970s. In reaction to the tax policies of neighbouring countries, the focus of activity shifted in the 1980s and 1990s to private banking. At the same time, the investment fund market was developing and Luxembourg played a leading role by swiftly implementing European directives. After the United States, Luxembourg is now the second most important centre in this market worldwide, managing funds with a combined value of over EUR 1,000 billion. Insurance and re-insurance companies are also key players in the Luxembourg market.

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At the end of 2004, some 22,500 people (10% of the national workforce) were employed by banks and insurance companies. If we add professionals dependent on this sector, such as accountants, financial consultants, tax advisers and lawyers, the number rises to 40,000. The financial sector produces 25% of GDP and contributes well over 30% of the national budget. At the end of the 1990s, 220 financial institutions were officially registered. As a result of mergers, the number in September 2004 was 167.

Luxembourg’s vulnerability, due to the overwhelming importance of this economic sector, was made apparent at the end of 2000 and the beginning of 2001. Due to the worldwide banking crisis, growth rates fell from 9% in 2000 to 1.5% in 2001. However, within the framework of European tax harmonisation, the country preserved its tradition of banking secrecy, thus precluding competitive advantages for third-party countries.

Banking secrecy did not, however, make the Grand Duchy a haven for dirty money. By the mid-1990s, legal loopholes had been plugged and, in response to general criticism, Luxembourg pursued a decisive policy to protect its reputation. Today, it has the strictest laws to combat money laundering (particularly money from drug trafficking) of any European state, and has made the greatest efforts in the fight against the sources financing terrorism. However, it is not only in the area of legislation that Luxembourg has long been beyond reproach: new regulatory authorities (the CSSF, among others) have been set up and significant manpower resources allocated in order to reduce risks as far as possible.

New advantages in transport, communications and technology

From the mid 1980s, transport and communications developed at breathtaking speed. The number of employees in this sector rose from 11,000 in 1985 to 22,000 in 2001.

In the airline industry, the Cargolux freight company has achieved remarkable success, and is a world-renowned operator. The national carrier Luxair has also contibuted significantly to the economic growth of the country.

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More recently, the communications sector has developed phenomenally, notably with two outstanding companies: RTL Group and SES. The former began as a standard radio station, and eventually became an audiovisual company of international standing and part of the vast German Bertelsmann Group. The latter (Société européenne des satellites) was created in 1986 and operates the ASTRA satellite systems. In taking over the American company GE Americom in 2001, SES took on a worldwide dimension. International communications is undergoing rapid development and Luxembourg, which has recently begun the liberalisation of this market, is well placed to attract foreign and national investment.

Aided by the high growth rate, state financial policy has contributed decisively to the success of the Luxembourg economy. Despite low tax rates (VAT, income tax and social security contributions), high growth leads to high fiscal income. The extremely low national debt allows such low tax rates, leading to low ancillary wage costs for employers and high take-home pay for employees hence the country’s attraction. Luxembourg is, at least in proportion to wealth generated, a ‘small’ state, which is an additional advantage.

The future: competitivity based on highly developed skills

Luxembourg’s extremely open economy is well prepared for a successful future in a global market. Former sovereign rights, such as those which gave the banking sector a temporary advantage, are no longer significant. The future development of Luxembourg as a financial centre will be based on the competitive advantages of highly developed skills. Research and innovation hold the key to the future, and have been given high priority for investment, both in the public sector (for example, the Public Research Centre, the future University of Luxembourg and the Luxembourg School of Finance) and the private sector (such as IEE, a world leader in sensors for the automobile industry, and the Goodyear Research Centre).

The changes the Luxembourg economy is undergoing, and the prosperity these generate, radiate to the neighbouring border areas. Meanwhile, some 110,000 people cross those borders every morning to go to work in Luxembourg. They already represent one-third of the workforce. In the country as a whole, foreign nationals form 39% of the total population of 450,000. Through social cohesion and rich plurilingual assets, the Grand Duchy of Luxembourg is today an eloquent example of the integrative strength of a growth-based economy.


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Last update of this page on : 26-01-2005