The Grand Duchy of Luxembourg was founded in 1815 and gained full independence in 1867. It is a small, land-locked state which has borders with Belgium, France and Germany. It was occupied by Germany during the World Wars of 1914–18 and 1939–45. After the Second World War Luxembourg abandoned its traditional neutrality, forming in 1948 the Benelux economic union with Belgium and the Netherlands that was formalized in a treaty in 1958. It was a founder member of the North Atlantic Treaty Organization in 1948 and of the European Coal and Steel Community in 1952.
A constitutional monarchy, the head of state is Grand Duke Henri, who acceded to the throne in October 2000 following the abdication of his father, Jean. Legislative power is vested with the Chambre des Députés which is elected every four years. The head of the government formed following elections held on 13 June 2004 is Jean-Claude Juncker of the Christian Social People’s Party (CSV). He first became Prime Minister in 1995, replacing Jacques Santer who reluctantly became president of the European Commission after having been identified as a compromise candidate for that office by the member states of the European Union. Juncker was later reappointed following elections held in June 1999 and June 2004. In 1999–2004 he led a coalition between the CSV and the Democratic Party (DP), which in 1999 overtook the Luxembourg Socialist Workers’ Party (LSAP) as Luxembourg’s second party. In elections held on 13 June 2004 the CSV won 36.11% of the vote and 24 parliamentary seats. It formed a coalition with the LSAP, which had regained the status of second party by winning 24.37% of the vote and 14 parliamentary seats. Voting in national and European elections is compulsory and the turn-out at the elections held in 2004 was 91.68%.
The political system of Luxembourg has been remarkably stable in the post-war period. Most governing coalitions have included the CSV, with the notable exception of that formed between the LSAP and the DP in 1974–79. During the 1980s the three main parties ceded about 10% of the vote to two new smaller parties that had emerged: the Green Party and the Action Committee for Democracy and Pension Rights (ADR). These parties increased their presence in parliament. In elections held on 13 June 2004 both the Green Party and the ADR won seven seats in the Chambre des Députés and, between them, 21.5% of the vote.
Economy: Luxembourg enjoys the highest per caput incomes in Europe. A small, regional economy, it has always been characterized by a high degree of specialization. Until the 1970s this was in steel production, but following the recessions of the 1970s it switched to emphasize banking, financial services, transportation and the media. The transformation from an industrial economy to one providing high value added services is accounted for by its unique regulatory framework and light taxation regime.
GNP: US $17,571m. (2001); GNP per caput: $39,840 (2001); GNP at PPP: $21,416m. (2001); GNP per caput at PPP: $48,560 (2001); currency: euro; unemployment: 3.0% (2002).
Luxembourg’s strength in banking and financial management developed during the 1980s and now accounts for around 20% of gross domestic product. This growth has been attributed to Luxembourg’s regime which offers tax-free savings and strict laws guaranteeing banking secrecy. The financial sector is centred on private banking, investment fund management and insurance. Today around 180 banks are based in Luxembourg and it has grown to become the sixth largest financial centre in the world. In investment fund management it is the second largest centre in the world. Luxembourg’s specialization in banking and financial services since the 1980s has more than compensated for the decline in the steel industry and has contributed to high rates of economic growth (around 5.5% per year) and low rates of inflation and unemployment.
The Luxembourg economy enjoys high rates of employment. Some 80,000 employees in Luxembourg are cross-border workers living in Germany, France and Belgium; 62% of total employment is undertaken by cross-border workers and resident foreigners. It is a regulated economy, and 95% of jobs are permanent contracts. However, as is typical for a corporatist economy, workers are largely male and young. Women and older workers have significantly lower rates of employment. Generous disability and early retirement pensions have encouraged large numbers of those aged over 55 to leave the labour market. Welfare benefits are generous and both wages and social security benefits are indexed to consumer prices.
Luxembourg formed an economic union with Belgium in 1921 and until Economic and Monetary Union (EMU) Luxembourg and Belgian francs had the same value and were interchangeable. The state formed an economic union with Belgium and the Netherlands in 1948 and was a founder member of the European Coal and Steel Community in 1952. Luxembourg was one of the first member states of the European Union (EU) to meet the convergence criteria for EMU. Until the late 1990s Luxembourg was slow at transposing directives of the Single European Market into law, particularly in the areas of transport, motor vehicles and social policy. However, to support its key financial services sector, financial market directives have been implemented quickly. In 2000 Luxembourg was the only country to oppose EU plans to end banking secrecy laws. It also opposed a further directive in 2003 on the taxation of savings income. In both cases Luxembourg (together with Austria and Belgium) was given a special ruling for a transitional period.
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