Economy of Luxembourg

By | April 29, 2022

According to cheeroutdoor, Luxembourg is a highly industrialized country with stable economic growth, low inflation and low unemployment. In terms of GDP per capita (approx. 44 thousand dollars, 2002), it has the highest European indicator. Over the past half century, Luxembourg’s economy has undergone a number of major structural shifts. In the 1970s-80s. a systematic departure from the traditional industrial specialization in the production of metals was carried out. During this period, along with the diversification of the industry, the financial sector became the main engine of economic growth. In con. 20th century Luxembourg entered a period of unprecedented transformation of the economy – the rapid development of the branches of the “new economy” began.

The volume of GDP is 20 billion dollars. The annual growth rate in 1997-2001 is approx. 6-8%, only in 2002 there was a decrease to 2.3% (which, however, is twice as high as the European average). Employment 262.3 thousand people, incl. 87.4 thousand are foreigners. Unemployment 4.1%, inflation – 1.6% (2002).

Sectoral structure of the economy in terms of contribution to GDP: industry – 30%, agriculture – 1%, services – 69% (2002). 8% is employed in industry, 2% in agriculture, and 90% in services.

The shape of the modern Luxembourg economy is determined by the three largest international corporations, whose governing bodies are located in Luxembourg and in the share capital of which the state is solidly represented: the Arbed steel concern, the second largest European metal producer; SES-Astra, the world’s leading telecommunications satellite operator; RTL, Europe’s leading commercial television corporation.

As part of the diversification of the Luxembourg economy, traditional types of production were also created, all of which arose in partnership with foreign companies. The most significant were enterprises for the production of car tires, the production of industrial plastics, electronics, etc.

A particularly noticeable phenomenon was the rapid development of the financial sector, which began as early as the 1960s, when it became possible for corporate lending from the territory of a country with a low level of taxation. Foreign banks began to create their divisions in Luxembourg. But the real boom came in the 1980s, when a mass of German savers began to allocate their funds in order to avoid paying national taxes. In 1999, approx. 210 banks with total balance sheet assets of 672 billion euros. Investment funds became widespread (their assets amounted to $817.7 billion). In the financial sector, there were approx. 22 thousand employed, its contribution to GDP was approx. ten%.

However, the “financial flux” of the Luxembourg economy is beginning to experience serious difficulties. International claims are being made against the activities of banks (accusations of “concealment of income”), the EU insists on the liberalization of their activities. The Luxembourg government has announced that the principle of maintaining “bank secrecy” does not represent the most important basis for the functioning of the financial system. Luxembourg has already expressed its readiness to abolish “bank secrecy” by 2010 (the number of banks in the country began to decline, in 2001 there were 197).

Agriculture is increasingly oriented towards animal husbandry (more than half of the agricultural land is used for fodder production), crop production is declining. Viticulture is actively developing (wine production on the hilly banks of the Moselle River). Small farms predominate.

A number of international highways pass through the territory of Luxembourg (Germany, France, Belgium). The length of the railway track is 274 km (including 242 km electrified). Highways – 5166 km (including 118 km – autobahns). River navigation (along the Moselle River) – 37 km. The main port is Mertert. 60 Luxembourg vessels were registered (including 19 for liquefied gas, 13 tankers for chemical products, 8 for oil, etc.) and 59 foreign (2002). There is a pipeline for oil products (48 km). There are two airports, incl. international (Findel).

The telephone communication system is fully automated (314.7 thousand users). Mobile phone owners 215.7 thousand people. (2000). Three TAT-6 channels (submarine cable Europe – North America) are leased for international telephone communications.

Tourism plays a huge role in the country’s economy, its contribution to GDP is approx. 6% (the highest rate in the EU). Equipped with approx. 5 thousand km of footpaths. Main objects: medieval castles (purchased by the state and equipped for tourists) and vineyards of the Moselle river valley (Luxembourg version of Moselle wine).

The current socio-economic policy of the country is aimed at implementing the basic postulates of the Luxembourg model. In the economic sphere, the main attention is paid to the processes of structural restructuring of the economy in order to avoid the dependence of the national economy on the development of any one sector. The fatal dependence on metallurgy has been overcome, and now the main efforts are aimed at weakening the impact of the financial sector. A national investment fund (assets – 863 billion euros) has been created, which is considered the largest in the EU. With its help, a new economic infrastructure is being formed, which allows more efficient development of new technological industries.

In the social sphere, the main focus is on maintaining the principle of automatic indexation of wages in accordance with the level of inflation. Two more important postulates have been put forward: a constant increase in the minimum wage and an orientation towards a high level of state pension. But this is not always possible to achieve. So, for example, in 1999 the coalition government decided (on the grounds of the need for budgetary balance) to reduce pension payments from 83.3 to 72% of the level of the previous salary. This decision led to the exit from the government coalition of the Luxembourg Socialist Party. The Central Trade Unions continue to insist on a return to the previous level.

Monetary policy is determined by the Central Bank of Luxembourg, which was created only in 1998 (previously, under the terms of the exchange agreement with Belgium, these functions were performed by the Belgian Central Bank). Its main efforts are aimed at maintaining a healthy state of public finances. In 2002, the budget was balanced (revenues and expenditures amounted to 5.5 billion dollars), the public domestic debt reached 7% of GDP (the lowest figure in the EU).

The level of taxation is constantly decreasing. The maximum personal income tax for individuals was 46% in 2000, in 2002 there was a decrease to 38%. Corporate taxes were also reduced (from 37% to 30%). Under these conditions, a massive influx of capital and skilled labor from neighboring countries is quite understandable. Without such constant nourishment, the Luxembourg economy would not have been able to develop so sustainably.

The standard of living is considered one of the highest in the EU, which is determined by high incomes and low taxes. There are no segments of the population in the country that have incomes below the subsistence level.

Foreign economic relations are especially important for Luxembourg, since the economy is mainly oriented towards world markets. Export 7.85 billion dollars (2000) (steel products, equipment, chemical and rubber products). Main partners: EU – 84.7%, USA – 3.5%. Import – 10.25 billion dollars (petroleum products, equipment, consumer and food products). Main partners: EU – 86.7%, USA – 5.8%. Luxembourg is actively involved in the international migration of capital. In the conditions of constant change of specialized production niches, the country needs to attract foreign direct investment. The need for large-scale investments in other countries arises in connection with the need to form their own marketing niches in the world market.

Economy of Luxembourg