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Popularly known as the Green Heart of Europe, bordered by Belgium to the north and west, France to the South, and Germany to the east, lies a landlocked country – Luxembourg or officially, the Grand Duchy of Luxembourg. Possessing a distinct and unique blend of cultures from its neighbors- Germany and France, the country is often touted as a financial powerhouse. Luxembourg has been a constant name in many of the top economic indices. It is ranked second in the list of countries with the highest per capita income and boasts of a stellar 12th in IMD’s World Competitiveness Index.

Such staggering figures arouse curiosity about the conditions and situations that allowed this small country to transform into a global economic force. A closer look brings to light several factors that can be attributed to the country’s success- from banking, (which also happens to be the largest sector in its economy), to steel, to tourism, Luxembourg has it all.

The name Luxembourg came into being in 963 A.D.

Siegfried, Count of the Ardennes, also the founder of Luxembourg, exchanged his land for a small but strategically situated Roman castle named Lucilinburhuc (“Little Fortress”). The castle was soon surrounded by a village, which grew into a city and then a country. Until 1815, Luxembourg went through several changes in its political scenario and leadership. But In 1815, the Congress of Vienna raised the duchy of Luxembourg to a grand duchy, thereby giving it theoretical autonomy.

However, during this period, Luxembourg wasn’t the powerhouse we know today. Most of its people were engaged in agriculture and iron mining to make both ends meet. In the pre-industrial period (17th-18th centuries), there were a number of furnaces throughout the country. The Luxembourgish steel industry generally produced iron bars, wrought iron, and cast iron. Due to the weak domestic market, most of this was exported to workshops in Liège, which used the iron in their manufactured products and exported those products from Dutch ports.

However, the country experienced a change of fortunes when it joined Zollverein or the German Customs Union. It was a coalition of German states formed to manage tariffs and economic policies within their territories. In 1842, the membership in Zollverein, helped Luxembourg gain access to a large market in the east. This was also the time when the Luxembourg-Thionville railway line was constructed, thus establishing links to the European industrial regions.

From here on, there was no looking back for the country as it emerged as one of the biggest steel producers in the world. With the introduction of English metallurgy in 1876, the refining process led to the founding of Arbed company in 1911, which later on went on to become Arcelor-Mittal, the second-largest steel producer in the world today.

The story doesn’t end here. Luxembourg has more to offer than just steel. Having the 25th most competitive financial sector in the world, and the third most competitive in Europe, after London and Zürich, the country has a robust banking sector. It houses various banking business models, from international, private, wealth management, retail banking, corporate finance to fund services and depository banking. Political stability, efficient communication channels, easy access to other European centers, skilled multilingual staff, a tradition of banking secrecy, and cross-border financial expertise have all contributed to the growth of this sector. The country has a relatively smaller domestic market which is also a reason why it has the highest banking internationalization rate in Europe where 94% of its banks are foreign. The European Investment Bank—the financial institution of the European Union—is also located there.

Equally notable are the tourism and telecommunication sectors of the economy that form a major chunk of its GDP. Luxembourg is well connected to almost all parts of Europe and beyond, through road, rail, and air that make it a hotspot for business as well as leisure travel. As of 2018, tourism’s contribution to the GDP was 8.7% and an estimated 15000 people depend on this industry for their livelihood, both directly and indirectly.

In 2019, the World Economic Forum ranked Luxembourg 23rd in the Travel and Tourism Competitiveness index out of 140 countries.

The country is also home to SES, one of the largest satellite companies in the world. Established in 1986, to operate and install a satellite communication system for transmitting television programs, their first satellite SES Astra was launched in1988 by Ariane rocket.

RTL Group, an international media company, headquartered in Luxembourg is a major private radio and television broadcaster in Germany, France, and other European countries.

However, the picture hasn’t been all rosy. With the amount of stability the economy offers and its dynamic business environment, it would be a no-brainer to guess that Luxembourg attracts foreign investors like no other. Luxembourg is one of the favorite countries for overseas businessmen looking to open a holding company, and many MNCs in the world choose this country for setting up such an entity. Here an unregulated and fully taxable holding company is called SOPARFI (SOciété de PARticipations FInancières).

The country came under harsh scrutiny in this context in November 2014, when a financial scandal named LuxLeaks materialized. It was a journalistic investigation, conducted by the International Consortium of Investigative Journalists, and exposed how Luxembourg’s authorities had struck tax avoidance agreements with some 340 companies including corporate giants like Ikea, Pepsi, Walt Disney, and Apple.

This helped these companies save billions of dollars in taxes and in some cases limited their tax payments to 1% or less. The revelations caused EU regulators to expand tax subsidy probes, propose new laws to fight corporate tax evasion, and create a committee to investigate fiscal deals all across the European Union.

Despite everything, the prowess of Luxembourg as an economic power cannot be undermined. With the country’s ambition to become an advanced digital society, investing considerable sums in fields like AI, and a growing IT sector, the future seems promising. With the government’s efforts to catalyze the start-up culture and an ambition to expand its standing as a cross-border center of excellence, along with increased investment in the sustainable finance sector by 2025, Luxembourg is undoubtedly the country of the future.

By Ruchi Gupta

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