Luxembourg country profile - Overview

  • 11 June 2015
  • From the section Europe
Map of Luxembourg

The Grand Duchy of Luxembourg - a small country landlocked by Belgium, France and Germany - is a prominent financial centre.

With roots stretching back to the 10th century, Luxembourg's history is closely intertwined with that of its more powerful neighbours, especially Germany.

Many of its inhabitants are trilingual in French, German and Luxembourgish - a dialect of German.

Despite declaring its neutrality, Luxembourg was occupied by Germany during both World Wars. Attempts to escape German influence initially led to an economic union with Belgium in 1921.

After renewed occupation in World War II, Luxembourg abandoned its neutrality and became a front-rank enthusiast for international co-operation.

Image caption Luxembourg's history stretches back over hundreds of years

Luxembourg became a founder member of a customs union with Belgium and the Netherlands in 1948, and of the European Economic Community, a forerunner of the European Union, in 1957. Around one-third of Luxembourg's population are foreigners.

Luxembourg's prosperity was formerly based on steel manufacturing. With the decline of that industry, Luxembourg diversified and is now best known for its status as Europe's most powerful investment management centre.

But the country's strict laws on banking secrecy produced a system that was open to exploitation for the purposes of tax evasion and fraud.

Concern over Luxembourg's reputation as a tax haven - especially in the wake of the 2008 financial crisis - prompted the G20 group of countries to add it to a "grey list" of nations with questionable banking arrangements in April 2009.

Luxembourg responded by taking steps to improve the transparency of its financial arrangements. By July 2009 it had signed agreements on the exchange of tax information with a dozen countries, and was commended by the OECD for its prompt efforts to implement the internationally agreed standard.

However, doubts have lingered over the country's commitment to preventing tax avoidance, and in 2015 it was told by the OECD that its economy was too dependent on providing financial services to multinational companies and that it needed to diversify to avoid being targeted by a G20-led crackdown on international tax avoidance.

Constitutional reform

Luxembourg's politics are characterised by stability and long-serving administrations.

This tranquillity was interrupted in 2008, when Grand Duke Henri said his conscience would not allow him to sign into law a bill approving euthanasia.

The crisis was resolved by a constitutional reform which removed the need for laws to be approved by the monarch, reducing the post to a largely ceremonial role.

Image caption Luxembourg has transformed itself into an investment management centre

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