Welcome to our article on Luxembourg, or officially the Grand Duchy of Luxembourg, a small landlocked country wedged between Belgium, France, and Germany. Despite its small size, Luxembourg is home to, by many metrics, the most successful economy in the world. In this article, we will explore how Luxembourg achieved such a high level of economic prosperity, what lessons we can learn from its success, and whether there are any threats to its incredible economic achievements.
Breaking the Mold of Micro-Nations
Before we dive into how Luxembourg achieved its impressive economic prosperity, we need to clarify that Luxembourg is not a micronation. It is a small country geographically, with a small population, but it has much more in common with its neighbors than it does with something like Monaco, Liechtenstein, or the Vatican.
It’s easy to understand why Monaco has such impressive economic statistics. It’s a country with very favorable tax laws for wealthy people looking for a new place to call home. Rich people are attracted to it because of these tax laws, and because it’s a nice, safe place to live with a thriving social scene of other rich people. All that demand, combined with a tiny supply of land, means that only rich people can afford to live there. And if a country is filled with very wealthy international business people and celebrities, it doesn’t really matter what the government’s economic policies are. It’s inevitably going to have the highest GDP per capita in the world.
Luxembourg, on the other hand, achieved tax-haven micronation levels of wealth while effectively just being a regular economy. It’s not a tax haven, and most of its residents are regular working people. It has regular industries, a regular government, and regular tax revenues. The only thing is, despite all of its apparent regularities, it’s by far the wealthiest country in the EU and also the wealthiest regular economy in the world. Luxembourg has a GDP per capita of $133,590, which is almost double that of the United States with a GDP per capita of $70,249. The USA itself is also an incredibly productive country, but Luxembourg’s economic output is 13 times the global average. Even if this can’t be replicated in our own economies, it can teach us a lot about what GDP actually is and how much it really means for real economic prosperity.
How Luxembourg Achieved High Levels of Economic Output
So, how did Luxembourg achieve such high levels of economic output? Is it possible for other economies to do the same thing? The answer lies in how the country picked its industries very carefully. Luxembourg only has a population of 640,000, which is well above microstate levels but is still smaller than almost all major cities in the world. Therefore, its industries are not nearly as diverse as the USA’s, but the ones that it does have are highly value-adding.
Banking, steel production, and tourism account for most of its economic output, which are all perfect industries but for different reasons. Financial services account for more than half of the country’s entire GDP. Typically, we think of Switzerland and we think of highly efficient and discrete European banking. But Luxembourg is an even more attractive destination to a lot of very wealthy individuals and institutions.
Luxembourg has a lot of advantages over Switzerland, which means that it’s just a better choice for a lot of financial services. For starters, it’s in the EU, and it uses the Euro. If you are a wealthy European or running a European business, it makes sense to have your banking done in your own currency, as opposed to a foreign currency like the Swiss franc, even if it is very stable and secure. Being part of the EU also gives it tax and legal advantages that are not available to Swiss banks or are certainly not as easy to get around.
In the past, these financial services have been the cause of concern for a lot of their neighbors because Luxembourg developed the same reputation that Switzerland had, which was that it’s a place that you go to do banking if you have something to hide. This reputation in the past put them on the G20’s gray list of countries with questionable banking arrangements. Being on this list opened them up to scrutiny that could eventually lead them to being cut off from global payment networks like Swift or having other restrictions placed on their most important industry. The country very quickly amended a few key tax laws and was removed from the gray list just a few months later. Obviously, they didn’t want to stay on this list because even if they were benefiting from hiding money or facilitating tax avoidance, it wouldn’t be worth it compared to how much they were making from just providing good banking services to good customers.
The country is home to the third most competitive financial center in Europe, behind only London and Zurich. Given the country’s small population, most of their banking is focused on international clients, and because that’s their focus, they become really good at it. Managing finances across multiple legal jurisdictions, language barriers, and business cultures is difficult, and it’s a highly priced service that a lot of companies are willing to pay a lot of money for. Most multinationals operating in Europe will work with Luxembourgish banks, accountants, and lawyers because they are well respected, very efficient, and act as a one-stop shop for everything those companies might need to do business across the continent.
The official language of Luxembourg is Luxembourgish, but since it’s such a small country with such strong connections to its neighbors, English, German, French, Dutch, and even Spanish and Italian are very common language images and are spoken widely by professionals providing international services in the country. Just having a center that can communicate with all the other major economies in Europe in their own language is worth paying to have financial services centered in Luxembourg. It’s actually such a widely recognizing intermediary that the European Union itself headquartered the European Investment Bank in Luxembourg City.
The European Investment Bank is not the same as the European Central Bank, which is the Reserve Bank of the EU. The European Investment Bank is a fund that raises its own money and then gives out loans to big projects that couldn’t be individually funded by member states. The member states of the EU are technically shareholders of the European Investment Bank, although it doesn’t run for a profit unless you count the economic benefits that come from being able to efficiently and cheaply fund infrastructure projects. The reason this is important to Luxembourg is that the country directly benefits from having such a large and influential institution operating in its capital.
The average salary in the banking industry is very high, with varying estimates of around 100,000 euros per year, with a lot of senior bankers earning a lot more than that. The industry has around 27,000 direct employees working for 124 officially authorized banks, which might not sound like a lot, but it’s around 5% of the total population. Banking also requires a lot of supporting industries like accounting, legal, and IT support, which are also very skilled and valuable industries in their own right. The economy also benefits from being able to manage so much wealth from across the world. Because it’s such a popular banking destination, the total assets the banking industry controls are equal to 12 times the country’s GDP.
Other Industries Contributing to Luxembourg’s Economic Success
Banking is not the only industry that contributes to Luxembourg’s economic success. Steel production is another key industry, accounting for around 7% of the country’s GDP. Luxembourg’s steel industry is one of the oldest in Europe and has been a major player since the 19th century. The country’s steel production is highly specialized, focusing on high-quality steel products for the automotive, aerospace, and construction industries. This specialization has allowed the country to compete on the global stage and maintain a high level of productivity.
Tourism is another important industry in Luxembourg, accounting for around 8% of the country’s GDP. The country’s picturesque landscapes, rich cultural history, and vibrant urban centers make it an attractive destination for tourists from all over the world. The tourism industry provides employment opportunities for many locals and contributes to the country’s overall economic growth.
Luxembourg is also home to a thriving startup ecosystem, which has been growing rapidly in recent years. The country’s favorable tax laws and supportive government policies have attracted many entrepreneurs and investors, leading to the development of a vibrant tech community. Many startups in Luxembourg focus on innovative technologies like fintech, blockchain, and artificial intelligence. The government has also established several initiatives to support the growth of the startup ecosystem, including investment funds and accelerator programs.
Luxembourg’s Unique Economic Model
Luxembourg’s economic success can be attributed to several factors, including its favorable tax laws, highly productive industries, and supportive government policies. However, there is another factor that sets Luxembourg apart from other successful economies: its small size.
Luxembourg’s small size allows it to be highly specialized in certain industries and to be highly efficient in its economic output. The country’s industries are highly interconnected, with many businesses and industries relying on each other for support. This creates a highly productive and efficient economy, where businesses can easily collaborate and share resources.
Luxembourg’s small size also allows it to be highly adaptable to changing economic conditions. The government can quickly implement policies and programs to support the economy, and businesses can easily pivot their operations to meet changing market demands. This agility has been critical to Luxembourg’s success, especially in the face of global economic uncertainty.
Threats to Luxembourg’s Economic Prosperity
Despite its economic success, Luxembourg is not immune to threats to its economic prosperity. One of the biggest threats facing the country is the potential for increased regulation and scrutiny from the European Union. The EU has been cracking down on tax havens and other countries with favorable tax laws, and Luxembourg could be a target of these efforts.
Another threat to Luxembourg’s economy is the potential for a global economic downturn. Luxembourg’s economy is highly dependent on international trade and investment, and a global recession could have significant negative impacts on the country’s economic growth.
Conclusion
Luxembourg’s economic success is a testament to the country’s highly productive industries, favorable tax laws, and supportive government policies. The country’s small size and highly specialized economy have allowed it to be highly efficient and adaptable to changing economic conditions. While there are threats to Luxembourg’s economic prosperity, the country’s unique economic model and thriving startup ecosystem position it well for continued success in the future.
Its basically the Singapore, hong kong and dubai of Europe. Low taxes, pro business environment, skilled labour and special treaties with other countries are the secret of success.
Two generations ago, Luxembourg was most known to Britons as the location of a radio station that brought the Beatles into their homes because British radio wouldn’t.
You missed one important part which also explains the high salaries: The indexation. Whenever the rise of cost of living surpasses a certain amount, every salary of every person in Luxembourg is supposed to rise too. This also explains Luxembourg’s high minimum wage. It is a great thing, but it also has its downsides. The salary rises the percentage for everybody, which means that people with a high salary gain a bigger raise than people with a lower salary. That’s why the gap between poor and rich increases very fast in Luxembourg.
Luxembourg is pretty much just a city for rich people that happens to have sovereignty. In economic, or political discourse, we can’t take what works for Luxembourg and apply to other normal, full-sized countries like Colombia, Algeria or South Africa.
I was in Luxembourg last year and it was super beautiful, clean, and organized. One of the best countries.
In short, Luxenbourgh has double the gdp per capita than the usa, because half its workforce is not part of its capita.