Luxembourg Economic Development:

Introduction:
Luxembourg is a small country of 2.586 km² located in Central Europe, sharing its borders with the
important European countries; France, Germany and Belgium. Luxembourg had a population of
639,330 inhabitants in 2021 (OurWorldInData) and the ethnic groups that coexist in the country are
mainly Luxembourgers of Celtic, French, Belgian or German descent, as well as Portuguese, Italian
immigrants.... It has three official languages: French, German and Luxembourgish.
Luxembourg is a constitutional parliamentary monarchy, with a head of government (Xavier Bettel)
and a head of state (Henry of Luxembourg). The State has a highly developed economy, it is a country
with one of the highest GDP per capita in the world, according to the World Bank. Its GDP per capita
in 2022 is of 107,660.1 (constant 2015 US$). Luxembourg is one of the founding members of the
European Union, so its capital, Luxembourg, is the headquarters of numerous institutions and agencies
of the EU.

Economic and social development through its history:

> 1870-1914 - First Globalization:

For many years Luxembourg had been a country dominated by different powers until it declared itself
independent in 1815 (it was not until 1839 that this independence was recognized). In these years, the
country was a poor country mainly agrarian and had a very high rate of migration, 1 out of 5 citizens
migrated to the US. From this time we can highlight that thanks to the German Customs Union
(Zollverein), to which Luxembourg joined in 1842, by which tariffs were eliminated between the
members of the German Confederation, the metallurgical industry of Luxembourg experienced a great
development. Being steel one of the main construction materials, as Luxembourg had a large quantity
and thanks to its strategic location, it became, little by little, the center of trade routes and a very
important supplier of iron and steel, until the present (Arcelor Mittal).

> 1914-1945 – WWI. Consequences, Great Depression. WWII:

Luxembourg, during both world wars, despite its neutrality, was occupied by Germany on two
occasions, this had a negative impact on the economy, as resources and manpower were directed to the
German force.

In 1929 the Great Depression occurred, the country experienced a decrease in demand for steel, loss
of jobs in this key sector, increased unemployment in other areas and a general decline in economic
activity.

However, throughout the 1930s, Luxembourg adopted economic and social policies which aimed to
mitigate the effects of the crisis. One of the most important ones was its policy for Holdings and its
subsidiaries, with very favorable conditions towards them. They paid around 1% of taxes. The ability
of companies to establish holding companies in Luxembourg, with tax benefits and flexible business
regulation, would have attracted additional investment and fostered economic growth.
Even so, at this time there were not many large companies so, as it is shown in the graph, the country
grew but not much more than others, for now. In the graph we can see the effects that the previous
commented Holdings policy had. Luxembourg had one of the highest GDP per capita of Europe but
the difference with other countries like the United Kingdom, wasn’t so significant.

> 1945-1973 - Golden Age of Capitalism.

In 1970, the US Holdings started establishing in Europe and were located in the place where they had
to pay the least taxes, Luxembourg. At that time, the financial industry was already very specialized to
get the most out of the country's tax laws. Numerous multinational companies, generating lots of
money established in the country, making the GDP grow enormously.
In the following graph we can notice this, Luxembourg’s GDP continues to grow more and more as
time passes, distancing itself from the other European countries significantly
> 1973 - Oil crisis.

During the 1973 oil crisis, there were major repercussions in Luxembourg. As a small and landlocked
country, it was practically dependent on imported foreign oil. Luxembourg was particularly hard hit, as
its economy depended on industry, which in turn depended heavily on oil.

Several measures were adapted to lessen the consequences of this impact, such as fuel efficiency,
investment in renewable energy sources and the use of public transport. Following these measures,
GDP growth slowed during 1974 and 1975, there was a major labor crisis, which led to inflation.

> 1978 - 2008 - Second Globalization. 1978 China’s reforms. 1990 Collapse SU.

The second globalization brought a huge increase in trade and investment opportunities for
Luxembourg companies. In 1978, China's reforms opened up a world of investment and prosperity for
Luxembourg. From the beginning of the reforms until today, trade between the two countries has
grown exponentially. China's investments in Luxembourg have had a major impact, especially in the
financial sector. After the trade alliance, there were also negative consequences such as job losses in
the manufacturing services sector. In the case of United Kingdom the gross domestic product in 1978
grew by 4.2% compared to 1977. This is a rate 17 tenths higher than that of 1977, which was
2.5%.This is a example of this information about de GDP of UK compared with GPD of Luxembourg:

The collapse of the Soviet Union in 1990 had an indifferent impact on Luxembourg, with both positive
and negative consequences, but it was not a major event for Luxembourg either. After the collapse of
the Soviet Union, Luxembourg had the opportunity to expand into the rest of Europe without the risk
of the threat of war, the perfect opportunity for increased trade with neighboring countries. It should
also be noted that Luxembourg was a major supplier to the war effort, which greatly helped the
country's economy. After the end of the war there was a decline in the steel industry.

> 2008 - Financial Crisis. Great recession. Anti-globalization ideas.

The 2008 financial crisis and the resulting Great Recession had a significant impact on Luxembourg,
as a large part of the country's open economy depends on the finance sector. Risky lending practices by
banks, subprime mortgages and the collapse of the real estate market were the factors behind this
major global crisis. There was a huge decline in GDP growth; the economy in 2009 shrank to 3.3
percent of GDP.

> 2020 - Covid Pandemic. 2022 Russian invasion of Ukraine.

The recent COVID-19 pandemic and Russia's invasion of Ukraine have had a major impact on
Luxembourg. After the previous events, a sharp decline was reflected in the country's economy, which
had a result in the GDP, with a contraction of 3.1% in 2020, the largest since the Second World War.
The invasion of Ukraine had an impact on the economic challenges due to the increase in energy
prices and shortages in the supply chain, the uncertainty about the global future after the invasion has
triggered the withdrawal of funds from investors. After what happened, and the impact and social
isolation, Luxembourg has a stable and innovative economy. In the case of the United Kingdom
economy, the second largest in Europe, it suffered a contraction of 11% in 2020 as a result of the
Covid-19 pandemic.
In conclusion, Luxembourg has proven to be persistently resilient in the face of various economic
crises due to its diversified economy, its emphasis on financial services and its ability to adapt to
changing global conditions. A key factor in its success has been its ability to attract foreign investment
and companies due to its sustained economic stability. After comparing with other countries, we have
been able to see how, despite being a small country, it has moved forward more easily than other large
European countries that faced the same crises, such as the United Kingdom.

Themes of interest:
> Population:
As we commented, before its industrialization, Luxembourg was losing population at a rapid pace, 1 in
5 Luxembourgers emigrated to the United States. According to the 2000 United States Census, there
were 45,139 Americans of Luxembourg ancestry in that year.
Since 1950, thanks to the economic growth mentioned previously (mainly), we can see in this graph
how the population does not stop rising, with a much more significant increase in the 2000s, its period
of greatest economic boom.

A relative change much higher than any other European country.

> Immigration:
Logically, in the immigration data we can also observe the great economic development of the country
since many people emigrate there because of their minimum wage or their quality of life.

The percentage of immigrants in Luxembourg was 47.3% in 2020 (Eurostat), the highest percentage
after Andorra in Europe. The following table shows their nationalities of origin.

As we can see, the main immigrants come from Portugal and France, it is coherent as they have a
much lower SMI and a lower Human Development Rate.

In the 2000s with the growth of new multi-million dollar technology companies establishing their
headquarters in Luxembourg, the GDP grew even more.
Bibliography and references:
https://ourworldindata.org/grapher/population?time=1979..latest&country=~LUX
https://es.wikipedia.org/wiki/Luxemburgo
https://european-union.europa.eu/principles-countries-history/country-profiles/luxembourg_es
https://data.worldbank.org/country/luxembourg
https://www.youtube.com/watch?v=dNSQZ7-RAN8
https://es.wikipedia.org/wiki/Uni%C3%B3n_Aduanera_de_Alemania
https://archive.ph/20200210221135/http://factfinder.census.gov/servlet/QTTable#selection-359.5-359.
11
https://datosmacro.expansion.com/demografia/migracion/inmigracion/luxemburgo
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