Luxembourg: country overview

02 July 2012
by Ina Dimireva -- last modified 12 February 2013

Luxembourg's small, stable, high-income economy - benefiting from its proximity to France, Belgium, and Germany - has historically featured solid growth, low inflation, and low unemployment.

Luxembourg flag

Year of EU entry: Founding member (1952)

Member of Schengen area: Yes

Political system: Constitutional monarchy

Capital city: Luxembourg

Total area: 2 586 km²

Population: 0.5 million

Currency: euro

Listen to the EU official language: French , German

Map of Luxembourg

Country overview

The Grand Duchy of Luxembourg is a small country surrounded by Belgium, France and Germany, and its history has been inextricably linked with that of its larger neighbours. It is largely made up of rolling hills and forests.

Luxembourg has been under the control of many states and ruling houses in its long history, but it has been a separate, if not always autonomous, political unit since the 10th century. Today, Luxembourg is a hereditary Grand Duchy with a unicameral parliamentary system.

Luxembourgish, the national language, is akin to German. German is the first foreign language for most Luxembourgers and is used in the media. French is the administrative language.

The economic structure of Luxembourg is based mainly in banking, insurance, and the steel industry. Agriculture and wine production are also important.

Many of Luxembourg's speciality dishes are of the type one would expect in a forested country. They include jugged hare and Ardennes ham. Trout and pike, fresh from the country’s rivers, also feature regularly on menus here.

Luxembourg shares the Moselle valley with Germany and the local white wines are well known and popular. Like other northern European countries, Luxembourg also produces popular brands of beer.

Economy overview

This small, stable, high-income economy - benefiting from its proximity to France, Belgium, and Germany - has historically featured solid growth, low inflation, and low unemployment. The industrial sector, initially dominated by steel, has become increasingly diversified to include chemicals, rubber, and other products. Growth in the financial sector, which now accounts for about 28% of GDP, has more than compensated for the decline in steel. Most banks are foreign-owned and have extensive foreign dealings, but Luxembourg has lost some of its advantages as a tax haven because of OECD and EU pressure. The economy depends on foreign and cross-border workers for about 60% of its labor force. Luxembourg, like all EU members, suffered from the global economic crisis that began in late 2008, but unemployment has trended below the EU average. Following strong expansion from 2004 to 2007, Luxembourg's economy contracted 3.6% in 2009, but rebounded in 2010-11 before slowing again in 2012. The country continues to enjoy an extraordinarily high standard of living - GDP per capita ranks among the highest in the world, and is the highest in the euro zone. Turmoil in the world financial markets and lower global demand during 2008-09 prompted the government to inject capital into the banking sector and implement stimulus measures to boost the economy. Government stimulus measures and support for the banking sector, however, led to a 5% government budget deficit in 2009. Nevertheless, the deficit was cut to 1.1% in 2011 and 0.9% in 2012. Even during the financial crisis and recovery, Luxembourg retained the highest current account surplus as a share of GDP in the euro zone, owing largely to their strength in financial services. Public debt remains among the lowest of the region although it has more than doubled since 2007 as percentage of GDP. Luxembourg's economy, while stabile, grew slowly in 2012 due to ongoing weak growth in the euro area. Authorities have strengthened supervision of domestic banks because of their exposure to the activities of foreign banks.