Luxembourg: Facing up to harder times

The Grand Duchy of Luxembourg, strategically placed at the conjunction of the most prosperous parts of Belgium, France and Germany, has long benefited from this culturally neutral niche. It is also proud of its role as one of the six founders of the EU. But as Luxembourg and the other qualifying EU member states prepare for monetary union, there are undercurrents of concern in the Grand Duchy about the threat to its thriving financial centre from a single currency and other harmonization proposals.

Over the years, Luxembourg's place financièrehas prospered as a result of comparative advantages such as free cross-border capital flows, the absence of monetary policy instruments such as minimum reserve requirements, and a favourable tax environment. The fear is that further European integration may level the playing-field and threaten the competitiveness of the Grand Duchy's financial sector.

Financial services account for an estimated 20% of Luxembourg's GDP, four times the proportion in most other EU countries. It hosts 220 banks, almost twice as many as a decade ago. The Grand Duchy is the fourth-largest centre for investment funds, private banking and syndicated loans. Euromarket activities are increasingly big business there, especially among large German banks such as Deutsche Bank, Dresdner Bank and Commerzbank.