Luxemburg, Europe’s bridge builders with ulterior motives

“As a small country, we are bridge builders by nature.” This was how Xavier Bettel recently summarised the way Luxembourg sees itself when it comes to European policy. Not long ago he had to step down as the Liberal head of the Luxembourg government, a post he had held for ten years, but in his new position of Minister of Foreign Affairs he continues to cultivate the country’s image as a passionate advocate of European solidarity – and in so doing is also positioning himself quite aggressively as a candidate for the office of President of the Council of the EU.

What Bettel and other senior Luxembourg politicians rarely say, however, is that their country has traditionally played an ambivalent role within the EU. In many areas the tiny Grand Duchy in the heart of Europe is indeed committed to EU progress. European integration is part of  the country’s raison d’être and is not politically controversial. This does not mean, however, that Luxembourg does not pursue its own agenda at the EU level.

Taxation is a key policy area where the cross-party Europhilia breaks down, and it is also largely absent from public debate. Behind the scenes, Luxembourg’s governments defend their national interests discreetly, consistently and – thanks to the veto on EU taxation issues – often successfully. As former Minister of Foreign Affairs Jean Asselborn once put it in an interview for Reporter.lu, “We are not altar boys. We have our ulterior motives too”.

It is therefore no wonder that Luxembourg’s bad image as a tax haven still persists in the eyes of some of its partners. Yet this tiny country with its outsize financial centre has changed considerably, albeit not necessarily from conviction. Rather, it has had to give way to international pressure (not least from its powerful neighbours, Germany and France) to modify some of its “aggressive tax avoidance” practices, as the EU Commission still calls them.

There has never been a radical rethink of them, however. The country’s economic dynamism remains highly dependent on attracting massive amounts of foreign capital. Its investment fund industry is flourishing and is now second only to the US in the value of the investment assets it manages.

Fuel and tobacco tourism – supported by tax dumping – add billions of euros to the state coffers. The notorious letterbox companies with their very limited economic substance continue to be politically tolerated. Or, to quote Jean Asselborn again: “As a small country we don’t have room for many buildings, that’s why we have so many letterboxes.”