Last reviewed 25 October 2023
One of the smallest but most affluent countries in Europe, Luxembourg offers niche trade and investment opportunities for sophisticated UK firms.
Looking to Luxembourg
A small, landlocked and picturesque country in the heart of western Europe, The Grand Duchy of Luxembourg is nonetheless an important financial, diplomatic and political centre. Though only a market of around 600,000 people — which includes a large number of foreign nationals working locally for international firms and organisations — it holds significant global reach, thanks to the presence of key European Union (EU) institutions.
These include the European Court of Justice, the European Court of Auditors as well as the European Investment Bank (EIB), the lending arm of the EU, reflecting its status as a major international hub for the global investment management industry. Its location in the heart of the EU has attracted major well-known global corporations too, serving as the European headquarters for the likes of Amazon, PayPal and Skype.
Little wonder then that, though only small, Luxembourg is, per capita, consistently ranked as the richest country in the world. Much of its dynamism is centred in and around the scenic national capital, Luxembourg City, with its UNESCO-listed Old Town, a popular magnet for tourists and short breakers from the UK and elsewhere.
Despite its international significance in the modern age, Luxembourg’s history has been heavily influenced by its larger, more powerful neighbours, bordered entirely by Belgium, France and Germany,
This was no more evident than during the tumultuous years of the 20th century, in which the country was occupied by Germany during both world wars despite declaring its neutrality. Understandably, it has long since been an advocate of international co-operation and collaboration and was one of the founding members of the predecessor organisation to the EU.
Outside of the capital, Luxembourg offers a diverse natural environment for visitors despite its modest size, at only 82 kilometres long and 57 kilometres wide.
This landscape includes the dense Ardennes forest and parks in the north, the Moselle river valley in the southeast, plus the rocky gorges of the Mullerthal region to the east. Its diversity is also reflected in the array of languages spoken as well, with many residents trilingual in French, German and Luxembourgish.
In political and economic terms, present-day Luxembourg has gained a reputation as a stable and competitive market and a leading hub for financial services institutions.
It is also one with an impeccable track record according to credit agencies, with the likes of Moody’s Investor Services maintaining Luxembourg’s AAA rating earlier this year, coupled with a “stable” outlook.
It reflects the country’s overall economic resilience and the strength of its public finances, despite a worsening global forecast and general inflationary trends.
But its modern-day financial haven status is a far cry from its earlier, industrial origins.
Now closely integrated with the economies of neighbouring states, and the EU more broadly, as well as a member of the euro currency zone, Luxembourg’s original prosperity can be traced back to its steel manufacturing days. As heavy industry has declined over the years, the country has moved into more sophisticated service niches, such as finance and tourism. These are both areas in which it excels, and where UK companies have a role to play.
Just over an hour away by plane from the UK, Luxembourg is well connected by a network of flights by airlines including Ryanair, British Airways and EasyJet, mostly via the main London airports. Luxair recently added a direct link from Manchester to its existing London routes, with three flights a week commencing in April 2024, intended to serve both business customers and tourist traffic.
A measure of its advance in the modern era, Luxembourg even has its own space agency today, which has grown out of the satellite communications sector, another important niche. The space agency and Luxembourg government together published a strategy through to 2027 that aims to make the industry one of Luxembourg’s main “economic pillars”.
In recent years, the space sector has been estimated to account for as much as 4% of Luxembourg’s gross domestic product (GDP). It is another area in which UK firms can potentially explore emerging opportunities and again reflects the high level of sophistication within this diminutive country with big aspirations.
Bilateral trade and investment
Despite the country’s small size, UK trade and investment with Luxembourg is thriving, predominantly within the services sector, and supported by active member groups such as the British Chamber of Commerce for Luxembourg. Total bilateral trade in goods and services was worth £17.7 billion (US$21.5 billion) in the four quarters to the end of Q1 2023, an increase of 14.4% on the same period a year earlier.
Major UK physical exports included mechanical power generators, plastics, miscellaneous electrical goods, cars, beverages and tobacco, reflecting the huge variety and depth of the trading relationship. In the other direction, Luxembourg’s leading exports to the UK comprised road vehicles other than cars, iron and steel, rubber manufactures, textile fabrics and mechanical power generators.
For new exporters of all shapes and sizes, Luxembourg is perceived as a comfortable starter market, albeit an affluent one with sophisticated and discerning tastes. Aside from its close proximity to the UK, English is widely spoken as a business language, and the country shares many similar standards and work procedures to the UK market.
Luxembourg also provides wider access to the larger EU market and offers a close contact point to the numerous global corporations which have established their European headquarters there. On the services side, again, there is a similar level of depth and diversity in the bilateral partnership.
In the past year, British firms have exported to Luxembourg financial, insurance and pension services, telecommunications, computer and information services, as well as construction services, according to UK government data. English and Welsh solicitors have also been given permission to practise in Luxembourg once more after a brief hiatus in the wake of Brexit, following successful talks between the Law Society of England and Wales and local representatives in Luxembourg.
According to the Law Society, the value of legal services exports to Luxembourg is estimated at about £300 million (US$364 million) per year. UK-based law firm Addleshaw Goddard is among firms to open an office in Luxembourg recently, in recognition of its standing as a hub for financial services institutions and the epicentre of activity for investment funds and asset management. Other big law firms with a presence in the market include Clifford Chance, Allen & Overy and Ashurst.
As two of Europe’s leading financial centres, there are already deep lines of collaboration between the UK and Luxembourg, which are expected to yield further opportunities ahead. As well as established areas in funds and investment management, increasingly these links are being utilised to explore innovative new mechanisms, such as green finance.
The British Embassy in Luxembourg, in collaboration with Deloitte Luxembourg, recently conducted a study on sustainable finance in the two countries to explore current regulatory frameworks, projected changes and areas in which the two sides can work together more closely. Sustainable finance essentially refers to investment and lending that considers environmental, social and governance (ESG) impacts, as well as traditional lending criteria.
With the UK already deemed a world leader in this emerging eco niche, London’s banks, fund managers, insurers and other institutions offer a ready source of expertise as other locations start to experiment and mature in this field that is expected to underpin strategic moves to net zero.
Luxembourg too is a leader in this field with its broad background across the funds industry. The recent joint study concluded that there is ample scope for government, public bodies and industry associations on both sides to facilitate and nurture initiatives and opportunities to grow together. Luxembourg has long shown that it is ready to pioneer and champion new alternatives.
Since March 2020, all public transport in the country has been entirely free to use, for example — a feat many see as a potential model that could be rolled out in locations across Europe and beyond.
The UK and Luxembourg seem set to work more closely together in the energy sector as well. It follows a landmark agreement on renewable energy co-operation with EU and North Seas countries, including Norway, another non-EU member, calling for greater collaboration on the development of offshore clean energy and grid infrastructure.
The goal on all sides is to boost net zero commitments and bolster energy security in the wake of the war in Ukraine, and the decision to halt purchases of cheap Russian gas. The initiative — which is expected to support the UK’s targets to increase offshore wind five-fold to 50GW, and deliver 18GW of electricity interconnector capacity by 2030 — will play a key role in supporting Luxembourg’s future energy requirements.
While Luxembourg is deeply embedded into the EU electricity market, most of its power is currently imported, which means energy security is high on the agenda.
With the UK currently building the world’s largest offshore wind farm, at Dogger Bank, it is an area where British firms may be able to play an important contributing role.