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Country Commercial Guides FY 2000: Luxembourg Report prepared by U.S. Embassy Luxembourg, released July 1999 Note*

CHAPTER III. POLITICAL ENVIRONMENT

NATURE OF POLITICAL RELATIONSHIP WITH THE UNITED STATES

The United States and Luxembourg have an outstanding relationship. As an active supportive player at the United Nations, Luxembourg strongly advocates improved human and civil rights around the globe, and has one of the best records of voting that coincides with the United States. As a founding member of NATO, Luxembourg remains convinced of the necessity for the continued presence of U.S. forces in Europe and emphasizes alliance solidarity as well as NATO expansion.

Luxembourg is a member of the World Trade Organization (WTO), General Agreement on Tariffs and Trade (GATT), Organization for Economic Cooperation and Development (OECD), and the Council of Europe. In addition, Luxembourg is the home of many European Union institutions, including the European Court of Justice, the European Investment Bank, administrative departments of the European Parliament, the European Statistical Office, and several Directorates of the European Commission, which reflects Luxembourg's commitment to European integration. By gaining Luxembourg's cooperation and support, the U.S. can increase its prospects for success in achieving objectives in such key international organizations.

MAJOR POLITICAL ISSUES AFFECTING BUSINESS CLIMATE

Luxembourg was considered to be more prepared for the single currency than any other EU member-state because of the important role of its banks in both the Eurobond market and in the European Currency Unit (ECU) bond market. In addition, it was the first EU nation-state to meet the Maastricht qualifying criteria for the euro, which reflects the strength of the Luxembourg economy. Tax harmonization measures in the EU are expected to include the imposition of withholding tax at source, which until now have not applied in Luxembourg. Financial experts predict that, although some instruments will disappear due to the tax harmonization, others will emerge. It is predicted that European fund management will attain much more momentum, comparable to that of the U.S. fund market. In addition, the movement toward necessary pension reforms in Europe will benefit existing fund management centers like Luxembourg. Already the banker for large numbers of clients from surrounding countries, it now has ambitions to be home to their pension funds which might help to balance the downturn in the banks' earnings from domestic operations resulting from the introduction of the euro.

Enlargement of the EU will have a great impact on Luxembourg's status and influence, as its voting weight in the Council of Ministers will be reduced and its turn to hold the six-month presidency of the EU Council of Ministers and direct EU affairs will become less frequent.

Prime Minister Jean-Claude Juncker, whose Christian Socialist Party received the largest vote in June 1999 elections, is resisting pressure from the OECD to cut benefits and increase labor market flexibility, which would address the country's low unemployment. There has also been pressure to reform Luxembourg's lack of withholding tax on earnings from deposits and financial instruments, minimum reserve requirements, and bank secrecy rules. Accusations that Luxembourg is being used as a tax haven as well as a money laundering center have been denied and the government has issued legislation extending the scope of existing money laundering laws.

SYNOPSIS OF THE POLITICAL SYSTEM

Luxembourg is a constitutional monarchy where social consensus and dialogue are emphasized. Executive power is in the hands of the Grand Duke, Prime Minister, Vice Prime Minister, and a Cabinet of Ministers (presently 11 Ministers and one Secretary of State). Prime Minister Juncker, leader of the Christian Democrats (CSV) party, has been asked by the Grand Duke to form a government following the June 1999 election. His party's coalition partner, LSAP, lost four seats in the 60-seat chamber of Deputies. Juncker is expected to form a coalition with the Democratic Party (DP).

Grand Duke Jean, (married to Princess Josephine-Charlotte of Belgium, sister of King Albert of Belgium) succeeded his mother, Grand Duchess Charlotte, in 1964. Prime Minister Jean-Claude Juncker, the Vice Prime Minister, as well as the Cabinet of Ministers are appointees of the Grand Duke, but are responsible to the legislative branch.

Legislative power rests with a unicameral Chamber of Deputies whose sixty members are up for election every five years. The last election was in June 1999. Since 1919, Luxembourg men and women over the age of eighteen have had the right to vote. Stability is demonstrated by the fact that changes in the government occur smoothly. Alternating as coalition partners without difficulty, the three main political parties are the Christian Social Party (CSV), the Democratic Party (DP), and LSAP. Other political parties include the ADR, Déi Gréng, Green and Liberal Alliance, and the newly formed Déi Lénk.

Elections for the municipalities are organized every six years and will next take place in October 1999. Local government elections are subdivided into three administrative districts: Diekirch, Grevenmacher, and Luxembourg. The district commissioners serve as intermediaries between the central Government and the 118 municipalities.

The judicial branch consists of the Cour Supérieur de Justice (Superior Court of Justice) whose judges are appointed for life by the Grand Duke.

The moderate center-left and center-right parties have traditionally formed the government of Luxembourg. As these parties support private enterprise, successive governments have, over the past 20 years, been successful in creating an economic and social climate, which encourages foreign investment.