Luxembourg: A Trading House without Merchants

It is fifty kilometres from Trier to Luxembourg. In Trier the Porta Nigra has stood for more than 1,800 years; the order that built it has long since vanished. Stones outlast orders, and prosperity remains visible long after its sources have dried up. Luxembourg itself is a leftover of the Congress of Vienna, set up as a buffer state in 1815 and declared neutral in 1867. In the same year its fortress, the «Gibraltar of the North», was razed by decision of the great powers. For a long time, nothing in this story suggests that the inhabitants wanted a state of their own. That is precisely why the country serves as a lesson in what a state does with a prosperity that it did not create.

No country in the European Union reports a higher gross domestic product per head. Of the roughly 494,000 people employed there, however, 47 per cent commute in every morning from France, Belgium and Germany, and only one in four is a Luxembourger. Gross domestic product includes what the cross-border workers produce, but it is divided only by the residents, who do little more than half of the work; gross national income per head is accordingly a good third lower. In this difference lies the key to the country: a substantial part of its prosperity is earned by people who live elsewhere, vote elsewhere and grow old elsewhere.

A few weeks ago I described Zug as a trading house for the world and at the same time warned that a good location can consume its head start in subsidies, compliance and complacency. Luxembourg is the example of this. Both places are small, rich and international. Zug, however, is one of 26 cantons that compete with one another, and its citizens decide on their taxes at the ballot box. Luxembourg lies at the centre of a union in which tax competition counts as a disturbance. What Luxembourg has become bodes ill for that union.

Small state or statism

Among friends of liberty the small state is considered the better form: one can leave it, mistakes remain visible, and the rulers have to know their subjects. I have often held this position myself, and in Zug I see it confirmed. Luxembourg shows the limit. In the 2026 budget, public expenditure reaches 48.3 per cent of economic output, the highest figure in the country's history, in a country without a debt crisis. The full-time positions of the central state rose by 42 per cent from 2016 to 2024, the population by 18. Smallness helps as long as emigration remains credible and the coffers are lean. Once the state is the largest employer, the largest builder and the most coveted provider, the small state is merely a state with a shorter path to the public purse.

The Spanish separatists show where confusing smallness with liberty leads. The Basque Country already collects its own taxes and has long spent considerably more per head than Catalonia or Madrid. A bourgeois party, a republican left and anti-capitalists campaigned together for the Catalan republic, and what they promised above all was a welfare state under its own flag. As states of their own, both regions would be even more statist than the already extremely statist Spain. Understood in this way, separatism is the wish to own the apparatus that one pretends to fight. Whoever wants to take distribution into his own hands fights the distributor in Madrid with the same energy with which he will later distribute in Barcelona.

Luxembourg shows what such a project looks like after 150 years: the most ambitious sons and daughters strive for the civil service, strangers occupy factories, banks and building sites. What matters more than the size of a state is whether one can refuse its offer. In Luxembourg the majority of voters live off that offer, and hardly anyone refuses it.

From Minette ore to fund factory

Twice the country has reinvented itself, and both times the decisive part came from outside. The phosphorus-bearing Minette ore became usable only with the Thomas process from 1879; German and Belgian capital, the Zollverein and workers from Italy and later Portugal turned the south into one of the densest industrial landscapes of Europe. In 1974 a sixth of all employees worked in mills and mines; the following year the world market collapsed.

The answer was the «Tripartite», a table at which government, employers and trade unions distributed the costs of the contraction and preserved social peace. The model was successful; since then every question of weight is decided at that table, at which no one sits who risks capital of his own. The steel group ARBED merged into ArcelorMittal, the headquarters remained in Luxembourg, ownership passed to an Indian entrepreneurial family.

The second invention began in 1929 with the tax-exempt holding company; in the 1970s and 1980s bank secrecy drew the savings of German and Belgian small savers across the border. In 1988 Luxembourg was the first state to transpose the European directive on investment funds and became the home port of a product that could be sold throughout the Community with a single authorisation. Today funds that are authorised in Luxembourg hold around six trillion euros; only in the United States is the figure higher. In Zug, under pressure from 25 other cantons, people learned to make taxes predictable. In Luxembourg they learned to transpose directives faster than everyone else, under the eyes of a Commission that regards quick transposition as a virtue. One looks in vain in this story for a product, a bank or an invention. The goods are produced elsewhere; Luxembourg produces the form that allows them to be sold in Europe. Put less kindly, the country rents out statehood: it sells its membership of the Union as a legal shell for other people's capital, and the price of the shell rises with every new rule from Brussels.

Consumed: the Union in miniature

Unfortunately this makes Luxembourg prototypical of the Union whose model pupil it wants to be. The state consumes a large part of its income. In 2026 the country spends eleven billion euros on salaries in the public sector. According to the OECD, nowhere do teachers earn more; the average salary in the civil service lies around a hundred thousand euros, and an automatic index raises it with the cost of living. In the civil service nine employees in ten are Luxembourgers; the national language keeps the cross-border workers away. The strangers produce the gross domestic product, the natives administer it. The civil service has become the sinecure of a statist population that does not experience it as a privilege because it knows nothing else. One recognises the ideal of being passed along from institution to institution, which I know from Vienna as the life plan of the middle class: kindergarten, school, university, public office, retirement. In Luxembourg it has become the ideal of an entire nationality.

The bill has been written, only not yet delivered. The pension system depends on more cross-border workers paying in every year than pensioners drawing out; in 2022 there were 2.3 contributors to every pensioner, and by 2070, according to the OECD, the ratio falls below one. Productivity has stagnated for fifteen years, growth came solely from more workers, and housing costs 78 per cent more than the European average. The country consumes its capital like the Union: high claims, little replenishment, and a bill to people who are not yet allowed to vote. The Union is on a large scale what Luxembourg is on a small one: an apparatus that lives off the substance that Europeans built up over centuries at their own risk. Its functionaries take their own funding as proof of their productivity.

The model pupil

In November 2014 a group of journalists published 548 tax rulings. A single advisory firm had negotiated them with the Luxembourg tax administration, for more than 340 corporations and during the years in which Jean-Claude Juncker governed the country. The rulings became public a few days after he took office as President of the Commission. A year earlier the country had surrendered its bank secrecy for foreigners. Since then the former tax haven has been the most correct place on the continent: it transposes every directive first, keeps every register and reports every arrangement, while participation income remains exempt and funds remain largely untaxed. The over-correct execution has, however, itself become the business. Every rule from Brussels creates new posts, law firms, auditors and fees in Luxembourg, and all of it is paid for out of the wealth that the rule supposedly fences in.

On the Kirchberg, where the outworks of the fortress stood until 1867, 14,500 officials of the Union work today, more than anywhere except Brussels. The Court of Justice, the Investment Bank, the Court of Auditors and the Stability Mechanism are based here. The country supplied three Presidents of the Commission, more than any other. Luxembourg lives off the Union as a spa town lives off its baths, and the Luxembourgers have learned to confuse their existence with that of the apparatus.

Juncker

Juncker is the prototype of the technocratic functionary, and one does him no justice by making him a villain. He was prime minister for 18 years, multilingual, witty and, in a rare way, candid about his method. In December 1999 he described it to «Der Spiegel»: «We decide something, then put it out there and wait a while to see what happens. If there is no great outcry and no uprising, because most people do not understand what has been decided, then we carry on, step by step, until there is no turning back.» In 2007, asked about reforms, he added that we all knew what to do; we simply did not know how to get re-elected afterwards. In April 2011, in the midst of the euro crisis, came the sentence: «When it becomes serious, you have to lie.» At the beginning of 2015 he told the Greek government in «Le Figaro» that there could be no democratic choice against the European treaties. In 2010 he called Switzerland a «geostrategic absurdity». Ten years ago I wrote that I would turn his sentence about lying around: when you have to lie, it is serious. In 2013 he had to resign because the secret service under his supervision had tapped politicians' telephones, taken bribes and bought luxury cars for private use; a year later he became President of the Commission. Politics is the only field in which failure leads to more power and income.

The functionary does not notice what he gives away; he shows his method with the pride of a craftsman. A system that distributes attracts people who want to distribute and promotes those who do it quietly. After a few decades the distributing class is the only one that still reliably reproduces itself, and its best are people like Juncker: gifted, loyal, untroubled by the question of who pays for it all. Luxembourg brought him forth as it brings forth its civil servants, and sent him to Brussels.

The squandering of prosperity

The squandering of prosperity, Wohlstandsverwahrlosung, expresses itself in the search for pseudo-problems out of existential boredom, in living off the unearned and the ununderstood, in high expectations under low pressure to perform, in substitute religions, in virtue signalling and above all in a cushion that separates one from reality. Venice, Bruges, Antwerp, Amsterdam and lastly Vienna passed through the same sequence: merchants became rentiers, rentiers became pensioners of their own past.

Fifteen years ago I was invited to Luxembourg as a speaker at an international conference of central bankers. For one dinner an entire castle had been hired, complete with its own trumpeters and professional court jesters. Along a long red carpet the lords of our age strode through the gate to fanfares, and in the hall of the European Investment Bank, modelled on a parliament, I took my place on the government bench. The fringe programme alone made clear that I was very close to the source of money. The jesters were allowed to juggle and to tell harmless jokes. That is status consumption in its purest form, and in Luxembourg it is seldom paid for privately.

The traces of this consumption become visible with delay. A few hundred metres from the old town, which is a World Heritage site, a restaurateur in the station district clears syringes, rubbish and excrement from his doorstep every morning. In May 2025 the mayor called the situation «dramatic», and the government presented a second drugs plan. A video that presented the district as the worst quarter in the country angered the authorities in 2026 more than the condition that it showed. The great majority of the residents who demonstrated in 2023 under the motto «Save the Gare» may not vote.

That people in so rich a country failed to notice this decay for so long is no accident: the budget is large enough to answer every deterioration with a programme before it reaches anyone who decides. The Luxembourgers who fill the posts seldom live by the station, and whoever lives there decides on no posts.

The trap of the financial centre

In Zug I called the layer of trustees, lawyers and compliance specialists parasitic, and I meant it as a description of their function. Whoever is paid voluntarily because he resolves a real conflict or protects property creates value; whoever lives off politically generated complexity draws on the production of others. In Luxembourg that layer is largely identical with the financial centre. A fund that is to be sold in Europe needs a Luxembourg shell, and the shell needs a depositary, a management company, an auditor, a law firm, a notary and a supervisory fee. None of them improves the investment; all are there because all the others are there, and each charges a fee that has little to do with his contribution. The return is largely unearned and nonetheless legal, audited and certified. For the investor this is a trap: the tax privilege is real, but it is paid for with a map of one's own financial existence that grows more complete every year. After a few years, dissolution costs more than continuation. One can protect wealth from taxes in Luxembourg; from its own administrators, hardly any more.

Added to this is the Cantillon effect. New money first reaches large borrowers, the subsidised and public employees, and Luxembourg brings all three together in a very small space. The country's fund assets tripled between 2006 and 2021 while productivity stagnated; prosperity grows with the money supply, hardly with performance.

A trading house without merchants

Zug became a trading house for the world because merchants came who connected time, place, risk and knowledge afresh and paid for their own errors. Luxembourg has developed the form of the trading house more perfectly than any other place in Europe: it keeps the books, holds the custody accounts and checks the beneficial owners. The merchants, however, sit in London, New York, Paris and Frankfurt and never enter the trading house. What remains of entrepreneurship belongs to foreigners or is played at by the state. In 2017 the country set aside 200 million euros for asteroid mining and within two years lost the twelve million that it had entrusted to an American company. Zug has neighbours who can do better and citizens who are allowed to say no. Luxembourg has the Union, and the Union has in Luxembourg its model.

Luxembourg does at least possess time, a cushion and low debt. Unfortunately time is exactly what the squandering of prosperity needs to become irreversible. The small state protects against nothing as long as it remains a state whose offer nobody can refuse. The fortress was razed in 1867, and the city grew rich because it was no longer allowed to be a fortress. On the Kirchberg a new fortress made of forms has been growing ever since, and in it wealth is less defended than besieged.

Acknowledgements: The Luxembourg lawyer Laurent Heisten contributed important background that has found its way into this essay. I thank Christian Langer and the Hayek Society for the invitation to Trier, which once again took me by way of Luxembourg.

A note on sources

Population, employment and cross-border workers: Statec (as of 1 January 2026 and end of 2025). Public expenditure, personnel costs and growth in posts: budget 2026 and the analysis of the Chamber of Commerce (Carlo Thelen, October 2025). Productivity, pensions and the financial sector: OECD Economic Survey Luxembourg 2025. Steel history: luxembourg.public.lu. Fund centre: CSSF, Luxembourg for Finance. LuxLeaks: ICIJ, November 2014. Juncker quotations: Der Spiegel 52/1999; The Economist, 15 March 2007; dapd/Spiegel, April 2011; Le Figaro, February 2015; Die Zeit, December 2010. Station district: Le Quotidien (September 2023), L'essentiel (May 2025 and 2026), Tageblatt. Space law: statement of the Minister of the Economy to Parliament, November 2018.