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A Tiny State With Lots Of Power...Hopes Unity Doesn't Go Too Far (Int'l Edition)

International -- Spotlight on Luxembourg


Gaston Thorn, Luxembourg's ex-Prime Minister and former president of the European Commission, pulled on his overcoat to leave for lunch. "Au revoir, Har Thorn," his secretary said.

Thorn smiled at the polyglot good-bye. On official matters, Luxembourgers write in French. But the newspapers are in German, and both tongues are taught in the schools. "Now you understand why Luxembourg enjoys the role of honest broker," Thorn tells his visitor. "We are located between the two great European powers, we speak both languages, and we understand both cultures."

That helps the country of 405,000 people play a giant role on the European stage. Another ex-Prime Minister, Jacques Santer, is president of the European Commission, while at December's Dublin summit, Prime Minister Jean-Claude Juncker, in fluent French and German, brokered a compromise between Paris and Bonn on a future single currency. In July, Luxembourg will take over the rotating six-month European Union presidency and gain a key say in forging Europe's upcoming monetary union. It could also make it the author of the treaties needed for entry of new East European members. However, the outsize power enjoyed by small states could be cut back if the EU is expanded.

Luxembourg's status as a tax haven--foreigners pay no capital-gains levy--could also be at risk: Germany's Theodor Waigel recently led a chorus of calls by fellow European finance ministers for a common tax policy.

Meanwhile, though, the tiny state can cry all the way to the bank. As the rest of Europe struggles to meet the stiff criteria for monetary union, Luxembourg passes the entry test without breaking a sweat. Its budget is in surplus, its debt minuscule, its money sound, and its inflation low. Enjoying Western Europe's highest per capita income, locals expressed alarm when, horror of horrors, unemployment recently jumped to an ungodly high of 3.7%. However, Lucien Thiel, managing director of the Luxembourg Bankers' Assn., explains that "one-third of our workers commute from neighboring countries, so in a certain sense, we have overemployment."

TRAFFIC JAMS. Luxembourg's new economic engines are broadcasting and, more particularly, banking--both gifts of geography. Gleaming offices have replaced Luxembourg City's elegant villas, gourmet restaurants are packed, and rush hour in the compact town is terrible. "It's probably easier to get out of New York at 5 p.m. than here," snaps Serge Kolb, economics director at the Institut Monetaire Luxembourgeois.

Money has flowed into Luxembourg banks since the 1960s from foreigners evading their local tax man. "The Belgian dentist with a suitcase of cash became sort of a stereotypical figure around here," says Simon Gray, editor-in-chief of Business Luxembourg. Then, in 1992, Bonn slapped a 30% withholding tax on investment income. Now, almost every second license plate in the center city seems German. "When the new law came in, we had long queues waiting for us to open the branch," admits Adrien Ney, managing director of Commerzbank International.

German pressure could hurt this thriving business. So could the advent of a single Euro currency. In one stroke of the pen, their lucrative business issuing German mark and French franc bonds will vanish. "We'll have to compete harder for business," admits Andre Roelants, chief executive of Banque Internationale a Luxembourg.

Yet he and other Luxembourg bankers remain confident. They are trying to build up strong positions in new markets such as private pension funds. "Pensions will be a strong growth area as governments cut back on public social security," predicts Thiel of the Bankers' Assn.

Just as important, Thiel and others expect their country's privileged status as a tax haven to continue into the Euro era. Britain, he points out, doesn't want to be forced to adopt high European tax rates and also opposes a common withholding tax. "Europe's leaders may agree on a common currency," he says. "But they'll never agree on a common tax policy."

And as long as leaders disagree, little players such as Luxembourg will profit from gaps in the creaky edifice of a single Europe.By William Echikson in Luxembourg EDITED BY TIMOTHY BELKNAPReturn to top

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