Luxembourg — Venice of the North

Venice built one of the most powerful empires of the Middle Ages. From its founding in the fifth century AD by the residents of Northern Italian towns fleeing Attila the Hun, it steadily increased its wealth and power — and managed to acquire large portions of land. At its heyday, La Serenissima, or the “Most Serene” as Venice was known, extended west almost as far as Milan. It also controlled most of the eastern Adriatic coast of what eventually became Yugoslavia.

But while Venice had a formidable navy and the land army to underpin its position in the world until the 17th century, its true power came from its role as a trading intermediary between the east and the west. It equipped and financed merchants trading by land and sea — with the Byzantine Empire, the Middle East, India and as far away as China. In fact, Marco Polo, believed to be the first European to have traveled in China in the late 1200s, hailed from Venice.

For all its territorial expansion, Venice remained, at its core, a city-state. Even by the standards of the day, it was a fairly small city: at its peak, a bit more than 200,000 people lived on a cluster of islands that was Venice proper. But this handful of islands was where the dependable political structure, the strong financial muscle, and the vast naval power that controlled the far-flung empire was concentrated.

As a city-state acting as a trading hub, Venice was merely the most successful and longest-lasting of a number of trading city-states going all the way to Ancient Greece. In Europe in the early Middle Ages, Venice had powerful rivals, such as Amalfi in the south of the Italian peninsula and Genoa in the east. Venice and Genoa fought four wars during 13th and 14th centuries. That is a record that even Germany and France did not surpass in the 19th and 20th centuries.

Historians ascribe the decline and fall of Venice to two causes. First, there was a change in trade routes. When Columbus discovered America in 1492 and Portuguese explorer Vasco da Gama successfully rounded the Cape of Good Hope in 1499, finding a cheaper and less perilous way of reaching India and the Far East, the importance of Venice began to dwindle.

Another blow came when larger countries, such as England, France and Spain, began building their own vast empires, which were beyond the means of a city-state and required a much larger population.

Despite these factors, the city-state tradition lived on. It can be argued, for example, that the Netherlands, which replaced Venice as a maritime power by the 17th century, was really a collection of provinces anchored by city-states. The similarity was enhanced by the fact that the Low Countries, just like the city of Venice, stands in part on man-made ground, which its people conquered from the sea.

In the 20th century, the city-state tradition has been successfully carried on by Hong Kong, which has functioned successfully as a financial hub and a trading intermediary between mainland China and the rest of the world.

Amsterdam, because of its numerous canals, is one of those cities that are sometimes called the “Venice of the North.” But it is really Luxembourg, its neighbor and partner in the old Benelux trading bloc, that has in many ways inherited the mantle of Venice today.

The Grand Duchy of Luxembourg is the smallest member of the European Union. Its territory is only about 2,500 square kilometers and it has a population of less than half a million, of which nearly 20% live in the capital. Unlike Venice, it is landlocked, squeezed between Germany, France and Belgium.

Yet Luxembourg shares Venice’s qualities as an intermediary — both with outsiders and among members of the same trading bloc. Just like Venice during the time of its global domination, the Grand Duchy is one of the most important financial centers of Europe. It has over 200 banks from 25 countries. Some 30 of the world’s leading 50 banks are represented in Luxembourg. Banking, according to PriceWaterhouseCoopers, is directly responsible for some 20% of the Grand Duchy’s GDP.

Even more important than the presence of the world’s leading financial institutions are the country’s loose banking laws. True, Luxembourg regularly gets into hot water with global authorities in charge of combating money laundering and illegal financial transfers across national borders. But it also simplifies doing business for millions of honest businessmen in countries, which have a high-risk credit profile, restrictive financial laws or an anti-business mentality. Private banking is a Luxembourg specialty.

The Luxembourg Stock Exchange lists a large number of international Eurobonds, as well as banks, financial institutions and companies from the Middle East, North Africa and other parts of the world that more established bourses would snub. Emphasizing Luxembourg’s role as a financial center, one of the two global securities clearing houses, Clearstream, is headquartered there.

As befits an intermediary, Luxembourg is remarkably open to trade. Exports of goods and services account for a whopping 130% of GDP. Imports are slightly smaller, but also easily surpass the overall size the country’s economy.

Just like its classical counterpart, Luxembourg is actually richer than the trading partners whose trade and financial transactions it facilitates. GDP per head last year was $45,800, making Luxembourg the richest country in the European Union. Luxembourg riches have made its inhabitants 50% wealthier than the Swiss on a purchasing power parity basis — and they make $10,000 more than the average American a year!

The only difference from once-upon-a-time Venice, or any other trading hubs of yesteryear, is that Luxembourg’s citizens no longer need to brave the seas and travel the world in order to perform their roles as intermediaries. In today’s world, dominated as it is by global financial flows and information technology, it is just as easy for the rest of the world to come to Luxembourg.