Luxembourg has an eventful monetary history and has only had a fully-fledged central bank since 1998.
- From the inception of the Luxembourg franc…
- …to the establishment of a European monetary union
In the course of the 19th century and until the 20th century, multiple currencies circulated in the Grand-Duchy. The French Revolution brought the standardised monetary and decimal system to Luxembourg. The Franc germinal, introduced in 1803, was widely accepted and retained its legal tender until 1825, even though Luxembourg adopted the monetary regime of the Netherlands in 1815, which lasted until its independence in 1839. In the meantime, Belgium, having obtained its independence, created its own currency, the Belgian franc, in 1832, which was subsequently introduced in Luxembourg.
The independence of the Grand-Duchy in 1839 and its consecutive adhesion to the German Customs Union (Zollverein) brought about the introduction of the Prussian thaler to Luxembourg, from 1842 onwards. The thaler became the main currency, even though the unit of account used in Luxembourg remained the Belgian franc.
In this context, two issuing institutions appeared in Luxembourg around the second half of the 19th century. First, the Banque internationale à Luxembourg (BIL), created in 1856, had the privilege of issuing banknotes and, like other private institutions in the then German confederation, the right to issue banknotes in several currencies: franc, florin, Prussian and Rhenish thalers. Second, the Banque Nationale du Grand-Duché de Luxembourg, a national issuing institution created in 1873, also issued banknotes that had legal tender in the Grand-Duchy’s public administrations. However, eight years later, due to operational and organisational deficiencies, the Banque Nationale ceased its activities.
During World War I the franc gradually replaced the German currency, particularly as Luxembourg exited the Zollverein in December 1918. Not only did the Luxembourg government start to temporarily issue paper money, but a law of 1914 also conferred legal tender to the notes issued by the BIL. In 1918, a grand-ducal decree used the term “Luxembourg franc” for the first time.
Luxembourg and Belgium signed a Convention for an Economic Union in 1921 which provided for a monetary association. As a result, a 1929 law established a parity of 1 to 1 between the Luxembourg and the Belgian francs. However, due to the devaluation of the Belgian franc in 1935, the exchange rate between the Luxembourg franc and the Belgian franc was set at 1.25 Belgian francs – the reestablishment of the 1 to 1 parity only took place in 1944 after the Liberation and was confirmed in 1949 and 1979. In 1935, a monetary convention between Belgium and Luxembourg allowed the National Bank of Belgium (NBB) to establish a branch in Luxembourg, and conferred legal tender to its notes on the territory of the Grand-Duchy.
Initiatives were put forward at the end of the 1950s and especially during the 1960s to create a monetary union at the level of the European Community. Several reports, including the one by the Luxembourg Prime Minister Pierre Werner (Werner Report, 1970), elaborated proposals to establish a European Monetary Union (EMU) in several stages – the natural outcome of the common market foreseen by the Treaty of Rome (1957). Against this background, the European Monetary System (EMS) was created in 1979 and fixed a fluctuation band around a bilateral central rate between European currencies. Faced with these European developments and the Belgian government’s decision to devalue the Belgian franc, and in order to confirm its monetary autonomy, the Luxembourg legislator established a national monetary institute in 1983 - the Institut monétaire luxembourgeois (IML). Whilst being entrusted with the issuing of banknotes and the supervision of the financial sector, the IML did not possess all the characteristics of a central bank. The law of 22 April 1998 foresaw that the IML would become Luxembourg’s central bank once the European System of Central Banks (ESCB) − comprising the national central banks (NCBs) of the European Union (EU) and the European Central Bank (ECB) − was in place, in accordance with the Maastricht Treaty signed in 1992. As the ECB was created on 1 June 1998, the ESCB came into force on the same day. The Banque centrale du Luxembourg (BCL) was born and the IML ceased to exist.
Eleven EU Member States were selected to enter the euro area at the European summit of 2 May 1998: Belgium, Germany, Ireland, Spain, France, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland. These Member States introduced the euro as scriptural money on 1 January 1999, when the euro area was endowed with a single monetary policy. Euro banknotes and coins were introduced on 1 January 2002. Since then, other EU Member States have been admitted into the euro area: Greece (2001), Slovenia (2007), Cyprus (2008), Malta (2008), Slovakia (2009), Estonia (2011), Latvia (2014), Lithuania (2015) and Croatia (2023).