Although the right to mint money is a sovereign prerogative par excellence, Luxembourg’s relationship with its currency has long been troubled. Until the beginning of the 21st century, several currencies circulated in the grand duchy. Foreign, Prussian, French and Belgian currencies were all used. While in the mid-19th century the Prussian thaler was the main currency of payment, the unit of account used in Luxembourg was the Belgian franc. At that time, the Banque Internationale à Luxembourg, created in 1856, obtained the privilege of issuing Luxembourg banknotes. In 1873, the Banque Nationale du Grand-Duché de Luxembourg obtained the same right. demonstrated the difficulties of a small country in managing its own currency. It was not until the First World War that the government began to temporarily issue paper money created in Luxembourg. It was not until 1918 that a Grand Ducal decree used the term ‘Luxembourg franc’ for the first time.
The Belgian coup de force
In 1922, the Convention on Economic Union with Belgium came into force, entrusting the Belgians with the management of the Luxembourg franc on the basis of parity, with 1 Belgian franc equivalent to 1 Luxembourg franc. This parity was respected until the arrival of the euro, with the exception of a parenthesis between 1935 and 1944, when the Luxembourg franc was worth 1.5 Belgian francs. In 1935, a monetary agreement between Belgium and Luxembourg provided for the Banque Nationale de Belgique to establish a branch in Luxembourg and gave legal tender status to BNB banknotes in the grand duchy.
This co-management of the Luxembourg currency would go smoothly until 22 February 1982. On the night of 21-22 February 1982, the group of 10 finance ministers met in Brussels and carried out a readjustment within the European Monetary System during which the Belgian franc was devalued by 8.5%. This led to the de facto devaluation of the Luxembourg franc. The Luxembourgers protested against the Belgian government’s unilateral decision and called for a reorganisation of the Belgo-Luxembourg Economic Union.
Addressing the Chamber of Deputies on 9 March, Pierre Werner, Luxembourg’s prime minister, spoke of “a monetary devaluation that leaves a bitter taste in the mouths of Luxembourgers, even a trauma, for both substantive and procedural reasons.” He noted that Luxembourg’s economy and budget were in much better shape than the Belgian economy and, above all, that it was much more open to the international market. And he denounced a violation of the Benelux Treaty by Brussels: Luxembourg had been presented with a ‘fait accompli”’ And he mentioned better European monetary integration as a solution for the future. “A currency based on the ECU is not something I would dislike,” he told MPs, while admitting that such a path would be long.
The birth of the BCL
A new monetary association regime was then negotiated. The two states would be treated on an equal footing and, above all, the foreign exchange and gold reserves held by the National Bank of Belgium will be precisely delimited and separated. The regime also opened up the possibility for Luxembourg to issue banknotes or coins or to entrust this task, in whole or in part, to an existing or future institution.
This was done in 1983 with the creation by the Luxembourg legislator of the Institut monétaire luxembourgeois. The IML was responsible for issuing money and supervising the financial sector. It only became a fully-fledged central bank, the Luxembourg Central Bank (BCL), on 1 June 1998 with the establishment of the European System of Central Banks, a body bringing together the EU’s national central banks and the European Central Bank, in accordance with the Maastricht Treaty signed in 1992.
Read the original French version of this article on the site.