While the vultures circle Europe, the second highest GDP per capita country has been able to continue business as usual, not having experienced a recession during the 2008 financial crisis. Filled with suited up bankers and bureaucrats, this country of about 500,000 is the second largest investment fund center in the world. The buses have padded seats and the bus drivers are grumpy despite their 30,000 Euro average wage. The streets are clean and often live music can be heard from the Place d’Armes square. In between the gare and the city runs the Vallée de la Pétrusse where one can peak at trimmed French-style gardens and abundant green, while the country’s golden lady keeps watch over the city center.

As private capital flees the Mediterranean tempête even the safest bets are not so safe anymore. As of France losing its Standard & Poor’s triple-A rating in January, Luxembourg is one of only four eurozone countries still holding the title, the others being Germany, the Netherlands, and Finland, but dark clouds are producing a perfect storm even over the little paradise of Luxembourg.

Luxembourg depends heavily on international business, more specifically service exports, as the third most open economy in the world. In 2010, 38 percent of Luxembourg’s GDP was based on the financial sector. This number does not take into account all of the services associated with banking including insurance, accounting, law firms, etc. that cater to the tastes of the purse-string holder banks that call the country home. However, new regulatory reform and the Euro Crisis are chopping away at the trunk of the economy.

In March, a European Commission draft paper, the Ucits V directive, singles out Luxembourg as inadequately protecting investors. This inadequacy was most visible in the use of Luxembourgish Ucits cross-border investment funds to channel money in the 2008 Madoff Ponzi scheme. Although Luxembourg’s authorities insist that accommodating regulators have not increased the country’s attractiveness for investors at the expense of France and Ireland, the country holds 31 percent of the 5.6 trillion Euro Ucits global market. In addition, the Euro Crisis will hit Luxembourg harder than the crises in the past. According to the President of the Association des Banques et Banquiers Luxembourg (ABBL), Ernst Wilhelm Contzen, “the golden days are over.” Luxembourg invested 1.3 billion Euros in Greek banks and in the past year bank profits have been down 25 percent. Furthermore, the financial sector accounts for about 30% of tax revenues as a percentage of the state budget. Thus, the government has looked for other venues to diversify its economy and settled on its most reliable trick: favorable tax policy.

In 2009, the country was placed on the OECD’s grey list as a tax haven, but has since been removed. Having learned its lesson, the government promotes business just slightly on the right side of legal in order to remain competitive, attracting multinationals scrounging to avoid taxes. However, this new venue is also under attack. With social movements, such as Occupy Wall Street and the Association pour la taxation des transactions financières et pour l’action citoyenne (ATTAC), lobbying for companies to “pay their fare share” and developing countries putting the same pressure on the G8, this source of revenue will lose profitability as regulatory reform ensues. To understand Luxembourg’s role in the international tax policies of the world’s biggest corporate players, these companies cycle money between Luxembourg and less tax friendly countries. For example, to avoid the UK’s 28 percent tax rate, GlaxoSmithKline opened a new company in Luxembourg that lent the UK headquarters 6.34 billion pounds, which was repaid in 124 million pounds in interest, which the Luxembourgish government agreed to tax at less than 0.5 percent. Through its subsidiary in Luxembourg, which employs only a few dozen, Apple is able to route 20 percent of iTunes’s worldwide sales, which exceeded $1 billion, through this quiet country, helping it achieve its 3.2 percent global tax rate in 2011. Thus, this adds to the perfect storm of economic disaster facing the country.

Luxembourg is positioned as the “negotiator” of Europe, but this corporate tax haven image is dampening this effect. Jean-Claude Juncker, Luxembourg’s Prime Minister, is head of the Euro Group, where the Finance Ministers of members of the eurozone discuss pressing issues to be presented to the Economic and Financial Affairs Council of the Council of the European Union. This is ideal for the country so as to make sure, despite its size, it can have its say in upcoming reform. The country also uses its multilingualism and political neutrality to punch above its weight at the European institutions.

According to an upper level official at the Ministry of Foreign Affairs: “The ‘honest broker’ is a kind of thing we are trying to do when we chair the E.U. In most areas, we don’t have direct interests when compared to most countries where the issues are too close to their national interests.” The country also uses its multilingualism, since Luxembourgers are taught in French and German, to help broker deals between its powerful neighbors of France and Germany. However, the press on its multinational tax policies will chip away at these relationships. Luc Frieden, the Minister of Finance, said he did not want Luxembourg “to live at the expense of other countries to whom [Luxembourg] owes so much and with whom Luxembourg works well”. Thus, the multinational tax policies and Ucits criticisms may bleed over and deplete Luxembourg’s political strength within the European Union.