# EUR-Lex - 52014DC0417 - EN

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# 52014DC0417

**Recommendation for a COUNCIL RECOMMENDATION on Luxembourg’s 2014 national reform programme and delivering a Council opinion on Luxembourg’s 2014 stability programme /* COM/2014/0417 final - 2014/ () */**

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Recommendation for a

COUNCIL RECOMMENDATION

on Luxembourg’s 2014 national reform
programme
and delivering a Council opinion on Luxembourg’s 2014 stability programme

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the
Functioning of the European Union, and in particular Articles 121(2) and 148(4)
thereof,

Having regard to Council Regulation (EC) No
1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary
positions and the surveillance and coordination of economic policies[1], and in particular
Article 5(2) thereof,

Having regard to the recommendation of the
European Commission[2],

Having regard to the resolutions of the
European Parliament[3],

Having regard to the conclusions of the
European Council,

Having regard to the opinion of the
Employment Committee,

Having regard to the opinion of the
Economic and Financial Committee,

Having regard to the opinion of the Social
Protection Committee,

Having regard to the opinion of the
Economic Policy Committee,

Whereas:

(1) 
On 26 March 2010, the European Council agreed to
the Commission’s proposal to launch a new strategy for growth and jobs, Europe
2020, based on enhanced coordination of economic policies, which will focus on
the key areas where action is needed to boost Europe’s potential for
sustainable growth and competitiveness.

(2) 
On 13 July 2010, the Council, on the basis of
the Commission's proposals, adopted a recommendation on the broad guidelines
for the economic policies of the Member States and the Union (2010 to 2014)
and, on 21 October 2010, adopted a decision on guidelines for the employment
policies of the Member States, which together form the ‘integrated guidelines’.
Member States were invited to take the integrated guidelines into account in
their national economic and employment policies.

(3) 
On 29 June 2012, the Heads of State or
Government decided on a Compact for Growth and Jobs, providing a coherent
framework for action at national, EU and euro area levels using all possible
levers, instruments and policies. They decided on action to be taken at the
level of the Member States, in particular expressing full commitment to achieving
the objectives of the Europe 2020 Strategy and to implementing the
country-specific recommendations.

(4) 
On 9 July 2013, the Council adopted a recommendation
on Luxembourg’s national reform programme for 2013 and delivered its opinion on
Luxembourg's updated stability programme for 2012-2016. On 15 November 2013, in line with Regulation (EU) No 473/2013[4],
the Commission presented its opinion on Luxembourg's
draft budgetary plan for 2014[5].

(5) 
On 13 November 2013, the Commission adopted the
Annual Growth Survey[6],
marking the start of the 2014 European Semester of economic policy
coordination. On the same day on the basis of Regulation (EU) No 1176/2011, the
Commission adopted the Alert Mechanism Report[7],
in which it identified Luxembourg as one of the Member States for which an
in-depth review would be carried out.

(6) 
On 20 December 2013, the European Council
endorsed the priorities for ensuring financial stability, fiscal consolidation
and action to foster growth. It underscored the need to pursue differentiated,
growth-friendly fiscal consolidation, to restore normal lending conditions to
the economy, to promote growth and competitiveness, to tackle unemployment and
the social consequences of the crisis, and to modernise public administration.

(7) 
On 5 March 2014, the Commission published the
results of its in-depth review for Luxembourg[8],
under Article 5 of Regulation (EU) No 1176/2011. The Commission's analysis leads
it to conclude that Luxembourg is not experiencing macroeconomic imbalances in
the sense of the Macroeconomic Imbalance Procedure. In particular, the analysis of the current account surplus shows
that it does not stem from anaemic domestic demand, but is rather the result of
Luxembourg's particular growth model, which is strongly based on financial
services. Risks to the domestic financial stability stemming from the presence
of a large financial sector exist but they are relatively contained as the sector
is diversified and specialised at the same time. The high level of indebtedness
in the private sector, in particular among the non-financial corporations
mainly reflects the presence of a large number of multinational firms that use
their branches or subsidiaries in Luxembourg for intra-group financing
operations. Finally, the current favourable position of public finances is
highly dependent on the sustainability of a growth model based on a buoyant
financial sector and presents a high sustainability risk in the long term.

(8) 
On 28 April 2014, Luxembourg submitted its 2014 national
reform programme and on 25 April 2014 its 2014 stability programme. In order to
take account of their interlinkages, the two programmes have been assessed at
the same time.

(9) 
The objective of the medium-term budgetary
strategy outlined in the 2014 Stability Programme is to return to the medium-term
objective in 2016, after significantly deviating from it in 2015. The programme
confirms the previous medium-term objective of a surplus of 0.5% of GDP, which
reflects the requirements of the Stability and Growth Pact. The (recalculated)
structural general government surplus is foreseen to decline from 1.4% of GDP
in 2013 to 1.1% in 2014, before turning into a deficit of 0.1% of GDP in 2015.
Thereafter, gradually increasing structural surpluses are planned to be
achieved. Therefore, Luxembourg is expected to remain at its medium-term
objective in 2014, but to significantly deviate from it in 2015. According to
the programme, the growth rate of government expenditure, net of discretionary
revenue measures, would be above the reference medium-term rate of potential
GDP growth in 2015. Overall, the programme objectives are partly in line with
the requirements of the preventive arm of the Stability and Growth Pact, with a
deviation in particular in 2015. The debt ratio, which stood at 23.1% of GDP in
2013, well below the 60% of GDP reference value, is projected to further
decline over the programme period. The macroeconomic scenario underpinning the
budgetary projections in the programme, which has been prepared by an
independent body (STATEC) is slightly optimistic for 2014 and 2015. The
government projects a GDP growth rate of 3.2% in both 2014 and 2015, whereas
the Commission 2014 spring forecast foresees 2.6% and 2.7%, respectively.
Furthermore, the measures underpinning the fiscal trajectory for the period
2015-18 have not yet been fully specified by the authorities. According to the
Commission forecast, which does not take into account the most recently
announced measures, the structural surplus is estimated to decline to 0.6% of
GDP in 2014 and turn to a deficit of 1.3% of GDP in 2015. The growth rate of
government expenditure, net of discretionary revenue measures, is estimated to
be above the reference medium-term rate of potential GDP in 2015, when a
significant deviation is expected. Based on its assessment of the 2014 Stability
Programme and the Commission forecast, pursuant to Council Regulation (EC) No
1466/97, the Council is of the opinion that there are risks to the achievement
of the targets of the programme, which are only partly in line with the requirements
preventive arm of the Stability and Growth Pact, in particular as of 2015.

(10) 
The government submitted to Parliament in July
2013 a draft bill on the transposition of the provisions of the Council
Directive 85/2011 on budgetary frameworks and the Treaty on Stability,
Coordination and Governance. While the draft law was expected to enter into
force on 1 January 2014, its adoption was delayed by the resignation of the
government in July. According to the draft bill, a new Multiannual Finance
Programme Law is introduced covering the same time horizon as the forthcoming
update of the Stability programme. The Multiannual Finance Programme Law would
be updated annually on a rolling basis, together with the annual budget. It
would detail plans to achieve the medium-term budgetary objective at the level
of the general government. The draft bill introduces multi-annual ceilings in
the Multiannual Finance Programme Law that would cover the central government
sector only, but there is no specification on the consequences in case ceilings
are exceeded. The draft bill does not foresee a national expenditure rule that
would guide the setting of multi-annual expenditure targets. However, it
contains provisions for the adjustment path to the medium-term objective to be
respected. A revised draft of the law was submitted to the Parliament in March
2014, and amongst else provides for the allocation of the task for the
independent monitoring of fiscal rules to a newly created institution, the
"Conseil National des Finances Publiques".

(11) 
In addition, tax revenues from VAT will be hit
by the new rules on VAT revenues generated from e-commerce activities. As from
2015, such revenues will be transferred from the country where the supplier is
located to that of the residence of the customer. The government has announced
that the VAT rates will be increased by 2pps, which should partially compensate
for the revenue loss. However, given the widespread use of reduced and super
reduced rates, additional revenue can be raised by
extending the application of the standard rate and thereby compensate more
largely for the above-mentioned losses.

(12) 
Gross public pension expenditure as a proportion
of GDP in Luxembourg is to increase, according to figures of the 2012 Commission's
Ageing Report, from 9.2% of GDP to 18.6% in 2060. This is mostly due to age-related
spending and in particular to pensions. The 2012 pension reform was limited in
scope and did not substantially address the threat posed to the long-term
sustainability of the public finances. Short-term financing of the pension
system is currently guaranteed by a low old-age dependency ratio and relies on
the contributions paid by the relatively young population of cross-border
workers. In the future, this trend is expected to reverse and pension costs, as
well as long-term care costs, will probably increase substantially. In order to
guarantee the viability of the pension system, a substantial increase in the
contribution rate would be necessary after 2020, in addition to the built-in
moderation of the adaptation of pensions to the standard of living. This would
entail a significant increase in the burden on labour supported by the future
active population and consequently a loss of cost competitiveness. Given the
currently high level of the replacement rate, some different measures could
have been taken so as to ensure a fairer distribution of the burden across
generations. The introduction of a cap on pension adjustments based on real
wage increases would increase pension reserves. In addition, increasing the
effective retirement age, currently situated at the age of 59, by aligning it
to change in life expectancy would help to ensure the long-term sustainability
of the pension system. Also, the possibilities for early retirement should be
reduced. Financial incentives to prolong working careers, as provided for in
the pension reform, may contribute to the sustainability of the pension system,
but the employability of older workers should be further improved by
reinforcing vocational education and lifelong learning. Luxembourg needs to
curb the future need for and related costs of, long-term care to ensure its
sustainability. Long-term care services could also be made more cost-effective
by strengthening coordination between healthcare and social care, improving
service delivery and better supporting family carers.

(13) 
Luxembourg's large current account surplus is
driven by financial services and masks a persistent and gradually increasing
deficit in the trade balance for goods, which stems from slow export growth.
While this trend reflects the increasing importance of the service sector in
the economy, it is also due to a more structural loss of cost-competitiveness.
The recent steady increase in the unit labour cost has undermined the
competitiveness of Luxembourg's industrial fabric. The modulation of the wage
indexation mechanism adopted by the government in 2012 will be terminated by
the end of 2014. While different avenues could be explored, it is important
that wages are more closely tied to productivity by means of a reform of the
wage indexation system, allowing for sectoral differentiation. The heavy
dependence on the financial sector represents a structural risk for the
Luxembourg economy. Therefore, Luxembourg needs to focus on the development of
highly specialised firms as a springboard for innovation-driven growth. While
the quadrupling of public sector R&D intensity since 2000 reflects the
resolve to build up public research capacities, Luxembourg is not on track to
reach its 2020 R&D intensity target of 2.3-2.6% of GDP, due to the sharp
decrease in business R&D intensity (from 1.53% of GDP in 2000 to 1% in 2012).
Its performance on the indicators on cooperation between public research
institutions and firms should be further improved. The reform launched in 2013
on the reinforcement of innovative clusters should be pursued.

(14) 
Although various measures have been adopted,
youth unemployment is persistently high, at 17.4% of the active population in
2013, albeit decreasing from 18% in 2012. It depends heavily on educational
level and is lower among those with a higher educational attainment.
Luxembourg’s education system faces a number of specific challenges, such as
multilingualism and the specific skills required by a highly specialised labour
market with a big financial sector. The results of the OECD's 2012 students'
skills survey confirmed that further measures are needed to counteract young
people's relatively weak performance in basic skills, as observed since 2006.
In this respect, the primary and secondary school reforms should be pursued. In
addition, the quality and attractiveness of vocational and educational training
should be further improved in order to provide the labour market with a
qualified workforce, including in particular people with a migrant background.
The design of the tax and benefit system is at the origin of very high labour-market
traps, among the highest in the EU, for all wage levels and family
compositions. Also, despite recent reform efforts, activation policies remain
weak; participation in active labour market policies is not compulsory at any
point during the period of unemployment, and there is no requirement to
continue job-seeking while participating in active labour market policies.

(15) 
Luxembourg is committed to reducing its
greenhouse gas emissions in the non-ETS sectors by 20% in 2020, but is expected
to miss this target by 23 percentage points. In addition, 2013 emissions are
expected to be 1% higher than the target set for 2013 in the Effort Sharing
Decision. Around 70% of transport-related emissions are connected to fuel
exports, inter alia as a result of very low excise duties on fuels. The
recognition of fuel export as a key challenge in the second National Climate
Action Plan adopted in May 2013 is a step forward. However, more specific and
long-term measures are needed to address this issue. Environmental taxation
accounted for 2.4% of GDP in 2012, whereas in 2004 it accounted for 3.1 %. This
drop is driven in particular by lower energy tax revenues influenced by the
absence of indexation on energy taxes. Transport taxes, excluding fuels, represented
0.2% of GDP in 2012. Taxes on fuel used for transport are high at 2.2% of GDP,
in spite of the preferential tax treatment of diesel, mostly owing to 'fuel-pump
tourism'. With environmental taxation accounting for a below-average proportion
of total tax revenue, the design of its environmental taxes can be improved, in
particular by increasing taxation on energy products for transport.

(16) 
In the context of the European Semester, the
Commission has carried out a comprehensive analysis of Luxembourg's economic
policy. It has assessed the stability programme and the national reform
programme. It has taken into account not only their relevance for sustainable
fiscal and socio-economic policy in Luxembourg but also their compliance with
EU rules and guidance, given the need to reinforce the overall economic
governance of the European Union by providing EU-level input into future
national decisions. Its recommendations under the European
Semester are reflected in recommendations (1) to (5) below.

(17) 
In the light of this assessment, the Council has
examined Luxembourg’s stability programme, and its opinion[9] is reflected in
particular in recommendation (1) below.

(18) 
In the context of the European Semester the
Commission has also carried out an analysis of the economic policy of the euro
area as a whole. On the basis of this analysis the Council has issued specific recommendations
for the Member States whose currency is the euro. Luxembourg should also ensure
the full and timely implementation of these recommendations.

HEREBY RECOMMENDS that Luxembourg
take action within the period 2014-2015 to:

1. 
Preserve a sound fiscal position in 2014;
significantly strengthen the budgetary strategy in 2015 to ensure that the
medium-term objective is achieved and remain at the medium-term objective
thereafter, in order to protect the long-term sustainability of public
finances, in particular by taking into account implicit liabilities related to
ageing. Strengthen fiscal governance by speeding up the adoption of a
medium-term budgetary framework covering the general government and including
multi-annual expenditure ceilings, and by putting into place the independent
monitoring of fiscal rules. Further broaden the tax base, notably on
consumption.

2. 
In view of ensuring fiscal sustainability, curb
age-related expenditure by making long-term care more cost-effective, pursue
the pension reform so as to increase the effective retirement age, including by
limiting early retirement and linking the statutory retirement age to life
expectancy. Reinforce efforts to increase the participation rate of older
workers, including by improving their employability through lifelong learning.

3. 
Speed up the adoption of structural measures, in
consultation with the social partners and in accordance with national practices,
to reform the wage indexation system with a view to improving the responsiveness
of wages to productivity developments, notably at sectoral level. Pursue the
diversification of the structure of the economy, including by fostering private
investment in research and further developing cooperation between public
research and firms.

4. 
Pursue efforts to reduce youth unemployment for low-skilled
jobs seekers with a migrant background, through a coherent strategy, including
by further improving the design and monitoring of active labour market policies,
addressing skills mismatches, and reducing financial disincentives to work. To
that effect, accelerate the implementation of the reform of general and vocational
education and training to better match young people's skills with labour
demand.

5. 
Develop a comprehensive framework and take
concrete measures to meet the 2020 target for reducing greenhouse gas emissions
from non-ETS activities, especially through the taxation of energy products for
transports.

Done at Brussels,

For
the Council

The
President

[1]               OJ L 209, 2.8.1997, p. 1.

[2]               COM(2014) 417 final.

[3]               P7_TA(2014)0128 and P7_TA(2014)0129.

[4]               OJ L 140, 27.5.2013, p.11.

[5]               C(2013) 8006 final

[6]               COM(2013) 800 final.

[7]               COM(2013) 790 final.

[8]               SWD(2014) 84 final.

[9]               Under Article 5(2) of Council Regulation (EC) No
1466/97.