COUNCIL OPINION

of 15 March 1999

on the stability programme of Luxembourg, 1999 to 2002

(1999/C 124/05)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulaltion (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(1) and (2) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

On 15 March 1999, the Council examined the stability programme of Luxembourg, which covers the period 1999 - 2002. The Council notes with satisfaction that the government financial accounts will continue te be in surplus throughout the period covered by the programme, while the government gross debt to GDP ratio will remain very low. The Council notes that, from a formal point of view, the stability programme is only partially in line with the agreed code of conduct on the content and format of stability and convergence programmes. The Council considers that the programme is consistent with the Broad Economic Policy Guidelines.

The stability programme presents three macroeconomic scenarios for the period 1999 to 2002. Under the central macroeconomic scenario, which for reasons of prudence the programme takes as the basis for the public finance projections, real GDP growth is estimated at 3,4 % for 1999 rising to 3,7 %, on average, for the period 2000 to 2002. The least favourable scenario forecasts GDP growth of 2,8 % for 1999 and 3,0 % for the period 2000 to 2002, while growth under the most favourable scenario is projected to reach 4,0 % in 1999 and 4,5 % during 2000 to 2002.

The Council considers that the macroeconomic framework presents, under the three alternative scenarios, a range of plausible assumptions for GDP growth, which are in line with the record of past performance and the long-term potential of the economy of Luxembourg. The general government accounts, expected to remain in surplus over the period under all three scenarios, is estimated at 1,7 % of GDP in 2002, under the central scenario, and at 1 % and 2,5 % of GDP under the least and most favourable scenarios, respectively.

The Council notes that the performance of the economy in recent years and sound policies have been the basis of the healthy public finances situation achieved by Luxembourg. It commends the approach of the programme to pursue further the joint strategy of sound public finance management, together with the effort to improve the functioning of the economy through structural reforms and other appropriate policy measures. The Council welcomes in this respect the planned government action involving active employment and equal opportunities policies, development of enterprise initiative and professional training.

The Council shares the analysis of the programme that a small open economy such as that of Luxembourg may be subject to wide variations of economic acivity and, therefore, should dispose of an adequate safety margin in order to cope with cyclical fluctuations while being able to maintain a sound budgetary position and puruse active policies. The Council considers that the projected surplus in the general government accounts provides an adequate safety margin in order to avoid breaching the 3 % of GDP reference value for the deficit, under normal cyclical movements. Moreover, the very low level of government debt ratio enhances this safety margin. Therefore, the budgetary targets of the stability programme of Luxembourg are in conformity with the requirements of the Stability and Growth Pact. The Council welcomes the readiness of the government to take the necessary measures to ensure respect of the budgetary targets in case of weaker than projected economic growth.

The Council notes, however, that the effort to control the growth of public expenditure should continue; in this respect, the decision of the government to extend over the next five years the limit on the growth of central government expenditure, in place since 1994, is appropriate. The Council considers that vigilance must also be exercised regarding the other components of public expenditure, in particular social security spending, taking account of the budgetary cost of policies undertaken in this area; such expenditure control, underpinned by the necessary reforms, is also necessary to prepare for the challenge of population ageing.

(1) OJ L 209, 2.8.1997, p. 1.