EN    EN EN 
EN    EN  EUROPEAN COMMISSION 
Brussels, 12.5.2010 
SEC(2010) 588 final 
  
REPORT FROM THE COMMISSION 
Luxembourg 
 
Report prepared in accordance with  Article 126(3) of the Treaty 
EN 2   EN REPORT FROM THE COMMISSION 
Luxembourg 
 
Report prepared in accordance with  Article 126(3) of the Treaty 
1. T HE APPLICATION OF THE STABILITY AND GROWTH PACT IN THE CURRENT CRISIS 
SITUATION  
Many EU countries are presently facing genera l government deficits above the 3% of GDP 
reference value set in the Treaty. The often stro ng deterioration in the deficit as well as the 
debt positions must be seen in the context of the unprecedented global financial crisis and 
economic downturn. Several factors are at pl ay. First, the economic downturn has brought 
about declining tax revenue and rising social benefit e xpenditure (e.g. unemployment 
benefits). Second, recognising that  budgetary policies have an impor tant role to play in the 
current extraordinary economic situation, the Co mmission called for a fiscal stimulus in its 
November 2008 European Economic Recovery Plan (EERP), endorsed by the European 
Council in December. The Plan explicated that  the stimulus should be differentiated across 
Member States to reflect their different positions  in terms of public finance sustainability and 
competitiveness and should be reversed when economic conditions improve. Finally, several countries have taken measures to stabilise the financial sector, some of which have impacted 
on the debt position or constitute a risk of hi gher deficits and debt in the future, although 
some of the costs of the government s upport could be recouped in the future. 
The Stability and Growth Pact requires the Comm ission to prepare a report such as the present 
one whenever an actual or planned deficit of a Member State exceeds the 3% of GDP 
reference value. This report, which represen ts the first step in the “excessive deficit 
procedure” (EDP), analyses the reasons for the breach of the reference value with due regard 
to the economic background and all other relevant  factors. The amendmen ts to the Stability 
and Growth Pact in 2005 aimed specifically at ensuring that in partic ular the economic and 
budgetary background was fully taken into account in all steps in the EDP. This means for 
instance that, if an “excessive deficit” is deemed  to exist, adequate c onsideration needs to be 
paid to the economic background and outlook wh en making recommendations on the pace of 
the correction. In this way, the Stability and Growth Pact provides the framework supporting 
government policies for a prompt return to so und budgetary positions taking account of the 
economic situation. 
2. L
EGAL BACKGROUND  
This report, which assesses re cent and current budgetary developments in Luxembourg and 
reviews the short and medium-ter m prospects in the light of ove rall economic conditions and 
policy action taken by the government, is prepared  according to Article 126(3) of the Treaty 
on the Functioning of the European Union (TFEU). 
Article 126 TFEU lays down an ex cessive deficit procedure (EDP).  This procedure is further 
specified in Council Regulation (EC) No 1467/97 “on speeding up and clarifying the 
EN 3   EN implementation of the excessive deficit procedure”1, which is part of the Stability and Growth 
Pact. According to Article 126(2) of the Treat y, the Commission has to monitor compliance 
with budgetary discipline on the basis of two cr iteria, namely: (a) whether the ratio of the 
planned or actual government deficit to gross domestic product (GDP) exceeds the reference 
value of 3% (unless either the ratio has declined substantially and continuously and reached a 
level that comes close to the reference value; or, alternatively, the excess over the reference value is only exceptional and te mporary and the ratio remains close to the reference value); 
and (b) whether the ratio of government debt  to GDP exceeds the reference value of 60% 
(unless the ratio is sufficien tly diminishing and approachi ng the reference value at a 
satisfactory pace). 
Article 126(3) stipulates that, if a Member St ate does not fulfil the requirements under one or 
both of these criteria, the Commi ssion has to prepare a report. Th is report also has to “take 
into account whether the government deficit ex ceeds government investment expenditure and 
take into account all other relevant factors, including the medium-term economic and 
budgetary position of the Member State”. 
According to data notified by the authoritie s in April 2010
2, validated by Eurostat3 the general 
government deficit in Luxembourg is planned to  reach 4.2% of GDP in 2010, thus exceeding 
the 3% of GDP reference value, while gene ral government gross debt would be 19.3% of 
GDP, well below the 60% of GDP reference va lue even if on a rising trend since 2007. 
The planned figure for the 2010 deficit provides prima facie  evidence on the existence of an 
excessive deficit in Luxembourg in the sense of  the Treaty and the Stability and Growth Pact. 
The Commission has therefore decided to initi ate the excessive deficit procedure for 
Luxembourg with the adoption of this report. Section 3 of the report examines the deficit 
criterion. Section 4 deals with publ ic investment and other releva nt factors. The report takes 
into account the Commission services’ spring 2010 forecast, which has been released on 5 
May 2010.  
Table 1 : General government deficit and debt a 
  2005 2006 2007 2008 2009 2010 2011 
            COM Apr 2010 
notif. COM 
 
General government  balance 0.0 1.4 3.6 2.9 -0.7 -3.5 -4.2 -3.9 
General government  gross debt 6.1 6.5 6.7 13.7 14.5 18.9 19.3 23.5 
Note :  
a In percent of GDP ;  
Source : April 2010 EDP notification, Eurostat and Co mmission services’ spring 2010 forecast (COM). 
                                                 
1 OJ L 209, 2.8.1997, p. 6. The report also takes into account the “Specifications on the implementation 
of the Stability and Growth Pact and guidelines on the format and content of stability and convergence programmes”, endorsed by the ECOFIN Counc il of 10 November 2009, available at  
http://ec.europa.eu/economy_finance/sgp/legal_texts/index_en.htm. 
2 According to Council Regulation (EC) No 479/2009, Member States have to report to the Commission, 
twice a year, their planned and actual government deficit and debt levels. The most recent notification 
of Luxembourg can be found at:  http://epp.eurostat.ec.europa.eu/portal/page/portal/g overnment_finance_statistics/excessive_deficit/edp_
notification_tables. 
3 Eurostat news release No 55/2010 of 22 April 2010. 
EN 4   EN 3. D EFICIT CRITERION  
In 2010, the general government deficit is planned to reach 4.2% of GDP. 
Well in excess of to the 3% of GDP, the planned deficit is not close to the Treaty reference 
value, but according to the Commission servic es' spring 2010 forecast the general government 
deficit would come out at 3.5% of GDP, which can still be considered as close . This 
divergence is mainly due to the fact that the Commission services forecast a lower rise in government expenditure (since they do not fully in corporate the 15% rise in public investment 
planned by the government) and expect that g overnment revenues broadly stabilise in 2010 
with respect to 2009, while the notification projects them to decline by 1.4%. 
Table 2
: Macroeconomic and budgetary developments a 
  2005 2006 2007 2008 2009 2010 2011 
            COM Feb 
2010 SP COM Feb 
2010 SP 
Real GDP (% change) 5.4 5.6 6.5 0.0 -3.4 2.0 2.5 2.4 3.0 
Potential GDP (% change)  3.9 3.5 3.8 3.5 2.3 2.1 2.2 2.5 2.1 
Output gap (% of potential GDP) +0.5 +2.5 +5.2  +1.7 -3.9 -4.1 -3.5 -4.1 -3.0 
General government balance 0.0 1.4 3.6 2.9 -0.7 -3.5 -3.9 (c) 
-4.2 (d) -3.9 -5.0 (e) 
-3.0 (f) 
Primary balance 0.2 1.5 3.9 3.2 -0.2 -3.0 -3.3 (c) 
-3.5 (d) -3.3 -4.3 (e) 
n.a. (f) 
One-off and other temporary measures 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 
Government gross fixed capital 
formation 4.5 3.6 3.3 3.2 3.6 3.7 3.9 (c) 
4.0 (d) 3.5 3.9 (e) 
n.a. (f) 
Cyclically-adjusted balance -0.3 0.1 1.1 2.0 1.2 -1.4 -2.2 -1.9 -3.5 
Cyclically-adjuste d primary balance -0.1 0.3 1.3 2.3 1.7 -1.0 -1.6 -1.3 -2.8 
Structural balance bc -0.3 0.1 1.1 2.0 1.2 -1.4 -2.2 -1.9 -3.5 
Structural primary balance -0.1 0.3 1.3 2.3 1.7 -1.0 -1.6 -1.3 -2.8 
Notes :  
a In percent of GDP unles s specified otherwise. 
b Cyclically-adjusted balance excluding one-off and other temporary measures. 
c February 2010 update of the stability programme 
d April 2010 notification 
e February 2010 update of the stability programme : "unchanged policy" scenario 
f February 2010 update of the stability programme : proposed adjustment path. 
Source : Eurostat, Commission services’ spring 2010 forecast  and February 2010 update of the stability programme.  
The planned excess over the 3% of GDP reference value is exceptional . In particular, it 
essentially results from a severe economic do wnturn in the sense of the Treaty and the 
Stability and Growth Pact, namely the recession in the context of the global financial crisis. According to the Commission services' Spri ng 2010 forecast, real GDP dropped by 3.4% in 
2009 and is forecast to recover to 2% in 2010. 
The excess over the 3% of GDP reference value can
 be regarded as temporary  in the sense of 
the Treaty and the Stability and Growth Pact . According to the Commission services' spring 
2010 forecast, which was based on the no polic y change assumption for 2011, the general 
government deficit would rise from 3.5% of GDP in 2010 to 3.9%  of GDP in 2011 essentially 
because the rise in revenues, though larger than in 2010, is expected to fall short of the increase in expenditure. However, on 5 May 2010, after the cut-off date of the forecast the 
Prime Minister announced consolidation measures that woul d amount, according to 
EN 5   EN information provided to the Commission on 7 May, to 1.6% of GDP in 2011 and another 
1.7% of GDP in 2012; they include a series of expenditure cuts , in particular in public 
investment as well as an incr ease in revenues. Given that th e Commission forecast of 3.9% of 
GDP already anticipated a somewhat lower invest ment growth, the part of this consolidation 
package that can be taken into  account for 2011 is estimated at about 1.2% of GDP and would 
reduce next year's deficit to around 2¾%, thus below the 3% of GDP threshold.  
In sum, the planned deficit for 2010 can be regard ed as exceptional, cl ose to the 3% of GDP 
reference value and temporary in the sense of the Treaty and the Stability and Growth Pact. 
This analysis suggests that the defic it criterion in the Treaty is fulfilled.  
4. R ELEVANT FACTORS  
Article 126(3) of the Treaty provides that the Commission report “shall also take into account 
whether the government deficit exceeds governme nt investment expenditure and take into 
account other relevant factors including the medium-term economic and budgetary position of the Member State”. These factors are further cl arified in Article 2(3)  of Council Regulation 
(EC) No 1467/97, which also spec ifies that “any other factors which, in the opinion of the 
Member State concerned, are relevant in order to comprehensively assess in qualitative terms 
the excess over the reference value and which the Member State has put forward to the 
Commission and to the Council” need  to be given due consideration. 
In view of the above provision s, the following four subsections consider in turn (1) the 
medium-term economic position; (2) the medi um-term budgetary position (including public 
investment); (3) other factors put forward by the Member State and (4) other factors 
considered relevant by the Commission. 
4.1. Medium-term economic position 
Cyclical conditions and potential growth   
After having recorded an average annual gr owth of 5.5% over th e years 2004-2007 (slightly 
above the long-term 5.2% average growth reco rded from 1983 to 2007), the Luxembourgish 
economy stagnated in 2008 and contracted by 3.4 % in 2009. It is projected to grow by 2.0% 
in 2010 and 2.4% in 2011 in th e Commission services' spring 2010 forecast. The output gap, 
which was substantially positive in the years before the crisis, reaching a peak of 5.2% in 2007, became widely negative in 2 009 (-3.9%). It is projected to slightly increase to -4.1% in 
2010 and to remain at that level in 2011.  
Recent structural reforms  
The structural reforms launched within the Li sbon process comprise a significant increase in 
public R&D expenditure, which were/are planne d to be brought from about ¼% of GDP in 
2005 to 0.6% in 2010 and eventually to 1% of GDP, in particular through the creation and 
development of the University of Luxembourg. At the same time, there have been efforts to improve R&D governance, in partic ular through the entry into fo rce of a law on research and 
innovation ( loi du 5 juin 2009 relative à la promotion de la recherche, du développement et 
de l’innovation ). New projects have been identified in the field of transport and telecoms 
infrastructures that should support the country 's competitiveness and keep the investment 
activity at a high level/further increas e the country's investment activity.  
EN 6   EN 4.2. Medium-term budgetary position 
Structural deficit a nd fiscal consolidation in good times   
The strong growth recorded between 2004 and 2007 was used to convert the deficit of 1.1% 
of GDP observed in 2004 to an average surplu s of 2.6% from 2006 to 2008. The fiscal stance, 
which was strongly expansionary in 2002-2004, tu rned moderately and then more openly 
restrictive, with the structur al balance improving by about 0.4 percentage point of GDP in 
2005 and 2006 and by about 1 percentage point  of GDP in 2007 and 2008. It peaked at a 
surplus of 2.0% of GDP in 2008 before decr easing to 1.2% in 2009 ag ainst the background of 
the sharp economic decline. Thanks to this  fiscal policy stance as well as surpluses 
accumulated during the 1990s4, the debt stock stood at 13.7% of GDP at the end of 2008.  
Public investment  
At 3.9% of GDP in 2010 according to the Februa ry stability programme, public investment 
would be more or less of the same magnitude as the deficit projecte d in the programme and 
the April EDP reporting. It amounted to 4.1% of GDP on average from 2001 to 2009, which 
is one of the highest figures among the EU 15. The Luxembourgish stimulus programme 
comprised a substantial increase in public i nvestment, which rose from 3.2% of GDP in 2008 
to 3.6% in 2009.  
Quality of public finances  
Despite its sizeable increase resulting from th e crisis, general government expenditure (42% 
of GDP in 2009) remains low compared to most  other Member States and public investment 
in percent of GDP is amongst the highest am ong the EU15. The government, especially the 
social security system, holds sizeable assets, which are the result of the recurrent surpluses 
recorded in the last decades. According to mo st estimates, these assets  amount to more than 
30% of GDP, compared to a debt-to-GDP ratio of just below 20% in 2010. The net financial 
position of the government is thus positive. The support operation to the financial sector launched at the end of 2008, which caused the doubli ng of the gross debt in that year, also 
resulted in a corresponding increase in government  assets. The increase in the gross debt ratio 
projected for 2010 and 2011, triggere d by the large deficits of the central government, will 
also go together with a rise in government a ssets, mainly accumulated from the surpluses of 
the social security system (about  1¾% of GDP in both years).  
Long-term sustainabilit y of public finances   
In its opinion of 26 April 2010 on the most r ecent stability program me, the Council assessed 
the long-term sustainability of Luxembourg's public finances  as follows. The long-term 
budgetary impact of ageing projected for Luxem bourg is significantly above the EU average 
due in particular to a very considerable projected increase  in pension expenditure. The 
significant assets accumulated by the social security system will contribute to offsetting the projected long-term budgetary imp act of ageing but th is will not be suffi cient to cover the 
sizeable increase in age-related expenditure . Achieving high primary surpluses over the 
medium term and implementing measures aimed at curbing the substantial increase in age-
related expenditure would contribute to reduci ng the risk to the sustainability of public 
finances, which were assessed in the Comm ission 2009 Sustainability Report as medium. 
                                                
 
4 There are no complete accounts for genera l government in Luxe mbourg before 1990. 
EN 7   EN Against this background, Luxembourg was invited to improve the long-term sustainability of 
public finances by reforming the pension system and to set a MTO that takes sufficiently into 
account the implicit liabilit ies related to ageing. 
4.3. Other factors put forwar d by the Member State 
In reply to a request addresse d by the Commission to the author ities of Luxembourg regarding 
relevant factors in accordance with Article 2(3) of Council Regulation (EC) No 1467/97, they 
confirmed on 3 May 2010 that according to their latest estimations, Luxembourg's 2010 
public deficit is likely to exceed the 3% of GDP  threshold. As regards the closeness to the 
reference value, the authorities acknowledged that their latest es timate of a deficit of 4.2% of 
GDP in 2010 could under no circumstances be qua lified as "close" to the reference value, 
while pointing out that it was made before rece iving revenue data for th e first quarter and an 
upward revision of the GDP growth forecasts for 2010. This better performance had been to 
some extent already anticipated in the Comm ission services Spring 2010 forecast. Moreover, 
following discussions in Parliament on 6 and 7 May, the authorities provided information to 
the Commission on 7 May regarding the consolida tion measures that Prime Minister Juncker 
had announced during his speech to Parliament on 5 May.  
4.4. Other factors considered relevant by the Commission  
Apart from the impact of the economic downtur n, the excess above the reference value also 
results from the stimulus package decided by the Luxembourgish government as part of the 
European Economic Recovery Plan (EERP): as a response to the economic crisis, the 
Luxembourgish government adopted a recovery  package, which (together with other 
measures which were taken before the aggravatio n of the crisis but have also the effect to 
support the economy) amounted in 2009 to over 3% of GDP. 
To stabilise the financial system, the Luxem bourgish authorities granted a loan to the 
Luxembourgish subsidiaries of Fortis and De xia. These loans amounted together to about 
EUR 2.8 billion (7% of GDP). The loan to Fortis, which amounted to EUR 2.4 billion, was 
subsequently converted into capital. The financ ing of these loans resu lted in a doubling of the 
general government gross debt by the end of 2008, from 7.0% of GDP  in 2007 to 14.4% of 
GDP (although it also increased the government ’s assets to the same extent). The 
Luxembourgish authorities also decided together  with the Belgian and French governments to 
guarantee Dexia's liabilities towards credit ins titutions and institutional counterparties for a 
total of EUR 150 billion, of which 3% or EUR 4.5 billion for the Luxembourgish government 
(about 12½% of Luxembourg's GDP). This guarant ee has not led to any disbursement up to 
now. 
In its opinion of 26 April 2010 on the most recent update of the stability programme, the 
Council considered that, in view of the downt urn and the sound budgetary starting position of 
Luxembourg the temporary deterioration in th e general government balance in 2009 and 2010 
partly reflecting the adoption of stimulus measures is a ppropriate. However, from 2011 
onwards, the Council also noted  that the fiscal stance as  shown in the programme's 
"unchanged policy scenario" cannot be considered in line with the requirements of the Pact, as 
the government deficit would remain above 3% of GDP until 2014 and there would be no 
consolidation effort to ensure that the defic it is brought below the th reshold. The Council also 
stated that, while the authorities indicated their intention to follow a more ambitious 
consolidation path with a view to bringing public finances back to ba lance in 2014 and to 
achieve the medium-term objective in the following years, this adjustment path could not be 
EN 8   EN properly assessed in the absence of any information including th e underlying measures. It thus 
indicated that more information on these measures would be welcome.  
The Council, therefore, invited Luxembourg to start fiscal cons olidation as from 2011 with a 
view to bringing the deficit below the 3% of GDP threshold and thereafter progressing 
towards the MTO. It also invi ted Luxembourg to specify the measures that would be needed 
to achieve this consolidation. 
5. C ONCLUSIONS  
Whereas the general government deficit in Luxe mbourg is planned to reach 4.2% of GDP in 
2010, which is above and not close to the 3% of GDP reference value of the Treaty, the 
Commission services' 2010 spring forecast projects a deficit of 3.5% of GDP which can be 
considered as close. The excess over the refe rence value can be qualified as exceptional 
within the meaning of the Treaty and the Stabi lity and Growth Pact. Taking into account the 
latest consolidation measures announced by the Luxembourg government, this excess can be 
regarded as temporary. This suggests that the deficit criterion in th e Treaty is fulfilled.  
The general government gross debt remains well below the 60% of GDP reference value. This 
suggests that the debt criter ion in the Treaty is fulfilled. 
In line with the Treaty, this report has also examined “relev ant factors”, which, according to 
the Stability and Growth Pact, can only be taken into account in the steps leading to the 
decision on the existence of an excessive defi cit if the double condi tion - that the deficit 
remains close to the reference value and that its  excess over the reference value is temporary - 
is fully met. Considered on their own merit, the relevant factors in the current case on balance 
seem to be favourable.