Recommendation for a COUNCIL RECOMMENDATION on the National Reform Programme 2011 of Luxembourgand delivering a Council opinionon the updated Stability Programme of Luxembourg, 2011-2014
Date: 2011-06-07
Institutions: European Commission
Subjects: Luxembourg, budget deficit, economic policy, employment policy, pay, pension scheme, social rights, vocational training

EUROPEAN COMMISSION 

Brussels, 7.6.2011 
SEC(2011) 811 final 

Recommendation for a 

COUNCIL RECOMMENDATION 

on the National Reform Programme 2011 of Luxembourg 

and delivering a Council opinion 

on the updated Stability Programme of Luxembourg, 2011-2014 

{SEC(2011) 724 final} 

EN 

   EN 

 
 
 
 
  
 
 
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the National Reform Programme 2011 of Luxembourg 

and delivering a Council opinion 

on the updated Stability Programme of Luxembourg, 2011-2014 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Article 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 
policies1, and in particular Article 5(3) thereof, 

Having regard to the recommendation of the European Commission2, 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

After consulting the Economic and Financial Committee, 

Whereas: 

(1) 

(2) 

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

is  needed 

On 13 July 2010, the Council 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,3 which together form the “Integrated guidelines”. Member States were 
invited  to  take  the  integrated  guidelines  into  account  in  their  national  economic  and 
employment policies. 

1 
2 
3 

OJ L 209, 2.8.1997, p. 1. 
OJ C , p. . 
Maintained for 2011 by Council Decision 2011/308/EU of 19 May 2011. 

EN 

2 

   EN 

 
 
 
 
                                                 
(3) 

(4) 

(5) 

(6) 

(7) 

(8) 

On  12  January  2011,  the  Commission  adopted  the  first  Annual  Growth  Survey, 
marking  the  start  of  a  new  cycle  of  economic  governance  in  the  EU  and  the  first 
European semester of ex-ante and integrated policy coordination, which is anchored in 
the Europe 2020 strategy.  

On  25  March  2011,  the  European  Council  endorsed  the  priorities  for  fiscal 
consolidation  and  structural  reform  (in  line  with  the  Council’s  conclusions  of  15 
February and 7 March 2011 and further to the Commission’s Annual Growth Survey). 
It  underscored  the  need  to  give  priority  to  restoring  sound  budgets  and  fiscal 
sustainability,  reducing  unemployment  through  labour  market  reforms  and  making 
new efforts to enhance growth. It requested Member States to translate these priorities 
into  concrete measures to be included  in their Stability or Convergence Programmes 
and National Reform Programmes. 

On 25 March 2011, the European Council also invited the Member States participating 
in  the  Euro  Plus  Pact  to  present  their  commitments  in  time  to  be  included  in  their 
Stability or Convergence Programmes and their National Reform Programmes. 

On  29  April  2011,  Luxembourg 
its  update  2011  Stability 
Programmecovering the period 2011-2014 and its 2011 National Reform Programme. 
In order to take account of the interlinkages, the two programmes have been assessed 
at the same time.  

submitted 

Considering  the  exceptional  weight  of  the  financial  sector  in  the  economy, 
Luxembourg has withstood the financial and economic crisis relatively well. After real 
GDP fell by 3.6% in 2009 the economy recovered quickly in 2010. GDP expanded by 
about 3.5%, boosted by an increase in public spending decided by the Government as 
part of the European Economic Recovery Programme, and by a strong increase in net 
exports. Employment remained resilient, partly due to a sizable recourse to short-time 
working  arrangements,  encouraged  by  the  authorities.  Unemployment  began  to  rise 
from  the  beginning  of  2008  on  and  broadly  stabilised  at  about  6%,  a  level  which  is 
historically  high 
in 
Luxembourg are relatively sound (a deficit of 1.7% and gross debt of 18.4% in 2010), 
thanks to a very favourable starting position. 

the  recession,  public  finances 

in  Luxembourg.  Despite 

Based  on  the  assessment  of  the  updated  Stability  Programme  pursuant  to  Council 
Regulation  (EC)  No  1466/97,  the  Council  is  of  the  opinion  that  the  macroeconomic 
scenario  underpinning  the  budgetary  projections  is  slightly  cautious  when  compared 
with the Commission services 2011 Spring forecast. According to the programme, the 
target  for  2011  is  a  deficit  of  1.0%,  which  is  in  line  with  the  Commission  services' 
spring  forecast.  The  programme,  under  an  unchanged  policy  scenario,  projects  a 
deterioration  of  the  headline  deficit  in  2012  to  1.5%  of  GDP  before  it  improves 
gradually  again  to  0.8%  of  GDP  by  2014.  The  Commission  services'  forecast  is 
slightly more optimistic projecting a deficit of 1.1% of GDP in 2012, based on a more 
favourable  macro-economic  scenario  and  a  slower  increase  in  expenditure.  The 
programme  does  not  foresee  the  achievement  of  the  Medium  Term  Objective 
(hereinafter MTO), which is defined as a structural surplus of 0.5% of GDP, within the 
2011-2014 programming period. On the contrary, the structural balance (recalculated 
by  Commission  services  based  on  the  information  in  the  programme,  following  the 
commonly  agreed  methodology)  is  expected  to  deteriorate  gradually  from  a  0.3% 
surplus in 2011 to a 0.8% deficit in 2014.  

EN 

3 

   EN 

 
(9)  With  GDP  growth  projected  to  remain  robust,  Luxembourg's  public  finances  could 
benefit from a further improvement of the structural balance with a view to achieving 
the MTO already in 2012. This would provide the country a safety margin against a 
possible  future  economic  downturn  and  help  improve  long-term  sustainability  of 
public  finances.  Additionally,  in  the  light  of  the  estimated  impact  of  the  implicit 
liabilities related to population ageing, the country would benefit from having a more 
ambitious MTO.  

(10)  The  increase  in  age-related  public  expenditure  in  Luxembourg  in  coming  decades  is 
projected to be the strongest in the EU. The short-term financing of the pension system 
is currently supported by a low old-age dependency ratio and depends in part on the 
contributions  paid  by  the  relatively  young  population  of  cross-border  workers.  In 
future,  both  factors  will  reverse  and  pension  costs  are  anticipated  to  increase 
substantially.  Although  the  government  has  accumulated  sizeable  assets  and  pension 
reserves are still growing, these will not be sufficient to ensure the sustainability of the 
system. In addition, the employment rate of older workers (age 55-64) at 38.2% (2009) 
is one of the lowest in the EU-27 (EU average: 46%). While the statutory retirement 
age  is  in  principle  65  years,  the  Luxembourg  pension  system  often  allows  retiring 
earlier  with  virtually  no  reduction  in  the  pension  level,  which  is,  moreover, 
comparatively high. As a result, the average age of withdrawal from the labour market 
is  59.4  years,  which  weighs  on  the  costs  of  the  pension  system.  The  government's 
plans for a pension reform foresee a new model aimed at keeping jobholders in work 
longer on a voluntary basis. This would improve the dependency ratio of the pension 
system. However, this mechanism would only concern new pensioners and only apply 
to  the  part  of  the  career  situated  after  the  entry  into  force  of  the  reform,  so  it  would 
only produce its full effect in 40 years. 

(11)  The price and cost competitiveness of Luxembourg has deteriorated substantially since 
the  beginning  of  the  last  decade.  This  is  due  to  developments  both  in  wages  and 
productivity. Over the period 2000-2010, unit labour costs rose about one and a half 
times faster in Luxembourg than on average in the EU-15, and more than five times 
faster  than  in  Germany.  Given  the  agreement  between  the  government  and  the  trade 
unions  to  postpone,  from  Spring  to  October  2011,  the  application  of  the  automatic 
wage  indexation  mechanism,  there  will  be  a  substantial  moderation  of  real  wage 
growth in 2011. A decision has yet to be taken concerning the subsequent threshold. 
Given the current inflation outlook the next automatic indexation could fall already in 
spring 2012, thus wiping out the earlier gains in cost competitiveness. 

(12)  Despite  historically  strong  employment  growth,  the  employment  rate  of  the  resident 
population is lower than the EU average, especially at both ends of the age spectrum. 
Job creation in recent years has mainly benefitted non-residents. Even though the rise 
in  unemployment  since  2008  is  related  to  the  recession,  it  has  an  increasingly 
structural  character,  illustrated  by  the  fact  that  during  the  growth  years  prior  to  the 
crisis, employment needed to grow at around 4% a year in order to produce a marginal 
decline  in  unemployment.  Youth  unemployment  is  relatively  high  at  16.1%  in  2010 
compared  to  6%  of  total  active  population.  The  unemployment  rate  depends  heavily 
on the educational level. Young residents face an acute competition for available jobs 
from non-residents, who are often as much or even more skilled.  

EN 

4 

   EN 

 
(13)  The Luxembourg government outlined a series of commitments in the context of the 
Euro Plus Pact.4 These commitments refer to the four areas of the Pact. On the fiscal 
side, the government approved the features of a pension reform and commits itself to 
finalising  the  reform  by  the  end  of  2011.  To  reinforce  financial  stability,  measures 
focus  on  boosting  the  resistance  of  the  financial  sector  through  regulation  and 
supervision  at  the  European  and  international  level  and  pursuing  the  efforts  to 
diversify the structure of the Luxembourg economy. Employment measures focus on 
increasing the efficiency of active employment policies (reform of the "Administration 
de l'Emploi") and encouraging life long learning in the private sector by a higher co-
financing rate by the state. The competitiveness measures include a postponement of 
the  indexation  of  wages  from  spring  2011  (implied  by  the  automatic  indexation 
system) to October 2011, and a commitment to negotiate with social partners a similar 
postponement for 2012. Moreover, the government committed to improve the business 
environment through administrative simplification and better infrastructure. They are 
in line with the broader reform agenda outlined in the Stability and National Reform 
Programmes  and  address  challenges  in  the  areas  of  pensions,  competitiveness, 
employment  (particularly  of  young  and  older  workers)  and  the  financial  sector. 
However, some of the proposed reforms lack detail. The Euro Plus Pact commitments 
have been assessed and taken into account in the recommendations. 

(14)  The  Commission  has  assessed  the  Stability  Programme  and  National  Reform 
Programme including the Euro Plus Pact commitments for Luxembourg5. It has taken 
into account not only their relevance for sustainable fiscal and socio-economic policy 
in Luxembourg but also their conformity 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. In this light, the Commission considers that a 
more  ambitious  reduction  of  the  deficit  in  2011  should  be  possible  in  view  of  the 
favourable  macro-economic  outlook,  and  that  a  stronger  fiscal  effort  would  allow  to 
reach  the  MTO  in  2012.  Further  steps  should  also  be  taken  to  reform  the  pension 
system  and  promote  active  ageing,  to  strengthen  competitiveness,  and  to  help  young 
people into jobs.  

(15) 

In light of this assessment, the Council has examined the 2011 update of the Stability 
Programme  of  Luxembourg  and  its  opinion6  is  reflected  in  particular  in  its 
recommendation under (1) and (2) below. Taking into account the European Council 
conclusions  of  25  March  2011,  the  Council  has  examined  the  National  Reform 
Programme of Luxembourg, 

HEREBY RECOMMENDS that Luxembourg should take action within the period 2011-2012 
to: 

(1) 

Take advantage of the improving cyclical conditions to strengthen the fiscal effort in 
order to further reduce the headline deficit and reach the medium-term objective in 
2012. 

4 
5 
6 

More details on the commitments made under the Euro Plus Pact can be found SEC(2011) 724. 
SEC(2011) 724. 
Foreseen in Article 5(3) of Council Regulation (EC) No 1466/97. 

EN 

5 

   EN 

 
                                                 
(2) 

(3) 

(4) 

Propose and implement a broad pension reform to ensure the long-term sustainability 
of the pension system, starting with measures that will increase the participation rate 
of  older  workers,  in  particular  by  discouraging  early  retirement  and  including 
measures that link the statutory retirement age to life expectancy. 

Reform,  in  consultation  with  social  partners  and  in  accordance  with  national 
practices,  the  system  of  wage  setting  to  ensure  that  wage  growth  better  reflects 
developments in labour productivity and competitiveness.  

Take  steps  to  reduce  youth  unemployment  by  reinforcing  training  and  education 
measures aimed at better matching young people's skills to labour demand. 

Done at Brussels, 

For the Council 
The President 

EN 

6 

   EN