COMMISSION STAFF WORKING DOCUMENT Assessment of the 2013 national reform programme and stability programme for LUXEMBOURG Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on Luxembourg’s 2013 national reform programme and delivering a Council Opinion on Luxembourg’s 2013 stability programme for 2012-2016
Date: 2013-05-29
Institutions: European Commission
Subjects: Luxembourg, VAT, budget deficit, budgetary equilibrium, competitiveness, economic recession, labour market, public expenditure, reduction of gas emissions, tax reform, youth unemployment

EUROPEAN 
COMMISSION 

Brussels, 29.5.2013  
SWD(2013) 366 final 

COMMISSION STAFF WORKING DOCUMENT 

Assessment of the 2013 national reform programme and stability programme for 
LUXEMBOURG 

Accompanying the document 

Recommendation for a COUNCIL RECOMMENDATION  

on Luxembourg’s 2013 national reform programme and delivering a Council Opinion 
on Luxembourg’s 2013 stability programme for 2012-2016 

{COM(2013) 366 final} 

EN 

   EN 

 
 
 
 
  
 
CONTENTS 

Executive summary .................................................................................................................... 3 

1. 

2. 

2.1. 

2.2. 

3. 

3.1. 

3.2. 

3.3. 

3.4. 

3.5. 

4. 

5. 

Introduction .................................................................................................................. 5 

Economic developments and challenges...................................................................... 6 

Recent economic developments and outlook............................................................... 6 

Challenges .................................................................................................................... 7 

Assessment of policy agenda ....................................................................................... 9 

Fiscal policy and taxation............................................................................................. 9 

Financial sector .......................................................................................................... 17 

Labour market, education and social policies ............................................................ 18 

Structural measures promoting growth and competitiveness..................................... 22 

Modernisation of public administration ..................................................................... 26 

Overview table ........................................................................................................... 28 

Annex ......................................................................................................................... 32 

2 

 
 
1. 

EXECUTIVE SUMMARY 

Economic Outlook 

In 2012 economic growth was sluggish and is projected to remain so in 2013. According 
to the Commission's spring 2013, forecast GDP growth is expected to rise from 0.3% in 2012 
to 0.8% in 2013 and 1.6% in 2014. The main contribution will come from domestic demand, 
backed by improving confidence. Unemployment started to rise in 2012, reaching 5.1%, and 
is predicted to rise further to 5.5% in 2013 and 5.8% in 2014. Inflation, which averaged 2.9% 
in 2012, is expected to slow down to 1.9% in 2013 and 1.7% in 2014. 

Public  finances  deteriorated  in  2012,  with  the  general  government  deficit  estimated  to 
have increased to 0.8% of GDP from 0.2% of GDP in 2011. The structural surplus (minus 
one-off  and  short-term  effects)  also  deteriorated  in  2012  to  0.1%  of  GDP,  though  the 
Commission estimates this will improve to 0.7% in 2013 before falling back to 0.3% in 2014. 
In 2012, the general government debt increased to 20.8% of GDP, and is expected to rise to 
23.4% in 2013 and 25.2% in 2014. 

Key Issues 

Luxembourg’s remarkable period of economic growth in  the past  30 years  was mostly 
based on the strong expansion of financial services. The country is heavily dependent on its 
financial  sector,  which  accounts  for  about  30%  of  total  value  added  and  25%  of  collected 
fiscal revenues. 

Luxembourg  has  made  some  progress  in  addressing  the  2012  CSRs,  particularly  on 
fiscal consolidation. The general government deficit is expected to decrease to 0.2% of GDP 
in  2013,  mostly  due  to  the  consolidation  measures  adopted  with  the  Budget  for  2013.  In 
December  2012  the  Luxembourgish  Parliament  adopted  the  reform  of  the  pension  system. 
However,  the  reform  is  rather  limited  in  scope  and  does  not  guarantee  the  long-term 
sustainability of public finances. 

Luxembourg faces major challenges as regards the long-term sustainability of its public 
finances, the competitiveness and the diversification of its economy, the labour market 
and greenhouse gas emissions. 

•  Public finances: While public finances are expected to improve in 2013 on the back 
of  a  sizeable  consolidation  package,  the  improvement  is  not  yet  sustainable  as  the 
public deficit, according to the programme, is projected to worsen from 2015 onwards. 
The  adoption  of  a  medium-term  budgetary  framework  would  strengthen  fiscal 
governance. The reform of the pension system adopted in December 2012 can only be 
considered  a  first  step  in  the  right  direction  as  it  does  not  include  a  link  between 
statutory retirement age and life expectancy. Additional measures are needed to tackle 
the  expected  increase  in  age-related  expenditure,  which  is  the  highest  in  the  EU, 
including  addressing  increasing  long-term  care  expenditure.  Revenues  raised  from 
consumption taxes are low, amounting to less than a third of fiscal revenues.  

•  Labour market: Youth unemployment is relatively high, standing at 18% of the total 
active  population  in  2012,  almost  four  times  higher  than  the  overall  unemployment 
rate. Despite progress in combating youth unemployment, there is still the need for a 

3 

 
more coherent strategy. The  situation for  migrants  and  young  people  with  low  skills 
remains difficult; despite several initiatives, more needs to be done. In order to remain 
competitive Luxembourg needs to ensure that wages evolve in line with productivity 
developments (nominal unit labour costs increased by almost 16% between 2008 and 
2012, which is almost than two times faster than in neighbouring countries). 

•  Competitiveness:  Competitiveness  losses  recorded  over  the  last  decade,  particularly 
the  large  increase  in  unit  labour  costs,  need  to  be  addressed  in  a  fundamental  way. 
Efforts to diversify the economy deserve to be pursued. The low level of cooperation 
between  public  research  institutions  and  firms  and  the  sharp  drop  in  business  R&D 
intensity (which fell from 1.53% in 2000 to 0.98% of GDP in 2011) reveal the current 
weakness  of  Luxembourg’s  research  and  innovation  system.  A  debt  bias  in  the 
corporation taxation is likely to have contributed to the high level of indebtedness of 
corporations. 

•  Greenhouse gas emissions: Luxembourg has committed itself to reducing the level of 
greenhouse  gas  emissions  in  sectors  not  covered  by  the  EU's  Emissions  Trading 
System by 20% by 2020. According to the latest projections, however, Luxembourg is 
not on track to achieve that target. The fuel-pump tourism induced by the low petrol 
and diesel taxes contributes largely to this shortcoming. 

4 

 
1. 

INTRODUCTION 

In  May  2012,  the  Commission  proposed  a  set  of  country-specific  recommendations  (CSRs) 
for  economic  and  structural  reform  policies  for  Luxembourg.  On  the  basis  of  these 
recommendations,  the  Council  of  the  European  Union  adopted  five  CSRs  in  the  form  of  a 
Council Recommendation in July 2012. These CSRs concerned public finances, the pension 
system, wage setting, the labour market and a reduction in greenhouse gas emissions.  

This  Staff  Working  Document  (SWD)  assesses  the  state  of  implementation  of  these 
recommendations in Luxembourg. It assesses policy measures in light of the findings of the 
Commission’s Annual Growth Survey 2013 (AGS)1 and the second annual Alert Mechanism 
Report  (AMR),2  which  were  published  in  November  2012.  The  AGS  sets  out  the 
Commission’s  proposals  for  building  the  necessary  common  understanding  about  priorities 
for action at national and EU level in 2013. It identifies five priorities to guide Member States 
to  renewed  growth:  pursuing  differentiated,  growth-friendly  fiscal  consolidation;  restoring 
normal  lending  to  the  economy;  promoting  growth  and  competitiveness  for  today  and 
tomorrow; tackling unemployment and the social consequences of the crisis; and modernising 
public  administration.  The  Alert  Mechanism  Report  serves  as  an  initial  screening  device  to 
determine whether macroeconomic imbalances exist or might emerge in Member States. The 
AMR found positive signs that macroeconomic imbalances in Europe are being corrected. To 
ensure  that  a  complete  and  sustainable  rebalancing  is  achieved,  14  Member  States  were 
selected for a review of developments in the accumulation and unwinding of imbalances.3 

Against  the  background  of  the  2012  Council  Recommendation,  the  AGS  and  the  AMR, 
Luxembourg  presented  updates  of  its  national  reform  programme  (NRP)  and  of  its  stability 
programme  on  26  April  2013.  These  programmes  provide  detailed  information  on  progress 
made  since  July  2012  and  on  government  plans.  The  information  in  these  programmes 
provides the basis for the assessment made in this document. 

The  programmes  submitted  went  through  an  inclusive  consultation  process  involving  the 
Luxembourg  Parliament.  Preparation  of  the  NRP  involved  in-depth  consultations  with  the 
social  partners,  local  actors  and  civil  society  to  increase  ownership  of  the  Europa  2020 
strategy and the Luxembourg strategy at national level. 

Overall assessment 

The analysis in this SWD leads to the conclusion that Luxembourg has made some progress 
on measures taken to address the CSRs of the Council Recommendation. However, the main 
challenges  identified  in  July  2012  remain  however  broadly  valid  as  there  is  still  a  need  for 
further progress. Luxembourg’s performance in terms of priorities set out in the 2013 Annual 
Growth Survey also needs to improve.  

The  general  government  deficit  in  2012  rose  compared  to  2011,  when  it  was  fairly  small. 
Public  finances  are  expected  to  improve  in  2013  on  the  back  of  a  sizeable  consolidation 
package. However the improvement is not yet sustainable, as the public deficit, according to 

1 COM(2012) 750 final 
2 COM(2012) 751 final. 
3  13  in-depth  reviews  were  published  on  10  April  2013.  While  selected  for  an  in-depth  review  in  the  AMR, 
Cyprus  was  ultimately  not  reviewed  under  the  Macroeconomic  Imbalance  Procedure  in  view  of  the 
advanced preparations for a financial assistance programme. 

5 

 
                                                 
the  programme,  is  projected  to  worsen  from  2015  onward  and  Luxembourg  is  expected  to 
diverge from its medium-term objective (MTO). 

The  recently  enacted  pension  reform  is  rather  limited  in  scope  and  therefore  does  not 
guarantee the long-term sustainability of the public finances.  

Luxembourg  has  a  very  good  economic  track  record,  but  in  order  to  remain  competitive  it 
needs to ensure that wages evolve in line with productivity. The limit to the application of the 
automatic  wage  indexation  decided  by  the  government  is  only  temporary  and  does  not 
guarantee an evolution in line with productivity.  

Despite progress in combating youth unemployment, there is still needs for a more coherent 
strategy,  involving  stronger  collaboration  with  municipalities,  more  efficient  use  of 
employment  services  and  more  investment  in  training  and  education,  as  well  as  better 
activation  policies.  Unemployment  seems  to  have  an  increasingly  structural  character 
requiring more effective active labour market policies.  

Regarding  Europe  2020  objectives  on  energy  and  climate,  Luxembourg  is  not  on  track  to 
reach its targets for greenhouse gas emission reductions and for renewable energy. Low fuel 
taxes  induce  so-called  ‘fuel  tourism’4  and  negative  externalities  in  terms  of  pollution  and 
congestion.  

The policy plans included in the 2013 NRP submitted by Luxembourg respond to last year’s 
recommendations.  The  national  reform  programme  adequately  reflects  the  challenges 
identified in last year's Staff Working Document. It outlines the policy initiatives which have 
been taken to address the various aspects of the CSR. In addition, when relevant, it provides 
an indication of the government's policy plans, even if in some areas they lack the ambition 
needed  to  address  the  challenges  in  a  comprehensive  and  structural  way.  The  stability 
programme  confirms  the  medium  term  objective  of  a  surplus  of  0.5%  of  GDP  in  structural 
terms, but misses to outline the strategy to reach this objective.  

2. 

ECONOMIC DEVELOPMENTS AND CHALLENGES 

1.1. 

Recent economic developments and outlook 

Recent economic developments 

In 2012 and early 2013, growth and employment in Luxembourg were strongly affected 
by the general weakening of global activity. In 2012, GDP grew by a mere 0.3% according 
to the Commission 2013 spring forecast. Since the onset of the crisis the contribution of net 
exports  to  growth  has  become  negative,  mainly  on  the  back  of  lower  exports  of  (financial) 
services. In spite of a slight reduction in its contribution to the national gross added value, the 
financial sector as a whole has withstood the crisis better than initially anticipated. However, 
the  industrial  sector,  and  the  steel  industry  in  particular,  is  on  the  contrary  going  through  a 
painful restructuring as shown by the contraction in the level of industrial production (-19.7 % 
over the period 2007-2012) since its peak in 2007. The fall recorded in 2012 was similar to 
that seen in the countries hit worst by the crisis (Italy, Spain). 

4  Fuel  prices  in  Luxembourg  are  lower  than  in  the  neighbouring  countries  due  to  comparatively  lower  excise 
duties and value-added taxes charged on petrol and diesel. The difference in fuel prices induces people 
to  cross  the  border,  even  making  a  detour,  to  purchase  fuel  for  their  vehicles.  Sales  to  non-residents 
(including cross-border commuters) account for 75 % of fuel sales in Luxembourg. 

6 

 
                                                 
Despite  the  sluggish  pace  of  economic  activity,  job  creation  remained  robust  in  2012 
when employment grew by 2.3% year-on-year. These figures mask a fall in the number of 
hours worked, almost uninterrupted since the first quarter of 2011. This reflects a rise in the 
number of part-time workers and a fall in overtime working. The increase in employment also 
has to be assessed also against the fact that, since 2010, the growth rate for workers resident in 
Luxembourg  has  been  faster  than  that  for  non-residents,  reversing  a  well-established  trend. 
One  reason  for  this  could  be  that  non-residents  are  often  employed  in  sectors  exposed  to 
competition, while residents tend to be employed in sectors that are less open to competition 
such  as  services.  In  spite  of  solid  job  creation,  unemployment  in  December  2012  stood  at 
5.1 % of the active labour population as compared with 4.8 % one year earlier, owing to a rise 
in the labour force. 

Economic outlook 

GDP growth prospects for 2013, projected at 0.8%, are modest when compared to pre-
crisis rates (over the period 2000-2007 economic output increased to an average rate of 
4.7%).  ,The  economy  continues  to  struggle  with  a  low  level  of  industrial  activity,  and 
increasing  unemployment.  Growth-supporting  government  activities  are  anticipated  to 
decrease  following  the  announced  retrenchment  in  public  consumption  and  investment.  The 
projected impact of consolidation measures on households’ disposable income coupled with 
the  low  consumer  confidence  level  is  likely  to  further  affect  consumption  and  investment, 
despite  the  relief  provided  by  smaller  price  changes.  The  low  level  of  capacity  utilisation 
associated with weak demand casts some uncertainty over firms’ investment plans. Financial 
services are expected to continue to contribute positively to growth as the development of the 
fund  and  insurance  industries  will  compensate  for  the  slack  in  traditional  intermediation 
activities  where,  despite  the  criteria  for  lending  being  assessed  as  not  particularly  tight, 
demand  for  credit  remains  low.  In  2014,  GDP  is  projected  to  grow  by  1.6%.  The  main 
contribution  will  come  from  domestic  demand  backed  by  improving  confidence.  The 
contribution from exports is expected to remain positive but lessened by more dynamic import 
growth, once domestic demand gains momentum. 

The macro-economic scenario underlying the national budgetary projections in the 2013 
update  of  the  Stability  Programme  is  broadly  in  line  with  the  Commission  services' 
spring  forecast  for  2013  and  2014.  For  the  outer  years  of  the  programme  the  growth 
scenario  is  slightly  optimistic  as  the  projected  growth  of  1.7%  and  3.4%  in  2015  and  2016 
respectively is well above the estimated rate for potential growth of around 1.0%. The main 
downside  risk  for  this  growth  scenario  concerns  the  financial  services  industry's  export 
performance.  

1.2. 

Challenges 

Luxembourg faces major challenges as regards the long-term sustainability of its public 
finances, the competitiveness and the diversification of its economy, the labour market 
especially the employment rate of the young and old age cohorts and its taxation system 
with regard to the environment. 

These  challenges  were  first  identified  in  the  2012  SWD.  In  July  2012,  relevant  policy 
responses were reflected and integrated in the CSRs of the Council Recommendation issued 
for Luxembourg. As suggested by the AGS and the AMR, all of these challenges remain fully 
or  partly  relevant.  In  addition,  new  challenges  have  arisen  as  a  result  of  recent  economic 
developments. 

7 

 
Public  finances  deteriorated  in  2012  with  the  general  government  deficit  estimated  to 
have increased to 0.8 % of GDP in 2012 from 0.2 % in 2011, albeit almost in line with the 
target of 0.7 % of GDP set in the initial budgetary target. Total government expenditure 
rose  7.2 %  in  nominal  terms  compared  to  the  previous  year.  The  structural  surplus  also 
deteriorated in 2012 to 0.1 % of GDP from 0.3 % in 2011. However, the government reacted 
quickly  and  in  December  it  adopted,  together  with  the  budget  for  2013,  a  consolidation 
package  of  around  2 %  of  GDP  that  is  expected  to  improve  the  nominal  deficit  to  0.2 %  of 
GDP  in  2013.  Although  Luxembourg  has  been  able  to  maintain  sound  public  finances  over 
the  last  decade,  there  are  several  factor  indicating  increasing  risks:  rather  volatile  revenues 
over the cycle, linked to the small size of the economy and its large degree of openness, as 
well  as  the  increasing  proportion  of  non-reducible  expenditure.  In  addition,  the  relatively 
small overall deficit hides a negative position of around 2% of GDP at the level of the central 
government, mitigated by a yearly surplus in the social security subsector of around 1.5% of 
GDP. Moreover, from 2015 the VAT revenues from e-commerce5 will fade away as result of 
the  introduction  of  the  new  VAT  rules  regarding  electronic  services,  which  will  bring 
Luxembourg in compliance with the EU rules. Finally there are risks that other sources will 
also evaporate in the near futures such as the excise duties on cross-border sales of fuel (‘fuel 
tourism’) and the corporate income taxes paid by financial institutions. The introduction of a 
medium-term  budgetary  framework,  in  line  with  Directive  2011/85/EU,  would  provide 
guidelines to smooth revenue and expenditure developments over the cycle and ensure sound 
budgetary outcomes in the short and medium term. 

The  medium-term  fiscal  sustainability  gap  in  Luxembourg  is  relatively  low,  thanks 
mainly to the current low level of government debt and to a balanced budget. In contrast, 
the  risks  for  long-term  fiscal  sustainability  as  measured  by  the  commonly  agreed  indicator 
(S2)6 are high (the highest in the EU), owing to the expected increase in pension expenditure. 
Currently,  the  short-term  financing  of  the  pension  system  is  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, as 
well as long-term care costs, are expected to increase substantially. 

Luxembourg’s  remarkable  period  of  economic  growth  in  the  past  30  years  was 
essentially  based  on  the  strong  expansion  of  financial  services.  The  country  is  heavily 
dependent on its financial sector, which accounts for about 30% of total value added and 25% 
of collected fiscal revenues. As the future of financial activities worldwide seems less bright 
than before, the heavy dependence of the economy and of the public finances on this industry 
is a structural risk. 

In addition to its ‘sovereignty niches’ on which financial sector expansion is based, the 
country crucially needs to develop alternative ‘competence niches’ as a springboard for 

5 Currently around EUR 500 m of annual revenue (1.2% of GDP). In December 2007 the European Council of 
Finance Ministers (Ecofin) reached a landmark political agreement on two draft directives and a draft 
regulation aimed at changing the rules on value-added taxation intended to ensure that VAT on services 
accrues  to  the  country  where  consumption  occurs,  and  to  prevent  distortions  of  competition  between 
member  states  operating  different  VAT  rates.  The  agreement  ended  a  five-year  deadlock  on  the 
sweeping changes to the community's VAT laws. To appease Luxembourg, which used its veto to block 
the proposed reforms, the enter info force of the new rules about the reverse charging of VAT on the 
purchases  of  goods  and  services  electronically  has  been  delayed  until  2015,  with  a  revenue  sharing 
agreement phased in over the subsequent three years.  

6 The S2 indicator, which shows the difference, the sustainability gap, between the constant revenue ratio as a 
share of GDP that guarantees the respect of the inter-temporal budget constraint of the government, i.e. 
that  equates  the  actualized  flow  of  revenues  and  expenses  over  an  infinite  horizon,  and  the  current 
revenue ratio. 

8 

 
                                                 
innovation-driven growth. Bearing in mind, Luxembourg has in the last two decades rapidly 
built  up  its  public  research  capacities,  from  a  situation  where,  25  years  ago,  the  public 
research  system  was  non-existent.  However,  the  contribution  of  these  efforts  to  the 
Luxembourg  economy  so  far  remains  very  limited.  The  low  level  of  cooperation  between 
public  research  institutions  and  firms  as  well  as  the  sharp  drop  in  business  R&D  intensity 
(from 1.53% in 2000 to 0.98% of GDP in 2011) reveal the current weakness of Luxembourg’s 
research and innovation system. 

A  long-standing  challenge  for  the  Luxembourg  economy  stems  from  the  loss  of  cost 
competitiveness as a result of high wage increases and very low productivity growth (the 
productivity  level  is,  however,  very  high).  Nominal  unit  labour  costs  continue  to  increase 
faster  in  Luxembourg  than  in  neighbouring  countries,  particularly  in  the  manufacturing 
industry. 

Despite  the  very  strong  employment  growth  recorded  over  the  past  three  decades,  the 
employment rate of the resident population is lower than the EU average, especially at 
both ends of the age spectrum. Youth unemployment is persistently high, standing at 18% 
of the active population in 2012, compared to 5% overall unemployment. The unemployment 
rate depends heavily on educational level. Young residents face intense competition for jobs 
from non-residents, who are often more skilled. This raises the question of the performance of 
the  education  system,  which  both  PISA  tests7  indicate  is  around  or  below  the  EU  average. 
Luxembourg’s  education  system  faces  a  number  of  specific  challenges  including  the 
multilingualism demands that are especially challenging given the high proportion of people 
with migrant background in the population (43.1%) with an additional family language, and 
the specific skills required by a strongly specialised labour market with a big financial sector. 
However, there is also a need to act to remove all factors that hinder the supply of labour: low 
educational attainment is not the only problem. There is a clear need to reinforce follow-up of 
activation and labour market policies. The employment rate for older workers (54-64) is rising 
but  remains  far  below  the  European  average  (41%  in  2012  against  48.9%  for  the  EU  as  a 
whole).  

Luxembourg  has  committed  itself  to  reducing  the  level  of  emissions  in  non-ETS 
(Emissions Trading System) sectors by 20 % by 2020. According to the latest projections 
based on the existing measures, however, Luxembourg is not on track to achieve that target. 
The fuel-pump tourism induced by the low level of taxation on petrol and diesel contributes 
largely to this shortcoming. 

3. 

ASSESSMENT OF POLICY AGENDA 

1.3. 

Fiscal policy and taxation 

Budgetary developments and debt dynamics 

According  to  the  medium-term  budgetary  strategy  outlined  in  the  2013  update  of  the 
Stability  programme  the  general  government  balance  will  record  a  deficit  of  0.7%  of 
GDP in 2013, only marginally down from the 2012 deficit of 0.8% of GDP. In 2014 the 

7 PISA is an international study that was launched by the OECD in 1997. It aims to evaluate education systems 
worldwide  every  three  years  by  assessing  15-year-olds'  competencies  in  the  key  subjects:  reading, 
mathematics and science. To date over 70 countries and economies have participated in PISA. The most 
recent results are available at: http://www.oecd.org/pisa/pisaproducts/pisa2009keyfindings.htm. 

9 

 
                                                 
government balance is expected to improve to 0.6% of GDP. In structural terms the forecast 
for the government balance in 2013 is +0.3% of GDP8, in line with the national target for the 
medium-term  budgetary  objective  (MTO)  of  a  surplus  of  0.5%  of  GDP.  This  MTO  is 
considered to reflect the objectives of the Pact. In the outer years, however, the programme 
projects  the  structural  balance  to  fall  short  of  the  chosen  MTO.  In  2014,  while  the  nominal 
headline  balance  is  still  expected  to  show  a  slight  improvement,  the  structural  balance  is 
projected  to  deteriorate  to  a  balanced  budget  as  the  improvement  of  the  cyclical  conditions 
more than offset the progress in the headline deficit.  

In  2012,  the  headline  deficit  stood  at  0.8%  of  GDP,  compared  to  a  deficit  of  0.2%  of 
GDP in 2011. It represents, however, an improvement compared to the target as presented in 
last  year's  stability  programme,  in  which  a  deficit  of  1.2%  of  GDP  was  expected.  The 
outcome is almost in line with the target set in the initial budget for 2012, where a deficit of 
0.7%  of  GDP  was  planned,  even  if  this  deficit  represented  an  improvement  on  2011,  for 
which at the time of the adoption of the budget, a deficit of 1.2% was expected. This better-
than-expected outcome is mostly due to more buoyant revenues, in particular the VAT from 
e-commerce  activities  and  from  expenditure  slippages  being  less  important  than  initially 
projected.  

For  2013  the  programme  forecasts  the  general  government  deficit  of  0.7%  of  GDP,  a 
marginal  improvement  compared  to  the  previous  year.  The  Commission's  2013  services 
spring forecast expects the deficit to come out lower, at 0.2% of GDP based on the view that 
the  Luxembourg  authorities  have  adopted  a  prudent  approach  in  their  estimation  of  future 
revenue  and  expenditure  flows.  The  measures  adopted  with  the  budget,  estimated  by  the 
national  authorities  at  around  2.1%  of  GDP  (see  Box  1),  combined  with  extremely  buoyant 
developments  of  the  VAT  revenues  from  e-commerce  activities  would  be  enough  to  reduce 
the headline deficit for the current year by ½% of GDP compared to 2012. 

According  to  the  programme  the  general  government  deficit  in  2014  would  record 
another  small  improvement  to  0.6%  of  GDP,  compared  to  0.7%  of  GDP  in  2013.  
Economic  activity  is  projected  to  gain  pace  and  expand  by  2.2%  after  1.0%  in  2013.  The 
projected acceleration of the economy is expected to boost revenues while expenditure would 
remain under control. The Commission's spring forecast expects economic activity in 2014 to 
expand at a lower rate (1.6% compared to 2.2% in the programme); less buoyant revenues and 
more dynamic expenditure would lead to a deficit of 0.4% of GDP after 0.2% in 2013. 

8 Cyclically adjusted balance net of one-off and temporary measures, recalculated by the Commission services 

on the basis of the information provided in the programme, using the commonly agreed methodology. 

10 

 
                                                 
 Box 1. Main measures 

Main budgetary measures 

  Revenue 

Expenditure 

2013 

•  Measures  affecting 

taxes  paid  by 

•  Reduction  in  operating  costs  of  the 

corporations (+0.2% of GDP) 

administration (-0.1% of GDP) 

•  Measures  affecting 

taxes  paid  by 

•  Reduction of expenditure on investments 

households (+0.2% of GDP) 

(-0.6% of GDP) 

•  Increase  in  solidarity  tax  on  households 

•  Measures 

to 

limit  growth  of  public 

and corporations (0.3% of GDP) 

•  Reduction  of  the  maximum  refundable 
amount  of  property  purchase  (+0.0%  of 
GDP) 

administration wage (-0.1% of GDP) 
•  Reduction in subsidies (-0.0% of GDP) 

•  Increase  in  excise  duties  on  tobacco  and 

•  Reduction  in  social  benefits  in  kind  (-

diesel (0.1% of GDP) 

0.2% of GDP) 

•  Increase of car taxation (+0.0% of GDP) 

•  Reduction of transfer to the Employment 

Fund (-0.0% of GDP) 

  Note: The budgetary impact in the table is the impact reported in the programme, i.e. by the national 
authorities.  A  plus  sign  indicates  that  revenue/expenditure  increases  as  a  consequence  of  the 
measure. The degree of detail reflects the information made available in the stability programme and, 
where available, in a multiannual budget.  

The figures for 2015 and 2016 in the programme can be considered as targets, given that 
they  are  not  underpinned  by  sufficiently  specified  measures.  While  the  underlying 
macroeconomic  environment  is  expected  to  remain  favourable,  the  general  government 
balance is projected to deteriorate substantially to a deficit of 1.3% of GDP both in 2015 and 
2016. This deficit is however entirely explained by a change  in the  European legislation on 
VAT on e-commerce, which from 2015 onward will be levied in the country of residence of 
the consumer rather than in the country of residence of the service provider. The impact of the 
change  in  legislation  would  lead  to  a  drop  in  VAT  revenues  estimated  at  around  1.4%  of 
GDP.  The  government  has  already  announced  that  to  compensate,  at  least  partially,  for  the 
loss in revenue, the standard VAT rate will be increased from 2015. The deterioration of the 
public deficit envisaged in the programme will lead the structural balance to diverge from the 
MTO in the outer years of the programme. However the programme states clearly that, should 
if Luxembourg has not have achieved its MTO in 2016, which is indeed the case under the 
programme scenario, additional measures will be introduced to make sure the target is met. 

The macro-economic scenario underpinning the national budgetary projections in 2013 
and  2014  is  plausible  and  broadly  in  line  with  the  Commission's  spring  forecast.  The 
GDP growth of 1.0% in 2013 is only slightly above the 0.8% projected in the spring forecast. 
In 2014, the authorities' projection for growth of 2.2% is higher than the Commission's. The 
difference  is  explained  by  a  higher  contribution  of  inventories.  For  the  outer  years  of  the 
programme,  the  growth  scenario  is  slightly  optimistic,  as  the  projected  growth  of  1.7%  and 
3.4% in 2015 and 2016 respectively is above the estimated rate for potential growth of around 
1.0%.  The  main  downside  risk  for  this  growth  scenario  is  to  the  export  performance  of  the 
financial services industry. 

11 

 
 
 
 
 
 
 
 
 
 
 
 
In  2012,  the  surplus  of  the  structural  balance  declined  to  0.1%  of  GDP  from  0.3%  of 
GDP in 2011 and has failed to remain at MTO defined as a surplus of 0.5% of GDP of 
the  general  government  balance  in  structural  terms.  The  revenues  in  2012,  net  of 
discretionary  measures,  grew  to  a  higher  rate  than  that  implied  by  the  standard  elasticities. 
The structural expenditure ratio moved up by almost 1% of GDP in 2012, only partly related 
to  the  increasing  trend  in  some  expenditure  items  and  the  impact  of  the  population  ageing. 
The  deterioration  is  reflected  in  the  growth  rate  of  the  government  expenditure,  net  of 
discretionary  revenue  measures.  In  2012,  this  exceeded  the  reference  medium  term  of 
potential GDP growth (1.76%).9 The deviation of the growth rate of government expenditure 
in 2012 compared to the reference rate is estimated at 1.3% of GDP on an annual basis and 
0.9%  of  GDP  on  average  when  assessed  over  two  consecutive  years,  2011-2012,  therefore 
above  the  threshold  of  0.5%  of  GDP,  and  0.25%  of  GDP  respectively  to  consider  the 
deviation  as  significant.  However,  other  factors  should  be  taken  into  account to  qualify  this 
deviation:  (i)  the  deficit  deteriorated  in  structural  terms  by  0.2%  of  GDP,  relatively  small 
compared  to  the  excess  in  the  expenditure  benchmark  and  below  the  threshold  to  qualify  a 
deviation as significant; (ii) the economy of Luxembourg, given the small size of the country 
and its degree of openness is very volatile, including the price deflators; the latter had implied 
inflation surprises on the upside in 2012 as compared to the values used in the assessment of 
the expenditure benchmark, which can be a mitigating factor to explain a higher government 
expenditure  growth;  and  (iii)  according  to  the  Commission's  spring  2013  forecast, 
Luxembourg  should  attain  its  MTO  in  2013  thanks  to  an  appropriate  structural  adjustment, 
including  meeting  the  expenditure  benchmark.  All  these  elements  point  to  a  non-structural 
nature  of  the  deviation  and  rather  highlight  the  risks  associated  with  both  revenue  and 
expenditure projections. 

Following  the  above  overall  assessment  of  Luxembourg  budgetary  developments,  with  the 
structural balance as a reference, including the analysis of expenditure,  net of discretionally 
revenue measures, a deviation from the adjustment path toward the MTO is observed in 2012, 
which, following the overall assessment presented above, has not been judged as significant. 

In 2013, however, the re-calculated structural balance is expected to improve to 0.3% of 
GDP from 0.1% in 2012 and to be broadly in line with the MTO. In 2013, thanks to the 
consolidation  measures  adopted  by  the  government  (see  Box  1)  government  expenditure  is 
expected  to  evolve  at  a  rate  lower  than  the  reference  rate  that  ensures  an  annual  structural 
adjustment  towards  the  MTO  of  0.5%  of  GDP.  However,  this  restraint  of  net  expenditure 
growth  below  the  benchmark  in  2013  is  not  enough  to  compensate  for  the  2012  deviation 
from the expenditure benchmark, nor to avoid the risk of a significant deviation on average 
over  2012-2013  next  year  according  to  the  Commission's  spring  forecast.  According  to  that 
forecast  the  improvement  in  the  structural  balance  in  2013  will  be  higher  and  should  attain 
0.7% of GDP, mostly explained by more buoyant revenues than the authorities projected. 

In  the  outer  years  of  the  programme  the  structural  balance  is  expected  to  deteriorate 
deviating from the MTO, mostly because of a drop in revenues, as consequence of the entry 
into force of change in the European legislation on VAT on e-commerce, which from 2015 
onward will be levied in the country of residence of the consumer rather than in the country of 
residence  of  the  service  provider.  However,  according  to  the  programme  over  the  same 
period,  the  growth  rate  of  net  expenditure  is  projected  to  exceed  the  reference  rate.  The 

9  Luxembourg  reached  its  MTO  in  2011  and  as  a  consequence  the  standard  reference  rate  is  used  for  2012. 
However,  in  2012  Luxembourg  will  deviate  from  its  MTO.  Hence,  a  lower  reference  rate  which  ensures  an 
annual structural adjustment towards the MTO is used for 2013. 

12 

 
                                                 
government has announced its commitment to taking additional measures to ensure the return 
of its public finances to the MTO by 2016 or at the latest by 2017, though concrete measures 
have  not  been  fully  specified,  besides  the  announced  increase  in  VAT  rates  from  2015 
onwards. 

In 2012, the general government debt increased to 20.8% of GDP from 18.3% of GDP in 
2011.  According  to  the  programme,  the  debt  is  projected  to  increase  steadily  in  the  coming 
years and would stand at 27.9% of GDP in 2016.  The recurrent central government deficits 
will need to be financed through additional debt, as the structural surplus of the social security 
subsector cannot be used to finance it, as it is transferred to the pension reserve fund. At the 
end of 2012, the reserve fund has accumulated assets equivalent to 27.5% of GDP, a higher 
amount than the gross public debt. Since the debt-to GDP ratio is below the reference rate, the 
debt reduction benchmark is not applicable. Medium-term debt projections (see Graph below 
Table  V  in  annex)  indicate  that  full  implementation  of  the programme  would  put  debt  on  a 
slightly increasing path by 2020, although remaining below the 60% of GDP reference value. 

Long-term sustainability 

Luxembourg does not appear to face a risk of fiscal stress in the short term. The country 
is  at  low  sustainability  risk  in  the  medium  term  and  at  high  risk  in  the  long-term 
perspective, mainly due to the budgetary impact of ageing costs. Indeed, government debt 
(20.8% of GDP in 2012 and expected to rise to 25.2% in 2014) is well below the 60% of GDP 
threshold. Risks would be even lower in the event that the structural balance reverted to the 
higher values observed in the past, such as the average for the period 1998-2012. The focus 
should, therefore, be on curbing age-related expenditure in general and pension expenditure in 
particular. 

On  5  December  2012,  the  Luxembourg  Parliament  finally  adopted  a  pension  reform 
proposal  that  had  been  submitted  by  the  government  in  January  2012.  The  reform 
entered  into  force  on  1  January  2013;  however,  the  new  calculation  method  will  be 
implemented only gradually over the next 40 years. According to data from the 2012 Ageing 
Report, which had already anticipated most aspects of the forthcoming reform, Luxembourg 
stills need to implement long-term sustainability-enhancing policies equivalent to a permanent 
improvement of 8.6 percentage points of GDP in the primary balance to close the fiscal gap, 
according to the S2 indicator. This is an effort significantly above the average improvement 
required for the EU as a whole (3.0 percentage points). Assuming no further policy changes 
are  made,  debt  would  slightly  decrease  to  20.0%  of  GDP  by  2020  from  20.8  %  of  GDP  in 
2012. Thanks to its lower initial debt, Luxembourg has time to adjust policies to account for 
the impact of age-related expenditure. Moreover, the country has accumulated public reserves 
of around 27 % of GDP, but this only reduces risks for sustainability in the short to medium 
term. 

Given the very high projected increase in age-related expenditure, emphasis should be 
put  on  containing  long-term  public  spending  trends,  especially  as  regards  pension  and 
long-term  care  components.  Ensuring  sufficient  primary  surpluses  over  the  medium  term 
and further reforming the social security system, notably the pension system, so as to soften 
the  projected  impact  of  the  age-related  expenditure,  would  improve  the  sustainability  of 
public finances. 

The recently legislated pension reform does not include a reference to a link between the 
statutory retirement age and life expectancy. Moreover, given the projected high increase 
in  expenditure  by  2060,  it  is  likely  that  additional  reform  steps  will  be  necessary  to  further 

13 

 
boost  sustainability  in  the  future,  considering  that  the  impact  of  the  2012  pension  reform  is 
likely to not be sufficient to bridge the funding gap as projected in the 2012 Ageing Report.10 
According  to  an  analysis  carried  out  by  the  Central  Bank  of  Luxembourg11  even  after  the 
reform the indebtedness of the social security system would set to rise to above 200% of GDP 
in 2060. 

Box 2: Pension reform in Luxembourg 

The reform has maintained the basic principles of the old system, such as the retirement age 
of  65  and  a  possibility  of  early  retirement  at  57  or  60.  Job  holders  are  encouraged  to  work 
longer on a voluntary basis, with additional pension rights for years worked after the age of 60 
of  a  career  of  more  than  40  years,  instead  of  55  and  38  years  respectively  today.  The  new 
calculation  method  will  be  implemented  only  gradually  over  the  next  40  years.  Job  holders 
would have to work only three years longer to receive the same benefit, while the replacement 
rate  remains  very  high,  making  it  not  very  attractive  to  work  longer  than  the  minimum 
required. 

According to the new rules, the automatic adaptation of the pension benefits to trend in real 
wage  will  depend  on  the  financial  situation  of  the  scheme.  In  the  event  that  pension 
expenditure exceeds revenues (expected to occur as from 2020), the adaptation will no longer 
consider  trends  in  wages,  but  it  will  be  linked  to  changes  in  the  cost  of  living  (price 
indexation). 

Finally,  a  monitoring/evaluation  procedure  has  been  put  in  place.  The  law  provides  for 
mandatory  revision  every  five  years.  Thus,  in  2017,  the  General  Inspectorate  of  Social 
Security (IGSS), designated as supervisory authority, will present a new study on the plan’s 
financial position in the medium term. Based on these findings, other measures for financial 
consolidation  (increase  in  contribution  rate  or  additional  adaptation  of  benefits)  could  be 
discussed with the social partners. 

Currently  the  contribution  rate  amounts  to  24%  of  the  wage  mass  (up  to  a  certain  ceiling), 
with  employers,  employees  and  the  state  each  contributing  one  third.  The  government 
recognises that, under the assumptions used for the reform,12 this contribution rate will not be 
sufficient and has alluded to the need for a gradual increase to 31% in the long run in order to 
guarantee a balanced regime. 

10 European Commission, 2012, ‘The 2012 Ageing Report: Economic and budgetary projections for the 27 EU 
Member 
at:  
(2010-2060)’ 
http://ec.europa.eu/economy_finance/publications/european_economy/2012/2012-ageing-report_en.htm 
11  See  "Avis  de  la  Banque  centrale  du  Luxembourg"  on  the  2013  Project  of  budget  available  at: 

available 

States 

http://www.bcl.lu/fr/publications/avis/Avis_de_la_BCL_sur_le_projet_de_Budget_2013__web1.pdf 
(page 33). 

12  The  assumptions  of  average  GDP  growth  of  3 %  and  employment  growth  of  1.5 %  underlying  the 
government’s  projections  may  prove  to  be  overly  optimistic.  In  the  past,  the  Luxembourg  economy 
recorded  very  high  growth  rates  (GDP  expanded  yearly  by  3.7 %  between  1992  and  2010,  while 
employment increased by 3.2 % annually), driven by the expansion of the financial sector. However, as 
mentioned above, it is unlikely that the financial sector will be able to play the same driving role in the 
future  and  thus  new  sources  of  growth  will  have  to  be  found  to  achieve  a  3 %  average  growth  rate. 
Moreover, the authorities assume that a further increase in the proportion of non-residents in the active 
population  will  support  part  of  the  burden  of  the  ageing  population.  Although  this  is  plausible  in  the 
near future, it looks optimistic over a longer-term horizon. 

14 

 
                                                 
Even after the reform, to guarantee the financial viability of the pension system, a substantial 
increase  in  the  contribution  rate  after  2020  will  be  necessary,  in  addition  to  the  built-in 
moderation  of  the  adaptation  of  pensions  to  the  standard  of  living.13  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 (87% compared to between 42% and 49% in neighbouring countries), even for high wage 
earners,  which  has  only  been  possible  thanks  to  the  boom  in  employment  over  the  last  30 
years, different measures could have been taken so as to ensure that future generations do not 
have to bear excessive burdens and a substantial reduction in benefits. 

Besides,  the  impact  of  long-term  care  expenditure  on  fiscal  sustainability  is  not  to  be 
neglected as it is projected to contribute by 2.1 percentage points to the aforementioned 
sustainability  gap.  The  2012  Ageing  Report  shows  a  high  expected  increase  in  both  the 
number  of  elderly  people  and  the  number  of  self-assessed  dependents  in  Luxembourg. 
Therefore,  a  continued  focus  on  cost-saving  prevention  and  rehabilitation  measures,  and  on 
improved  conditions  for  independent  living,  combined  with  increased  efficiency  and 
effectiveness  of  long-term  care  services  would  prove  useful  as  a  means  of  containing  the 
future expected need for (and therefore, cost of) long-term care services. Given the relatively 
stronger  emphasis  on  in-kind  benefits,  especially  institutional  care,  and  the  related  average 
cost  per  user14,  other  cost-savings  measures  should  be  explored,  such  as  introducing  more 
transparent  and  comparable  pricing  system  for  care  institutions.  Generally,  the  eligibility 
criteria  could  also  be  strengthened.  Indeed,  Luxembourg  does  not  appear  to  apply  a  means-
tested  eligibility  criterion  for  either  in-kind  or  cash  long-term  care  benefits.  In  addition,  the 
objectivity of existing eligibility criterion on the basis of dependency could be strengthened, 
as it is assessed by individual medical doctors, nurses or care workers.15 

Fiscal framework 

Fiscal  governance  in  Luxembourg  is  essentially  not  rules-based.  According  to  the  2009 
coalition agreement, public debt should remain at a low level — but no formal quantification 
of  the  target  is  provided  —  and  central  government  expenditure  should  grow  at  a  rate 
compatible  with  the  medium-term  economic  growth  prospects.  Neither  the  debt  nor  the 
expenditure agreements are established in law; there is no identified monitoring body and no 
predefined action in case of non-compliance. 

Government  revenues  in  Luxembourg  are  particularly  volatile,  notably  because  of  the 
country’s  openness  and  because  of  the  economy’s  strong  specialisation  in  the  financial 
sector. Luxembourg does not have a medium-term budgetary framework underpinning multi-
annual fiscal planning by providing guidelines for smooth revenue and expenditure evolution, 
thereby  contributing  to  budgetary  discipline  in  the  medium  and  long  term.  A  multi-annual 
programme exists for investment expenditure but has only an indicative character. 

Luxembourg  ratified  the  Treaty  on  Stability,  Coordination  and  Governance  in  March  this 
year.  The  entry  into  force  of  the  ‘six-pack’  (2011  package  of  EU  legislation  to  strengthen 

13  This  limitation  of  the  adaptation  of  pensions  to  the  standard  of  living  will  not  affect  the  calculation  of  the 
initial  pension  level  at  the  time  of  retirement,  but  only  the  subsequent  adaptation  to  wage  evolution 
during the pension period. 

14 In 2010, 37% of the dependents aged 15 or more do receive long-term care services, at home or in institutions. 
Luxembourg appears to spend 91% of public spending on LTC for in-kind benefits (services), 63% of it 
being  for  services  in  institutions.  The  average  cost  per  user  in  institutions  is  about  69  %  of  GDP  per 
capita, i.e. slightly above the EU average (based on the Ageing Report 2012). 

15 See MISSOC, 2012. 

15 

 
                                                 
economic governance) confirms Luxembourg is committed to reform its fiscal framework and 
in  particular,  to  pursue  and  enshrine  in  law  the  objective  of  a  balanced  budget  with  the 
introduction of a structural budget balance rule that includes a correction mechanism in case 
of non-compliance and an independent body in charge of monitoring and assessment. 

Tax system 

With tax revenue amounting to 37.9% of GDP in 2012, Luxembourg stands out with a 
tax level both below the EU-27 average (39.9%) and below that of its three neighbouring 
countries − Belgium, France and Germany. The structure of the Luxembourg tax system, in 
terms of the proportion of revenues collected by the different taxes, has remained relatively 
stable since 2000. Less than one third of tax revenue is raised from consumption taxes, which 
places  Luxembourg  among  Member  States  with  the  lowest  share  in  the  EU-27  (24th  in 
2011)16;  partially  owing  to  moderate  VAT  nominal  rates  (15%)  and  reduced  rates  (6%  and 
12%).  Luxembourg  ranks  first  in  terms  of  the  number  of  categories  of  goods  and  services 
covered by reduced VAT rates. The presence of a large financial sector, exempted from VAT 
under the Directive, also explains the low VAT to GDP ratio. Overall Luxembourg has scope 
to  raise  revenue  by  extending  the  application  of  the  standard  VAT  rate.  Labour  taxation  is 
among  the  lowest  in  the  EU,  with  the  tax  wedge  on  labour  for  an  average  single  earner 
without  children  amounting  to  36.0%  in  2011,  substantially  lower  than  the  EU-27  average 
(41.1%).  Revenues  from  capital  taxes  as  a  percentage  of  total  taxes  (28.1%)  are  among  the 
highest in the EU (20.5%). The revenues from corporate income tax are among the highest in 
the EU, which is partly due to the importance of the financial sector in the economy. Taxes 
are  collected  in  a  relatively  efficient  way,  with  Luxembourg’s  administrative  costs  for  tax 
collection standing at the EU-27 average. 

In terms of environmental taxation, apart from a slight increase in excise duties on diesel 
oil, from EUR 330 per 1000 litres to EUR 335, not much has been done to contribute to 
achieving environmental objectives. Tax rates on transport fuels  are still low compared to 
EU averages and considerably lower than in neighbouring countries. The level of tax on diesel 
is also relatively low compared to petrol. Moreover, indexation of environmental taxes would 
prevent a gradual reduction in revenues over time (in % of GDP). Finally, more targeted and 
less costly support for industries and consumers  than reduced VAT rates on energy use could 
be  considered  instead  of  the  current  12%  rate  on  fossil  fuel  for  heating  and  commercial 
purposes, and a 6% rate for natural gas or electricity consumption. In addition, revenues could 
possibly be raised from taxes on pollution/resources. 

Revenues from recurrent property taxes were the second lowest in the EU in 2011. The 
taxation base is the unit value of a property, which is based on a scale that dates back to 1941 
and  is  definitely  not  aligned  with  current  rental  value.  Coupled  with  mortgage  interest 
deductibility,  favourable  taxation  of  capital  gains  on  principal  residences  and  interest-rate 
subsidies,  the  current  taxation  system  is  conducive  to  owner  occupation.  In  these 
circumstances, given limited supply, this largely drives up house prices. As a result, reducing 
implicit tax subsidies in relation to home ownership (or tax expenditure in this area) should be 
considered as a priority. 

The  main  measures  voted  in  the  2013  Budget  law  are  in  the  direction  of  the  tax 
recommendations in the AGS 2013, supporting inclusive growth and financial stability 
while  considering  the  consolidation  efforts.  In  terms  of  greening  the  taxation  system,  the 

16 

See 

Taxation 

at: 
http://ec.europa.eu/taxation_customs/taxation/gen_info/economic_analysis/tax_structures/index_en.htm 

European  Union 

available 

Edition, 

trends 

2013 

the 

in 

– 

16 

 
                                                 
Budget  law  introduced  an  increase  of  excise  duties  on  diesel  oil  along  with  particular 
provisions to revise taxation on vehicles. The tax deduction granted to vehicles equipped with 
a  diesel  engine  whose  CO2  emissions  do  not  exceed  10mg/lm  is  abolished  while  bonuses 
granted for electric vehicles are maintained. Nevertheless, the measures announced fall short 
of achieving the environmental objective. The recent increase in excise duties on diesel oil –
from  EUR  330  per  1000  litres  to  EUR  335  –  falls  short  of  properly  integrating  all  negative 
environmental  impacts  associated  with  diesel  combustion.  No  reliable  assessment  has  been 
made  available  yet  on  the  potential  impact  of  an  increase  in  energy  excise  duties  on 
Luxembourg's fiscal revenues.  

As  regards  corporation  taxation  the  investment  deduction  for  CIT  purpose  will  be 
reduced as of 2013. Tax credit rate for global investment is kept at 7% for investments up to 
EUR 150,000 however, for the tranche exceeding EUR 150,000 the credit rate decrease from 
3% to 2%. In addition, the tax credit applied for additional investments is decreased from 13% 
to 12%.  

The corporation sector is characterized by a high level of indebtedness to which the debt 
bias in corporate taxation (via the deductibility of interests) is likely to have contributed. 
Besides  general  anti-avoidance  rules,  Luxembourg  has  no  specific  provisions  to  address  the 
bias such as thin capitalization rules, allowance for corporate equity, etc... Reducing the level 
of indebtedness is particularly important given the size of the financial sector in Luxembourg.  

Luxembourg  is  frequently  used  by  multinational  companies  to  channel  tax  driven 
financial  flows  to  other  jurisdictions.  A  recent  OECD  study17  suggests  that  some 
international corporations may shift profits to low-tax jurisdictions via Luxembourg. Indeed, 
the absence of withholding tax on outbound royalties and intercompany interest payments and 
the fact that the Luxembourgish tax administration gives advance clearance (tax rulings) on 
the  tax  consequences  for  such  activities  have  contributed  to  companies  known  as  Special 
Purpose  Vehicles  being  registered  in  Luxembourg  without  having  a  substantial  physical 
presence  there.  This  generates  gross  financial  flows  made  through  special  purpose  entities 
through  Luxembourg  that  in  2011  amounted  to  USD  1,987  billion  for  inward  stock 
investment and to USD 1,945 billion for outward stock investment. The current international 
pressure to reform tax rules to prevent the use of such vehicles in this way may have adverse 
economic effects for Luxembourg and other Member States. 

1.4. 

Financial sector 

The size of the financial sector in Luxembourg remains very large compared to the size 
of the economy. Total bank assets at the end of February 2013 stood at EUR 741.5 billion, 
down around EUR 29 billion from a year earlier. As a percentage of GDP, total assets in 2012 
amounted  to  1673%,  down  from  their  recent  peak  in  September  2008,  when  they  stood  at 
2658 %  of  GDP.  The  Luxembourg  banking  sector  consists  mainly  of  subsidiaries  and 
branches of foreign banks and a few Luxembourg-based banks. In December 2012, only five 
banks  out  of  142  were  domestically  owned.  Luxembourg  banks  are  heavily  involved  in 
private banking and wealth management and generally act as net liquidity providers to their 
foreign parents. In addition, they very often act as sponsoring banks to the local investment 
fund industry. 

Luxembourg banks’ profitability and solvency, as measured respectively by the return 
on  equity  ratio  (9.8%  as  of  June  2012)  and  by  the  capital  adequacy  indicators  (Tier  1 

17 Addressing Base Erosion and Profit Shifting (OECD, 2013). 

17 

 
                                                 
ratio  at  17.5%)  show  the  financial  sector  is  healthy.  In  spite  of  the  broadly  positive 
numbers, the improvement in 2012 over the previous year is more the result of the absence of 
negative factors, such as equity losses, than the fruit of the traditional activity, which actually 
continued to worsen. The profit and  loss accounts for the banking  sector  deteriorated  in  the 
first part of 2013, reaching levels comparable to 2008 reflecting a squeeze on interest margins 
as  well  as  an  increase  in  staff  costs.  The  latter  increase  is  mainly  related  to  redundancy 
payment costs.  

Conditions  for  lending  to  corporations  have  remained  tight  since  the  onset  of  the 
financial crisis, even if less so than in the euro area on average. The additional conditions 
that  banks  are  demanding  in  order  to  grant  a  loan  have  been  noticeably  tightened.  Small 
enterprises  are  most  affected,  while  medium-sized  and  large  corporations  can  finance  their 
needs  directly  on  the  bond  market.  Small  enterprises  in  Luxembourg,  especially  innovative 
small  and  medium-sized  enterprises  (SMEs),  would  benefit  from  tapping  into  alternative 
sources of finance. 

As  regards  lending  to  households  for  housing,  conditions  have  tightened  recently.  The 
tightening  is  the  result  both  of  an  increase  in  the  financing  costs  faced  by  banks  and  an 
increase in the risk perception associated with this kind of operation. Such tightening is often 
reflected  in  a  reduction  in  the  amount  of  money  granted  versus  the  value  of  the  guarantee 
(loan  to  value  ratio).  On  the  demand  side,  in  contrast  with  recent  developments  in  the  euro 
area generally, an increase has been recorded. 

1.5. 

Labour market, education and social policies 

Labour market 

A  particularity  of  the  labour  market  is  the  increasing  share  of  non-resident  workers, 
currently around 42% of total employment. Productivity levels are the highest in the EU. 
On  the  other  hand,  adjustment  of  employment  in  times  of  economic  downturn  is  slow, 
resulting in a fall of apparent productivity. This is due both to strict employment protection 
legislation  as  well  as  labour  hoarding  by  firms  that  are  reluctant  to  lay  off  highly-skilled 
workers because of their scarcity on the labour market.  

The total employment rate is relatively high. In 2012 it stood at 71.4% of population in the 
age  bracket  20-64,  meaning  that  there  was  slow  progress  towards  the  national  employment 
target (73%). The employment rate of young people (in the age bracket 15-24) is rather low, 
at  21.7%  in  2012,  compared  to  32.9%  for  the  euro  area.  The  employment  rate  of  older 
workers (age 55-64), at 41% in 2012, is one of the lowest in the EU. 

The  Luxembourg  government  has  demonstrated  a  strong  commitment  to  combating 
youth  unemployment,  responding  to  last  year’s  CSR.  The  youth  unemployment  rate,  at 
18% in 2012, though still below the EU average, is persistently high when compared to the 
country’s overall unemployment rate. On the other hand, the youth employment ratio is very 
low,  pointing  to  a  low  percentage  of  active  population  in  this  age  cohort.  Several  measures 
have been set up to help young people get back to the employment market (such as setting up 
a  career  guidance  centre  (Maison  de  l’Orientation),  an  Employment  Observatory,  and  so-
called  fit4jobs  incentives).  The  government,  in  collaboration  with  the  national  employment 
agency  (Agence  pour  le  développement  de  l’emploi  (ADEM)),  is  assessing  the  measures 
taken  to  analyse  how  they  could  be  improved.  An  ambitious  action  plan  for  youth 
employment has been announced, which envisages a ‘Youth Guarantee’ (Garantie Jeune): in 

18 

 
line  with  the  Council  recommendation.18  Nevertheless,  most  of  these  initiatives  are  very 
recent  and  some  have  only  been  partially  implemented.  It  is  still  too  early  to  assess  their 
effectiveness,  while  it  is  clear  that  in  order  to  maximise  returns  of  sustainable  youth 
employment  dynamics,  these  measures  should  be  part  of  a  comprehensive  reform  strategy, 
including  enhanced  activation  policies  to  combat  benefit  dependency.  The  design  of  the 
Luxembourg social benefit system, including its generosity, leads in fact to a lot of inactivity 
and low-wage traps for resident workers, notably, amongst others, young people, women and 
older workers. 

The  employment  rate  of  older  workers,  at  41%  in  2012,  is  still  weak.  The  low 
participation  rate  of  older  workers  is  closely  linked  to  the  generosity  of  the  pension  system 
and the availability of favourable early retirement schemes. While the statutory retirement age 
is in principle set at 65 years, the Luxembourg pension system often allows people to retire 
earlier  with  virtually  no  reduction  in  the  pension  level,  which  is,  moreover,  comparatively 
high.  As  a  result,  the  average  effective  age  of  withdrawal  from  the  labour  market  is  59.4, 
which weighs on the costs of the pension system. Even after the implementation of the 2012 
pension reform, job holders would have to work three years longer to receive the same benefit 
with  the  possibility  for  early  retirement  being  left  broadly  unchanged.  In  addition, 
replacement  rates  remain  very  high.  Against  this  background,  the  financial  incentives  to 
prolong working careers envisaged in the pension reform are particularly welcome. However, 
the  employability  of  older  workers,  including  their  skills,  needs  to  be  improved 
simultaneously. 

The  employment  rate  of  women  is  still  rather  low  but  catching  up  with  the  European 
average. The NRP 2013 confirms the measures taken by the government to increase women's 
participation  in  employment  that  were  mentioned  in  the  NRP  2012.  These  measures  (i.e. 
dealing  with  child-care,  parental  leave  for  women  and  men,  transposition  of  EU  directive 
2010/18/EU, reduction of wage gap, equal treatment, promoting women entrepreneurs,…) are 
currently  being  implemented  and  are  to  be  monitored  by  the  government  in  order  to  assess 
their real impact. In addition, taxation could be used as another instrument to improve female 
participation. Currently, the joint taxation for couple may create disincentives for the second 
earners  to  go  back  to  work.  Given  a  sufficiently  well  paid  primary  income  earner,  the 
incentives for the other spouse to work are weakened by the fact that she would be taxed at a 
higher bracket, even for low earnings. LU not only faces a low employment rate for women, 
but also a low employment rate for women in a couple. 

The  structural  component  of  unemployment  has  been  steadily  increasing  over  the  last 
decade,  including  in  times  of  significant  economic  growth  with  booming  employment, 
which  suggests  that  part  of  the  workforce  does  not  match  the  needs  of  the  economy. 
Hence,  it  can  be  said  that  CSR  2012  in  the  field  of  labour  market  is  only  partially 
implemented.  Employment  performed  particularly  well  during  the  recession  and  never 
decreased during the crisis. A quantitative and qualitative follow-up of labour measures and 
an  evaluation  of  the  situation  of  the  young  people  on  the  labour  market  would  be  welcome 
and would enable a more precise national plan to be drawn up, including more concrete and 
more sectorial measures to help young people get back on the market. 

Education 

18 The Council Recommendation of 22 April 2013 on establishing a Youth Guarantee (2013/C 120/01) calls for 
Youth Guarantee schemes that ensure that all young people under the age of 25 years receive a good-
quality offer of employment, continued education, an apprenticeship or a traineeship within four months 
of becoming unemployed or leaving formal education. 

19 

 
                                                 
Luxembourg's  education  system  faces  specific  challenges  due  to  the  multilingualism 
demands  of  the  system,  the  high  proportion  of  people  with  migrant  backgrounds  in  the 
population  (43.1%),  and  the  specific  skills  required  by  a  strongly  specialised  labour  market 
with  a  large  financial  sector.  A  reform  of  the  secondary  school  system  is  currently  being 
prepared and new guidance procedures are being implemented as from 2013, concerning the 
last year of primary education and lower secondary school classes.   

Luxembourg  has  one  of  the  lowest  early  school  leaving  rates  in  Europe,  standing  at 
8.1%19  in  2012,  compared  to  the  13.5%  EU  average.  However,  early  school  leaving 
remains  a  major  issue  for  Luxembourg,  as  many  drop-outs  do  not  attain  proficiency  in  all 
three  official  languages,  especially  among  the  population  with  a  migrant  background,  and 
therefore  a  number  of  career  paths  are  in  practice  closed  to  them.  The  early  school  leaving 
strategy  outlined  in  the  2013  NRP  promotes  educational  success,  strengthening  vocational 
guidance and explaining the capacity of reintegration programmes such as the second chance 
school.  A  focus  on  support  to  young  people  at  risk  from  migrant  background  is  important. 
Vocational education and training (VET) should be given particular attention in this context. 
The reform of VET provides more possibilities to bridge the gap between vocational training 
and  higher  education.  For  example,  the  aforementioned  "Maison  de  l’Orientation",  which 
provides guidance services and direction, opened in 2012. A law approved on 6 March 2012 
aims  to  motivate  small  companies  to  take  greater  advantage  of  continuing  education 
programmes, and to get companies in general to extend continuing education programmes to 
workers with low levels of initial training. A key challenge will be to increase the quality and 
attractiveness of VET studies and to raise them to the ‘excellence’ level in order to provide a 
qualified workforce to the labour market and to offer professional perspectives to the learners. 
The percentage of young people who were neither in employment nor in education or training 
(NEET)  decreased  further  in  2011  to  4.7%,  and  now  stands  at  5.9%,  less  than  half  the  EU 
average.  

The  tertiary  education  attainment  rate  according  to  the  Eurostat  methodology  is,  at 
49.6%  in  2012,  well  above  the  EU  average  of  35.8%  and  above  the  EU  target  of  40%. 
However,  the  figure  of  49.6%  is  misleading  because  Eurostat  measures  tertiary  attainment 
based on the working population in Luxembourg, but a high percentage of this population is 
either  not  resident  in,  or  not  originally  from,  the  country.  In  its  2012  NRP,  Luxembourg 
proposed to set the national target at 66% instead of 40%. Efforts to reach a higher education 
attainment  rate  among  residents  are  important  in  view  of  the  Europe  2020  benchmark  for 
higher education. 

Adult participation in lifelong learning (LLL) has increased over the last few years and 
reached 13.9% in 2011, against a 9% EU average. Despite this rather good performance, 
greater adult participation in LLL is needed to tackle the country’s structural unemployment 
since  residents  are  facing  competition  from  a  large  pool  of  potential  workers  from 
neighbouring  countries,  often  highly  skilled  and  with  overall  lower  reservation  wages,  as  a 
result  of  lower  minimum  wages  and  out-of-work  benefits.  A  particular  focus  on  those  aged 
55-64 with a low education level is needed. A White Paper on LLL strategies was published 
in November 2012. From 2012 on, LLL in the private sector will be co-financed by the state 
at a rate of 20% instead of 14.5% (35% for young unskilled workers and older workers). This 
strategy  should  help  get  older  workers  back  to  work,  along  with  tackling  youth 
unemployment. 

19 Provisional Eurostat 2012 data. 

20 

 
                                                 
PISA performance20 on basic skills of young people is relatively weak and there has been 
a  negative  tendency  in  reading,  mathematics  and  science  since  2006.  Luxembourg’s 
performance  in  international  comparisons  of  student  outcomes  suggests  that  much  can  be 
done to improve the effectiveness of teaching and  learning.  Despite  substantial spending on 
teachers, there is significant shortage of qualified teachers. To monitor and assess the quality 
of teaching at primary and secondary level, Luxembourg has also put in place an agency for 
school  quality  development  (Agence  pour  le  développement  de  la  qualité  scolaire-ADQS). 
However  further  improvement  and  targeting  of  education  resources  to  schools  with 
disadvantaged  students  and  an  increase  in  resources  available  for  language  support  and 
remedial  classes  are  needed.  For  example,  there  needs  to  be  more  enrolment  in  early 
childhood  education  and  care  and  targeted  support  to  children  from  low-income  and/or 
foreign-language families. 

Social policies 

Luxembourg  finally  set  a  national  poverty  target  in  line  with  the  Europe  2020  goals, 
which aims to reduce the number of people threatened by poverty or social exclusion by 
6000 in 2020. Poverty and social exclusion rates in Luxembourg are among the lowest in the 
EU.  Data  tend  to  show  the  growing  importance  of  social  transfers  for  households:  indeed, 
more people rely on the help of the RMG (guaranteed minimum income), and the AROPE (at-
risk–of-poverty-or-social-exclusion) rate only slows down after social transfers. 

The  number  of  people  living  in  households  with  very  low  work  intensity  decreased, 
which  seems  to  be  the  mirror  of  the  increase  in  participation  rates,  notably  of  women  and 
older  people.  In  line  with  growth  in  employment,  the  share  of  those  living  in  jobless 
households declined. The strong financial sector contributes to very high median and average 
wages. The minimum wage, though the highest in the EU (EUR 1758), is just enough to cover 
the poverty threshold. Particularly worrying is the in-work poverty rate for single parents, the 
second  highest  in  the  EU-27.  Similarly,  the  in-work  poverty  rate  for  temporary  workers 
(20 %) was the third highest in the EU and has been increasing since 2007. 

The  situation  of  children,  young  people  and  with  migrant  background  is  challenging. 
Child  poverty  has  been  increasing  over  the  last  2  years.  However,  the  risk  of  severe 
material  deprivation  for  children  is  much  lower  in  Luxembourg  than  in  the  EU  on  average 
(1.2%  in  2011  against  10%)21,  and  only  2.9%  of  children  live  in  low-work-intensity 
households22. 

The poverty situation of people with a migrant background is considerably worse than 
that of nationals, although it has improved in recent years. The AROPE rate has steadily 
declined since 2006, reaching 16.8% in 2011 for EU nationals. The AROPE rate in the case of 
non-EU  nationals,  having  declined  steadily  for  some  years,  showed  a  recent  sharp  increase, 
reaching 47.7% in 2011 (the highest rate since 2004). 

The publication 'A look at single parent families' of the National Institute for Statistics 
and  Economic  Studies  (STATEC)  in  2011,  illustrates  that  single  parent  families  are 
especially exposed to the risk of poverty. The LU government proposed seven measures to 

20 OECD Reviews of Evaluation and Assessment in Education – Luxembourg – 2012 
21 As a reference, the risk of severe material deprivation for the total LU population is of 1.2% (as opposed to 

10% in EU27). 

22 As a reference, in LU, people living in low-work intensity households of 5.8% (as opposed to 8.8% in EU27). 

21 

 
                                                 
achieve  the  poverty  target,  four  of  which  focused  mainly  on  women  and  single  parent 
families. 

Also by taking into account the challenge of multilingualism, a multidimensional approach to 
poverty  reduction  would  be  ensured  through  better  coordination  of  social  inclusion  policies 
across government services, and through the involvement of civil society and social partners 
in  the  context  of  the  open  method  of  coordination.  Although  no  poverty-related  CSR  was 
addressed to Luxembourg, the government decided to take some measures along Europe 2020 
lines.23 While several measures have been implemented or are planned, Luxembourg has no 
fully integrated ways of assessing inclusion measures, so it is not easy to have a clear idea of 
the outcome. Therefore, a social impact assessment system would be advisable. 

3.4. 

Structural measures promoting growth and competitiveness 

Luxembourg’s  overall  macroeconomic  performance  has  been  remarkable  over  the  last 
decade with GDP growth reaching an annual average of 3.1% over the period 2000-11. 
However,  in  the  years  following  the  2008-09  crisis  Luxembourg’s  growth  performance  was 
nearly flat and on average, just in line with the euro area. With the recent  slowdown of the 
economy’s main growth engine, the financial sector, the country’s vulnerability has become 
more visible. Luxembourg’s loss of price competitiveness over the last decade is mostly due 
to high wage increases coupled with low productivity growth. 

Cost competitiveness 

Irrespective  of  the  geographical  and/or  product  specialisation,  the  steady  increase  in 
unit  labour  costs  is  clearly  hurting  the  country’s  competitiveness.  The  adoption  at  the 
beginning  of  2012  of  the  law  on  the  temporary  modulation  of  the  automatic  indexation 
mechanism  up  to  2014  is  intended  to  improve  the  cost  competitiveness  of  the  Luxembourg 
economy  by  preventing  an  upward  spiral  of  cost  and  price  increases.  The  automatic 
indexation of March 2012 was postponed to October 2012. The automatic indexation steps in 
each  time  that  the  cost  of  living  increases  by  2.5%.  However,  until  end-2014  at  least  12 
months should elapse between each indexation step of 2.5. This means that between October 
2012  and  end  of  2014  there  will  be  a  maximum  of  three  indexation  steps.  Moreover,  the 
composition  of  the  reference  basket  for  calculation  of  the  annual  cost  of  living  index  was 
modified, taking out from it the more volatile components (alcohol, tobacco and fuel). From 
2015  onwards,  the  automatic  indexation  system  will  be  applied  in  the  standard  way  again. 
Finally, as the counter for the next automatic indexation will be set at zero before returning to 
the normal system, some of the gains in cost competitiveness could become permanent. Due 
to  this  provision,  inflation  occurring  between  2012  and  2014,  which  has  not  been 
compensated  by  the  maximum  of  three  indexation  steps,  will  in  fact  not  count  for  the  next 
automatic  wage  indexation  after  2014.  Nevertheless,  these  being  temporary  measures  not 
aimed at addressing cost competitiveness in a structural way, further action will be necessary 
under CSR 3 in order to better link wage and productivity developments so as to help ensure 
long-term price competitiveness. While the government has no intention of reconsidering the 
principle of wage indexation, the possibility of differentiating the wage increases according to 

23 Measures relate to: Continuing the policy of providing welcoming socio-educational structures to children; — 
Making  parents  who  benefit  from  the  guaranteed  minimum  income  (RMG)  mechanism  aware  of  the  usage  of 
welcome centre checks; — Increasing activation rates as part of the RMG mechanism; — Promoting measures 
favouring the transition of young people from academic to professional life and those motivating them to return 
to  school;  —  Making  full  use  of  the  instruments  put  in  place  under  the  social  aid  law;  —  National  strategy 
against homelessness and exclusion caused by housing; — The minimum pension mechanism. 

22 

 
                                                 
sectorial  productivity  to  account  for  differences  in  the  level  of  productivity  across  sectors 
could be explored. The nominal unit labour costs increased by almost 16 % between 2008 and 
2012, which is almost two times faster than in the neighbouring countries. This is particularly 
the case for the industrial sector, where the drop in productivity has been particularly sizeable 
and larger than in the financial sector. In the financial sector on the other hand, the level of 
productivity  is  much  higher  (more  than  double)  than  in  the  remaining  part  of  the  economy, 
and this provides some space to absorb the drop in productivity. 

Research and innovation 

Luxembourg  is  not  on  track  to  reach  its  R&D  intensity  target  for  2020  of  2.3-2.6%  of 
GDP, as its R&D intensity is on a declining trend. This declining trend is explained by the 
sharp  decrease in business  R&D intensity (from 1.53% of GDP in  2000 to  0.98% in 2011). 
Public  sector  R&D  intensity  steadily  increased  from  0.12 %  in  2000  to  0.45%  of  GDP  in 
2011,24 reflecting Luxembourg the authorities’ resolve to build up public research capacities.  

While these efforts and the policy of attracting outstanding foreign researchers to work 
in  Luxembourg  have  already  allowed  a  good  level  of  scientific  performance  to  be 
reached,  the  country’s  research  and  innovation  system  remains  very  weak,  with  its 
public  parts  not  yet  able  to  play  any  decisive  role  in  fostering  innovation-driven 
economic  development.  The  performance  of  Luxembourg  as  regards  the  indicators  on 
cooperation  between  public  research  institutions  and  firms  is  well  below  the  EU  average, 
reflecting the current disconnect between private sector R&D and the public research system. 
The  many  actions  taken  to  foster  public-private  cooperation  and  more  generally  business 
R&D  and  innovation25  have  so  far  had  limited  impact.  For  instance,  objectives  in  terms  of 
spin-off  creation  specified  in  the  performance  contracts  of  public  research  organisations  are 
not being met. 

As  2013  is  the  end  year  of  a  programming  period  (for  the  main  research  programmes 
and  funding  schemes26  as  well  as  for  performance  contracts  with  the  public  research 
centres  and  the  University  of  Luxembourg),  the  opportunity  should  be  taken  to  carry 
out  a  comprehensive  assessment  of  efforts  made  so  far  and  a  thorough  review  of  the 
country’s  research  and  innovation  policy.  The  development  of  a  genuine  Smart 
Specialisation strategy could play a crucial role in maximising the economic impacts of public 
research  funding,  in  particular  through  ensuring  a  leverage  effect  on  private  investments 
which appear to be absent so far. In this context, support to clusters has the potential to play a 
much  more  important  role  in  Luxembourg’s  research  and  innovation  policy.  Such  targeted 
approach could usefully be complemented by a comprehensive horizontal policy focused on 
the development and growth of innovative firms, including for instance through fostering the 
development of an entrepreneurial culture. 

24 This however remains well below the EU average of 0.74 %. 
25 e.g. the law of 5 June 2009 organising state aid for the private sector, the law of 21 December 2007on IP tax 
incentives, the law of 18 February 2010 providing public aid to the private sector in the field of eco-
innovation,  the  setting  up  of  business  incubators,  the  creation  of  a  partnership  with  a  business 
accelerator  located  in  Silicon  Valley  (Plug  and  Play  Tech  Centre),  the  setting  up  of  a  cluster 
programme, the creation of a Master’s degree in Entrepreneurship and Innovation, the setting up of the 
Luxembourg  Future  Fund,  the  specification  of  IP/spin-off  requirements  in  public  research  centre 
performance contracts, etc. 

26  e.g.  the  CORE  programme  2008-2013  which  funds  R&D  projects  in  thematic  priorities  selected  through  a 
foresight  exercise  in  2006/2007,  the  aid  programme  for  research  training  (AFR  2008-2013),  the 
programmes ATTRACT and PEARL 2008-2013 aiming at attracting young and top researchers to work 
in the country. 

23 

 
                                                 
Towards green and sustainable growth 

Under  the  Europe  2020  strategy,  Luxembourg  has  committed  itself  to  reducing  its 
greenhouse  gas  emissions  in  the  non-ETS  sectors  by  20%  in  2020  compared  to  2005. 
Luxembourg is expected to fail to meet its target by a wide margin. According to the latest 
national projections, when existing measures are taken into account, Luxembourg is expected 
to  increase  by  3%  its  non-ETS  GHG  emissions  compared  to  2005,  missing  its  target  by  23 
percentage  points.  Emissions  in  2011  are  already  3%  higher  than  Luxembourg's  target  for 
2013  under  the  Effort  Sharing  Decision.  Measures  currently  in  place  (e.g.  promotion  of 
energy efficiency and use of renewable energy, Kyoto cents, vehicle tax reform) would only 
yield  approximately  a  third  of  the  greenhouse  gas  emission  reduction  necessary  to  meet  the 
target. The second national action plan for CO2 emissions reductions, initially to be adopted 
in  the  first  half  of  2012,  is  now  expected  for  the  second  trimester  of  2013.  A  Climate  and 
Energy Fund is in place to finance the use of flexible mechanisms as well as the development 
of  energy  efficiency  and  renewable  energy  projects.  Income  sources  for  this  fund  come  in 
large part from the so-called "Kyoto-cent", levied on all petrol and diesel sold since 1 January 
2007 (EUR 0.02/litre for petrol, EUR 0.0225/litre for diesel). 

Luxembourg has the highest motorisation rate of any EU country which, together with 
the pressure of a large number of commuters from neighbouring countries who use their 
car  to  get  to  work,  leads  to  heavy  road  traffic  congestion,  in  particular  during  peak 
hours.  The  transport  sector  was  responsible  for  64%  of  non-ETS  emissions  in  2010  and 
represents  a  key  challenge  for  Luxembourg.  In  August  2012,  the  excise  duty  on  diesel 
increased by 1.5%, but it stands far below the level set in neighbouring countries. The recent 
increase  of  excise  duties  on  diesel  oil  falls  short  of  properly  integrating  all  negative 
environmental  impacts  associated  with  diesel  combustion.  No  reliable  assessment  has  been 
made  available  yet  on  the  potential  impact  of  an  increase  in  energy  excise  duties  on 
Luxembourg's fiscal revenues. Luxembourg’s relatively low fuel taxes weaken incentives to 
use public transport, and create strong incentives for both private car owners in the region and 
drivers of heavy vehicles in transit to make a detour to fill up their tanks in Luxembourg. The 
tax exemption for company cars is another costly measure that is not conducive to achieving 
sustainable transport solutions. Targeted increases in the "Kyoto-cent" could increase funding 
sources for renewable energy and energy efficiency projects while decreasing incentives for 
fuel-tourism.  This  would  also  mitigate  the  risks  of  rising  costs  for  meeting  the  targets  via 
alternative measures. 

The efficiency of newly registered vehicles has improved, at 138.4 g CO2/km driven in 
2012.  Luxembourg  applies  an  annual  vehicle  tax  that  slightly  increases  with  the  CO2 
emissions per km of the registered car. On 1 January 2013, a one-off bonus system for low-
emitting vehicles was revised, and now applies to a smaller class of vehicles. In March 2012, 
the government announced a plan to increase the proportion of electric vehicles in the stock of 
passenger  cars  from  virtually  zero  to  10%  by  2020.  This  could  help  increase  the  share  of 
renewable  energy  used  in  transport.  This  share  is  currently,  at  2%,  still  far  away  from  the 
2020 target of 10%. Luxembourg aims at a 25-75 public-private modal split in transportation, 
up  from  the  17/83  split  in  2010  (Sustainable  Mobility  Strategy  —  ‘MoDu’27).  Besides  the 
construction of a tramway line in the city of Luxembourg (planned for 2014) and a number of 
park  &  ride  facilities  in  the  city  outskirts,  few  specific  policies  are  currently  being 
implemented to meet this goal. Luxembourg should continue with the implementation of the 

27  In  May  2012  the  Ministère  du  Développement  durable  et  des  Infrastructures  launched  an  initiative  called: 
‘MoDu  —  A  global  strategy  for  sustainable  mobility  —  for  residents  living  in  Luxembourg  and  the 
Greater Region’. 

24 

 
                                                 
MoDu strategy by giving priority to projects which promote the use of public transport. The 
introduction  of  congestion  charging  on  roads  may  also  encourage  a  shift  towards  public 
transport. Moreover, promoting better public transport connections with neighbouring regions 
may encourage some cross-border commuters to leave their car at home. Finally, speeding up 
the installation and application of intelligent transport systems would help prevent congestion 
and would thus improve the use of the existing road infrastructure. 

Luxembourg  still  has  a  long  way  to  go  to  reach  the  legally  binding  target  of  11%  of 
renewable  energy  sources  in  final  energy  consumption.  Its  share  of  renewable  energy  in 
gross  final  energy  consumption  was  only  2.83%  in  2010.  Given  the  limited  national 
capabilities,  Luxembourg  does  not  appear  to  be  able  to  meet  its  renewable  energy  target 
through domestic measures. Therefore, the timely implementation of cooperation mechanisms 
with other Member States will most likely be necessary. 

Luxembourg  is  dependent  on  imports  for  all  its  energy  needs.  Electricity  demand  is 
relatively high per capita and Luxembourg does not itself have sufficient generation capacity 
to  meet  this  demand.  Further  interconnections  with  neighbouring  countries  could  therefore 
improve  security  of  supply.  With  regard  to  electricity,  the  current  interconnection  capacity 
with  Germany  is  sufficient  but  the  situation  has  to  be  reassessed  as  a  result  of  the  German 
nuclear  phase-out.  Moreover,  higher  imports  from  renewable  sources  would  justify  further 
connecting  infrastructures.  With  regard  to  gas,  the  country  is  suffering  from  limited 
availability of firm entry capacity and a better congestion management mechanism could help 
alleviate this situation. 

The  feed-in  tariff  system,  recently  restricted  for  photovoltaic,  is  now  only  available  for 
installations fulfilling specific criteria. By contrast, feed-in tariff rates have not been changed. 
Luxembourg  has  aligned  national  cogeneration  rules  with  those  of  the  EU,  which  entails 
remuneration for electricity producers that operate cogeneration facilities. 

Luxembourg’s  efforts  to  promote  energy  efficiency  focus  mainly  on  buildings,  in 
particular the residential sector. On 1 January 2013, Luxembourg extended and updated its 
financial  support  for  low-energy  residential  building  refurbishment,  including  support  to 
small-scale renewable energy technologies. On the other hand, energy use continues to benefit 
in  many  instances  from  a  reduced  VAT  rate.  A  voluntary  agreement  exists  with  private 
companies to implement an energy management system and establish an action programme to 
preserve  energy.  In  addition,  further  potential  actions  that  could  save  energy  in  the  tertiary 
and  industrial  sector,  such  as  energy  audits,  could  be  developed  into  concrete  measures. 
Several energy efficiency programmes target cooperation and sharing of best practices, both 
within  Luxembourg  —  in  the  context  of  the  Climate  Pact  with  communes  —  and  with  its 
neighbours. Nevertheless, there remains untapped potential for cost-effective energy savings 
in  Luxembourg,  especially  in  the  buildings  sector,  which,  in  turn,  boosts  the  job  creation 
potential of energy efficiency investments in the construction sector. The complete and timely 
transposition  and  effective  implementation  of  the  Energy  Efficiency  Directive  (due  to  be 
transposed  by  June  2014)  would  provide  additional  means,  including  audits,  to  promote 
energy efficiency. 

Internal market and competition 

25 

 
For  directives  relating  to  the  internal  market,  Luxembourg  posted  a  decrease  in  its 
current  transposition  backlog28:  0.6%  in  November  2012  as  opposed  to  1.4%  in 
November 2011. It more than halved the total number of its outstanding directives (from 
20 to 8). Regarding competition in network industries, Luxembourg belonged to the group of 
Member States that was granted two more years to liberalise its postal market. In December 
2012 a law has been voted that open up the country's postal market to full competition. The 
law provides for the universal service system to be supported via a central fund, managed by 
the Luxembourg Institute of Regulation (ILR), into which competitors operating in the postal 
market  will  pay  money  to  support  the  nationwide  delivery  network.  In  2011  a  price 
observatory  was  created  to  guarantee  more  transparency  on  consumer  prices.  In  October 
2011, the two existing competition bodies were merged into one, named ‘the Council’, with 
increased powers. The Council has to be consulted on any draft law or regulation which may 
affect competition. The Luxembourg National Competition Authority is particularly small and 
competition enforcement would be strengthened if it had more staff. 

Professional  services  used  to  be  highly  regulated  in  Luxembourg  but  recent  legislation 
implementing the Services Directive adopted in September 2011 has considerably reduced the 
regulatory burden. One of the most important changes is the new law regulating access to the 
professions  of  craftsmen,  traders,  retailers,  industrialists  and  other  liberal  professions.  By 
removing  obstacles  consisting  of  numerous  formalities,  Luxembourg  has  opened  up  the 
market  and  made  access  easier  for  service  providers  from  other  Member  States.  However, 
there seem to be some restrictions in the services sector. Some measures have been identified 
regarding requirements where the Directive leaves a margin of appreciation to Member States 
to streamline the regulatory environment for the establishment of providers (e.g. quantitative 
restriction on places selling alcoholic beverages, ban on having more than one establishment, 
and  shareholding  requirements  for  lawyers).  In  addition,  it  is  not  always  clear  whether 
authorisations  applying  to  incoming  service  providers  can  be  justified  for  one  of  the  four 
reasons recognised by the Directive (public policy, public security, public health or protection 
of  the  environment)  and  whether  they  are  proportionate.  The  Luxembourg  government  has 
kept  social  contributions  stable,  neutralised  the  effect  of  an  increase  in  minimum  wages  on 
labour costs and kept public investment at a high level. 

1.6.  Modernisation of public administration 

Luxembourg is undergoing a reform of the public administration. In July 2012 a draft 
law  was  presented  to  Parliament.  As  part  of  it,  the  government  wants  to  review  the 
system of promotions, the career structures and the organisation of the training period. 
An appraisal system is envisaged to assess officials' work, attendance, personal conduct and 
interactions. 

The government is in favour of revising the pay structure in the public service, which would 
go through an analysis of the level of remuneration of early-career newcomers in all jobs. 

The  reform  of  the  public  administration  provides  for  structuring  a  new  career; 
prolonging  the  training  period  and  reducing  the  training  allowance;  the  introduction  of 
management  by  objectives  in  all  departments  and  administrations;  the  introduction  of  a 
system  of  assessment  of  personal  and  professional  skills;  the  creation  of  an  ombudsman 
within the public administration.  

28 

See 

Internal 

Market 

Scoreboard 

– 

February 

2013 

available 

at: 

http://ec.europa.eu/internal_market/score/docs/score26_en.pdf 

26 

 
                                                 
Luxembourg generally ranks well in surveys29 on the administrative burdens of the tax 
system. Despite below-average availability (70% for citizens and 75% for businesses), the use 
of e-government services by citizens and enterprises is one of the highest in Europe (67% and 
90%  respectively).  Public  procurement  directives  have  been  implemented  in  national 
legislation.  Contracts  below  the  thresholds  are  subject  to  specific  procedures  with  lighter 
requirements. Information available on the actual application of the public procurement rules 
or of the national system of remedies is scarce and does not allow definite conclusions to be 
drawn. A national procurement portal where publication of tenders is mandatory provides for 
wide  dissemination  of  procurement  opportunities  to  potential  tenderers  and  also  for  the 
electronic download of tender documents. It does not provide any e-submission functionality. 

Luxembourg's poor performance of as regards the time required to start a business (19 
days  in  2012  compared  to  12  on  average  for  OECD  countries)30  is  balanced  by  a  high 
enterprise  survival  rate  after  two  years,  which  places  Luxembourg  in  second  position 
among  the  EU  Member  States31.  The  government  is  committed  to  reinforcing  structural 
competitiveness by improving the business environment through administrative simplification 
and better infrastructure. 

New legislation adopted on 13 September 2011 simplified administrative procedures for the 
development  and  operating  conditions  of  classified  establishments,  mainly  by  introducing 
tacit authorisation and obliging administrations to meet specific deadlines. 

The legislation transposing the Services Directive also simplifies the processes and documents 
required from service providers. A Single Contact Point is operational in French, German and 
English. Its functionality is growing, while the  availability of  more  online  procedures  could 
still be improved. 

29  According  to  Paying  taxes  –  Doing  Business  2013,  Luxembourg  ranks  14th  out  of  185  countries;  detailed 
information available at: http://www.doingbusiness.org/reports/thematic-reports/paying-taxes/. 

30 Figures from Doing Business 2013 – Luxembourg. 
31 The most recent figures refer to 2010. 

27 

 
                                                 
4. 

OVERVIEW TABLE 

2012 commitments 

Summary assessment 

Country-specific recommendations (CSRs) 

CSR  1:  Preserve  a  sound  fiscal  position  by  correcting 
any  departure  from  a  MTO  that  ensures  the  long-term 
sustainability of public finances, in particular taking into 
account implicit liabilities related to ageing. To this end, 
reinforce  and  rigorously 
the  budgetary 
strategy,  supported  by  sufficiently  specified  measures, 
for  the  year  2013  and  beyond,  including  meeting  the 
expenditure benchmark. 

implement 

CSR  2:  Strengthen  the  proposed  pension  reform  by 
taking  additional  measures  to  increase  the  participation 
rate  of  older  workers,  in  particular  by  preventing  early 
retirement,  and  by  taking  further  steps  to  increase  the 
effective  retirement  age,  including  through  linking  the 
statutory  retirement  age  to  life  expectancy,  in  order  to 
ensure  the  long-term  sustainability  of  the  pension 
system. 

Some progress 

The general government deficit in 2012 is estimated 
to have deteriorated at 0.8% of GDP, after a deficit 
of  0.2%  of  GDP  in  2011.  The  structural  balance  is 
estimated  at  0.1%  of  GDP,  just  below  the  MTO, 
chosen by the country, of a surplus of 0.5% of GDP. 
The  growth  rate  of  government  expenditure,  net  of 
discretionary revenue measures, is estimated to have 
exceeded 
in  2012, 
the  expenditure  benchmark 
however, the deviation is considered not significant 
in view of the following factors: i) the deterioration 
of the structural balance in 2012 is small, only 0.2% 
of GDP; ii) high volatility of the country's economy 
impacted  on  the  GDP  deflator  and  could  be 
factor  explaining 
considered  as  a  mitigating 
government high expenditure.. In addition, given the 
consolidation  package  included  in  the  budget  for 
2013, estimated at around 2% of GDP, the headline 
deficit  in  2013  is  expected  to  improve  substantially 
and  return  in  compliance  with  the  MTO  target. 
However, the correction is not sustainable yet. On a 
no-policy-change assumption, the deficit is projected 
to deteriorate in 2014 and the years after. 

Limited progress 

The  pension  reform  adopted  in  December  2012  is 
considered  a  light  reform  (does  not  meet  the 
commitment  of  the  authorities  in  the  NRP)  and 
should  be  followed  by  stronger  reforms  over  the 
next  few  years.  Despite  the  fact  that  age-related 
expenditure,  and  in  particular  pension  outlays,  is 
projected to increase, with unchanged policies, from 
17.8%  of  GDP  in  2010  to  29.8%  of  GDP  in  2060, 
the  highest  increase  in  the  EU,  there  is  a  clear  lack 
of  ambition  and  the  situation  would  need  to  be  re-
evaluated against the long-term challenges. 

Changes  introduced  with  the  reform  will  be  only 
gradually  implemented  over  the  next  40  years. 
People would need to work three years more to get 
the same pension as before the reform. 

The measures taken on lifelong learning should help 
increase 
labour  market  participation  of  older 
workers and should be continued (in view of the fact 
that people currently tend to retire at the age of 59.4 
on  average,  thanks  to  the  generous  pension  system 
in place).  

CSR  3:  Take  further  steps  to  reform,  in  consultation 
with the social partners and in accordance with national 

Limited progress 

28 

 
 
 
 
 
  
 
 
practice,  the  wage  bargaining  and  wage  indexation 
system,  with  a  view  to  preserve  the  competitiveness  of 
the  Luxembourg  economy  in  the  longer  term,  as  a  first 
step  by  maintaining  the  current  one-year  indexation 
interval  beyond  2014  and  by  reducing  the  impact  of 
energy and other volatile items on the reference index. 

CSR 4: Continue efforts to reduce youth unemployment 
involvement,  and  by 
by  reinforcing  stakeholders’ 
strengthening 
in 
particular  for  those  with  low  education  levels,  with  the 
aim  of  better  matching  young  people’s  skills  and 
qualifications to labour demand. 

training  and  education  measures, 

CSR 5: Ensure that the targets for reducing greenhouse 
gas  emissions  from  non-ETS  (Emissions  Trading 
System) activities will be met, in particular by increasing 
taxation on energy products. 

29 

The measures taken by Luxembourg so far are only 
temporary: the indexation system is being modulated 
between  2012  and  2014.  Luxembourg  should  take 
further  measures  to  reform  the  system  in  itself  to 
avoid  future  loss  of  competitiveness.  A  better  link 
between  wages  and  productivity  could  be  achieved 
by  introducing  in  a  permanent  way  a  link  between 
wage and productivity and sectoral differentiation in 
the wage bargaining system.  

Limited progress 

Luxembourg  has 
taken  a  number  of  relevant 
measures to tackle youth unemployment which seem 
to  point  in  the  right  direction  but  so  far  these  have 
been  only  partially 
implemented.  The  youth 
unemployment rate is relatively high in Luxembourg 
compared to the low overall rate of unemployment. 
The high and increasing unemployment rate and the 
increasing  number  of  vacant  jobs  points  to  the 
existence of a mismatch between the workforce and 
the  needs  of  the  labour  market.  The  structural 
component of unemployment has increased steadily 
over  the  last  decade  even  in  times  of  significant 
economic  growth  with  high  employment.  This 
suggests a mismatch between the workforce and the 
needs of the labour market. Luxembourg’s education 
system faces specific challenges due to the demands 
of  multilingualism,  the  high  proportion  of  people 
with migrant background in the population, and the 
high  demand  for  skilled  workers  in  the  labour 
market.  Additional  investment  in  education  and 
training  as  well  as  a  coherent  strategy  would  be 
welcomed.   

There  is  still  the  need  of  a  coherent  strategy.  A 
stronger collaboration between administration levels 
(state,  municipalities)  and  a  more  efficient  use  of 
employment  services  would  produce  better  results. 
In  order  to  address  the  skill  mismatch,  there  is  a 
need to provide guidance to pupils to an earlier age, 
already  in  the  low  secondary  school.  Overall,  more 
will  need  to  be  done  to  improve  significantly  the 
integration  of  people  with  migrant  background  and 
the  LU 
low-skilled  young 
authorities  should  be  encouraged  to  take  forward 
further action.    

job  seekers,  and 

Limited progress 

Excise  duties  on  diesel  were  increased  in  August 
2012  from  EUR  330  per  1000  litres  to  EUR  335. 
The  2013  budget  law  includes  an  increase  of  the 
excise duties on diesel oil. However it has not been 
implemented  yet.  Although 
closing, 
significant gaps remain with neighbouring countries, 
and 
to 
which 
environmentally  harmful  ‘fuel  tourism.’  Incentives 
for the purchase of emission-efficient cars have been 
restricted  and  now  apply  to  a  smaller  group  of 

unnecessary 

contributes 

slowly 

 
 
  
 
 
vehicles  than  they  previously  did.  The  CO2-related 
vehicle  tax  only  provides  moderate  incentives  for 
the purchase of clean vehicles.  

Europe 2020 (national targets and progress) 

Employment rate target: 73% 

R&D target: 2.3%-2.6% of GDP (of which 1.5% to 1.9% 
for  the  private  sector  and  0.7%  to  0.8%  for  public 
spending) 

The  overall  employment  rate  of 
the  resident 
population  grew  slightly  from  70.1 %  in  2011  to 
71.4  in  2012 %,  which  was  still  above  the  EU 
average  in  2011  (EU27:  68.5 %).  The  target  set  by 
the Luxembourg government is 73 % (EMPL) 

Luxembourg is not at all on track to reach its R&D 
intensity target for 2020, as its R&D intensity is on 
a  declining  trend.  This  declining  trend  is  explained 
by  the  sharp  decrease  in  business  R&D  intensity 
(from  1.53%  of  GDP  in  2000  to  0.98%  in  2011). 
Public sector R&D intensity on the contrary steadily 
increased  from  0.12%  in  2000  to  0.45%  in  2011. 
This fourfold increase reflects the willingness of the 
country  to  build  up  its  public  research  capacities 
from  a  situation  where,  25  years  ago,  the  public 
research system was in fact non-existent.  

-20% 
Greenhouse  gas 
compared  to  2005  emission  (from  sources  not  covered 
by the Emission Trading System 

(GHG)  emissions 

target: 

Change  in  non-ETS  greenhouse  gas  emissions 
between  2005  and  2011:  -4%.  According  to  the 
the 
latest  national  projections 
Commission  and  when  existing  measures  are  taken 
into account, the target is expected to be missed: +3 
%  in  2020  compared  to  2005  (representing  a 
projected  gap  of  23  percentage  points  compared  to 
the target). 

submitted 

to 

Renewable energy target:  11% 

Share of renewable energy in the transport sector:  10%:  

Share  of  total  renewable  energy  in  gross  final 
energy consumption was 2.9 % in 2011 and 2.0 % in 
the  transport  sector.  (Source:  Eurostat.  April  2013. 
For 2011, only formally reported biofuels compliant 
with  Art.  17  and  18  of  Directive  2009/28/EC  are 
included). 

National indicative energy efficiency target for 2020: No 
target  notified  for  2020.  Target  only  reported  for  2016 
(i.e. 14.06% of energy savings to be reached in 2016). 

Early school leaving target: <10% 

30 

Luxembourg  has 
its  energy 
efficiency target as required by Articles 3 and 24 of 
the Energy Efficiency Directive. 

to  notify 

failed 

The  number  of  early  leavers  from  education  and 
training, after going down to 7.1% in 2010 and 6.2% 
in 2011, rose again in 2012 and stands at 8.1% and 
it remains a major issue for Luxembourg. The target 
set by Luxembourg is 15% but this number could be 
reviewed in 2015 if the situation remains the same. 
However, the migrant population in particular is still 
hit  heavily  by  early  school  leaving.  For  children 
from immigrant families where none or only one of 
the  official  languages  is  spoken  at  home,  gaining 
proficiency in all three official languages is difficult. 
For students without fluency in the three languages, 
a  number  of  career  paths  will  be  closed.  The 
percentage  of  young  people  who  were  neither  in 

 
 
 
 
 
 
 
 
 
 
 
Tertiary education target: >40% 

employment  nor  in  education  or  training  (NEET) 
decreased  further  in  2010  to  5%  and  in  2011  to 
4.7%,  but  rose  again  in  2012  and  stands  now  at 
5.9%.  Nevertheless,  it  is  still  less  than  half  the  EU 
average (13.2%).  

to 

to 

the 

thus 

adopts 

increase 

Luxembourg 

tertiary  attainment  rate  according 

The 
the 
Eurostat  methodology  is,  at  48.2%  in  2011,  above 
the  EU  target  of  40%.  However,  the  tertiary 
attainment  of  the  resident  population  is  lower, 
currently about 30 %, despite the strong demand for 
workers  with  tertiary  qualifications.  In  its  2012 
NRP, 
European 
including  non-resident 
methodology  — 
workers  —  but  proposes  to  put  the  target  at  66 % 
instead  of  40 %.  Luxembourg  has  taken  several 
measures 
the  number  of  students 
embarking  on  higher  education  studies:  allowing 
validation  of  prior  learning  and  experience  giving 
access  to  university  studies;  offering  more  varied 
higher education studies; establishing a link between 
higher education programmes and companies’ needs 
in order to promote employability; offering financial 
support to all students whether they are studying in 
Luxembourg  or  outside  the  country;  tutoring  of 
students  at  the  University  of  Luxembourg.  The 
reform  of  the  vocational  education  and  training 
system will provide more opportunities to bridge the 
gap  between  vocational  education  and  training  and 
higher education. 

Risk  of  poverty  or  social  exclusion  target:  reduction  of 
the  number  of  people  threatened  by  poverty  or  social 
exclusion by 6000 in 2020 

People at risk of poverty or social exclusion in terms 
of thousand persons numbered 11 in 2010 and 12 in 
2011. According to the NRP 2012, Luxembourg set 
finally  a  national  poverty  target  in  line  with  the 
EU2020  goals,  which  aims  at  reducing  the  number 
of people threatened by poverty or social exclusion 
by  6000  in  2020.  The  overall  employment  and 
poverty  situation  in  Luxembourg  seems  to  have 
improved or at least not worsened over the last year. 
But the position of cross-border workers, and that of 
non-Luxembourg  nationals,  more  particularly 
Portuguese (extent of the working poor - more than 
21%  among  Portuguese  workers)  and  non-EU-27 
citizens, remains a big challenge for Luxembourg. 

31 

 
 
 
 
 
 
 
 
5. 

ANNEX 

Table I. Macroeconomic indicators 

Core indicators
GDP growth rate
Output gap 1
HICP (annual % change)
Domestic demand (annual % change) 2
Unemployment rate (% of labour force) 3
Gross fixed capital formation (% of GDP)
Gross national saving (% of GDP)
General Government (%  of GDP)
Net lending (+) or net borrowing (-)
Gross debt
Net financial assets 
Total revenue 
Total expenditure
  of which: Interest
Corporations (%  of GDP)
Net lending (+) or net borrowing (-)

1995-
1999

2000-
2004

2005-
2009

2010

2011

2012

2013

2014

4.8
-1.2
1.1
5.1
2.7
21.4
32.1

2.8
7.2
43.0
43.2
40.3
0.4

4.2
1.9
2.8
3.1
3.1
21.9
33.1

2.7
6.3
54.7
43.0
40.3
0.3

2.4
0.6
2.7
1.1
4.7
20.2
29.2

1.5
9.8
53.1
41.5
40.0
0.3

2.9
-1.7
2.8
9.2
4.6
18.4
27.6

-0.9
19.2
52.1
42.0
42.9
0.4

1.7
-1.2
3.7
6.1
4.8
19.0
28.2

-0.2
18.3
44.9
41.5
41.8
0.5

0.3
-2.0
2.9
2.8
5.1
20.2
27.1

-0.8
20.8
n.a
42.1
43.0
0.4

0.8
-2.0
1.9
0.4
5.5
19.9
27.8

-0.2
23.4
n.a
42.9
43.1
0.5

1.6
-1.5
1.7
1.8
5.8
20.0
28.1

-0.4
25.2
n.a
42.9
43.4
0.5

n.a

n.a

-1.3

-4.7

-1.6

n.a

n.a

n.a

n.a
n.a
n.a
n.a

n.a
n.a
n.a
n.a

n.a
n.a
n.a
n.a

n.a
n.a
n.a
27.8

n.a
n.a
n.a
27.4

n.a
n.a
n.a
n.a
n.a
n.a

3.2
n.a
32.4
n.a
n.a
n.a

n.a
n.a
29.9
n.a
n.a
n.a

-91.2
-430.4
12.8
32.1

-132.8
-279.0
10.8
31.0

-59.0
-444.1
11.2
31.4

3.4
84.6
26.2
1.0
15.3
7.8

1.1
83.0
26.4
1.3
13.9
5.7

2.4
73.6
25.5
0.8
14.9
6.6

Net financial assets; non-financial corporations
Net financial assets; financial corporations
Gross capital formation
Gross operating surplus
Households and NPISH (%  of GDP)
Net lending (+) or net borrowing (-)
Net financial assets
Gross wages and salaries
Net property income
Current transfers received
Gross saving
:
Net lending (+) or net borrowing (-)
Net financial assets
Net exports of goods and services
Net primary income from the rest of the world
Net capital transactions 
Tradable sector
Non tradable sector
  of which: Building and construction sector
Real effective exchange rate (index, 2000=100)
Terms of trade goods and services (index, 2000=100)
Market performance of exports (index, 2000=100)
Notes:
1 The output gap constitutes the gap between the actual and potential gross domestic product at 2005 market prices.
2 The indicator on domestic demand includes stocks.
3  Unemployed persons are all persons who were not employed, had actively sought work and were ready to begin working immediately or within two weeks. 
The labour force is the total number of people employed and unemployed. The unemployment rate covers the age group 15-74.

9.0
366.2
30.2
-22.5
0.1
28.9
61.0
5.7
104.4
101.8
106.7

7.6
276.3
32.1
-31.6
-0.6
28.5
62.1
5.4
112.9
105.1
108.6

6.8
404.7
31.2
-27.8
-0.3
30.6
59.9
5.2
115.3
106.9
109.5

5.0
n.a
30.4
-27.6
-0.5
29.0
61.0
5.3
114.8
107.5
106.0

n.a
n.a
30.7
-27.8
n.a
n.a
n.a
n.a
117.6
107.7
106.0

n.a
n.a
31.0
-27.8
n.a
n.a
n.a
n.a
119.2
108.2
105.5

9.1
n.a
21.3
-15.2
-1.0
32.8
56.7
6.2
95.9
97.9
95.8

n.a
n.a
18.9
-7.2
n.a
35.5
54.6
6.1
97.1
99.0
85.0

n.a
n.a
n.a
n.a
n.a
n.a

n.a
n.a
n.a
n.a
n.a
n.a

Source :
Commission services’ 2013 spring forecasts (COM); Stability programme (SP).

32 

 
 
 
 
 
 
 
 
 
 
Table II. Comparison of macroeconomic developments and forecasts 

Real GDP (% change)
Private consumption (% change)
Gross fixed capital formation (% change)
Exports of goods and services (% change)
Imports of goods and services (% change)
Contributions to real GDP growth:
- Final domestic demand
- Change in inventories
- Net exports
Output gap1
Employment (% change)
Unemployment rate (%)
Labour productivity (% change)
HICP inflation (%)
GDP deflator (% change)
Comp. of employees (per head, % change)
Net lending/borrowing vis-à-vis the rest of the 
world (% of GDP)

2012
COM SP
0.3
1.5
7.0
-3.2
-2.6

0.3
1.7
7.0
-3.1
-2.7

2013
COM SP
1.0
-0.8
-0.2
0.1
-0.3

0.8
0.1
-0.2
1.0
0.9

2014
COM SP
2.2
1.9
-3.3
4.8
4.2

1.6
1.5
2.7
4.1
4.7

2.7
-0.7
-1.7
-2.0
2.3
5.1
-1.9
2.9
3.9
1.2
5.0

0.8
-1.6
1.1
-2.1
2.1
5.4
-2.2
2.9
3.9
1.2
n.a.

0.3
0.0
0.5
-2.0
1.6
5.5
-0.8
1.9
2.5
2.2
n.a.

0.4
0.6
0.0
-2.2
1.7
5.9
-0.8
2.1
2.1
1.5
n.a.

1.2
0.0
0.4
-1.5
1.3
5.8
0.3
1.7
2.7
3.0
n.a.

0.5
1.7
0.1
-1.3
1.3
6.1
0.7
1.8
2.1
2.7
n.a.

2015
SP
1.7
4.4
1.0
5.8
6.7

1.3
0.3
0.2
-1.1
2.3
5.9
1.0
2.8
1.7
2.1
n.a.

2016
SP
3.4
2.3
-0.3
6.3
5.7

1.0
2.3
0.1
0.6
1.9
5.8
1.6
1.8
0.9
2.5
n.a.

Note:
1In percent of potential GDP, with potential GDP growth recalculated by Commission services on the basis of the programme 
scenario using the commonly agreed methodology.

Source :

Commission services’ 2013 spring forecasts (COM); Stability programme (SP).

33 

 
 
 
 
 
 
 
 
 
 
 
Table III. Composition of the budgetary adjustment 

(% of GDP)

Revenue
of which:
- Taxes on production and imports
- Current taxes on income, wealth, etc.
- Social contributions
- Other (residual)
Expenditure
of which:
- Primary expenditure

of which:

Compensation of employees
Intermediate consumption
Social payments
Subsidies
Gross fixed capital formation
Other (residual)
- Interest expenditure
General government balance (GGB)
Primary balance
One-off and other temporary measures
GGB excl. one-offs
Output gap2
Cyclically-adjusted balance
Structural balance (SB)3
Change in SB
Two year average change in SB 

2

3

Structural primary balance
Change in structural primary balance
Expenditure benchmark

Applicable reference rate

4

2012

2013

2014

2015

2016

COM COM
42.9
42.1

12.4
14.1
12.0
3.6
43.0

12.6
14.6
12.1
3.7
43.1

SP
42.6

12.6
14.5
12.0
3.5
43.3

1
COM
42.9

12.8
14.4
12.1
3.7
43.4

SP
42.7

12.6
14.6
12.1
3.4
43.3

SP
42.5

12.0
14.8
12.2
3.5
43.8

SP
42.8

11.9
14.9
12.3
3.7
44.1

42.6

42.7

42.8

42.8

42.9

43.4

43.7

8.1
3.9
20.3
1.7
3.9
4.7
0.4
-0.8
-0.4
0.0
-0.8

-2.0

0.1

0.1
-0.2
0.1

0.5

8.2
3.9
20.5
1.8
3.6
4.8
0.5
-0.2
0.2
0.0
-0.2

-2.0

0.7

0.7
0.6
0.2

1.2
0.6

8.2
3.9
20.7
1.8
3.4
4.8
0.5
-0.7
-0.3
0.0
-0.7

-2.2

0.3

0.3
0.2
0.0

0.8
0.3

8.3
3.7
20.5
1.8
3.7
4.8
0.5
-0.4
0.1
0.0
-0.4

-1.5

0.3

0.3
-0.5
0.1

0.8
-0.4

8.3
3.8
20.8
1.8
3.3
4.8
0.4
-0.6
-0.1
0.0
-0.6

-1.3

0.0

0.0
-0.3
-0.1

0.4
-0.4

8.5
3.8
21.0
1.9
3.4
4.9
0.4
-1.3
-0.9
0.0
-1.3

-1.1

-0.8

-0.8
-0.8
-0.6

-0.4
-0.8

8.4
3.9
21.2
1.9
3.3
4.9
0.4
-1.3
-0.9
0.0
-1.3

0.6

-1.6

-1.6
-0.8
-0.8

-1.2
-0.8

1.76

0.63

0.63

1.08

1.08

-0.07

-0.07

Change: 
2012-2016

SP
0.7

-0.5
0.8
0.3
0.1
1.1

1.1

0.3
0.0
0.9
0.2
-0.6
0.2
0.0
-0.5
-0.5
0.0
-0.5

2.5

-1.7

-1.7
-
-

-1.7
-

-

5

0.4

0.5

1.7

1.3

-0.4

-0.6

0.2

0.9

0.1

0.4

0.0

0.4

-0.1

 (% GDP)

Deviation
Two-year average deviation (% GDP)
Notes:
1On a no-policy-change basis.
2Output gap (in % of potential GDP) and cyclically-adjusted balance according to the programme as recalculated by Commission services 
on the basis of the programme scenario using the commonly agreed methodology.
3Structural (primary) balance = cyclically-adjusted (primary) balance excluding one-off and other temporary measures.
4 Reference medium-term rate of potential GDP growth. The (standard) reference rate applies from year t+1, if the country has reached its 
M TO in year t. A lower  rate applies as long as the country is adjusting towards its M TO, including in year t.The reference rates applicable 
to 2014 onwards have been updated in 2013. 
5 Deviation of the growth rate of public expenditure net of discretionary revenue measures and revenue increases mandated by law from the 
applicable reference rate. The expenditure aggregate used for the expenditure benchmark is obtained following the commonly agreed 
methodology. A positive sign implies that expenditure growth exceeds the applicable reference rate. 

1.0

-
-

Source :
Stability programme (SP); Commission services’ 2013 spring forecasts (COM); Commission services’ calculations.

34 

 
 
 
 
 
 
 
Table IV. Debt dynamics 

(% of GDP)

1
Gross debt ratio
Change in the ratio
Contributions 2 :

1. Primary balance

2. “Snow-ball” effect

Of which:

Interest expenditure

Growth effect

Inflation effect

3. Stock-flow adjustment

Of which:

Cash/accruals diff.

Acc. financial assets

Privatisation

Val. effect & residual

5,6

Gap to the debt benchmark
7
Structural adjustment
To be compared to:
Required adjustment8

Notes:

Average
2007-2011

14.8

2.3

-1.3

-0.2

0.4

-0.1

-0.5

3.9

2012

20.8

2.5

0.4

-0.3

0.4

-0.1

-0.7

2.4

2013

2014

COM

23.4

2.6

-0.2

-0.2

0.5

-0.2

-0.5

3.1

SP

23.8

3.0

0.3

-0.2

0.4

-0.2

-0.4

3.0

COM

25.2

1.8

-0.1

-0.4

0.5

-0.4

-0.6

2.3

SP

25.9

2.1

0.1

-0.5

0.5

-0.5

-0.5

2.5

2015
SP

27.1

1.2

0.9

-0.5

0.4

-0.4

-0.4

0.8

2016
SP

27.9

0.8

0.9

-0.7

0.4

-0.9

-0.3

0.6

2013

2014

2015

2016

2012

n.r.
n.r.

COM / 
3

SP
n.r.
n.r.

4

SP

n.r.
n.r.

COM / 
3

SP
n.r.
n.r.

4

SP

n.r.
n.r.

SP

n.r.
n.r.

SP

n.r.
n.r.

n.r.

n.r.

n.r.

n.r.

n.r.

n.r.

n.r.

1End of period.
2The snow-ball effect captures the impact of interest expenditure on accumulated debt, as well as the impact of real GDP growth 
and inflation on the debt ratio (through the denominator). The stock-flow adjustment includes differences in cash and accrual 
accounting, accumulation of financial assets and valuation and other residual effects. 

3 Assessment of the consolidation path set in SP assuming growth follows the COM  forecasts.
4Assessment of the consolidation path set in the SP assuming growth follows the SP projections.
5Not relevant for M ember Sates that were subject to an EDP procedure in November 2011 and for a period of three years 
following the correction of the excessive deficit.
6Shows the difference between the debt-to-GDP ratio and the debt benchmark. If positive, projected gross debt-to-GDP ratio 
does not comply with the debt reduction benchmark.
7Applicable only during the transition period of three years from the correction of the excessive deficit for EDP that were ongoing 
in November 2011.

8Defines the remaining annual structural adjustment over the transition period which ensures that - if followed – M ember State 
will comply with the debt reduction benchmark at the end of the transition period, assuming that COM  (SP) budgetary 
projections for the previous years are achieved.

Source :

Stability programme (SP); Commission services’ spring 2013 forecasts (COM); Commission services’ calculations.

35 

 
 
 
 
 
 
 
 
Table V. Sustainability indicators  

S2

of which:

Initial budgetary position (IBP)

Long-term cost of ageing (CoA)

of which:

Pensions

Health care

Long-term care

Others

S1 (required adjustment)*

of which:

Initial budgetary position (IBP)

Debt requirement (DR)

Long-term cost of ageing (CoA)

S0 (risk for fiscal stress)**

Debt,  % of GDP (2012)

Age-related expenditure, % of GDP (2012)

LU

EU27

No-policy 
change 
scenario 

Programme 
(SCP) 
scenario

No-policy 
change 
scenario 

Programme 
(SCP) 
scenario

8.6

-0.1

8.7

6.5

0.7

1.5

0.0

-1.5

-1.4

-2.2

2.0

10.9

2.1

8.8

6.5

0.7

1.5

0.1

0.8

0.8

-2.3

2.3

3.0

0.8

2.2

1.0

0.9

0.6

-0.4

2.2

0.0

1.9

0.3

0.12

20.8

17.8

:

87.0

25.8

1.3

-0.9

2.2

1.1

0.8

0.6

-0.3

0.5

-1.8

1.9

0.4

Note: 
The 'No-policy change' scenario depicts the sustainability gap under the assumption that the budgetary position evolves 
according to the Commissions' spring 2013 forecast until 2014. The 'Programme (SCP)' scenario depicts the sustainability gap 
under the assumption that the budgetary plans in the programme are fully implemented.
* The required adjustment of the primary balance until 2020 to reach a public debt of 60% of GDP by 2030.              
** The critical threshold for the S0 indicator is 0.44. 

Source : 
Commission services; 2013 stability programme.                                                                                                                               

36 

 
 
 
 
 
 
3
7

S
C
P
s
c
e
n
a
r
i
o

C
O
M
c
o
n
s
o

l
i

d
a
t
i
o
n
s
c
e
n
a
r
i
o
(
1
%
p
e
r

y
e
a
r

o
n
S
B

)

i

n
o
r
d
e
r

t

i

o
a
c
h
e
v
e
M
T
O

0

1
0

2
0

3
0

4
0

5
0

6
0

7
0

8
0

(

%
o
f

G
D
P

)

G

r
o
s
s
d
e
b
t

a
s
%
o
f

G
D
P

-
L
U

-

M
e
d
u
m

i

t
e
r
m
d
e
b
t
p
r
o
j
e
c
t
i
o
n
s

C
O
M
n
o
-
p
o

l
i

c
y

c
h
a
n
g
e
s
c
e
n
a
r
i
o

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

C
O
M
+
S
h
o
c
k

(
+
1
p
.
p
.

C
O
M
+
S
h
o
c
k

(

-
1
p
.
p
.

i

n
t
h
e
s
h
o
r
t
-
t
e
r
m

/
l
o
n
g
-
t
e
r
m

i

n
t
e
r
e
s
t

t

t

r
a
e
o
n
m
a
u
r
i
n
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a
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n
e
w
d
e
b

t

i

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h
e
s
h
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r
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t
e
r
m

/
l
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-
t
e
r
m

i

n
t
e
r
e
s
t

t

r
a
e
o
n
m
a

t

u
r
i
n
g
a
n
d
n
e
w
d
e
b

t

f
r
o
m
2
0
1
5
)

f
r
o
m
2
0
1
5
)

C
O
M
c
o
n
s
o

l
i

d
a
t
i
o
n
s
c
e
n
a
r
i
o
(
0
.
5
%
p
e
r

y
e
a
r

o
n
S
B

)

i

n
o
r
d
e
r

t

i

o
a
c
h
e
v
e
M
T
O

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Table VI. Taxation indicators 

Total tax revenues (incl. actual compulsory social contributions, % of GDP)

39.3

35.9

37.5

39.2

37.5

37.2

2002

2006

2008

2009

2010

2011

Breakdown by economic function (% of GDP)1
     Consumption

              of which:

              - VAT

              - excise duties on tobacco and alcohol

             - energy

             - other (residual)

     Labour employed

     Labour non-employed

     Capital and business income

     Stocks of capital/wealth
     p.m.  Environmental taxes 2
3
VAT efficiency
     Actual VAT revenues as % of theoretical revenues at standard rate

Note: 

10.7

10.1

10.5

10.9

10.1

10.2

5.8

2.0

2.6

0.3

14.0

1.1

10.2

3.3

2.8

5.8

1.5

2.5

0.3

6.3

1.4

2.5

0.3

6.7

1.4

2.4

0.4

6.3

1.3

2.2

0.3

6.3

1.3

2.2

0.3

13.3

14.6

15.6

14.9

15.2

1.2

7.8

3.4

2.6

1.3

8.1

2.9

2.6

1.4

8.5

2.7

2.6

1.3

8.4

2.8

2.4

1.4

7.7

2.7

2.4

73.0

89.3

99.5

95.2

94.4

101.7

1 Tax revenues are broken down by economic function, i.e. according to whether taxes are raised on consumption, labour or capital. See European Commission 
(2013) Taxation trends in the European Union, for a more detailed explanation.

2 This category comprises taxes on energy, transport and pollution and resources included in taxes on consumption and capital.

3 The VAT efficiency is measured via the VAT revenue ratio. The VAT revenue ratio is defined as the ratio between the actual VAT revenue collected and the 
revenue that would theoretically be raised if VAT was applied at the standard rate to all final consumption. A low ratio can indicate a reduction of the tax base due 
to large exemptions or the application of reduced rates to a wide range of goods and services ('policy gap') or a failure to collect all tax due to e.g. fraud ('collection 
gap'). See European Commission (2012), Tax reforms in EU M ember States, European Economy 6/2012 and Taxation Papers 34/2012 for a more detailed 
explanation.

Source: Commission

38 

 
 
 
 
 
Table VII. Financial market indicators 

2008

2009

2010

2011

2012

Total assets of the banking sector (% of GDP)

3403.3

3099.6

2640.4

2579.3

2174.4

Share of assets of the five largest banks (% of total assets)

Foreign ownership of banking system (% of total assets)
Financial soundness indicators:
              - non-performing loans (% of total loans)1)
              - capital adequacy ratio (%) 2)
              - return on equity (%) 2),3)
Bank loans to the private sector (year-on-year % change)

Lending for house purchase (year-on-year % change)

Loan to deposit ratio

CB liquidity as % of liabilities

Banks' exposure to countries receiving official financial assistance  (% of GDP)

Private debt (% of GDP)
Gross external debt (% of GDP)4)
            - Public
            - Private

Long term interest rates spread versus Bund (basis points)*

Credit default swap spreads for sovereign securities (5-year)*
Notes: 

29.7

95.5

0.6
15.4

5.5

10.8

8.6

68.6

4.2

…

29.3

90.6

0.7
19.2

11.5

-5.3

7.1

66.1

1.5

…

31.1

…

0.3
17.4

13.0

1.5

8.8

67.2

0.3

…

31.2

…

0.4
16.4

4.5

1.5

8.9

65.8

0.8

…

…

…

0.3
17.5

9.8

-6.9

7.2

60.5

0.6

…

397.9

409.8

388.7

372.0

343.3

2.6
2730.5

2.9
2926.1

6.3
2386.1

6.0
2588.9

7.8
3138.6

0.6

…

1.0

…

0.4

…

0.3

…

0.3

…

1) Latest data (September 2012).
2) Latest data (June 2012).
3) Tier 1 capital.
4) Latest data 2012Q3.

* M easured in basis points.

Source :

Bank for International Settlements and Eurostat (exposure to macro-financially vulnerable countries), IMF (financial soundness indicators), 
Commission (long-term interest rates), World Bank (gross external debt) and ECB (all other indicators).

39 

 
 
 
 
 
 
Table VIII. Labour market and social indicators 

Labour market indicators
Employment rate
(% of population aged 20-64)
Employment growth 
(% change from previous year)
Employment rate of women
(% of female population aged 20-64)
Employment rate of men 
(% of male population aged 20-64)
Employment rate of older workers 
(% of population aged 55-64)
Part-time employment (% of total employment, 
15 years and more)
Part-time employment of women  (% of women employment, 15 
years and more)
Part-time employment of men  (% of men employment, 15 years 
and more)
Fixed term employment (% of employees with a fixed term 
contract, 15 years and more)
Transitions from temporary 
to permanent employment
Unemployment rate1 (% of labour force, 
age group 15-74)

Long-term unemployment rate2 (% of labour force)

Youth unemployment rate 
(% of youth labour force aged 15-24)

Youth NEET rate (% of population aged 15-24)

Early leavers from education and training (% of pop. 18-24 with at 
most lower sec. educ. and not in further education or training)
Tertiary educational attainment (% of population 30-34 having 
successfully completed tertiary education)
Formal childcare (from 1 to 29 hours; % over the population less 
than 3 years)
Formal childcare (30 hours or over; % over the population less 
than 3 year)

Labour productivity per person employed (annual % change)

Hours worked per person employed  (annual % change)

Labour productivity per hour worked (annual % change; constant 
prices)

Compensation per employee (annual % change; constant prices)

Nominal unit labour cost growth (annual % change)

Real unit labour cost growth (annual % change)

2007

2008

2009

2010

2011

2012

69.6

68.8

70.4

70.7

70.1

71.4

0.0

61.0

78.3

32.0

17.8

37.2

2.6

6.8

1.5

4.2

1.2

0.0

60.1

77.2

34.1

18.0

38.3

2.7

6.2

1.6

4.9

1.6

0.0

61.5

79.0

38.2

18.2

35.1

5.6

7.2

1.5

5.1

1.2

0.0

62.0

79.2

39.6

17.9

36.0

4.0

7.1

0.8

4.6

1.3

0.0

61.9

78.1

39.3

18.4

36.1

4.8

7.1

1.4

4.8

1.4

0.0

64.2

78.5

41.0

19.0

36.3

5.4

7.7

:

5.1

1.6

15.6

17.3

16.5

15.8

16.4

18.3

5.7

12.5

35.3

11.0

14.0

2.0

0.5

1.5

0.0

1.6

-2.0

6.2

13.4

39.8

13.0

13.0

-5.5

0.9

-6.3

3.0

9.4

8.9

5.8

7.7

46.6

22.0

12.0

-5.1

-3.8

-1.3

1.3

7.3

6.8

5.1

7.1

46.1

17.0

19.0

1.1

0.1

1.0

-4.6

1.6

-5.6

4.7

6.2

48.2

16.0

28.0

-1.2

-0.2

-1.0

-2.9

3.3

-1.7

5.9

8.1

49.6

:

:

-2.0

-0.6

-1.4

-1.3

4.3

0.7

Notes:
1 Unemployed persons are all persons who were not employed, had actively sought work and were ready to begin working immediately or within 
two weeks. The labour force is the total number of people employed and unemployed.

2 Long-term unemployed are unemployed persons for at least 12 months.

Sources: 
Commission (EU Labour Force Survey and European National Accounts) 

40 

 
 
 
 
 
Expenditure on social protection benefits (% of 
GDP)
Sickness/Health care

Invalidity

Old age and survivors

Family/Children

Unemployment

Housing and Social exclusion n.e.c.

Total

of which:  means tested benefits
Social inclusion indicators
At-risk-of-poverty or social exclusion1 
(% of total population)
At-risk-of-poverty or social exclusion of children 
(% of people aged 0-17)
At-risk-of-poverty or social exclusion of elderly 
(% of people aged 65+)
At-Risk-of-Poverty rate2 (% of total population)
Severe Material Deprivation3  (% of total population)
Share of people living in low work intensity households 4 (% of 
people aged 0-59)
In-work at-risk-of poverty rate (% of persons employed)
Impact of social transfers (excluding pensions) on reducing 
poverty
Poverty thresholds, expressed in national currency at constant 
prices5
Gross disposable income (households)
Relative median poverty risk gap (60% of median equivalised 
income, age: total)

2006

2007

2008

2009

2010

5.07

2.64

7.34

3.39

0.98

0.17

20.01

0.60

4.94

2.34

7.06

3.15

0.93

0.15

18.96

0.57

5.28

2.42

7.56

4.15

0.96

0.19

20.98

0.63

5.99

2.68

8.54

4.20

1.32

0.35

23.57

0.87

5.68

2.54

8.06

3.97

1.25

0.30

22.30

0.82

2007

2008

2009

2010

2011

15.9

21.2

7.2

13.5

0.8

5.0

9.3

15.5

20.9

5.4

13.4

0.7

4.7

9.4

42.3

43.2

17.8

23.7

6.2

14.9

1.1

6.3

10.0

44.8

17.1

22.3

6.1

14.5

0.5

5.5

10.6

50.2

16.8

21.7

4.7

13.6

1.2

5.8

9.9

50.0

17935

18071

17838

18155

17773

:

14639

15266

15743

16059

18.8

16.6

17.6

18.6

15.7

Notes:
1 People at-risk-of poverty or social exclusion (AROPE): individuals who are at-risk-of poverty (AROP) and/or suffering from severe 
material deprivation (SM D) and/or living in household with zero or very low work intensity (LWI).
2 At-risk-of poverty rate (AROP): share of people with an equivalised disposable income below 60% of the national equivalised median 
income. 
3 Share of people who experience at least 4 out of 9 deprivations: people cannot afford to i) pay their rent or utility bills, ii) keep their 
home adequately warm, iii) face unexpected expenses, iv) eat meat, fish, or a protein equivalent every second day, v) enjoy a week of 
holiday away from home once a year, vi) have a car, vii) have a washing machine, viii) have a colour tv, or ix) have a telephone.
4 People living in households with very low work intensity: share of people aged 0-59 living in households where the adults (excluding 
dependent children) work less than 20% of their total work-time potential during the previous 12 months.
5 For EE, CY, M T, SI, SK, thresholds in nominal values in Euros; HICP -  index 100 in 2006 (2007 survey refers to 2006 incomes)

Sources: 
For expenditure for social protection benefits ESSPROS; for social inclusion EU-SILC.

41 

 
 
 
 
 
Table IX. Product market performance and policy indicators 

Performance indicators

Labour productivity1 total economy (annual 
growth in %)
Labour productivity1 in manufacturing (annual 
growth in %)
Labour productivity1 in electricity, gas, steam and 
air conditioning supply (annual growth in %)
Labour productivity1 in the construction sector 
(annual growth in %)
Total number of patent2 applications per million of 
labour force

2003-
2007

1.9

2.7

2.2

1.5

2008

2009

2010

2011

2012

-5.5

-5.1

-18.5

-21.1

1.1

9.8

-47.4

3.7

-13.7

-1.2

-2.0

1.3

1.6

n.a.

n.a.

-11.5

-3.3

3.9

-4.8

n.a.

477.2

432.5

389.3

358.2

n.a.

n.a.

Policy indicators

Enforcing contracts 3 (days)
Time to start a business 3 (days)
R&D expenditure (% of GDP)
Tertiary educational attainment 
(% of 30-34 years old population)
Total public expenditure on education 
(% of GDP)

2003-
2007
321

26

1.6

2008

2009

2010

2011

2012

321

26

1.7

321

24

1.7

321

19

1.5

321

19

1.4

31.4

39.8

46.6

46.1

48.2

3.60

n.a.

n.a.

n.a.

n.a.

321

19

n.a.

n.a.

n.a.

Product market regulation4, Overall
(Index; 0=not regulated; 6=most regulated)
Product market regulation4, Retail
(Index; 0=not regulated; 6=most regulated)
Product market regulation4, Network Industries 5
(Index; 0=not regulated; 6=most regulated)

2007

2008

2009

2010

2011

2012

n.a.

n.a.

1.6

4.3

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

2.4

n.a.

n.a.

n.a.

n.a.

n.a.

Notes:
1 Labour productivity is defined as gross value added (in constant prices) divided by the number of persons employed.
2 Total number of patent applications to the European Patent Office (EPO) per million of labour force
3 The methodologies, including the assumptions, for this indicator are presented in detail on the website 
http://www.doingbusiness.org/methodology. 
4 The methodologies of the product market regulation indicators are presented in detail on the website 
http://www.oecd.org/document/1/0,3746,en_2649_34323_2367297_1_1_1_1,00.html. The latest available product market 
regulation indicators refer to 2003 and 2008, except for Network Industries.
5 Aggregate Energy, Transport and Communications Regulation (ETCR).
*figure for 2007.

Source :
Commission, World Bank - Doing Business  (for enforcing contracts and time to start a business) and OECD (for the 
product market regulation indicators). 

42 

 
 
 
 
 
Table X. Green Growth 

Green Growth performance

Macroeconomic
Energy intensity 
Carbon intensity 
Resource intensity (reciprocal of resource productivity)
Waste intensity 
Energy balance of trade 
Energy weight in HICP
Difference between change energy price and inflation 
Environmental taxes over labour taxes
Environmental taxes over total taxes

Sectoral 

Industry energy intensity 
Share of energy-intensive industries in the economy
Electricity prices for medium-sized industrial users**
Gas prices for medium-sized industrial users***
Public R&D for energy 
Public R&D for the environment
Recycling rate of municipal waste
Share of GHG emissions covered by ETS*
Transport energy intensity
Transport carbon intensity
Security of energy supply
Energy import dependency
Diversification of oil import sources 
Diversification of energy mix
Share renewable energy in energy mix

kgoe / €
kg / €
kg / €
kg / €
% GDP
%
%
ratio
ratio

kgoe / € 
% GDP
€ / kWh
€ / kWh
% GDP
% GDP
ratio
%
kgoe / €
kg / €

%
HHI
HHI
%

2002-
2006

0.18
0.48
0.45
n.a.
-3.3%
n.a.
n.a.
19.0%
7.5%

0.27
6.5
n.a.
n.a.
n.a.
n.a.
62.2%
n.a.
n.a.
n.a.

n.a.
n.a.
n.a.
n.a.

2007

2008

2009

2010

2011

0.16
0.42
0.40
n.a.
-3.7%
11
-0.8
17.0%
7.0%

0.25
6.8
0.10
0.03
0.02%
0.03%
82.0%
20.8%
0.98
2.33

96.7%
0.55
0.46
2.7%

0.16
0.41
0.36
0.33
-4.6%
12
11.7
16.6%
7.0%

0.29
5.9
0.10
0.04
0.01%
0.02%
82.4%
17.2%
0.98
2.35

97.5%
0.56
0.46
2.8%

0.16
0.41
0.34
n.a.
-2.5%
11
-11.9
15.2%
6.6%

0.32
4.9
0.12
0.04
0.01%
0.02%
82.0%
18.7%
0.87
2.06

97.5%
0.61
0.46
2.8%

0.16
0.42
n.a.
0.36
-3.5%
11
3.5
14.9%
6.5%

0.35
n.a.
0.10
0.04
0.01%
0.02%
82.3%
18.4%
0.89
2.15

97.1%
0.56
0.45
2.8%

0.16
n.a.
n.a.
n.a.
-3.9%
12
6.8
n.a.
n.a.

302.15
n.a.
0.10
0.05
0.01%
0.01%
n.a.
17.0%
n.a.
n.a.

97.4%
n.a.
0.47
2.6%

Country-specific notes: 
The year 2012 is not included in the table due to lack of data.
General explanation of the table items:
Source: Eurostat unless indicated otherwise; ECFIN elaborations indicated below
All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2000 prices)
          Energy intensity: gross inland energy consumption (in kgoe) divided by GDP (in EUR)
          Carbon intensity: Greenhouse gas emissions (in kg CO2 equivalents) divided by GDP (in EUR)
          Resource intensity: Domestic M aterial Consumption (in kg) divided by GDP (in EUR)
          Waste intensity: waste (in kg) divided by GDP (in EUR)
Energy balance of trade: the balance of energy exports and imports, expressed as % of GDP  
Energy weight in HICP: the share of the "energy" items in the consumption basket used in the construction of the HICP
Difference between energy price change and inflation: energy component of HICP, and total HICP inflation (annual %-change)
Environmental taxes over labour or total taxes: from DG TAXUD's database "Taxation trends in the European Union"
Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in 2005 EUR) 
Share of energy-intensive industries in the economy: share of gross value added of the energy-intensive industries in GDP
Electricity and gas prices medium industrial users: consumption band 500  - 2000M Wh and 10000 - 100000 GJ;  figures excl. VAT.
Recycling rate of municipal waste: ratio of municipal waste recycled over total municipal waste
Public R&D for energy or for the environment: government spending on R&D (GBAORD) for these categories as % of GDP
Share of GHG emissions covered by ETS: based on greenhouse gas emissions as reported by M ember States to EEA (excl LULUCF)
Transport energy intensity: final energy consumption of transport activity (kgoe) divided by transp industry gross value added (2005 EUR)
Transport carbon intensity:  greenhouse gas emissions in transport activity divided by gross value added of the transport sector
Energy import dependency: net energy imports divided by gross inland energy consumption incl. energy consumption international bunkers

Diversification of oil import sources: Herfindahl index (HHI), calculated as the sum of the squared market shares of countries of origin 

Diversification of the energy mix: Herfindahl Index over natural gas, total petrol products, nuclear heat, renewable energies and solid fuels

Share renewable energy in energy mix: %-share in  gross inland energy consumption, expressed in tonne oil equivalents

*Provisional data (15 April 213). Commission Services and EEA.

** For 2007 average of S1 & S2 for DE, LU, NL, FI, SE & UK. Other countries only have S2.

*** For 2007 average of S1 & S2 for IT, NL, FI, SE & UK. Other countries only have S2.

43