COMMISSION STAFF WORKING DOCUMENT Country Report Luxembourg 2017 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2017 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011 {COM(2017) 90 final} {SWD(2017) 67 final to SWD(2017) 93 final}
Date: 2017-02-22
Institutions: European Commission, Secretariat-General
Subjects: EU employment policy, EU investment, Luxembourg, economic development, economic recovery, euro area, fiscal policy, macroeconomics, multilateral surveillance, structural adjustment

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 22.2.2017  SWD(2017) 81 final   COMMISSION STAFF WORKING DOCUMENT Country Report Luxembourg 2017 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP  2017 European Semester: Assessment of progress on structural reforms,  prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011  {COM(2017) 90 final} {SWD(2017) 67 final to SWD(2017) 93 final}   
 
 
CONTENTS 

Executive summary 

1. 

2. 

Economic situation and outlook 

Progress with country-specific recommendations 

3. 

Reform priorities 

Financial sector 

3.1.  Public finances and taxation 
3.2. 
3.3. 
3.4. 

Investment 

Labour market, education and social policies 

A.  Overview Table 

B.  MIP Scoreboard 

C. 

Standard Tables 

References 

LIST OF TABLES 

1.1. 

2.1. 

Key economic, financial and social indicators – Luxembourg – 

Progress with country-specific recommendations 

3.2.1.  Financial soundness indicators, all banks in Luxembourg 

3.3.1.  METR by age group, based on EUROMOD 

B.1. 

The MIP scoreboard for Luxembourg 

C.1. 

Financial market indicators 

C.2. 

Labour market and social indicators 

C.3. 

Labour market and social indicators (cont.) 

C.4. 

Product market performance and policy indicators 

C.5.  Green growth 

LIST OF GRAPHS 

1.1. 

1.2. 

1.3. 

1.4. 

Breakdown of real GDP growth 

Breakdown of potential growth 

Key labour market indicators 

Breakdown of NULC (2000=100) 

1 

4 

11 

14 

14 
23 
28 
33 

42 

46 

47 

52 

10 

12 

24 

29 

46 

47 

48 

49 

50 

51 

4 

5 

5 

6 

 
 
 
 
1.5. 

1.6. 

1.7. 

Breakdown of the current account balance 

Banks activity and profitability 

Sectoral breakdown of the general government balance 

3.1.1.  Breakdown of overall tax burden 

3.1.2.  Environmental taxes, % of GDP 

3.1.3. 

Total expenditure per inhabitants in 2015, (thousands of pps.) 

3.1.4. 

The fiscal rule index in the EU, 2013 and 2014 

3.1.5.  Population and employment evolution 

3.1.6.  Access to retirement by age 

3.2.1.  Size of the financial sector (EUR billion) 

3.2.2.  Real house prices evolution 

3.2.3.  Price to income 

3.2.4.  Price to rent 

3.2.5.  Overvaluation gap with respect to price to income, price to rent and fundamental model 

valuation gaps 

3.3.1.  Employment rates by age 

3.3.2. 

Low-wage trap for second earners in a couple, 2015 

3.3.3.  Sectorial distribution of employment 

3.4.1.  Ease of doing business according to the World Bank, number of reforms 2010-2016 

3.4.2.  Restrictiveness indicator, 2016, Luxembourg and the EU 

3.4.3.  Hours lost in traffic 

3.4.4.  Motorway density 

LIST OF BOXES 

2.1. 

Contribution of the EU Budget to structural change in Luxembourg. 

3.1.1. 

The distributional impact of the tax reform. 

3.4.1.  Analysis of the ICT sector. 

3.4.2.  Renewable energy and energy efficiency 

3.4.4. 

Investment challenges in Luxembourg 

7 

7 

9 

14 

17 

18 

19 

20 

21 

23 

24 

25 

25 

26 

28 

29 

30 

36 

38 

39 

39 

13 

15 

34 

35 

41 

 
 
 
 
EXECUTIVE SUMMARY 

This report assesses Luxembourg’s economy in the 
light  of 
the  European  Commission’s  Annual 
Growth  Survey  published  on  16  November  2016. 
In the survey the Commission calls on EU Member 
States  to  redouble  their  efforts  on  the  three 
elements  of  the  virtuous  triangle  of  economic 
policy  –  boosting  investment,  pursuing  structural 
reforms and ensuring responsible fiscal policies. In 
so  doing,  Member  States  should 
focus  on 
enhancing  social  fairness  in  order  to  deliver  more 
inclusive growth.  

The  economy  of  Luxembourg  has  sharply 
rebounded since the start of the financial crisis. 
According  to  the  European  Commission  2017 
winter forecast, the strong momentum is projected 
to  continue  in  2016  and  in  the  next  two  years  as 
GDP  growth  is  expected  to  have  increased  by 
3.8%  in  2016,  to  accelerate  to  4.0%  in  2017  and 
return  to  3.9%  in  2018,  close  to,  but  still  below 
is 
pre-crisis  growth  rates.  Domestic  demand 
expected to replace net exports as the main growth 
driver.  

The financial sector is the largest contributor to 
national gross value added.  The investment fund 
industry  has  gained  momentum,  benefiting  from 
the  expansion  of  global  financial  markets.  At  the 
same time, buoyant credit provided by banks to the 
private sector has accompanied a solid investment 
trend, notably in the real estate and non-residential 
construction 
public 
investment, mostly in relation to the realisation of 
sizeable  infrastructure  projects,  has  rebounded 
sharply  in  recent  years  after  a  period  of  sluggish 
growth.  

particular, 

sectors. 

In 

Economic  growth  continues  to  be  accompanied 
by  sustained  job  creation.  In  2016  employment 
growth  is  estimated  to  have  accelerated  to  3.0%, 
compared  to  2.6%  in  the  previous  year,  with  all 
sectors  providing  a  positive  contribution  to  the 
overall  growth  since  2015.  Information  and 
Communication  Technology  (ICT)  activities  and 
services  to  the  business  sector  are  areas  where 
growth  has  been  the  most  dynamic  over  recent 
years.  Unemployment  continues  to  fall,  but  at  a 
slower  pace  than  expected,  as  strong  job  creation 
favours more cross-border workers than residents.  

The  general government  balance  is expected to 
post  a  surplus  of  around  1½  of  GDP  in  2016. 
Growth  in  public  revenues  has  been  sustained  as 

1 

the  government  adopted  several  measures 
to 
counter  the  loss  of  VAT  revenues  from  e-
commerce  related  transactions  due  to  a  change  in 
the  legislation.  At  the  same  time,  expenditure 
growth  has  trended  down  since  2013,  partially 
thanks  to  the  lack  of  indexation  of  a  large 
proportion  of  public  expenditure  (public  wages, 
inflation 
to 
pensions,  etc.)  due 
environment and to the saving measures adopted in 
the context of the 2015 budget.  

low 

the 

Subdued  inflation  has  contributed  to  moderate 
wage  developments.  However,  the  long  lasting 
fall in oil prices, which has dragged on inflation in 
previous years, appears to have bottomed out. The 
protracted  low  inflation  environment  delayed  the 
triggering  of  the  automatic  wage  adjustment, 
which occurred only at the beginning of 2017, with 
the  previous  automatic  wage  adjustment  having 
taken  effect  in  October  2013.  Thanks  to  weak 
wage developments and the surge in output, some 
of  the  past  cost-competitiveness  losses  have  been 
recouped. 

implemented, 

limited 
Overall,  Luxembourg  has  made 
progress in addressing the 2016 country-specific 
recommendations. It has made limited progress in 
ensuring  the  sustainability  of  public  finances.  In 
particular,  while  a  bill  on  the  reclassification  of 
workers  with  disabilities,  aiming  to  keep  these 
people  at  work,  has  been 
the 
adoption of the law limiting early retirement is still 
pending.  There  has  been  no  progress  on  aligning 
the  statutory  retirement  age  to  change  in  life 
expectancy.  Limited  progress  has  been  made  in 
removing  barriers  to  investment  and  innovation 
that  limit  economic  development  in  the  business 
sector.    Some  progress  has  been  made  to  address 
bottlenecks  that  hamper  housing  investment.  Few 
measures  have  been  adopted  and  others  are 
planned.    Nevertheless,  in  view  of  the  projected 
the 
population 
Luxembourg authorities remain sizeable  

increase  challenges  ahead  for 

Regarding progress in reaching the national targets 
under  the  Europe  2020  Strategy,  Luxembourg  is 
performing  well  in  the  areas  of  employment, 
renewable  energy,  energy  efficiency,  reducing 
early  school 
tertiary 
education  attainment.  By  contrast,  Luxembourg  is 
still far from reaching its targets for investment in 
research  and  developments  (R&D),  reducing 
greenhouse gas emission, and reducing poverty. 

leaving  and 

improving 

 
 
Executive summary 

European 

integrated 

banking union because it will provide a better, 
more 
regulatory 
framework. Favourable lending conditions and 
low  interest  rates  have  supported  a  surge  in 
mortgage credits. This has led to an increase in 
households'  indebtedness  that  over  the  last  10 
years has reached a level close to the euro area 
average  as  a  proportion  of  GDP.  There  are 
potential risks to the financial sector stemming 
from  developments  in  the  housing  market  and 
the concentration of mortgage lending activities 
in a few banks. Nevertheless, mitigating factors 
such  as  the  sound  capitalisation  of  banks  and 
the  low  share  of  non-performing  loans  mean 
that  direct  risks  to  the  banking  system  related 
to  residential  real  estate  can  be  assessed  as 
limited. 

  Reducing  the  economy's  reliance  on  the 
financial sector remains a central long-term 
challenge. A strategic document commissioned 
by the authorities to foster a transition towards 
a  new  industrial  model  was  released  last 
November.    Its  effective  impact  will  depend, 
however, on the specific measures that will be 
ultimate 
implemented.  Furthermore, 
success  of 
is 
potentially  constrained  by  a  number  of  factors 
innovation  and  entrepreneurship. 
such  as 
Labour  cost  developments  also  play  a  role  in 
more  price 
sectors,  potentially 
limiting the variety of areas that can be targeted 
to those with high added value.  

the  diversification  strategy 

sensitive 

the 

harm 

could 

capital 

  Private  investment,  especially  in  intangible 
capital,  remains  below 
the  euro  area 
average.  The  low  level  of  investment  in 
growth 
intangible 
perspectives  because  it  undermines  innovation 
and  productivity.  Business 
research  and 
development (R&D) intensity is in a decreasing 
trend.  This  together  with  the  high  level  of 
restrictiveness  of  legislation  in  the  services 
sector, especially in the business services, limit 
the  potential  for 
innovation  and  hamper 
diversification   

  The  labour  market  continues  to  perform 
well,  but  there  are  still  challenges  for 
growth 
specific 
continues  on 
the 
unemployment rate is among the lowest in the 

groups. 
a 

steady  path 

Employment 

and 

The main findings of the analysis in this report and 
the related policy challenges are as follows: 

  Long-term 

from 

findings 

increase 

fiscal  sustainability  concerns 
remain  given  the  projected 
in 
ageing  costs.  Currently,  the  pension  system  is 
still  in  surplus  and  has  accumulated  sizeable 
reserves, largely due to continued labour force 
increase.  However, 
the 
November 2016 pension review carried out by 
the authorities confirm that concerns remain, as 
the annual balance of the system is expected to 
become negative by 2023. Pension expenditure 
is  projected  to  increase  by  3.3  percentage 
points  of  GDP  up  to  2040  (the  second  highest 
increase  in  EU),  compared  to  the  EU  average 
of  0.4  percentage  points  of  GDP.  Under  less 
favourable  demographic  and  labour  market 
developments  the  size  of  future  deficits  would 
be  even  higher.  Further  challenges 
to 
sustainability  stem  from  long-term  care,  in 
which  expenditure  is  projected  to  steeply 
increase  and  more  than  double  with  respect  to 
the current value measured as a share of GDP.   

population. 

Insufficient 

  Housing demand continues to exceed supply, 
resulting  in  a  sharp  increase  in  real  estate 
prices.  The  number  of  dwellings  built  has 
consistently  remained  below  the  estimated 
needs to match the demand from the constantly 
growing 
land 
availability  or  the  incapacity  to  mobilise  the 
available land seems to be the main obstacle to 
the  creation  of  new  housing  units.  High  and 
increasing  house  prices  coupled  with  an 
ownership  bias  risk  discouraging  people  from 
moving to Luxembourg, undermining its ability 
to attract and retain a high-skilled labour force, 
many  of  whom  are  non-nationals.  In  addition, 
this  risks  exacerbating  the  problem  of  traffic 
congestion and air pollution. 

  Luxembourg  has  a  healthy  financial  sector, 
for which risks can be assessed as contained. 
The whole economy benefits from the presence 
of  a  large  financial  sector.  In  the  near  term, 
developments 
the  financial  sector  are 
expected to continue to have a strong impact on 
the  country's  economic  performance.  A  strong 
financial  supervision  framework  is  key  to 
ensure the resilience of the sector. Luxembourg 
is  in  a  good  position  to  benefit  from  the  EU 

in 

2 

 
 
of 

the 

structure 

EU.  Weak  labour  market  outcomes  for  older 
workers and, to a lesser extent, women, remain 
an important policy challenge however. Elderly 
and  low-skilled  workers  are  more  likely  to  be 
unemployed.  This  is  partly  related  to  the 
economic 
country, 
characterised  by  a  long-term  shift  towards 
high-skilled  sectors  and  a  strong specialisation 
in financial and business services. Poverty and 
social  exclusion  risks  are  increasing  but  still 
among  the  lowest  in  the  EU.  Nevertheless, 
social  transfers  remain  essential  in  lifting 
people  out  of  poverty.  The  tax  and  benefit 
system  has  helped  keep  income  inequality  at 
moderate levels. 

  Despite very high rates of tertiary education 
attainment,  performance  in  providing  basic 
skills  is  weak  by  international  comparison 
and  has  worsened  since  2012.  The  impact  of 
the  students’  socioeconomic  background  on 
their performance is one of the strongest in the 
EU,  pointing  to  high  educational  inequality. 
Adapting  vocational  education  and  training  to 
labour market needs remains challenging.  

  Public finances remain sound. However, part 
of  the  available  fiscal  space  has  been  used  to 
implement  a  tax  reform.  The  reform  aims  to 
increase  equity  and  competitiveness  while 
preserving  sustainability.  Some  features  of  the 
Luxembourg  taxation  system  remain  sensitive 
to  international  initiatives  in  the  fight  against 
tax avoidance. The tax reform narrowed the tax 
base.  At  the  same  time,  taxation  on  housing 
property  is  low,  which  seems  to  contribute  to 
low housing supply. There is also low transport 
traffic 
fuel 
congestion and may counteract efforts to reach 
EU2020  targets  and  to  invest  in  less  polluting 
energy resources. Luxembourg does not have a 
regular  spending  review  mechanism  in  its 
budgetary  process,  which  could  increase  the 
efficiency of public expenditure. 

taxation,  which 

stimulates 

Executive summary 

3 

 
 
1.  ECONOMIC SITUATION AND OUTLOOK 

GDP growth 

After  peaking  at  4.7%  in  2014,  GDP  growth 
stood  at  3.5%  in  2015  and  is  expected  to  have 
increased  to  3.8%  in  2016,  underpinned  by 
robust  domestic  demand  and  net  exports.  The 
growth  momentum  is  expected  to  accelerate  in 
2017  to  4.0%,  before  returning  to  3.9%  in  2018. 
Luxembourg's  economy  has  been  significantly 
more dynamic than those of its neighbouring trade 
partners and the euro area as a whole (Graph  1.1) 
during the expansion phases, especially in the two 
waves  of  the  recent  crisis.  This  comes  at  the 
including 
expense  of  pronounced  volatility, 
frequent, 
statistical 
the 
sharp 
authorities.(1)    

revisions  by 

Graph 1.1: 

Breakdown of real GDP growth 

Source: European Commission 

in  2016,  much 

Private  and  public  consumption  are  estimated 
to  have  provided  a  stable  positive  contribution 
line  with 
to  growth 
developments  over 
last  decade.  The 
the 
continuous demographic expansion combined with 
dynamic  wages  and,  more  recently,  the  vanishing 
inflation  differentials  with  the  EU,  has  sustained 

in 

(1)  In  July  2015  STATEC  revised  the  estimate  economic 
output for 2013 at 4.3 %, up from an estimation of 2.0 %. 
Estimations  of  growth  for 2014  have  as  well  been  subject 
to  sharp  revisions.  In  July  2015,  GDP  growth  was 
estimated  at  5.6  %  to  be  revised  down  to  4.1  %  in 
November. Lately, in October 2016, GDP growth for 2015 
was revised down to 3.5% from the June estimate of 4.8%. 

4 

the  purchasing  power  of  households.  The  tax 
reduction  package  that  entered  into  force  in 
January  2017,  coupled  with  the  automatic  wage 
indexation  triggered  at  the  beginning  of  2017  are 
likely to spur private consumption.  

Net  exports  have  recovered  rapidly  after  the 
second wave of the crisis. Since 2013, they have 
significantly contributed to growth. As a small and 
open economy, Luxembourg mainly depends on its 
ability  to  export  its  output,  largely  dominated  by 
services,  in  particular  financial  services.  While 
overall perspectives for the financial sector appear 
positive,  a  deeper  analysis  will  be  carried  out  in 
Section 3.2.1.         

of 

terms 

sectorial 

composition, 
In 
is  mostly  services-
Luxembourg's  economy 
driven,  with  services 
increasingly  driving 
economic growth. Services sectors represent over 
87 %  of  total  economic  activity  in  terms  of  gross 
value added, compared with 7.6 % for industry and 
4.8 % for construction. Primary activities represent 
a meagre 0.2 %. Financial services have stagnated 
at around 26 %, having reached 30 % in the years 
before the crisis, but non- financial services to the 
business  sector,  which  represent  around  44 %  of 
real  value  added  and  employment,  have  remained 
the  most  dynamic,  in  terms  of  their  value  added 
contribution and employment creation.  

Potential growth 

The  rapid  and  sustained  recovery  of  potential 
growth  after  the  first  wave  of  the  crisis  hides 
the  vanishing  contribution  from  total  factor 
productivity. During the period 2004-2007 (Graph 
1.2),  the  decline  in  potential  growth  was  entirely 
due  to  continued  falls  in  total  factor  productivity 
growth.  Potential  employment  growth  remained 
stable,  while  capital  stock  growth  accelerated  by 
the end of the period. During the first years of the 
crisis,  2008-2010,  potential  growth  dropped 
markedly.  Potential  employment  growth  also 
the 
declined  but 
contribution from total factor productivity became 
negative. After the crisis, potential labour bounced 
back to even higher levels than before the crisis, as 
did capital though to lower levels. By contrast total 
factor productivity (TFP) growth remained muted. 
(see Section 3.4.1). 

lesser  extent,  while 

to  a 

-8-6-4-20246810010203040506070809101112131415161718%, ppsInventories investmentInvestment (GFCF)ConsumptionNet exportsReal GDP growth 
 
 
                                                           
1. Economic situation and outlook 

(15-24) 

unemployment rate, although low overall, does not 
show  a  considerable  declining 
trend,  despite 
employment growth, stagnating at 6.3 %, in 2016. 
remains  high, 
Youth  unemployment 
despite  a  sharp  decrease  in  2015  (17.3 %  against 
22.6 % in 2014. Due to the high rate of enrolment 
in  tertiary  schools,  few  people  are  active  on  the 
labour market in this age group. The rate of young 
people  not  in  employment,  education  or  training 
was  6.2 %  in  2015,  well  below  the  EU  average 
(see Graph 1.3). 

Despite  the  good  labour  market  performance 
overall,  employment  rates  remain  below 
national targets. Luxembourg has not reached its 
mid-term  employment  rate  target  of  71.5%  yet, 
staying at 70.9% in 2015. The employment rate of 
older workers did not improve in 2015 and remains 
far below the EU average. Section 3.4.3 discusses 
these issues in more detail. 

Graph 1.3: 

Key labour market indicators 

Graph 1.2: 

Breakdown of potential growth 

Source: European Commission 

Inflation    

In  September  2016,  headline  inflation  became 
positive  again  after  7  months  below  nil.  As  a 
result,  the  annual  average  inflation  rate  remained 
flat  in  2016,  down  from  0.1%  in  2015.  However, 
the  long-lasting  fall  in  oil  prices,  which  has 
dragged  on  inflation  in  previous  years,  seems  to 
have  bottomed  out.  Automatic  wage  indexation 
was  triggered  in  January  2017,  resulting  in  a 
general  wage  increase  of  2.5 %.  These  factors, 
coupled  with  the  tax  reform  entering  into  force 
also  in  January  2017,  are  expected  to  foster 
consumption and subsequently prices. As a result, 
the  annual  average 
to 
approach  2%  in  2017.  Core  inflation,  which 
excludes  unprocessed  food  and  energy,  will  also 
increase at 1.6%.  

is  expected 

inflation 

Labour market  

The  pace  of  job  creation 
is  set  to  have 
accelerated further in 2016 to 3.0 % from 2.6 % 
in 2015, but unemployment persists for specific 
groups,  albeit  at  an  overall  low  level.  Job 
creation is high, though not yet matching pre-crisis 
rates. The outlook for employment growth over the 
coming years remains positive, despite an expected 
slowdown  in  the  pace  of  job  creation  by  2018,  in 
line  with  GDP  projections.  However,  as 
in 
previous  times  of  economic  upswing,  job  growth 
in  2016  favoured  cross-border  workers  more  than 
residents.  Employment  of  non-resident  workers  is 
estimated  to  have  increased  by  3.5 %  in  2016 
compared  with  2.6 %  for  resident  workers.  The 

Activity rate and employment rate (% of population), total, 
ages 20-64. 
Unemployment rate and long-term unemployment rate (% 
of labour force), total, ages 15-74. 
Youth unemployment rate (% of labour force), total, ages 
15-24. 
NEET: Not in employment, education or training (% of 
population), total, ages 15-24. 
Source: Eurostat 

Social developments 

Income inequality after taxes and benefits remains 
low  in Luxembourg  compared  to  the EU  average. 
The incomes of the richest 20 % of the population 
were around 4.3 times higher than the incomes of 

5 

-1.00.01.02.03.04.05.0040506070809101112131415161718192021Rate of change y-o-y (%)Capital Accumulation ContributionTFP ContributionTotal Labour (Hours) Contribution64666870727476780510152025010203040506070809101112131415%%Activity rate 20-64 (rhs)Unemployment rate 15-74 (lhs)Long-term unemployment rate 15-74 (lhs)Youth unemployment rate 15-24 (lhs)NEET rate 15-24 (lhs) 
 
 
1. Economic situation and outlook 

wage.  The  wage  drift,  i.e.  the  propensity  for 
employees'  actual  earnings  to  grow  faster  than 
increases in their negotiated wage rates, was on the 
contrary relatively small.  

Graph 1.4: 

Breakdown of NULC (2000=100) 

i.e. 

the  poorest  20%  in  2015(2).  The  ratio  has  been 
fairly  stable  in  the  past  decade.(3)  Low  income 
inequality  can  be  explained  by  relatively  equally 
income  by 
incomes, 
distributed  market 
households  before  taxes  and  social  transfers  (see 
also  Section  3.3.3).The  gap  between  market 
income 
income 
inequality (4)  suggests  that  Luxembourg  tax  and 
benefit  system  is  performing  at  EU-average  level 
in  terms  of  reducing  inequality. (5)    Inequality  in 
net  wealth  (6)  was  within  the  range  observed  in 
several  other  EU  countries  for  which  data  were 
collected in 2013- 2014 (ECB 2016)  

and  disposable 

inequality 

Competitiveness 

After  a  long  period  of  deterioration,  the  cost 
competitiveness  of  the  economy  has  started  to 
improve  in  2013.  Nominal  wage  growth  was 
subdued at 0.9% in 2015, and is expected to have 
slowed  down  further  to  0.5%  in  2016.  Overall, 
from  2000  to  2015,  nominal  unit  labour  costs 
(NULC) increased by 50 %, almost twice as much 
as in the euro-area (27 %) and three times as much 
as in Germany (16 %).  

The  development  of  nominal  unit  labour  costs 
largely  follows  price  developments,  since  real 
unit  labour  costs  (RULC)  have  barely  risen 
over  the  period  starting  in  2000  (Graph  1.4). 
Real  unit  labour  costs  marginally  increased  at  the 
beginning  of  the  period  and  during  the  first  years 
of  the  crisis,  corresponding  to  relatively  small 
increases 
real  wages  not  matched  by 
productivity  gains.  Throughout  the  whole  period 
up  to  2015,  productivity  gains  have  been  close  to 
zero, slightly negative even, as has the average real 

in 

(2)  As  measured  by  the  S80/S20  income  quintile  share  ratio. 
This  is  the  ratio  of  total  income  received  by  the  20 %  of 
households  with  the  highest  income  (top  quintile)  to  that 
received by the 20 % of households with the lowest income 
Income  must  be  understood  as 
(lowest  quintile). 
equivalised  disposable  income.  Data  should  be  interpreted 
with care because they are for resident households only. As 
such  they  do  not  capture  the  effects  on  the  income 
distribution of the large number of cross-border workers. 
(3)  The  S80/S20  ratio  increased  from  3.9  in  2005  to  4.6  in 

2013 after which it decreased again to 4.3 in 2015. 

(4)  The Gini coefficient was 0.48 in 2015 before taxes, social 
transfers  and  pensions  were  taken  into  account,  and  0.29 
after taxes, transfers and pensions - a gap of 19 pps. This is 
similar than the EU average of 20 pps,. 

(5)  See  for  more  analysis,  including  a  breakdown  of  income 
inequality  by  revenue  source,  in:  Rapport  travail  et 
cohésion sociale (2016) STATEC. 

(6)  Difference between total assets and total liabilities. 

6 

Source: European Commission 

External position 

The  current  account  balance  still  has  a 
comfortable  surplus  (see  Graph  1.5).  Its  surplus 
shrank  below  6 %  of  GDP(7)  in  2013.    It  then 
continued  decreasing  to  5.2  %  of  GDP  in  2015. 
This  is  because  VAT  on  e-commerce,  paid  to  the 
consumers'  countries  of 
residence,  will  be 
discounted  from  the  export  of  services.  The  still 
large  current  account  surplus  is  driven  by  the 
services balance surplus, mostly financial services. 
Financial services exports represent more than half 
of  the  total  export  of  services  and  are  to  a  large 
extent (more than 80 %) related to the activities of 
investment funds. At the same time, the balance of 
goods recorded a deficit of 5.1 % of GDP in 2015, 
after  -0.5 %  in  2014.  (8)  The  reason  for  this 
deterioration 
in  exports  of 
is  a  sharp  drop 
merchanting activities.  

The  current  account  surplus  is  dragged  down 
by  the  widening  deficit  of  the  primary  income 

(7)  Relevant  threshold  in  the  context  of  the  macroeconomic 

imbalance procedure. 

(8)  The  balance  of  goods  has  been  significantly  revised  and 
improved  in  line  with  the  new  international  standards  on 
the balance of payments statistics (European Commission, 
2016a). 

80901001101201301401501600001020304050607080910111213141516NULCGDP deflatorRULCReal WageLabour productivityNULC EA 
                                                           
 
                                                           
1. Economic situation and outlook 

balance.  This  net  outflow  increased  to  31%  of 
GDP  in  2015  (from  8.1%  of  GDP  in  2000).  This  
reflects  the  increasing  success  of  the  financial 
services  industry  in  placing  its  products  on  the 
market  abroad  and  the  large  number  of  foreign 
workers and pensioners. 

Graph 1.5: 

Breakdown of the current account balance 

industry 

The  fund 
is  at  a  record  high. 
Luxembourg  has  the  second  largest  investment 
fund industry in the world after the US. Since the 
end  of  2008,  about  20 %  (or  EUR  1.2  trillion)  of 
all  new  net  worldwide  inflows  into  investment 
funds were allocated to Luxembourg funds. These 
continue  to  benefit  from  major  central  banks’ 
quantitative  easing  programmes  and  the  investors' 
search for a return on their investment. By August 
2016,  assets  under  management  of  the  funds 
industry had reached EUR 3.6 trillion, the highest 
level  on  record  and  twice  the  amount  recorded  at 
the trough of the financial crisis. 

Graph 1.6: 

Banks activity and profitability 

Source: Eurostat 

Luxembourg is a net creditor to the rest of the 
world.  Its  net  assets  (net  international  investment 
position) 
represent  around  25 %  of  GDP. 
However,  this  relatively  small  figure  hides  a 
massive  gross  international  investment  position, 
reflecting large FDI and portfolio claims. 

Financial sector 

The financial sector in Luxembourg, very large 
relative to the size of the economy, has returned 
to  modest  expansion  since  2013.  Over  the  last 
three  decades,  Luxembourg’s  financial  sector  has 
to  domestic 
emerged  as  a  key  contributor 
economic  activity,  while  also 
taking  on  an 
important  international  role  as  a  hub  for  euro-
denominated  bond 
issuance.  The  sector  has 
the  years,  and 
diversified  considerably  over 
continues  to  diversify  in  new  areas.  In  2015,  the 
financial  sector  (including  insurance)  contributed 
over  26 %  to  the  country's  gross  value  added, 
somewhat  less  than  before  the  crisis,  when  it 
exceeded  30 %.  Since  2013,  total  assets  have 
resumed their expansion and are doing so fast.  

7 

Source: European Commission 

The  banking  sector 
lost  some  momentum 
during  the  crisis  years  but  has  remained 
resilient.  Almost  all  of  the  143  banks  located  in 
Luxembourg are foreign-owned and internationally 
oriented. Only five are predominantly domestically 
focused  and  government  ownership  is  significant 
in three of these. Luxembourg banks have the EU's 
highest  solvency  and  Tier  1  ratios,  and  the  EU's 
lowest  ratio  of  non-performing 
loans.  After 
peaking  at  EUR  1  trillion  in  October  2008,  total 
bank  assets  have  fluctuated  around  the  EUR  0.7 
trillion  mark  over  the  last  few  years,  while 
profitability  has  remained  constant  (although 
above  10 %)  (Graph  1.6).  However,  adapting  to 
new regulations remains a key challenge for banks 
throughout  Europe,  especially 
the  current 
context of prolonged low interest rates.  

in 

-50-40-30-20-10010203040509900010203040506070809101112131415% of GDPCapital account (KA)Secondary income balancePrimary income balance  Trade balance - services  Trade balance - goodsTrade balanceCurrent account balance (CA)Net lending/borrowing (CA+KA)05101520253004005006007008009001000040506070809101112131415Balance sheet total (euro billion) (lhs)Return on Equity % (rhs) 
 
 
1. Economic situation and outlook 

is  projected  to  decline  further  in  2016.  It  remains 
more  than  four  times  lower  than  the  euro-area 
average  (92.6 %  of  GDP).  At  the  end  of  2015, 
existing  public  guarantees  represented  9.7 %  of 
GDP,  5.5 %  of  which  are  related  to  the  financial 
sector.  Given  the  low  level  of  public  debt  and  its 
relatively 
fundamentals, 
Luxembourg,  together  with  Germany,  is  the  only 
country  in  the  euro  area  that  still  has  an  ‘AAA’ 
rating from all the three major rating agencies.  

economic 

solid 

Public finances 

inflation 

combined  with 

The general government  balance  is expected to 
have  recorded  a  surplus  of  1.6%  of  GDP  in 
2016.  Low 
the 
incremental  impact  of  measures  adopted  in  the 
2015  budget  should  help  contain  expenditure 
growth,  despite  of  a  high 
level  of  public 
investment  maintained  by  the  authorities.  At  the 
same time, revenues are set to remain firm in line 
with the projected robust economic growth. 

The  surplus  is  expected  to  fade  out  almost 
completely  in  2017,  given  the  continued  high 
level of investment and the implementation of a 
comprehensive  tax  reform  that  entered  into 
effect  in  2017.  Its  full  implementation  will  cost 
around  one  percentage  point  of  GDP.  Section  2.6 
discusses this issue in more detail. 

Despite  the  overall  surplus,  a  breakdown  by 
sector of the general government balance shows 
that the central government accounts continued 
to  post  deficits  throughout  the  period  since  the 
outbreak  of  the  financial  crisis.  The  steady 
surpluses  of  the  social  security  sector  offset  this 
large  central 
deficit  (Graph  1.7).  While 
government deficits recorded from the onset of the 
financial  crisis  have  been  almost  completely 
absorbed, the deficit is projected to widen again in 
2017,  mostly  as  a  result  of  the  implementation  of 
the comprehensive tax reform. 

the 

Credit and investment 

increase 

Credits to the non-financial private sector have 
continued  to 
in  2016.  Companies' 
demand for loans increased by around 18 % in the 
first 10 months of the year, boosted by investment 
projects  and  debt  restructuring  operations.  This  is 
partially  explained  by  the  fact  that  firms  continue 
to benefit from relaxed credit conditions. The latest 
bank  lending  survey  confirms  that  Luxembourg 
banks have eased their lending criteria, in line with 
the  more  flexible  trend  observed  across  the  euro 
area.  Banks  also  anticipate  a  significant  recovery 
in  business 
loan  applications,  while  better 
conditions  on  the  housing  market  continue  to 
support  the  demand  for  home  loans.  Box  3.4.2 
trends  and  provides  an 
discusses 
overview  of 
to  greater 
investment and ongoing reforms. 

the  existing  barriers 

investment 

Indebtedness 

Private  sector  debt  is  well  above  the  euro-area 
average although this is mostly explained by the 
large  presence  of  multinationals.  It  peaked  in 
2007 at 402.3 % of GDP (in gross terms) and since 
then has fallen substantially to 327.9 % in 2014. In 
2015  it  increased  again  to  343.1 %  of  GDP.  The 
increase  was  mostly  related 
to  non-financial 
corporations.  The  largest  share  (284.9 %  of  GDP) 
of private debt is from non-financial corporations, 
in  particular  multinationals  that  use  Luxembourg 
as  a  financial  hub  for  their  intra-group  financing 
operations.  

Low  interest  rates  and  the  easing  of  financial 
conditions have supported the steady growth of 
mortgage loans. These accounts for a large part of 
household  indebtedness  (in  2014  household  debt 
amounted  to  58.2 %  of  GDP,  compared  with 
59.6 %  in  the  euro  area).  The  steady  increase  in 
house  prices  is  likely  to  have  exacerbated  this 
trend,  with  households  asking  for  ever  higher 
loans. As most mortgages are taken out at variable 
rates,  if  interest  rates  were  to  return  to  average 
it  could  put  debt  service 
historical 
constraints on households, especially lower income 
households (Section 3.2.2). 

levels, 

While private sector debt is comparatively high, 
public debt is well below the euro area average. 
After  peaking  at  23.5 %  of  GDP  in  2013,  public 
debt has declined to 22.1 % of GDP in 2015, and it 

8 

 
1. Economic situation and outlook 

Graph 1.7: 

Sectoral breakdown of the general 
government balance 

Source: Eurostat 

9 

-4.0-3.0-2.0-1.00.01.02.03.04.05.06.07.020002002200420062008201020122014% of GDPCentral governmentLocal governmentSocial security fundsGeneral government 
 
 
1. Economic situation and outlook 

Table 1.1: 

Key economic, financial and social indicators – Luxembourg – 

(1) Sum of portfolio debt instruments, other investment and reserve assets 
(2,3) domestic banking groups and stand-alone banks. 
(4) domestic banking groups and stand-alone banks, foreign (EU and non-EU) controlled subsidiaries and foreign (EU and 
non-EU) controlled branches. 
(*) Indicates BPM5 and/or ESA95 
Source: European Commission,  ECB 

10 

 
 
 
 
2.  PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS 

Since 

(CSRs). 

economic  developments.  A 

recommendations 
the 
recommendation  were  published,  only  limited 
measures have been taken to address the long-term 
sustainability  challenge,  related  to  the  projected 
large increase in pension expenditure. A mid-term 
review  of  the  sustainability  of  the  pension  system 
in 2016 was carried out as planned and resulted in 
a  detailed  analysis  including alternative  scenarios, 
also taking account of less favourable demographic 
and 
law  on 
reclassification  of  workers  with  disabilities  was 
implemented in 2016. However, key legislation on 
early  retirement  and  the  Age  Pact  have  not  yet 
been  adopted,  meaning  that  only  limited  progress 
has  been  made  on  CSR  1.  Progress  on  CSR  2  is 
also  limited.  Few  measures  have  been  adopted  or 
announced, and the ones that have do not appear to 
fully address the challenge. Obstacles to economic 
developments  from  significant  barriers  in  the 
business  services  sector  persist  even  after  the 
adoption  and  implementation  of  the  announced 
measures. Some progress has been made to address 
bottlenecks  to  housing  investment.  Incentives  to 
real estate owners to sell their properties have been 
introduced  and  a  law  has  been  adopted  reducing 
the  length  of  the  procedure  for  granting  building 
permits.  Nevertheless,  in  view  of  the  projected 
population 
the 
Luxembourg authorities remain sizeable.     

increase  challenges  ahead  for 

the 

with 

implementing 

introduction  of 

Progress 
the 
recommendations  addressed  to  Luxembourg  in 
2016 (9)  has  to  be  seen  in  a  longer  term 
the 
perspective  since 
European  Semester 
in  2011.  Luxembourg 
adopted a pension reform in December 2012, to be 
phased  in  gradually.  Nevertheless,  even  after  the 
in  age-related 
reform 
expenditure  has  remained  the  largest  in  the  EU. 
The  reform  did  not revise  the  statutory retirement 
age  and  possibilities  of  early  retirement  have 
remained largely unchanged. It contains incentives 
to work longer, but their impact is limited. 

the  projected 

increase 

In  2015  a  reform  of 
the  professional 
classification  scheme  for  people  with  partial 
incapacity 
for  work  was  adopted.  While 
providing  adequate  protection  for  those  who  are 
most  vulnerable, 
to  keep 
reclassified  people,  especially  older  people,  at 
work. (10) This could have a positive impact on the 
rate  of  participation  rate  of  older  people  in  the 
workforce.  

reform  aims 

the 

long-term 

Beyond 
sustainability  concerns, 
Luxembourg  has  received  recommendations 
since  2011  in  relation  to  its  price  and  cost 
competitiveness, which has steadily deteriorated 
up  to  2014.  Analyses  have  shown  that  both 
productivity  and  wage  evolution  have  contributed 
to  this  trend.  In  terms  of  wage  evolution,  it  has 
been  recommended  to  Luxembourg  to  ensure  that 
wages evolves in line with productivity. To date no 
structural  measures  have  been  adopted  in  this 
regard, apart from the temporary modulation of the 
automatic  wage  indexation  to  inflation  between 
2012  and  2014.  The  cost  competitiveness  of 
Luxembourg  benefits 
low 
inflation environment. However, in the absence of 
new  structural  measures,  the  projected  increase  in 
inflation  may  put  at  risk  the  earlier  gains  in  cost-
competitiveness.  

the  current 

from 

limited(11) 
Overall,  Luxembourg  has  made 
progress in addressing the 2016 country-specific 

(9)  For  the  assessment  of  other  reforms  implemented  in  the 

past, see in particular section 3.1 and 3.2. 

(10)  50.1% of the persons reclassified externally are over 50. 
(11)  Information  on  the  level  of  progress  and  actions  taken  to 
address  the  policy  advice  in  each  respective  subpart  of  a 
CSR is presented in the Overview Table in the Annex. This 
overall  assessment  does  not  include  an  assessment  of 
compliance with the Stability and Growth Pact. 

11 

 
 
                                                           
 
2. Progress with country-specific recommendations 

Table 2.1: 

Progress with country-specific recommendations 

Source: European Commission 

12 

Luxembourg Overall assessment of progress with 2016 CSRs:  Limited  CSR 1: Ensure the long-term sustainability of public pensions by increasing the effective retirement age, by limiting early retirement and increasing incentives to work longer, and by aligning the statutory retirement age to changes in life expectancy.   Limited progress    Limited progress in ensuring the sustainability of the public finances.  Limited progress in increasing the effective retirement age.  Limited progress in limiting early retirement.  Limited progress in limiting increasing incentives to work longer.  No progress in aligning the statutory retirement age to changes in life expectancy.  CSR 2: Remove barriers to investment and innovation that limit economic development in the business services sector. Address bottlenecks that hamper housing investment. Limited progress   Limited progress: Few actions have been taken to limit restrictions in the business services sector, but their impact appears to be limited.   Some progress: Some measures have been adopted and other are planned to increase house supply. Nevertheless, the challenge ahead remains significant, also in view of the projected increase in population.    
 
 
 
 
2. Progress with country-specific recommendations 

13 

Box 2.1: Contribution of the EU Budget to structural change in Luxembourg.Luxembourg is a beneficiary of the European Structural and Investment Funds (ESIF) with an allocation of up to EUR 140 million for the period 2014-2020. This is equivalent to 1% of the expected national public investment1. By 31 December 2016, an estimated EUR 45 million, which represents about 32 % of the total allocation for ESI Funds, has already been allocated to concrete projects.  Financing under the European Fund for Strategic Investments (EFSI), Horizon 2020, the Connecting Europe Facility  and  other  directly  managed  EU-funds  is  additional  to  the  ESI funds. By end 2016, Luxembourg has signed agreements for EUR 71 million for projects under the Connecting Europe Facility. The EIB Group approved financing under EFSI amounts to EUR 86 million, which is expected to trigger nearly EUR 248 million in total investments (as of end 2016). All necessary strategies as required by the ex-ante conditionalities have been met prior to programme adoption thus ensuring a timely and efficient up-take of the funds, except one related to the smart specialisation strategy. This issue is expected to be addressed shortly as the Luxembourg Government will approve and endorse the planned strategy.  All relevant CSRs were taken into account when designing the 2014-2020 programmes. The ESI Funds play a role in strengthening research, technological development and innovation in order to create greater economic diversification and to enhance the number of SMEs involved in research. The ESI Funds will also support measures relating to environmental protection, resource efficiency and support for the shift towards a low-carbon economy in all sectors. In addition to that, support will be provided to sustainable professional integration of jobseekers, inactive persons and young people (including through the implementation of the Youth Guarantee), active inclusion, and skills development through better access to lifelong learning. Nearly 6 000 young people and 500 jobseekers aged 45+ are being mentored; support for entrepreneurship or training in the field of ICT for job seekers is provided; the promotion of active inclusion and professional integration of more than  1 300 disadvantaged people is underway https://cohesiondata.ec.europa.eu/countries/LU                                                              1 National public investment is defined as gross capital formation + investment grants + national expenditure on agriculture and fisheries  
 
 
 
 
 
 
 
3.  REFORM PRIORITIES 

3.1.  PUBLIC FINANCES AND TAXATION 

interests  from  10 %  to  20 %  (above  EUR  250  of 
interest 
income  per  person  and  per  credit 
institution).  Finally,  it  introduces  the  option  for 
individual  taxation  of  couples,  as  discussed  in 
Section 3.3.1. At prima facie, the reform appears to 
benefit  all  households  across 
income 
distribution, even if at a different extent. Box 3.1.1 
gives an assessment of the distributional impact of 
the reform(13).  

the 

Graph 3.1.1:  Breakdown of overall tax burden 

Source: European Commission 

(13)  In the exercise only the measures from i) to vii) have been 

included in the simulation. 

3.1.1.  TAXATION 

The  overall  tax  burden  amounted  to  38.1 %  of 
GDP in 2014, close to the EU average of 38.8 % 
of  GDP 
(European  Commission,  2016b), 
(Graph  3.1.1).  The  sources  of  tax  revenues  are 
almost equally distributed, with direct and indirect 
taxes  making  up  around  two  thirds  of  total  tax 
revenues,  while  the  remainder  corresponds  to 
social  contributions.  In  2016,  the  government 
announced  a  major  overhaul  of  the  tax  system. 
Parliament  adopted  the  reform  in  December  2016 
and  it  entered  into  force  on  1  January  2017  (with 
one exception). (12) 

The reform of Luxembourg's tax system focuses 
mostly  on  personal  income  tax  and  corporate 
income tax. Together, these two taxes account for 
approximately  a  third  of  total  tax  revenues.  The 
reform is part of a larger overhaul envisaged by the 
redistributive 
Luxembourg  authorities  of 
system of incomes (see Section 3.3). Measures that 
relate  to  the  housing  market  are  discussed  in 
Section 3.2.3. 

the 

Personal Income Taxation (PIT) 

The  reform  of  personal  income  taxation  was 
guided  by  the  principles  of  social  equity  and 
selectivity. The main measures introduced include: 
i) a review of the tax brackets and tax rates, ii) an 
increase in the top personal income tax rate, iii) the 
abolition  of  the  0.5%  temporary  budget-balancing 
tax  ("impôt  d'équilibrage  budgétaire  temporaire"); 
iv)  the  reform  of  tax  credits  (for  earned  income, 
pensions, 
single 
parents);  v)  a  change  in  the  treatment  of  rental 
income  derived  from  approved  bodies;  vi)  an 
increase 
interest 
deductibility, as well as vii) an increase in the tax 
allowance  for complementary pension  schemes.  It 
also provides for a review of childcare allowances 
("frais  de  domesticité  et  frais  de  garde  d'enfant") 
and  for  an  increase  in  the  withholding  tax  on 

self-employed  people 

limit  of  mortgage 

and 

the 

in 

(12)  By  law  of  29  June  2016,  the  tax  rate  applicable  to  capital 
gains  on  real  estate  transactions  occurring  between  1  July 
2016 and 31 December 2017 has been reduced to a quarter 
of  the  global  rate  (instead  of  half  of  the  global  rate 
applicable).  

14 

05101520253035404550DKFRBEFISEATITEA19HUEU28DELUNLHRSIELPTUKCZESEEMTCYPLSKLVLTBGROIEDirect taxesIndirect taxesSocial contributionsTax burden 
 
                                                           
 
 
                                                           
3.1. Public finances and taxation 

15 

 Box 3.1.1: The distributional impact of the tax reform.To estimate the distributional effects of the tax reform, a simulation for estimating the impact of several of the planned measures has been carried out based on the EUROMOD model. It should be emphasised, however, that the distributional effects of the overall reform could not be assessed, as not all aspects of the tax reform (e.g. taxation on an individual basis) were simulated. Simulation results show that all households are affected by the reform and that almost all households are benefiting. The only exception is the 10th decile, where some households might be negatively impacted due to the increased top rates. However, there is an important variability across households in terms of the effect of different measures. Graphs 1a and 1b below disentangle the effect by groups of policy measures and provide an overview of those households benefiting (Graph 1a) and of the change in disposable income (Graph 1b) by income decile. Graph 1a shows that abolishing the temporary crisis tax and changing tax allowances benefits higher deciles more than lower deciles. This is expected as the lower deciles were less impacted from the crisis tax, while the allowances by their nature are also designed to reduce the gross tax liability for those that have either a mortgage or intend to pay contribution to the voluntary pension scheme. The share of households benefiting from the changes in personal income tax schedule increases also with the deciles, reaching 100% already in the middle deciles. This is the effect of a more gradual increase in tax rates. By contrast, tax credits clearly benefit more households at the lowest end of the income distribution and the share of households benefitting from the measure decreases with the deciles.  Similar results are found when translating the reform into changes of equivalised disposable income (Graph 1b). Disposable incomes are higher after the reform across all earnings ranges. Overall, disposable incomes increase with the deciles, although the highest relative gain (4.6%) is for the 10th decile. Only the increased tax credits had a higher impact on the lower end of the income distribution and therefore were able to reduce income inequality. Also in the light of the redistribution of income, increased tax credits are the policy measures which reduce inequality most. Graph 1: a) Shares of winner households by different measures, by decile (%); b) Change to the mean equivalised disposable income of households (2016-2017)  (1) Note: The simulation has been carried out jointly by the European Commission and the Joint Research Center. Section 3.1.1 provides with the list of simulated measures. EUROMOD is the tax-benefit microsimulation model for the European Union, simulating benefit entitlements and tax liabilities (including social security contributions) of individual and households according to the tax-benefit rules in place in each Member State. The simulations are based on representative survey data from the European Statistics on Income and Living Conditions (EU-SILC) and cover the main elements of direct taxation and social contributions as well as non-contributory benefits. Source: European Commission, Joint Research Centre.  010203040506070809010012345678910% of winner households within decileHousehold income decilesCrisisScheduleTax creditsFull reformAllowances0.01.02.03.04.05.012345678910% of baselineHousehold income decilesCrisisScheduleTax creditsAllowances 
 
 
 
 
 
 
3.1. Public finances and taxation 

of  the  tax  system  which  may  facilitate  aggressive 
tax planning. In that respect, the very high level of 
foreign direct investment (FDI) positions, the share 
of  those  FDI  held  by  so-called  'Special  Purpose 
Entities'  (SPE),  but  also  of  interests,  dividends  or 
royalties  payments(17)  as  percentage  of  GDP 
suggest  that  the  country's  tax  rules  are  used  by 
companies that engage in aggressive tax planning. 
Within  this  context,  however,  it  is  important  to 
note  that  corporate  tax  initiatives,  such  as  the 
amendment to the Parent-Subsidiary Directive and 
the Anti-Tax Avoidance Directive, will strengthen 
Member  States'  anti-abuse  frameworks  and  boost 
tax 
the 
automatic  exchange  of  information  on  tax  rulings 
or on country-by-country reports.  

for  example 

transparency, 

through 

Luxembourg  has  expressed  its  willingness  to 
maintain  an  internationally  competitive  tax 
regime while respecting international tax rules. 
In  line  with  Action  5  of  the  Base  Erosion  and 
Profit  Shifting  (BEPS)  (see  OECD,  2015),  as 
endorsed  by  the  Code  of  Conduct  for  Business 
Taxation, the patent box regime has been repealed. 
Moreover,  Luxembourg  has  introduced  a  new 
article  in  the  tax  legislation  that  provides  more 
guidance concerning how to apply the arm's length 
principle  that  was  formalised  on  1  January  2015. 
In  order  to  enhance  the  fight  against  tax  fraud, 
Luxembourg introduced the concept of 'aggravated 
tax  fraud',  which  would  constitute  a  criminal 
offence. 
enhance  VAT 
compliance, joint liability has been introduced for 
managers and companies, which have not met their 
VAT obligations.  

Furthermore, 

to 

Environmental and energy taxation 

Luxembourg has witnessed a steady decrease in 
its  environmental  tax  revenues  proportion  of 
GDP  over  the  last 10 years,  amounting  to 2.0 % 
of  GDP  in  2014  (EU28  average:  2.5 %  of  GDP), 
(European  Commission,  2015b,  p.  68).   Energy 
largest  proportion  of 
taxes  make  up 

the 

(17)  In  2015,  the  level  of  inward  and  outward  foreign  direct 
investment amounted respectively to 5868% and 6867% of 
GDP.  The  share  of  inward  and  outward  FDI  held  by  SPE 
amounted respectively to 93% and 95% of GDP. The flows 
of dividends paid and received (calculated as net income on 
FDI) amounted respectively to 85.6% of GDP and 108.9% 
of  GDP.  Interests  received  (calculated  as  net  income  on 
FDI)  amounted  to  23.02%  of  GDP  and  the  royalties  paid 
and  received  amounted  respectively  to  5.5  %  of  GDP  and  
2.3% of GDP in 2015. 

Corporate Income Taxation (CIT) 

The  reform  of  corporate  taxation  aims  to 
support  investment  and  boost  competitiveness 
through a decrease in tax rates and a review of 
several tax expenditures. It provides for a gradual 
decrease  of  the  corporate  income  tax  rate  from 
21 % to 19 % in 2017 and 18 % in 2018. Including 
surcharges,  this  means  that  the  29.22 %  top 
corporate  rate  will  go  down  to  27.08 %  in  2017 
and  26.01 %  in  2018.  Also  the  corporate  income 
tax  rate  applicable  to  corporations  with  a  taxable 
income  below  EUR  25,000  will  be  reduced  from 
20 % 
the  scope  of  eligible 
to  15 %,  while 
companies has been enlarged.  

In order further to support competitiveness and 
investment,  several  tax  expenditures  have  been 
adjusted.  The  complementary  and  global  tax 
credit for investment will be each one increased by 
to  13 %  and  8 % 
one  percentage  point, 
respectively. Moreover, the carry forward of losses 
will be limited to 17 years, the minimum net worth 
tax  for  "Sociétés  de  Participations  Financières 
(SOPARFI)  increased  and  capital  gains  derived 
from  the  transmission  of  businesses  can  benefit, 
under  certain  conditions,  from  a  tax  deferral. 
Overall, 
is 
expected to cost, when at regime, around 0.2% of 
GDP. (14) This does however not take into account 
the longer term positive effects on competitiveness 
and investments.  

the  reform  of  corporate 

taxation 

Some of Luxembourg's tax rules may be used in 
structures  of  aggressive  tax  planning. (15)  The 
absence  of  certain  anti-abuse  rules(16)  and  the 
absence of withholding taxes on outbound interest 
and  royalties  vis-à-vis  third  countries  are  features 

(14)  Draft  Budgetary  Plan  -  Luxembourg,  2016-2017,  page  4. 
The  estimate  reports  the  impact  of  the  corporate  income 
tax.  

on 

2012 

aggressive 

(15)  Aggressive tax planning consists in taking advantage of the 
technicalities  of  a  tax  system  or  of  mismatches  between 
two  or  more  tax  systems  for  the  purpose  of  reducing  tax 
liability  (source:  Commission  Recommendation  of  6 
December 
planning 
(2012/772/EU)).  For  an  overview  of  the  most  common 
structures of aggressive tax planning and the provisions (or 
lack  thereof)  necessary  for  these  structures  to  work,  see 
Ramboll  Management  Consulting  and  Corit  Advisory 
(2016),  Study  on  Structures  of  Aggressive  Tax  Planning 
and  Indicators,  European  Commission  Taxation  Paper 
n°61.  It  should  be  noted  that  country-specific  information 
provided  in  the  study  gives  the  state  of  play  by  May/June 
2015. 

tax 

(16)  For more details, see European Commission, 2016a. 

16 

 
                                                           
                                                           
3.1. Public finances and taxation 

Graph 3.1.2:  Environmental taxes, % of GDP 

Source: European Commission 

to 

encourage 

tax  reform 
a 

includes 
The  above-mentioned 
measures 
"sustainable 
mobility", supporting the purchase of electric cars, 
pedelecs  and  bicycles.  For  company  cars,  the 
valuation  of 
in  kind  will  be 
differentiated depending on the  CO2  emissions of 
the  car.  The  current  rate  of  1.5 %  of 
the 
commercial value of the car will be replaced with a 
range of percentages between 0.5 % and 1.8 %.  

the  benefit 

Measures taken in favour of more "sustainable 
mobility"  are  likely  to  have  limited  impact  as 
long  as  conventional  fuel  has  comparative 
advantage.  Policy  approach  in  terms  of  both 
taxation  and  investment  priorities  (Section  3.4.5.) 
does  not  seem 
to  pursue  entirely  coherent 
objectives.  

In  spite  of  these  measures,  Luxembourg  is 
expected  to  miss  its  2020  target  to  decrease  its 
greenhouse gas emissions by 20 %. According to 
the  latest  national  projections  based  on  existing 
measures, non-emission  trading  scheme  emissions 
will  decrease  by  15 %  between  2005  and  2020. 
The  target  is  consequently  expected  to  be  missed 
with a margin of 5 percentage points. (22)   

(22)  Report  from  the  Commission,  "Implementing  the  Paris 
Agreement - Progress of the EU towards the at least -40% 
target", COM(2016) 707 final 

taxes 

environmental 
in  Luxembourg  by  far, 
amounting  to  1.8 %  of  GDP  in  2014,  see  Graph 
3.1.2.  Revenues 
transport 
(excluding fuels)  amount  to  just 0.1 %  of  GDP  in 
2014.  

taxation  of 

from 

Luxembourg’s transport fuel tax rates are some 
of the lowest in the EU, not having been modified 
since October 2007 (petrol) and July 2012 (diesel), 
although  the  increase in  VAT  from  15 %  to  17 % 
contributed to increased fuel taxes. The tax rate on 
diesel  fuel  is 62 %  of  the  petrol  tax  rate (18). This 
differential  does  not  reflect  the  respective  social 
costs  associated. (19)  The  lower  tax  rate  on  diesel 
fuel helps explain the high share of new registered 
diesel cars in total cars, which at more than 70% in 
2015, was still among the highest in the EU. (20) 

Transport taxes in Luxembourg are also low in 
comparison to other Member States. The vehicle 
registration  fee  applied  regardless  of  vehicle  type 
or emissions is one of the lowest in the EU and has 
no impact on a driver’s choice of vehicle.  

The low excise duties on transport fuels are an 
incentive  to  fuel  consumption,  resulting  in  a 
high  cost  for  the  economy  and  creating  traffic 
congestion  and  air  pollution  (see  also  Section 
3.4.5). In 2012, the total cost of fuel consumption 
amounted  to  approximately  EUR  3.5  billion  per 
year  considering  national  and 
international 
negative ecological and health impact compared to 
EUR  2.1  billion  of  benefits  in  terms  of  taxes  and 
employment(21).  More  than  half  of  the  country's 
Greenhouse  Gas  (GHG)  emissions  stem  from  the 
transport  sector,  70 %  of  which  are  linked  to  fuel 
export.  Emissions  per  capita  are  the  highest  in 
Europe due to the very high proportion of road fuel 
sales  to  non-residents  (European  Commission, 
2015c).  

(18)  European  Environment  Agency  2016,  Environmental 
taxation and EU environmental policies. Table 4.3 on p.24. 
(19)  Diesel  fuel  affects  local  air  pollution  much  stronger  than 
the  higher  emissions  of 
to 

gasoline,  primarily  due 
particulate matter and nitrogen oxides per litre. 

(20)  European  Automobile  Manufacturers  Association,  2013 

data. 

(21)  Ermittlung  und  Bewertung  der  positiven  und  negativen 
Wirkungen  des  Treibstoffverkaufs  unter  besonderer 
Berücksichtigung  negativer 
externer  Umwelt-  und 
und 
Gesundheitseffekte 
maßnahmeninduzierte  Veränderungen,  Government  of 
Luxembourg, 25 November 2016. 

Status 

2012 

quo 

– 

17 

0.000.501.001.502.002.503.003.504.004.50DKSIHRELITNLCYMTFIBUEELVHUPOUKEU28IEATEA19ROPTSECZBEFRDELUESSKLTOtherTransport taxesEnergy taxesTotal environmental taxes 
                                                           
 
                                                           
3.1.2 Spending review  

The  adopted  tax  reform  is  expected  to  narrow 
the tax base. In addition, at least a part of fiscal 
revenues  remain  rather  fragile.  At  the  same 
time,  expenditure,  especially  that  age  related,  is 
projected to increase significantly.   

Government  expenditure,  as  a  proportion  of 
GDP,  is  below  the  euro  area  average,  however 
expenditure per inhabitant is one of the highest 
in  the  euro area  (see Graph  3.1.3).  At  41.5 %  of 
GDP  in  2015,  total  public  spending  appears  low 
compared  to  the  euro  area  average  of  48.4 %. 
However,  Luxembourg  continues  to  have  one  of 
the highest levels of public expenditure per capita 
in  the  EU,  even when the number  of  cross-border 
workers  is  taken  into  account.  These  workers 
benefit  from  several  elements  of  the  Luxembourg 
welfare  system.  Other  costs,  such  as  those  related 
to  transport  infrastructure,  would  probably  be 
lower,  were  it  not  for  the  large  amount  of 
commuting.  When  the  number  of  cross-border 
workers  is  included  in  the  denominator,  the  gap 
versus average spending in the euro area decreases 
considerably, but still remains significant. 

In  line  with  the  government  programme,  a 
spending  review  was  carried  out  in  2014. 
Aiming to reduce overall public spending through 
a  renewed  budgetary  strategy  focused  on  more 
efficiency  and  transparency  in government  action, 
or achieving the same results with less, the review 
produced  a  list  of  258  measures,  most  of  them 
spending  cuts.  The  consolidation  package  named 
'ZukunftsPak' was integrated into the 2015 budget 
and  its  implementation  is  planned  for  the  period 
2015-2018.  

3.1. Public finances and taxation 

Graph 3.1.3:  Total expenditure per inhabitants in 2015, 

(thousands of pps.) 

* Figures for LU have been corrected to include the number 
of cross-border workers.  
(1) Government outlays are measured in purchasing power 
parity to take account of the different level of prices across 
countries. 
Source: European Commission 

The  government's  planned  reform  of  the 
budgetary procedure envisages the introduction 
of  a  programme-based  budgetary  system.  The 
reform  aims  at  implementing  a  framework  for 
evaluation  and  audit  and  a  better  system  for 
infrastructure  projects.  A 
managing  major 
spending review mechanism for future reviews has 
not yet been integrated into the budgetary process. 

3.1.3 Fiscal framework 

The  design  of  Luxembourg's  national  fiscal 
framework has improved recently, as it became 
more  aligned  with  European  regulation.  A 
structural  balanced  budget  rule  was  introduced 
with the adoption of the Law of 12 July 2014. This 
was  also  done  with  a  view  to  transposing  the 
requirements  of  the  2011  Council  Directive  on 
budgetary  frameworks  and  the  Fiscal  Compact 
(Graph 3.1.4).(23)  

(23)  The  Fiscal  Rule  Index  is  calculated  by  the  Commission 
annually  based  on  self-declared  data  from  the  Member 
States.  The  latest  update  has  a  cut-off  date  of  end-2014. 
The index is based on five dimensions of the strength of all 
fiscal  rules  in  place  (legal  base,  room  for  revising 
bodies, 
and 
objectives,  monitoring 
enforcement mechanism and media visibility) and adjusted 
for the sector coverage for each country. 

enforcement 

18 

05101520253035LULU*DKATBEFISEFRNLDEEA-19IEITEU-28UKESSIELMTPTCZSKHUCYEEPLHRLTLVROBG 
 
                                                           
3.1. Public finances and taxation 

Graph 3.1.4:  The fiscal rule index in the EU, 2013 and 2014 

Source: European Commission 

3.1.4 Fiscal sustainability 

Luxembourg faces low fiscal sustainability risks 
in  the  short  and  medium  term.  However,  the 
need  to  meet  future  ageing  cost  increases  puts 
the country at medium fiscal sustainability risk 
in the long term. Specifically, this is indicated by 
the relatively sizeable value of the long-term fiscal 
sustainability  gap  indicator  S2,  at  4.4  percentage 
points  of  GDP.  These  risks  are  entirely  driven  by 
the  need  to  meet  future  increases  in  ageing  costs, 
in  particular  pension 
care 
expenditure. (25)  

long-term 

and 

Despite recent improvements, the setting of the 
multiannual expenditure ceiling is fraught with 
some  shortcomings.  First,  it  does  not  cover  all 
government  layers,  only  the  central  government 
sector.  The  binding  nature  of  the  ceilings,  an 
essential feature for ensuring their effectiveness, is 
not  safeguarded  by  law.  The  expenditure  ceilings 
the 
can  be  modified  at 
government to allow, for instance, for revisions in 
underlying  macroeconomic 
or 
respond  to  other  unforeseen  events,  without  the 
explicit  regulation  for  providing  explanations  for 
the  changes.  The  timely  availability  of  sub-
national  budgetary  (local  government)  figures  is 
still  not  guaranteed.  This  also  has  negative 
implications for budgetary planning. 

the  discretion  of 

assumptions 

There are some concerns with the plausibility of 
the macroeconomic projections underlying both 
annual  and  multi-year  budgetary  planning. (24) 
First, these macroeconomic forecasts do not appear 
to take into account the most recent and available 
economic 
lack  of 
harmonisation between the releases of updates and 
the  budgetary  calendar.  The  frequent  and  sizeable 
revisions  of  the  most  important  economic  figures 
also  undermine  the  credibility  of  the  budgetary 
projections.  

information,  reflecting 

the 

(24)  The  macroeconomic  forecasts  underlying  the  government 
budgetary planning are prepared by the "Institut national de 
la  statistique  et  des  études  économiques  du  Grand-Duché 
du Luxembourg" (STATEC). 

Pension 

Luxembourg pension system has benefited from 
a  steady  increasing  population  and  workforce 
(see  Graph  3.1.5). (26)  In  particular  the  number  of 
non-national  residents  and  cross-border  workers 
has 
increased  significantly  since  1990.  The 
financing  of  the  Luxembourg  pension  system  is 
based on a pay-as-you-go system and therefore on 
an 
the,  on 
average,    relatively  young  age  of  immigrants  and 

inter-generational  contract.  Given 

(25)  See  Debt  Sustainability  Monitor  2016 

(European 

Commission Institutional Paper no. 047, January 2017). 
(26)  Between  1990  and  2015  total  population  increased  by 
49.2% (compared to 9.0% on average in the EA19), while 
over the same period the labour force increased by 116.2%. 
The  composition  of  the  labour  force  has  experience  a 
significant  shift  as  the  share  of  frontier  workers  in  the 
overall labour force has moved from 33.6% in 2000 to 43% 
in 2015. 

19 

-2.0-1.00.01.02.03.04.0BGFRESNLSKITLVDEIELUROSEDKPLHRPTBEMTUKATELHUEELTCYFICZSI20132014 
                                                           
 
                                                           
3.1. Public finances and taxation 

contributions paid and pension benefits received is 
expected to fade out as the proportion of pensions 
paid  to  frontier-workers  equalize  or  exceed  the 
share  of  contribution  paid  by  them.  In  2015  a 
proportion  of  46.2%  of  pension  payments  was 
granted 
to  non-residents.  The  proportion  of 
pensions  paid  to  non-residents  has  been  steadily 
increasing  since  1995,  when  it  represented  less 
than  a  quarter  of  the  overall  number  of  pension 
payments. 

By  2040,  Luxembourg  will  face  a  significant 
in  age-related  public  expenditure, 
increase 
mostly  related  to  pension  liabilities.  According 
to the 2015 Ageing Report, the latter is expected to 
increase  by  3.3  percentage  points  of  GDP  up  to 
2040 (28),  compared  to  an  EU  average  increase  of 
0.4  percentage  points  of  GDP.  While  the  above 
increase is one of highest in the EU, it represents a 
sharp  downward  revision  of  estimated  pension 
expenditure  compared  with  the  2012  Ageing 
Report.    However,  the  revision  mostly  reflects 
more  favourable  demographic  assumptions  (see 
European  Commission,  2016a).    Simulations  run 
under  more  conservative  assumptions  would 
project  pension  expenditure  to  increase  to  20.0  of 
GDP in 2060, compared with 13.4% of GDP in the 
central 
of 
scenario, 
Luxembourg, 2017, p. 215). 

(see  Central  Bank 

The national authorities carried out a mid-term 
review  of  the  sustainability  of  the  pension 
system in 2016, one year ahead of schedule (29). 
On  December  2016  a  report  with  the  findings  of 
the  review  was  published  (Box  3.1.2.)  The  report 
presents an analysis of the expenditure trend based 
on  the  current  set  of  rules.  It  also  looks  at  the 
impact  of  alternative  demographic  and  economic 
scenarios  on  the  expenditure  projection.  On  the 
basis of the findings of the report, the government 
intends to discuss with social partners the possible 
financial 
measures  necessary 
consolidation of the pension system.  

to  ensure 

the 

largely 

reflect  more 

(28)  These  projections  represent  a  sharp  downward  revision 
compared  to  the  previous  2012  Ageing  report  projections 
and 
favourable  demographic 
assumptions, in the absence of a new pension reform. 
(29)  According  to  the  2012  pension  reform  a  review  of  the 
sustainability  of  the  pension  system  should  take  place 
every  5  years,  then  the  first  one  should  have  occurred  in 
2017. 

cross-border  commuters,  Luxembourg  has  so  far 
never  experienced  ageing  effects  that  would  have 
put  other  welfare  regimes  under  pressure.  On  the 
contrary, the continuous increase in the number of, 
on  average,  younger  active  foreigners  (both 
immigrants and cross-border commuters) has had, 
a  positive  effect  on  the  revenues  of  the  pension 
system  as  well  as  on  the  modest  increase  in  the 
average age of the workforce.  

Graph 3.1.5:  Population and employment evolution 

Source: European Commission 

Since  2009  new  pensioners  have  outnumbered 
new contributors, (27) but the annual amount of 
contributions  still  exceeds  payments.  In  2015, 
the  overall  amount  of  earning-related  pension 
contributions  exceeded  payments  by  around 
15.5 %. The excess revenues have fed the pension 
fund  reserves so  that at  the end of  2015,  the  fund 
owned  assets  worth  EUR  16.5  billion  (more  than 
30%  of  GDP).  Since  the  24 %  notional  payroll 
contribution  rate  is  higher  than  the  effective 
payroll  rate,  estimated  at  21.94 %  in  2015  the 
system  produces  surpluses  that  feed  the  pension 
reserves.  Nevertheless,  with  the  effective  payroll 
rate set to progress and to exceed the notional rate 
of  24 %  the  system  will  have  to  start  drawing  on 
its  reserves.  In  particular,  the  current  positive  gap 
with  regard  to  cross-border  workers  between 

(27)  In 2015, the number of new contributors increased by 2.5% 
compared  to  the  previous  year.  Nevertheless,  the  increase 
was  well  below  the  increase  in  the  number  of  new 
pensions,  In  light  of  the  large  number  of  pensions  paid  to 
non-residents,  most  of  which  are  not  completed,  the 
financial  situation  of  the  system  is  better  off  than  the 
demographic evolution shows. 

20 

9095100105110115120125070809101112131415LU - PopulationEA19 - PopulationLU - EmploymentEA19 - Employment 
 
                                                           
                                                           
3.1. Public finances and taxation 

In  2015,  the  average  effective  retirement  age 
was 61.3. (30) While the statutory retirement age to 
receive  the  old-age  pension  is  65,  only  less  than 
30 % of the overall number of people receiving an 
old-age  pension  (including  early  old-age  pensions 
at 57 and 60) was granted a pension at the age of 
65 (see Graph 3.1.6). 

The  effective  retirement  age  could  be  even 
lower,  if  specific  pre-retirement  schemes  or 
invalidity  pensions  were  taken  into  account.  A 
number  of  pre-retirement  schemes  (European 
Commission,  2014,  pages  13-14)  are  available 
from  the  age  of  57,  provided  the  conditions  for 
early  retirement  from  the  age  of  60  are  satisfied 
within the following 3 years. The draft law to limit 
early  retirement  (presented  to  Parliament  in  July 
2015) has not been passed yet. Its net impact is not 
clear  because  other  elements  such  as  salaries, 
health  or  working  conditions  play  a  major  role  in 
employees'  decisions  to  work  longer.  The  impact 
of  the  law  on  the  reclassification  of  workers  with 
disabilities  (implemented  since  January  2016)  on 

(30)  Estimation  based  on  national  information  as  published  at: 
http://www.isog.public.lu/islux/assurance-pension/analyse-
et-resultats/les-prestations.html. See Graph 3.1.6. 

reducing  the  number  of  people  entering  an  early 
retirement scheme has not been assessed yet. 

Graph 3.1.6:  Access to retirement by age 

Source: CNAP/IGSS 

The gender gap in pensions (40% in 2014) (31) is 
one  of  the  widest  in  the  EU,  although  it  has 

(31)  Cf. 

at 

http://www.isog.public.lu/islux/assurance-

pension/analyse-et-resultats/les-prestations.html. 

21 

0%5%10%15%20%25%30%575859606162636465 Box 3.1.2: Findings of the pension review.To carry out the medium-long term sustainability analysis of the pension system different scenarios have been used. The baseline scenario is built on the demographic and economic assumptions that have been used for the 2015 Ageing report and factor in the measures introduced with the 2012 pension reform. In particular, it includes the gradual implementation of the changes in the calculation method and the limitation to maximum 50% of the automatic adaptation of pension benefits to real wage evolution in case pension expenditure would exceed revenues. According to this scenario in 2060 the system will post a deficit of 4.0% of GDP as revenue will amount at 8.3% of GDP and outlays at 12.4% of GDP. A second scenario is built where the changes introduced with the 2012 pension reform are not taken into account. From the simulation it results that the measures in the reform have contributed to improve the sustainability of the system. In 2060, while revenues will not be different from the previous scenario, outlays will amount at 14.9% of GDP, 2.5% of GDP more than in absence of the reform. Finally, the review includes a scenario based on the less favourable demographic and economic assumptions, close to that underlying the 2012 Ageing Report. Under this scenario the pension system is expected to record a larger deficit of 8.2% of GDP in 2060, with revenues at 7.1% of GDP and outlays at 15.3% of GDP. The conclusions of the review are that the pension system is current on a comfortable position recording recurrent surpluses, which allowed cumulating sizeable pension reserves (around 30% of GDP in 2015). Nevertheless, additional measures seem needed to tackle the expected increase in expenditure.  
                                                           
 
 
                                                           
 
 
 
 
 
3.1. Public finances and taxation 

their  own  pension 

narrowed  by  5.1  percentage  points  since  2013. 
This  gap  is  primarily  caused  by  women  receiving 
low  pensions  rather  than  not  having  access  to  a 
pension  at  all.  The  2012  pension  reform  shows 
limited  progress  towards  allowing  more  women 
accumulating 
rights.  A 
government working group will be set up to assess 
the  voluntary  insurance  introduced  by  the  Law  of 
introduce 
it  aims 
21  December  2012; 
compulsory 
social 
insurance.  Poverty 
exclusion risks (AROPE) for women aged over 65, 
albeit  lower  than  the  EU  average,  have  increased 
from 6.9 in 2014 to 9.5 in 2015. The recent reform 
of family allowances seeks to remedy this situation 
(Section 3.4.3). 

and 

to 

Long-term care   

independent  body  overseeing 

The  government  proposed  a 
long  awaited 
reform of the long-term care insurance in June 
2016.  It  aims  to  guarantee  a  better  focus  on 
individual  needs,  simplified  procedures  and 
institutions,  and  to  maintain  the  social  ties  of 
dependent  people  without  changing  the  guiding 
the  system. 
principles  and  mechanisms  of 
Maintaining a dependent person integrated in their 
family  would  be  guaranteed  by  paying  more 
attention to informal carers, providing more respite 
care, training and more regular follow-up, together 
with a proposal to more frequently re-assess needs. 
The  evaluation  and  orientation  division  of  the 
General  Social  Security  Inspectorate  (IGSS)  will 
the 
become  an 
assessment  of  the  delivery  of  the  insurance. 
Adequate controls would help improve the quality 
of  services  provided  and  tailor  them  better  to  the 
needs of individuals. A biannual assessment report 
will  also  be  drafted.  The  reform  is  expected  to 
enter into force in the second half of 2017. It could 
potentially  contribute  to  alleviate  concerns  related 
to 
long-term  care 
increases 
expenditure,  which  is  projected  to  increase  from 
1.5%  to  3.2%  of  GDP  until  2060,  thereby  more 
than  doubling  with  respect  to  the  current  level. 
When  additional  cost  drivers  with  respect  to 
strictly  demographic  and  health-status  related 
factors  are  considered,  an  increase  of  larger 
magnitude  is  projected  with  expenditure  on  long-
term care reaching 4.8% of GDP. 

the  expected 

in 

22 

 
3.2.  FINANCIAL SECTOR 

3.2.1.  FINANCIAL SECTOR  

from 

spill-overs 

Luxembourg’s  financial  sector  weathered  the 
financial  crisis  of  2008-2009  relatively  well 
compared  to  its  neighbours,  helped  by  its 
specialisation in low-risk niches. Combined with 
the  relatively  small  scale  of  the  domestic  banking 
sector,  this  has  helped  to  mitigate  some  of  the 
negative 
unfavourable 
developments in international markets. Most banks 
in  Luxembourg  are  foreign-owned  and  have 
negligible  direct  links  with  the  resident  economy. 
Bank  assets  expressed  as  a  multiple  of  national 
GDP are by far the highest in Europe, but modest 
in absolute terms (Graph 3.2.1). However, indirect 
links between the Luxembourg banking sector and 
the financial system could remain sources of risks 
in relation to the potential transmission of financial 
shocks  to  the  banking  sector,  domestically  and 
abroad, and even to the real economy.  

Graph 3.2.1:  Size of the financial sector (EUR billion) 

Source: European Central Bank, own calculation 

Luxembourg is the  largest fund administration 
centre worldwide after the USA, having created 
a  tax  and  regulatory  framework  especially 
suited  for  fund  vehicles.  In  relative  terms, 
investment  funds  are  the  most  important  financial 
intermediaries.  Their  assets  increased  on  average 
14 % per year since 2008-2015, amounting to EUR 
3.6  trillion  by end  2016.  This  is roughly  70  times 
Luxembourg's  GDP.  Banks  are  the  second  most 
important  financial  intermediaries.  Their  assets 
have  oscillated  between  EUR  0.7  and  0.8  trillion 
since  2013,  about  15  times  the  country's  GDP. 

Assets held by  insurance  companies  totalled  EUR 
219 billion in 2015, more than four times GDP and 
more  than  double  what  it  was  at  the  end  2008. 
Although small compared to investment funds and 
banks,  Luxembourg's  insurance  sector  is  the  EU's 
biggest when  assets  are  expressed  as  a  proportion 
of GDP. 

creditors 

Luxembourg's  banks  have  the  highest  capital 
ratios  in  Europe.  Loan-to-deposit  ratios  are  well 
below 100 %, because most Luxembourg banks act 
as 
institutions. 
Profitability  has  been  sound  and  stable.  The  non-
performing loans ratio is the lowest in Europe and 
their  coverage  rate  is  in  line  with  the  European 
average (Table 3.2.1). 

their  mother 

to 

Luxembourg  chose  a  tri-partite  supervisory 
model.  Investment  funds  and  banks  are  overseen 
by  the  Commission  de  Surveillance  du  Secteur 
Financier  (CSSF).  At  the  end  of  2015  out  of  143 
banks established in Luxembourg, 59 were directly 
supervised  by  the  ECB.  The  CSSF  identified  six 
other  systemically  important  institutions  amongst 
them. These 59 banks represented 74 % of the total 
assets;  73  banks  were  considered  less  significant 
institutions  and  11  banks  were  branches  of  banks 
whose  headquarters  were  established  outside  the 
EU and did not fall within the SSM's remit.  

Luxembourg  introduced  a  number  of  macro-
prudential measures in 2016. The countercyclical 
capital buffer (CCB) was introduced on 1 January 
2016 and calibrated at 0 %. It has been maintained 
at  this  level  at  each  quarterly  re-setting,  as 
measured  by  the  credit-to-GDP  gap. (32)    The 
CSSF set the capital buffer requirements for the six 
other  systemically  important  institutions  between 
0.5 - 1%. (33)   

(32)  In  accordance  with  Article  130(2)  CRD  IV,  in  January 
the  CSSF  exempted  small  and  medium-sized 

2016 
investment firms from the countercyclical capital buffer. 
(33)  These banks are Deutsche Bank LU (1%), Société Générale 
Bank  &  Trust  (1%),  Banque  et  Caisse  d'Epagne  de  l'Etat 
Luxembourg  (0.5%),  BGL  BNP  Paribas  (0.5%),  CACEIS 
Bank LU (0.5%) and Banque Internationale a Luxembourg 
(0.5%). 

23 

0200040006000800010000BEFRLUNLUKDETotal Assets of Credit InstitutionsDomestic credit institutionsForeign-controlled subsidiaries and branches 
 
 
                                                           
3.2. Financial sector 

Table 3.2.1: 

Financial soundness indicators, all banks in Luxembourg 

* ECB aggregated balance sheet loans excluding to gov and MFI / deposits excluding from gov and MFI 
Source: ECB CBD, IMF 

3.2.2.  CREDIT SUPPLY AND HOUSEHOLDS' 

INDEBTEDNESS 

time  current  real  estate  policies  encourage  house 
ownership over renting. 

Graph 3.2.2:  Real house prices evolution 

Luxembourg's  real  estate  market  shows  a 
constant  dynamism  with  house  prices  growing 
steadily  for  several  decades.  In  2015  house 
prices (34) increased by 6.1 %, the steepest increase 
since  the  outbreak  of  the  financial  crisis  (Graph 
3.2.2).  Demand  for  loans  for  house  purchase 
continued  expanding  in  2015  (6.7 %).  In  addition 
to  strong  macroeconomic 
fundamentals  and 
financial 
demographic 
conditions reflected in low interest rates and easier 
access  to  credit  may  have  contributed  to  the 
increase  in  home  loans  and  maintained  the  strong 
house price dynamics.  

favourable 

growth, 

Steep  increasing  house  prices  have  had  a 
negative  impact  on  households'  capacity  to 
access  property.  Housing  affordability  measured 
as  the  price-to-income  ratio  has  continuously 
deteriorated  since  2000,  except  in  2008  and  2009 
(Graph 3.2.3.)  House  prices  have  increased  more 
quickly than households' disposable income. While 
the affordability ratio has decreased between 2010 
and 2015 by 5.2 % in the euro area as a whole, it 
increased  by  17.8 %  in  Luxembourg.  This  means 
accessing property is taking an increasingly higher 
toll on the finances of households.  

The  price-to-rent  indicator  shows  a  similar 
evolution  (Graph  3.2.4),  indicating  a  possible 
over-evaluation  of  house  prices.    At  the  same 

(34)  The  deflated  house  price  index  estimated  as  the  ratio 
between  the  house  price  index  and  the  national  accounts 
final  consumption  expenditure 
deflator 
(households and non-profit institutions serving households 
(NPISHs). Source: Eurostat. 

for  private 

Source: European Commission 

Measures  under  the  2017  tax  reform  have  the 
potential  to  increase  further  the  system  bias  in 
favour  of  ownership.  This  is  the  result  of  (i)  the 
legislated increase in the tax deduction possibilities 
under  a  home  savings  contract (35)  (with  the 
maximum amount deductible set at EUR 1.344 per 
year,  up  from  EUR  672  currently);  (ii)  the 
legislated  abolition  of  the  deemed  rental  value  of 
one's  own  residence  and  (iii)  the  increase  in  the 
ceiling  of  the  'deductible  passive  interests'  linked 
to  a  mortgage  loan.  Fiscal  incentives  that  favour 
ownership over renting often go hand-in-hand with 
households'  excessive 
is 
because a large part of these tax subsidies is likely 
to be capitalised into house prices. 

indebtedness.  This 

(35)  Only  Individuals  up  to  40  years  old  can  benefit  from  the 

measure. 

24 

9095100105110115120125070809101112131415BEFRDELU(%)201020112012201320142015Non-performing loans0.20.40.10.2--Coverage ratioLoan to deposit ratio*6965.860.954.952.451.8Tier 1 ratio16.217.119.622.318.520.2Return on equity13.05.110.49.911.011.0Return on assets0.70.30.60.60.70.8 
                                                           
 
                                                           
 
 
 
3.2. Financial sector 

Graph 3.2.3:  Price to income 

Graph 3.2.4:  Price to rent 

Source: European Commission 

Source: European Commission 

the 

More than 80 % of households' indebtedness is 
mortgage-related 
household 
and 
indebtedness ratio mirrors real estate inflation. 
Over  the  last  10  years  household  debt  has  been 
increasing,  to  reach  a  level  of  GDP  close  to  the 
euro  area  average.  Recent  figures  show  that,  on 
average,  one  third  of  a  household's  disposable 
income is needed to service mortgage debt. Since a 
large part of the loans are at variable rate, a sudden 
hike in interest rates could put some households at 
risk  of  defaulting,  especially  those  with  low 
incomes.  

in  the  housing  market  can 
Developments 
contribute  significantly  to  vulnerabilities in  the 
financial sector, as the European Systemic Risk 
Board  has  warned.  (36)  The  potential  risks 
stemming  from  housing  price  developments  are 
linked to the level of banks' exposure to mortgage 
credit and the indebtedness of households. In 2013 
the national macro-prudential authority introduced 
for 
capital 
more 
mortgages that exceed the 80 % loan-to-value ratio 
threshold.  Risks  for  the  Luxembourg  financial 
sector  appear  to  be  limited  in  the  short  term,  as 
banks  are  well  capitalised  and  the  proportion  of 
non-performing loans remains low. 

requirements 

demanding 

(36)  The  European  Systemic  Risk  Board 

issued  on  22 
September 2016 a warning to Luxembourg  as it identified 
medium-term  vulnerabilities  in  the  residential  real  estate 
sector  in  Luxembourg,  in  relation  to  the  combination  of 
high residential real estate prices and increasing household 
indebtedness.  

Vulnerability risks could increase in the case of 
an  abrupt  fall  in  house  prices.  Based  on  the 
price-to-income  and  the  price-to-rent  ratios  house 
prices  in  Luxembourg  appear  to  be  overvalued. 
Nevertheless when the evolution of other variables 
as  population  and  real  disposable  income  is 
factored  in,  the  current  level  and  evolution  of 
house  prices  appears  to  be  in  line  with  the 
fundamental  (see  Graph  3.2.5.)  and,  diminish  the 
risks of a sudden fall in house prices.(37)   

3.2.3.  THE HOUSING CHALLENGE 

Insufficient  housing  and  building  land  supply 
explains  a  large  part  of  the  steady  increase  in 
real estate prices. Luxembourg's large population 
and employment increase between 2000 and 2015, 
compared  to  other  euro  area  countries,  has  fed  a 
strong  demand  for  housing.  At  the  same  time 
residential  construction  has  suffered  from  serious 
underinvestment.  Except  for  2008  and  2009  the 
number  of  dwellings  built  (as  measured  by  the 
number of building permits granted 2 years earlier) 
has  remained  below  6300(38),  the  quantity of  new 
entities  estimated  to  be  needed  to  keep  up  with 

(37)  BCL, Revue de stabilité financière, 2016. 
(38)  STATEC, Projection des ménages privés et des besoins en 
logements 2010-2030 », Working Papers, Septembre 2011, 
p. 51. An average annual population increase of 1.27% was 
used  as  underlying  working  assumption.  Nevertheless 
between 2010 and 2015 population increased by an annual 
average  of  2.32%,  implying  that  an  even  higher  housing 
needs.   

25 

6070809010011012013019992000200120022003200420052006200720082009201020112012201320142015LUEA19506070809010011012019992000200120022003200420052006200720082009201020112012201320142015LUEA19 
 
                                                           
 
                                                           
3.2. Financial sector 

renewed their efforts to produce updated plans for 
coordinated urban developments. (40) 

it 

is  owned  by 

The  scarcity  of  supply  has  been  attributed  to 
several  factors,  mainly  the  lack  of  available 
land.    A  recent  census (41),  shows  that  in  2013 
around  9 %  of  the  surface  of  the  country  was 
defined as urbanised or to be urbanised according 
to the general development plans (PAG). However, 
only  around  8 %  of 
the 
municipalities  and  the  state,  while  most  of  it 
belongs to the private sector. Private owners do not 
have any major incentive to sell land or buildings 
because  they  generate  good  rents  and  increase 
significantly in value year after year. In the current 
low interest environment it is hard to conceive an 
investment with such a high return combined with 
that  low  risk.  It  is  the  incapacity  to  mobilise  this 
land  that  constrains  housing  supply  and  not  the 
lack of constructible land in itself.  

The  Housing  Pact  (Pacte  de  Logement)  was 
adopted  in  2008  to  overcome  these  constraints 
and give municipalities specific tools to increase 
the  supply  of  housing  and  compensate  for  the 
limited  amount  of  land  at  their  disposal.  These 
consisted  of  the  right  of  first  refusal  for  the 
municipalities,  and  some  additional  fiscal  and 
the 
administrative  measures.  They 
possibility of imposing a local tax on specific land 
to  avoid 
that  has  not  been  developed  yet 
speculation.  Nevertheless,  according 
the 
findings  of  a  recent  review  the  measure  did  not 
yield  the  expected  results.  A  working  group  of 
representatives  of  the  state  and  the  municipalities 
was  set  up  in  2016  to  formulate  proposals  for  a 
new Housing Pact.  

include 

to 

Recurrent  property  taxes  are  low.  Revenues 
from  recurrent  property  taxes  on  real  estate 
amounted to 0.1 % of GDP in 2014, lower than the 
euro  area  average  of  1.4 %  of  GDP.  Outdated 
cadastral  values  are  the  reason  for  this,  because 
levies are computed according to a scale that dates 
back  to  1941  and  is  not  aligned  with  real  current 
values.  Low  tax  rates  on  real  estate  properties, 
combined  with  interest  tax  relief,  generally  result 
in a bias towards home ownership.  

constantly  growing  demand.  In  fact,  supply  has 
proved  largely  inelastic  to  demand.  Over  the  last 
20  years  only  an  annual  average  of  2600  housing 
units has been built.  

Graph 3.2.5:  Overvaluation gap with respect to price to 

income, price to rent and fundamental model 
valuation gaps 

(1)  Long-term values for the price to income and price to 
rent ratios are computed over 1995-2015. For the model 
based valuation gaps, a Vector Error Correction Model has 
been estimated for a panel of 21 EU countries, using a 
system of five fundamental variables; the relative house 
price, total population, real housing investment, real 
disposable income per capita and real long-term interest 
rate.  
Source: European Commission 

that 

so  rapid 

Economic  developments  in  Luxembourg  have 
the  economic  and 
been 
demographic  scenarios  underlying  existing 
landscape plans have quickly become outdated. 
Plans (39) were prepared in 2004 for a harmonious 
and  coordinated  development  of  the  country's 
landscape.  However,  population  and  employment, 
and  in  particular  the  number  of  cross-border 
workers  as  a  proportion  of  total  workforce  have 
changed more quickly than expected making those 
plans  outdated.  High  and  increasing  house  prices, 
in  particular 
its 
to  urban  sprawl 
surrounding  areas,  has 
low  population 
significantly 
density  areas  experiencing 
faster  population 
growth rates than urban areas. This in turn has led 
to  a  large  increase  in  commuting  within  the 
country  (Section  3.4.5).  Recently,  the  authorities 

in  Luxembourg  city  and 

increasing,  with 

led 

(39)  Luxembourg’s national concept for transport and territorial 

development (IVL). 

(40)  See  the  initiative  "Wéi  e  qualitative  Wuesstem  fir  ein 
Land", available at http://www.gouvernement.lu/6466657. 
(41)  L'Observatoire  de  l'Habitat,  Le  potentiel  foncier  destiné  à 

l’habitat au Luxembourg en 2013, October 2015. 

26 

-50-40-30-20-100102030405019951997199920012003200520072009201120132015Model-based valuations gapPrice to income vs. hist. avg.Price to rent vs. hist. avg. 
 
                                                           
                                                           
3.2. Financial sector 

Housing Fund in charge of managing the country's 
largest  stock  of  social  housing.    Moreover,  in  the 
context of the planned reform of the 19 July 2004 
law on local planning it is foreseen to introduce a 
new type of contract (Baulandvertrag).  Under this 
contract 
the 
possibility  of  introducing  the  obligation  for  the 
fixed  period. 
landowner 
Municipalities  will  be  able  to  impose  penalties, 
such  as  the  reclassification  of  the  land  as  not 
suitable  for  construction,  in  case  the  land  is  not 
used. 

local  authorities  will  have 

to  build  within  a 

the 

The  government  is  engaged  in  promoting  the 
supply  of  subsidised  housing. (42)  In  January 
2017, 61 new projects of subsidised housing have 
been approved for an additional cost of EUR 42.1 
million.  This  will  lead  to  the  construction  of 
10.981  new  dwellings,  of  which  53.4%  is  to  be 
sold and 46.4% to be rented out. 

for 

the 

ahead 

challenge 

All  in  all,  despite  the  number  of  measures 
adopted  and  envisaged  to  increase  housing 
supply, 
the 
Luxembourg  authorities  remains  sizeable.  In 
view of the projected strong increase in population 
and  workforce  (Section  3.1.4  and  European 
Commission, 2016b) housing demand is projected 
to  remain  strong  in  the  years  ahead.    Conversely, 
and  in  spite  of  the  measures  mentioned  above, 
housing  supply  is  not  expected  to  accelerate 
significantly.  

(42)  See 

for 

more 

details: 

http://www.gouvernement.lu/6646229/13-conseil-
gouvernement 

The government's recent action aims to remove 
certain  constraints  on  the  housing  supply.  The 
recently adopted tax reform contains measures that 
aim  to  promote  the  placing  on  the  market  of 
dwellings  intended  for  sale.  Capital  gains  on  real 
estate sales between 1 July 2016 and 31 December 
2017 will be taxed at a quarter of the standard rate. 
A similar measure in the past produced significant 
results.  It  has  to  be  noted  however  that  in  the 
previous  episode  the  measure  remained  in  place 
for a longer time period, from 2002 to 2007. Given 
that this time the measure is time-limited (less than 
2  years,  a  relatively  short  term  in  real  estate 
market)  and  given  the  continuous  trend  towards 
higher  prices, 
it  will 
that 
significantly increase the housing supply.  

is  not  certain 

it 

The  Omnibus  law was  adopted  at  beginning  of 
2017.  It  contains  measures  that  could  have  a 
material  impact  in  reducing  the  length  of  the 
procedure  to  obtain  a  building  permit  (European 
Commission,  2016b),  and  then  it  could  contribute 
to increase housing supply. 

The authorities also plan to increase the supply 
of affordable housing. Housing costs and housing 
exclusion  are  among  the  major  challenges  for 
Luxembourg’s  social  inclusion  policies.  Housing 
costs  still  represented  more  than  40 %  of  their 
disposable household income for 27.9 % of people 
at risk of poverty in 2015. The planned tax reform 
provides for the non-taxation of 50 % of rents from 
the  rental  of  buildings  to  government-regulated 
bodies  such  as  the  ‘Agence  Immobilière  Sociale". 
For  several  years,  the  government  has  been 
encouraging  local  authorities  and  private  partners 
to increase the (social) housing stock (for example 
by  obliging  a  duty  on  property  developers  to 
include  at  least  10%  of  social  housing  in  new 
developments), with limited results to date. Further 
progress has been made with the introduction of a 
rent  subsidy  from  January  2016  for  low-income 
households  (around  the  minimum  wage)  if  their 
monthly  rent  on  the  private  market  exceeds  33 % 
of their net disposable income. So far this measure 
has  not  been  much  used:  the  authorities  only 
received 3000 applications (19 600 expected).  

Additional  measures  to  increase  the  supply  of 
housing are planned by the authorities. In order 
to  increase  the  supply  of  affordable  and  social 
housing they have proposed to Parliament a reform 
to  improve  the  operational  efficiency  of  the 

27 

 
 
                                                           
3.3.  LABOUR MARKET, EDUCATION AND SOCIAL POLICIES 

3.3.1.  LABOUR MARKET  

labour  market 

challenges.  The 

The labour market in Luxembourg continues to 
perform  well  but  unemployment  has  increased 
over  time and  weaker  labour  market  outcomes 
for  specific  groups  still  constitute  important 
policy 
is 
characterised  by  continued  employment  growth 
and  an  unemployment  rate  that  is  among  the 
lowest in the EU. Nevertheless, unemployment has 
significantly  increased  since  2011,  especially  for 
medium- and low-skilled workers. Employment is 
to  high  value-added  services 
shifting  further 
tending to employ high-skilled workers. Aggregate 
employment and activity rates have increased over 
time, with an important composition effect at play: 
tertiary education attainment has been consistently 
increasing and people with tertiary education have 
higher activity and employment rates. However, in 
2015  employment  and  activity  rates  did  not 
improve.(43)  The  strong  net  employment  creation 
can be attributed mostly to the continuous increase 
in the number of cross-border workers, who make 
up around 45% of the workforce, many employed 
financial 
in  highly  specialised  sectors 
services).   

(e.g. 

Improving  older  workers'  attachment  to  the 
labour market remains a key challenge as they 
still have one of the lowest employment rates in 
the  EU.  Generous  early  retirement  arrangements 
coupled  with  financial  disincentives 
to  work 
embedded in the tax and benefit system contribute 
to this low employment rate. Women's attachment 
to the labour market is also weak and characterised 
by a high amount of part-time employment, largely 
due  to  high  financial  disincentives  to  work  for 
second earners. 

Employment  of  older  workers:  disincentives  to 
work and employability  

The  employment  rate  of  older  workers  (55-64) 
remained  at  around  40 %  in  2015,  one  of  the 
lowest  in  the  EU,  (Graph  3.3.1)(44)  and  it  has 
low 
broadly 

since  2010.   The 

stagnated 

(43)  Provisional 2016 LFS quarterly data also do not point to an 

improvement. 

(44)  Due  to  a  redesign  of  the  Labour  Force  survey  in  2015, 
precise  percentages  are  not  given  but  annual  data,  in 
combination  with  quarterly  2016  data  suggests 
that 
employment  rates  of  older  workers  have  not  improved  in 
2015. 

employment  rate  of  older  workers  is  due  to  high 
inactivity in this age group and, to a lesser extent, 
to unemployment, which is well below the level of 
the  average  working  age  population.  While  life 
expectancy is continuing to increase (from 82.7 in 
2006 to 85 years in 2014 for women and from 77.6 
to  80.5  years  for  men),  the  employment  rate  for 
people  aged  between  60  and  64  is  17 %  (the 
second  lowest  in  the  EU,  compared  to  an  EU 
average  of  38.3 %),  while  51 %  of  persons  older 
than  65  consider  their  health  to  be  very  good  or 
good compared to the EU average of 38 %.  

Graph 3.3.1:  Employment rates by age 

Source: Eurostat 

is  a  significant  variation 

There 
in  older 
workers’  employment  rates  according  to  their 
educational  attainment.  The  employment  rate  of 
older workers with higher qualifications is 60.6 % 
International  Standard  Classification  of  Education 
(ISCED 5-8) (45), a much lower 34.3 % for ISCED 
3-4  and  only  25.2 %  for  ISCED  0-2.  Older 
low-skilled,  are  also 
the 
workers,  especially 
particularly affected by long-term unemployment.  

(45)  According  to  the  ISCED  2011  definition  there  are  nine 
levels  of  education,  from  level  0  to  level  8  (tertiary 
education  is  more  detailed):  ISCED  0:  Early  childhood 
education (‘less than primary’ for educational attainment); 
ISCED  1:  Primary  education;  ISCED  2:  Lower  secondary 
education;  ISCED  3:  Upper  secondary  education;  ISCED 
4: Post-secondary non-tertiary education; ISCED 5: Short-
cycle tertiary education; ISCED 6: Bachelor’s or equivalent 
level;  ISCED  7:  Master’s  or  equivalent  level;  ISCED  8: 
Doctoral or equivalent level. 

28 

02040608010015-1920-2425-2930-3435-3940-4445-4950-5455-5960-6465-69LU2015MaleFemale% of population% of population 
 
                                                           
 
                                                           
3.3. Labour market, education and social policies 

Their unfavourable labour market performance 
can be partly attributed to high disincentives to 
work  embedded  in  the  tax  and  benefit  system. 
Inactivity  traps  are  high  for  various  family  types 
across  the  wage  spectrum,  in  particular  for  low 
income  earners 
(see  European  Commission, 
2016a). The results of micro-simulations run using 
EUROMOD  show  that  the  financial  disincentives 
are comparatively higher for older workers (Table 
3.3.1).     

Table 3.3.1:  METR by age group, based on EUROMOD 

(1)  The METRs are an indicator of incentives to work resulting 
from the combined effect on net income from work of 
increasing taxes and social security contributions and 
decreasing benefits. 
Source: Joint Research Centre. 

remains  stalled,  awaiting  the  outcome  of  tripartite 
negotiations that could lead to major modifications 
(see Section 3.1.4 for details of the planned law on 
early retirement and the law on reclassification).  

Labour market participation of women 

labour  market  potential 

While  the  employment  rate  of  women  has 
increased  since  2008  to  reach  65.4 %  in  2015, 
their 
remains 
underused.  This  largely  reflects  the  high  gender 
gap in part-time employment (28.1 pps.): the part-
time  employment  rate  for  women  is  one  of  the 
highest in the EU (7th) and that of men one of the 
lowest  (21st).  Gender  differences  in  employment 
rates also increase with age. The employment rate 
of  women  already  declines  considerably  from  the 
45-49 age group.   

Graph 3.3.2:  Low-wage trap for second earners in a couple, 

2015 

of 

can 

but 

that 

older  workers, 

Targeted  measures  have  been  adopted  to 
improve  the  employability  and  labour  market 
a 
attachment 
comprehensive  strategy  has  not  been  put 
forward.  Two  new  active  labour  market  policy 
schemes  for  jobseekers  over  45,  managed  by  the 
Public  Employment  Service  (PES)  entered  into 
force  in  2016.  Both  schemes  are  intended  for 
companies 
hiring 
opportunities.  No  information  on  their  impact  is 
available  yet.  Older  jobseekers  can  benefit  from 
the  specific  personalised  support  depending  on 
their  situation 
labour  market.  This 
personalised support has been mainstreamed for all 
PES agencies as part of the overall reform passed 
in  2013  (see  European  Commission,  2016a).  The 
Age  Pact,  a  package  of  measures  to  keep  older 
workers  in  employment,  submitted  to  Parliament 
in April 2014, is still pending due to the very slow 
legislative  process  for  its  adoption. (46)    The  bill 

provide 

real 

the 

in 

(1) Low-wage trap for second earner in two-earner couple 
with two children, principal earner with 100% of average 
wage, second earner moving from 33% to 67% of average 
wage. The low-wage trap is defined as the rate at which 
taxes are increased and benefits withdrawn as earnings rise 
due to an increase in work productivity. 
Source: European Commission, OECD 

The  low-wage  trap  for  second  earners,  at 
41 % (47),  is  relatively  high  in  the  EU  context, 

(46)  Within  3  years  of  its  adoption,  companies  with  more than 
150 employees would have to present an age management 
plan  focusing  on  at  least  three  of  the  following  issues: 
recruiting  older  workers,  facilitating  career  changes, 
improving  working  conditions,  giving  access  to  life-long 
learning  and  passing-  skills  on  to  younger  generations. 
Financial  support  for  the  implementation  of  such  plans  is 

also  planned  for  smaller  companies  willing  to  submit  an 
age management plan. The reform will only cover 39% of 
employees. 

(47)  Percentage of the gross earnings that is 'taxed away' by the 
combined effects of the withdrawal of benefits and higher 
tax and social security contributions. 

29 

Age groupMETR18-29 years33.030-39 years39.440-49 years40.050-54 years40.555-59 years41.760-64 years43.5-20-10010203040506070BEBGSIDEFRATPTLUITDKFINLHUEU28IEROUKLVPLSEHRCZLTEEESELMTSK 
 
 
 
                                                           
 
                                                                                   
3.3. Labour market, education and social policies 

continue  to  be  the  case  up  to  2025.  Financial  and 
administration  professionals,  ICT  professionals, 
medical  doctors  and 
logistic 
engineers are in high demand.(48)  

technical  and 

Graph 3.3.3:  Sectorial distribution of employment 

Source: European Commission 

in 

the  PES 

department 

announced  by 

recruitment  goals 

The population is upskilling in response to these 
shifts  in  labour  demand,  but  older  generations 
may  continue  to  feel  the  impact  of  these  shifts 
until  they  retire.  The  government  is  currently 
working on a strategy for logistics that could pave 
the  way  for  career  opportunities  for  the  less 
qualified resident population. The recently created 
employers’ 
has 
strengthened  links  with  the  business  community. 
The 
the 
Luxembourg  Employers'  Association  (over  5000 
jobseekers  over  3  years  compared  to  2014)  are 
likely  to  be  met.  Relevant  training  is  proposed, 
focusing  on  new  occupations  in  ICT  and  logistics 
(see  European  Commission,  2016a,  on  Active 
labour  market  policies).  To  adapt  vocational 
education  and  training  to  labour  market  needs,  a 
law was adopted in March 2016, aiming to ensure 
quality learning outcomes. It is applicable from the 
beginning  of  the  2016/2017  school  year.  In 
collaboration  with  the  professional  chambers,  the 
government  will 
the 
put 
implementation  of  quality  assurance  for  work-
based  learning  and  define  a  process  aimed  at  not 

emphasis 

on 

(48)  CEDEFOP  (2016):  Skills  Panorama,  analytical  highlights. 
Luxembourg: Mismatch priority occupations. Available at:  
http://skillspanorama.cedefop.europa.eu/en/analytical_highligth

s/luxembourg-mismatch-priority-occupations. 

(Graph 3.3.2). The tax system plays an important 
role  in  this  respect.  The  mandatory  joint  taxation 
system  for  married  couples  can  in  fact  provide 
strong disincentives to work for the second earner 
in  a  couple.  The  tax  reform (Section  3.1.1.)  gives 
married couples the option to choose either joint or 
individual  taxation.  When  choosing  to  change  in 
favour  of  individual  taxation,  a  couple  must  then 
opt  for  individualisation  with  income  reallocation 
or  strict  individualisation.  However,  only  strict 
individualisation  of 
system  would 
the 
substantially remove the tax disincentive to take up 
more work for second earners. 

tax 

In recent years, the government has intervened 
to  remove  several  benefits  based  on  household 
income that resulted in disincentives for women 
to  participate  in  the  labour  market.  Over  2015 
and 2016 the government initiated a review of the 
whole set of family-related transfers. This resulted 
the  education  and  maternity 
in  abolishing 
allowances, bringing social security to the needs of 
a  modern  society  and  abolishing  some  other 
benefits. At the same time, parental leave has been 
encouraged,  enabling  parents  to  take  time  off  to 
care for their children while keeping an attachment 
to the labour market (Section 3.1.4).  

The  labour  market  performance  of  immigrant 
women  from non-EU  countries  is also  weak.  In 
2015 the employment rate of women from non-EU 
countries  was  41.5 %  as  compared  to  64.7 %  for 
Luxembourgish women, resulting in a gap of 23.2 
pps., well above the EU average of 18.4 pps. One 
reason  for  this  could  be  that  most  women  from 
non-EU  countries  (75 %)  residing  in  Luxembourg 
came 
(working) 
husbands. The design of the tax and benefit system 
also plays a role. 

to  accompany 

there 

their 

Mitigating  the  impacts  of  sectorial  shifts  in 
labour demand 

The  unemployed  are  more  likely  to  be  elderly, 
male,  medium-  and  low-skilled  workers,  due 
partly to long-term changes in the employment 
structure. For several years, employment has been 
shifting  gradually  away  from  manufacturing, 
employing  mostly 
low-  and  medium-skilled 
workers,  towards  high-skilled  services  employing 
predominantly  high-skilled  workers.  Occupations 
with  shortages  are  all 
requiring  high 
qualifications  and  forecasts  show  that  this  will 

jobs 

30 

0%10%20%30%40%50%60%70%80%90%100%1998200020022004200620082010201220142016Public sectorIT, fin. and insurance,real estate, profess.act, admin and supportTrade, transport,storage,accommodation andfoodConstructionIndustry withoutconstructionAgriculture 
 
                                                           
3.3. Labour market, education and social policies 

Luxembourg, 2015). There was a sharp increase in 
the  number  of  minors  applying  for  international 
protection  in  2015/2016  (Ministry  of  Education, 
2016). Special measures to address this intake have 
in  primary  and 
included  welcome  classes 
secondary  schools  focussed  on 
the 
learning 
language of instruction. These are also available to 
young adults.  

Luxembourg's early school leaving rate rose by 
3  pp  in  2015,  to  9.3 %.  While  the  rate  is  still 
below the EU average of 11 % and Luxembourg's 
Europe  2020  national  target  of  10 %,  the  increase 
from the previous year is still substantial. In 2014, 
early  school  leaving  rates  were  much  higher 
(15.1 %) for native-born children with both parents 
born  outside  of  the  EU  than  for  native-born 
without  a  migration  background  (5.4 %).  On  the 
positive  side,  virtually  all  children  participate  in 
early  childhood  education  and  care  (ECEC)  from 
age  four.  An  amendment  of  the  bill  on  youth, 
passed 
introduced  mandatory 
quality  standards  for  all  education  and  childcare 
services, parental assistants and youth centres. This 
can  help  prevent  early  school  leaving  in  the  long 
term. 

in  April  2016, 

from 

internship  positions. 

enterprises, 
and 

discouraging  companies,  especially  small  and 
offering 
medium-sized 
apprenticeship 
In 
September  2015,  a  bill  was  passed  on  financial 
support  for  companies  that  invest  in  life-long 
learning  for  their  employees.  It  also  covers  work 
adaptation training for low-skilled workers. While 
the  overall  rate  of  adult  participation  in  life-long 
learning  (18 %  in  2015)  is  above  the  EU  average 
(10.7 %), it is low among older workers (7.1 % in 
2015), (see also European Commission, 2016a, on 
vocational  education  and  training  challenges  in 
Luxembourg).   

3.3.2.  EDUCATION  

Basic  skills  outcomes  are  worse  than  the  EU 
average.  The  proportion  of  low  achievers  in  the 
2015  OECD  Programme  for  International  Student 
Assessment  (PISA)  was  higher  than  the  EU 
average  in  all  three  areas  tested  fields  (reading, 
mathematics  and  science),  at  26 %.  Performance 
worsened  between  2012  and  2015,  especially  in 
reading and science.  

is  a 

There 
strong  relationship  between 
socioeconomic  background  and  performance. 
The performance gap between non-immigrants and 
first-generation  immigrants  is  around  the  EU 
average,  but second-generation  immigrants  do not 
catch  up  with  non-immigrants.  Research  shows 
that teachers’ tracking recommendations are biased 
against  students  with  an  immigrant  background 
(Glock et al., 2013). Students from families where 
a  language  other  than  Luxembourgish  is  spoken 
are more likely to fall behind in all subjects and be 
oriented  to  the  technical  tracks  of  secondary 
school, together with students who are less good in 
French.  (49)    The  difference  in  language  regimes 
between  the  general  and  the  technical  tracks  of 
for 
secondary  education  narrows 
switching  from  technical  to  general  education.  In 
2013/2014,  47.4 %  of  Luxembourg  pupils 
completing  primary  education  were  oriented  to 
general  secondary  school,  against  only  11.4 %  of 
Portuguese  pupils  and  33.6 %  of  pupils  of  other 
nationalities  (Ministry  of  Education/University  of 

the  scope 

(49)  The  proportion of students  in  the  two  different  tracks was 
32  %  in  the  general  and  68  %  in  the  technical  path  in 
2013/2014 
of 
Luxemburg,  2015).  As  of  2016/2017,  parents  are  to  be 
involved in the orientation decision. 

of  Education/University 

(Ministry 

The  high  frequency  of  grade  repetitions  is  one 
of the factors behind the increasing early school 
leaving rates. The graduation rate in the minimum 
period  of  a  secondary  school  programme  is  only 
41%,  the  lowest  among  the  OECD  countries  and 
far  below  the  OECD  average  of  72%  (OECD 
2014).  Grade  repetition  is  high  in  all  secondary 
school types but particularly so in the lower cycles 
of  the  technical  secondary  school  and  lower 
technical  secondary  education  (Klapproth  and 
Schaltz,  2015,  pp.  76-83).  Data  show  that  the 
probability  of  repeating  a  grade  is  almost  50 % 
higher  for  students  of  Portuguese  nationality  than 
for  Luxembourg  students  with  similar  school 
is  costly (50)  and 
scores.  Repeating  years 
demotivating  for  students:  a  survey  showed  that 
school failure was one of the major reasons given 
for 
(Ministry  of 
interrupting 
Education, 2015).  

studies 

their 

(50)  The additional year of schooling for one student generates 
(MENJE  2016. 
  chiffres.  Année 

than  18.000  € 
luxembourgeois  en 

costs  of  more 
L’enseignement 
scolaire 2014-2015). 

31 

 
                                                           
                                                           
3.3. Labour market, education and social policies 

The  reform  of  secondary  education  is  under 
preparation and new legislative proposals were 
introduced in September 2016. In February 2016, 
the  Minister  signed  an  agreement  with  a  national 
teacher trade-union (SNE) on measures to develop 
the  quality  of  primary  education  (European 
Commission, 2016d). 

3.3.3.  SOCIAL POLICIES  

at-risk-of-poverty  or 

Poverty  risks  continue  to  be  below  the  EU 
average,  but  social  exclusion  risks  are  high  for 
children,  one-parent  households  and  non  EU 
nationals.  The 
social 
exclusion rate (AROPE) increased from 16.8 % in 
2011  to  18.5 %  in  2015.  The  groups  most  at  risk 
are  single-parent  households  (44.   6%  in  2015 
against  45.5 % 
in  2011),  migrants  (non-EU 
nationals aged 18 and over: 46.4 % in 2015 against 
47.7 %  in  2011  and  12.1%  for  nationals)  and 
children  (23 %  in  2015  against  21.7 %  in  2011). 
In-work poverty increased to 11.6 % in 2015 and is 
above  the  EU  average.  The  number  of  people  at 
risk of poverty or social exclusion increased during 
the crisis years and has been relatively stable since 
2012. It therefore seems that it will be difficult for 
Luxembourg to meet its 2020 targets, also in light 
of demographic factors. 

The  at-risk-of-poverty  or  social  exclusion  rates 
vary  a  lot  between  Luxembourgish  citizens 
(12.1 %  in  2015),  EU-28  citizens  (20.9 %)  and 
non  EU  citizens  (46.4 %).  The  differences  are 
similar  for  monetary  poverty  (the  at-risk-of-
poverty rate is 42.8 % for non-EU citizens against 
7.8 %  for  nationals)  and  for  relative  in-work 
poverty rates (36 %, with a 29.8 pps. gap to those 
born  in  Luxembourg,  one  of  the  highest  in  the 
EU). In light of the high number of recent asylum 
seekers, 
these  challenges  might  persist.  The 
December  2015  change  in  legislation  -  allowing 
asylum seekers to work after a period of 6 months 
after  seeking  asylum  -  is  welcome,  as  is  the 
planned  specialised  section  that  will  be  created  in 
2017  in  the  Public  Employment  Services  to  deal 
with people who have been granted refugee status.  

Social  transfers  are  essential  for  reducing  the 
at-risk-of-poverty  rate  even  if  the  income  of 
some  39 %  of  people  on  the  minimum  income 
(RMG) 
at-risk-of-poverty 
threshold.  The  at-risk-of-poverty  rate  reached 

is  below 

the 

system  of 

15.3 %  after  social  transfers  from  27.3 %  before 
transfers in 2015, thus effectively reducing poverty 
in  Luxembourg.  Several  measures  are  intended  to 
support  the  participation  in  the  labour  market  of 
disadvantaged  parents.  A  major  reform  of  the 
minimum  income  (‘Revenu  Minimum  Garanti, 
RMG´)  was  submitted  to  Parliament  in  the  first 
half  of  2017.  The  planned  new  income  scheme 
REVIS  (Social  Inclusion  Income)  builds  on  a 
social  and  labour  market  inclusion  approach, 
income 
establishing  a  coherent 
stabilisation, 
vocational 
activation 
reintegration  policies,  with  a  focus  on  tackling 
child  poverty  and  the  poverty  of  single-parent 
families,  and  simplifying  its  administration.    The 
reform is expected to considerably reduce the high 
inactivity traps generated by the current minimum 
income scheme (European Commission, 2016a). A 
new  body,  the  National  Social  Inclusion  Office 
(ONIS)  will  be  set  up,  with  responsibility  for 
social  and  occupational  stabilisation  measures  for 
those  furthest  away  from  the  labour  market.  The 
ministry  is  working  with  PES  and  the  voluntary 
sector 
reinforce  services  provision  with 
specialised staff for disadvantaged people.  

and 

to 

The possible impact of various new measures in 
the  area  of  family  policies  for  disadvantaged 
people  is  not  clear  yet,  due  to  their  sequencing 
and  timing  issues.  The  family  allowances  reform 
came  into  force  in  August  2016.  For  new  cases, 
families  will  receive  the  same  allowance  for  each 
child (before, the allowance per child increased for 
the  second  and  subsequent  children),  which 
represents  a  potential  lowered  support  for  larger 
families in the future. (51) The education allowance 
was abolished in June 2015, but the reform of the 
parental leave system came into force in December 
2016 (52),  making  it  more  flexible  and  accessible 
for people with precarious jobs. Another act under 
preparation,  concerning  the  regular  adaptation  of 
different family allowances to the evolution of the 
median wage, will show its effects only in 2018. 

(51)  Up  to  about  EUR  240  per  month  for  a  family  with  three 

children. 

(52)  Law n. 6935 of 3 November 2016. 

32 

 
 
                                                           
resilience  during  the  crisis,  Luxembourg  is  the 
only  Member  State,  with  Finland  and  Greece, 
where  investment  in  intangible  capital  decreased 
after  the  crisis.  Investment  growth  in  knowledge-
based  capital  (KBC) (55)  has  also  significantly 
slowed  down.  This  raises  concerns  because  such 
investment  is  an  important  driver  of  productivity 
and  growth  (Corrado  et  al.,  2012)  as  it  usually 
underpins 
subsequent 
adoption. The decline may suggest a slowdown in 
innovation  performance  detrimental  to  total  factor 
productivity growth. 

innovations  and 

their 

The  sharp  decrease  in  business  expenditure  on 
research and development (R&D), a key type of 
intangible investments, is a matter of particular 
concern.  Public  R&D  intensity  increased  fivefold 
between  2000  and  2015,  but  business  R&D 
intensity dropped in the same period from 1.5 % of 
GDP to 0.7 %.  

(55)  These  investments  include  expenditures  in  human  capital, 
e.g.  in  the  form  of  education  and  training,  public  and 
private  scientific  research,  business  expenditures  for 
product  research  and  development,  market  development 
and organisational and management efficiency. 

3.4. INVESTMENT 

3.4.1.  DIVERSIFICATION POLICIES  

towards 

(European 

Commission, 
high 

the  economy's  reliance  on 

Reducing 
the 
financial  sector  remains  a  central  long-term 
challenge.  As  highlighted  last  year,  the  relatively 
large weight in the economy of this sector is a risk 
factor 
2016a). 
value-added 
Diversification 
emerging  activities  remains  a  major  challenge  for 
the  economic  sustainability  and  development  of 
Luxembourg. Given its technological development 
and  high  labour  costs,  Luxembourg's  comparative 
advantage is likely to lie in sectors with high added 
value and high-skilled activities. Activities in these 
sectors  tend  to  be  technology-  and  knowledge-
intensive.  Areas  identified  as  most  promising  are 
Information  and  Communication  Technologies 
(ICT)  (see  Box  3.4.1),  materials  (composites), 
space 
successful 
diversification  of  the  economy  will  partly  depend 
on  efforts  to  strengthen  investment  in  innovation 
and knowledge-based capital (KBC). 

logistics. (53) 

The 

and 

and 

energy 

new 
include 

the  convergence  of 

Luxembourg is pursuing a transition towards a 
new  industrial  model.  A  strategic  study  on  'the 
third  industrial  revolution'  commissioned  by  the 
government  was  released  last  November.  The 
study encourages the transition to a new industrial 
ICT, 
model  based  on 
renewable 
transport 
modes(54).Targeted 
increasing 
areas 
energy  efficiency,  developing  a  high  performance 
computing  infrastructure,  as  well  as  setting  up 
technology  platforms  for  co-located  industry  and 
university 
researchers  working  on  common 
transversal issues. The study will now be subject to 
a  consultation  with  the  relevant  institutions.  A 
national  committee  under  the  responsibility of  the 
Minister  for  the  Economy  has  been  set  up  to 
coordinate  the  implementation  of  the  measures, 
some  of  which  have  already 
the 
endorsement  of  the  government.  The  effective 
impact  on  diversification  will  depend  on  the 
specific measures to be implemented. 

received 

The low level of investment in intangible capital 
may have had a negative impact on total factor 
relative 
(TFP).  Despite 
productivity 

their 

(53)  Cf.  Alexander  S,  Rumpf,  G,  del  Rio,  JC;  RIO  Country 

Report 2016: Luxembourg  (pending publication) 

(54)  Namely:  energy,  mobility,  building  sector,  food  sector, 
industry,  finance,  smart  economy,  circular  economy, 
prosumers and social model. 

33 

 
 
                                                           
                                                           
3.4. Investment 

The  decline  in  the  productivity  of  the  financial 
services  sector  remains  a  drag.  Like  in  most 
Member  States,  labour  productivity  growth  has 
declined after the crisis. However, in contrast to its 
neighbouring  countries,  Luxembourg  has  not  yet 
reached  its  2007  level. (56)    After  being  strong  in 
2015,  labour  productivity  growth  is  set  to  slow 
down  again  in  2016.  The  stagnation  in  the 
aftermath  of  the  crisis  is  partly  explained  by  the 
decline  in  the  contribution  of  traditional  growth 
drivers,  especially  the  financial  services  sector. 
The  latter's  decline  is  largely  due  to  the  declining 
productivity  growth  of  the  sector  (the  within 
effect)  rather  than  to  the  movement  of  workers 
across sectors (cross-sectoral effect).  

(56)  Data for change in period 2007-2016 of labour productivity 
per  hour  worked  in  US$  (converted  to  2015  price  level 
with updated 2011 PPPs): 6%  Germany, 4% Belgium, the 
Netherlands  and  France,  and  -1%  Luxembourg.  Source: 
The Conference Board Database. 

3.4.2.  THE CIRCULAR ECONOMY 

Over  the  past  few  years  Luxembourg  has 
increased its focus on the circular economy as a 
way  of  diversifying  economic  activities  and 
promoting competitiveness. In the context of the 
government  diversification  strategy,  an  eco-
Innovation  cluster  was  created.  An 
inter-
ministerial committee was set up in 2015 to bring 
together  public  actors  and  broaden  consensus  on 
the  circular  economy.  The  strategy  builds  on  the 
national commitment to a sustainable development 
model  (see  Box  3.4.2).  A  dedicated  financial 
support  scheme  has  been  started  for  companies 
willing  to  develop  a  circular  economy  strategy. 
While the circular economy is gaining momentum 
within the government and the private sector, some 
(Eco-
further  developments 
barriers  hamper 
Innovation Observatory, 2015, page 11-12).  

34 

Box 3.4.1: Analysis of the ICT sector.Information and communications technology is one of the priority sectors selected in the context of the economic diversification strategy where significant improvements have been made. Between 2008 and 2012, the sector recorded the fourth highest growth in the EU. In 2013 it further expanded by 4.8% representing 7.3 % of the national gross value added (Observatoire de la compétitivité, 2016, page 156). Strong technological infrastructure underpins this good performance. In recent years, additional measures have been taken to encourage the development of young innovative companies in this sector. For instance, the: Fit4start programme helps a selection of start-ups through a combination of financial support for prototype development and coaching. In January 2016, the ICT Seed Fund was launched to finance new innovative high-tech ICT businesses. The favourable position of ICT activities in the Luxembourg's economy could be hampered in the medium term by the shortage of high-level experts. Luxembourg is one of the top Member States for digital skills: 86 % of people aged 16-74 have basic or above basic digital skills (EU average: 56 % in 2016) and 97 % of individuals aged 16-74 are regular internet users (EU average: 79 % in 2016). However, the sector suffers from a shortage of qualified ICT experts. In 2016, 61 % of businesses that recruited or tried to recruit staff for jobs requiring ICT specialist skills reported problems in filling these positions (EU average: 41 % in 2016). This is also related to Luxembourg’s low number of Science, Technology and Mathematics (STEM) graduates. A mere 3.5 people per 1000 aged 20-29 graduated in STEM in 2014, the lowest performance in the EU-28 (EU average: 18 graduates per 1000 in 2013). However, this low number is also due to the large number of Luxembourgish students who study abroad. In response to this problem, in May 2015 Luxembourg launched the new "Digital4Education" initiative as part of the "Digital Lëtzebuerg" strategy. One year after the launch of the "Start&Code" programme, offering the possibility to young unemployed people and refugees to participate in a six-week IT training course, Employment Minister Nicolas Schmit presented the state of play. By 2017, 90 participants will have completed the training, 15 % of whom are refugees.  
                                                           
 
 
 
 
 
3.4. Investment 

3.4.3.  LABOUR COST DEVELOPMENTS 

2017,  by  1.4%  to  align  it  with  the  evolution  of 
average real wages over the period 2014-2015.(57)  

labour 

and  unit 

in  2015, 

Wages  and  labour  costs  have  increased  in  line 
with productivity developments since 2013. The 
subdued  wage  developments  recorded  since  2013 
have  helped  reverse  the  deterioration  in  cost 
competitiveness accumulated over the past decade 
(European  Commission,  2016a).  A  very  small 
increase in nominal unit labour costs of 0.3% was 
recorded 
cost 
developments  are  expected  to  be  minor  in  2016. 
Looking at wage developments in real terms, over 
the  years  2013-2015,  wage  growth  lagged  behind 
productivity  growth,  as  in  most  Member  states. 
The decrease in wage growth was also driven by a 
modulation  in  the  automatic  wage  indexation, 
limiting the frequency of indexation between 2012 
and 2014, since at least 12 months should have to 
elapse  between  two  consecutive  indexation  steps 
of 2.5 %. Luxembourg returned to automatic wage 
indexation  in  2015.  The  temporary  modulation  of 
the  automatic  wage 
in 
December 2011 for the period 2012-2014 came to 
an  end  in  2014.  Given  sluggish  consumer  prices 
and  plummeting  oil  prices,  the  next  automatic 
wage 
the 
beginning  of  2017,  leading  to  a  nominal  wage 
increase of 2.5% in 2017. In addition, workers paid 
at  minimum  wage  will  see  their  overall  wage 
increasing by 3.9% in 2017 as the social minimum 
wage has been increased, with effect from January 

indexation  decided 

triggered  only  at 

indexation  was 

3.4.4.  BUSINESS ENVIRONMENT (BUSINESS 

SERVICES AND RETAIL SECTOR) 

Business environment  

Little progress has been made in enhancing the 
business environment in recent years. According 
to  the  World  Bank,  Luxembourg  ranks  low  in 
terms  of  ease  of  doing  businesses  (see  Graph 
3.4.1).(58)  This  results  from  Luxembourg  trailing 
other  Member  States  in  getting  credit,  protecting 
investors,  and  resolving  insolvency.  Other  survey 
data  sometimes  yields  different  results  from  the 
data  of  the  World  Bank (Observatoire  de  la 
(59). 
Compétitivité, 
Nevertheless, 
there  have  been  relatively  few 
reforms  to  enhance  the  business  environment  in 
recent years. 

Eurobarometer) 

2016; 

(57)  Law n. 7085 of 15 December 2016. 
(58)  Luxembourg  is  ranked  59th  in  the  World  Bank's  Doing 
Business  2017,  while  it  was  ranked  57th  in  the  previous 
edition.  It  is  the  third  lowest  ranking  amongst  Member 
States,  only  higher  than  those  of  Greece  and  Malta.  Cf. 
Doing Business 2016, World Bank. 

(59)  There  are  various  potential  reasons  for  the  discrepancies 
between  surveys, 
the  different  focus  and 
sampling  strategies,  and  implementation  lags  not  well 
captured by the Doing Business methodology.   

including 

35 

Box 3.4.2: Renewable energy and energy efficiencyRenewable energy and energy efficiency policies are crucial, as the country has little domestic energy production and imports nearly all its needs in oil, gas and electricity. Further investment in renewable energy is warranted for Luxembourg to reach the 2020 target of 11 %. In 2014, the proportion of renewable energy sources in final energy consumption (4.5%) was above the indicative trajectory for 2013-2014 (3.9). But the trajectory will become steeper towards 2020. Luxembourg recently introduced a scheme of premium payments for operators of wind, solar, biogas, hydropower and biomass installations, to spur further investment in renewable electricity generation. The total budget of the measure will be approximately EUR 150 million, allocated between 2016 and 2020. With regard to energy efficiency, Luxembourg has reduced its primary energy consumption from 4.3 Mtoe in 2013 to 4.18 in 2014. Final energy consumption decreased from 4.13 Mtoe in 2013 to 4 Mtoe in 2014. Luxembourg has also implemented an Energy Efficiency Obligation Scheme, under which electricity and natural gas suppliers are required to encourage and/or incentivise their customers to reduce their energy use by investing in more efficient appliances  and better insulation and renovating buildings.  
                                                           
 
 
 
 
 
3.4. Investment 

Graph 3.4.1:  Ease of doing business according to the World 

Bank, number of reforms 2010-2016 

The vertical segment indicates the variation in the indicator 
between 2010 and 2016 (or the mentioned period in the 
following graphs) with the upper and minimum levels 
reached during the period. The distance to frontier (DTF) is 
reflected on a scale from 0 to 100, where 0 represents the 
lowest performance and 100 represents the frontier. 
Source: World Bank, Doing Business Database. 

is  showing 

Luxembourg 
improvement,  but 
entrepreneurship  is  still  not  a  preferred  career 
choice.  Early  stage  entrepreneurship  is  back  on 
track,  with  around  50%  more  people  engaged  in 
new  businesses  than  elsewhere  in  the  EU,  on 
average.  However,  there  is  still  a  low  rate  of 
established  businesses  (half  the  EU  average). 
Transferring  property  requires  considerably  more 
resources  than  the  EU  average.  Businesses  in 
Luxembourg  also  have  twice  the  number  of  tax 
payment  transactions  to  do  than  their  peers  on 
average. The Chamber of Commerce has published 
a  guide  on  transferring  of  businesses  to  provide 
information  on 
entrepreneurs  with  practical 
transferring  and  taking  over  companies.  Efforts 
have  been  made  to  provide  a  more  responsive 
administration  with  better  online  access  for  small 
and  medium-sized  enterprises  (SMEs). (60)    Much 
has  also  been  done  to  reduce  administrative 
response  times  for  different procedures.  Measures 
have  also  been  taken  to  digitalise  administrative 
procedures, (61) 
administrative 
accelerate 
simplification  (Box  3.4.3), (62)  and  simplify  the 
legal and regulatory system for SMEs. (63)  

(60)  Part of the site online portal ‘www.guichet.lu’. 
(61)  The ‘Digital Luxembourg’ initiative - Digital Lëtzebuerg. 
(62)  European Commission (2016a), Small Business Act - Fact 

sheet Luxembourg. 

(63)  Current  update  of  the  ‘Luxembourgish  Accounting  Law’ 
and  the  ‘draft  bill  on  the  introduction  of  a  company  with 
simplified  limited  liability’  currently  under  review  by  the 
Council of State. 

and 

non-R&D 

Businesses are engaged in innovation, although 
business  R&D  expenditure  remains 
low. 
Luxembourg's  SMEs  are  overall  more  innovative 
than  their  EU  peers.  However,  private  R&D 
investments 
innovation 
expenditures (64)  are  below 
the  EU-average. 
Luxembourg  SMEs  also  lag  behind  their  peers  in 
terms  of  the  commercialisation  of  innovation, 
especially on-line. The government has launched a 
comprehensive range of measures to encourage the 
creation  of  innovative  start-ups.  It  is  also  taking 
action  to  raise  the  SME  community's  awareness 
through 
'Pakt  Pro-
Commerce' (see below).  

initiatives  such  as 

the 

Competition in product and services markets 

labour  cost 

low  however. (65)  In  contrast, 

The  functioning  of  services  markets  is  critical 
for the cost competitiveness of the economy. The 
cost  competitiveness  of  Luxembourg's  economy 
deteriorated in the last decade, partly because unit 
labour costs (ULC) increased twice as much as in 
the  euro  area  and  four  times  as  much  as  in 
is 
Germany.  The  proportion  of 
relatively 
the 
proportion of cost that is due to intermediate inputs 
from the services sector (60 %) is much larger and 
well above the EU average (24 %), notably in the 
services  market.  Although  two  thirds  of  these 
services are imported, high levels of restrictiveness 
in  services  markets  can  harm  the  competitiveness 
of  businesses  in  Luxembourg.  These  data  also 
point 
that 
restrictions in the services markets of neighbouring 
economies 
on  Luxembourg's 
have 
competitiveness.  

the  negative  spillover  effects 

could 

to 

High regulatory barriers remain in the business 
services  sector.  According  to  a  new  indicator 
developed  by  the  European  Commission,(66)  the 

(64)  Innovation  expenditure  for  enterprises,  excluding  R&D 
expenditures (e.g. investment in equipment and machinery, 
acquisition of patents and licenses. 

(65)  Labour  costs  represent  "only"  16%  of  the  production  cost 
for  Luxemburg's  businesses,  in  comparison  with  26%  in 
the EU as a whole. 

(66)  The European Commission has developed a new composite 
indicator on restrictiveness of most existing barriers to the 
access to and exercise of regulated professions. It is based 
on  data  collected  from  Member  States,  complemented  by 
desk  research.  This  new  indicator  has  many  similarities 
with  the  Commission's  indicator  assessing  the  barriers  in 
business services published in 2015, but also differs from it 
in certain aspects. Cf. SWD(2016) 436 final. 

36 

0510152025505560657075808590MTELLUITCYHRBEHUBGROSKESSIFRNLCZPTPLLTATIEDELVFIEESEUSUKDKDTFMin of 2010-2017 DTFMax of 2010-2017 DTFDTF 2017number of reforms 2010-2016 
 
 
                                                           
                                                           
 
3.4. Investment 

architects  and  engineers.  In  2016  it  decided  to 
remove  the  fixed  tariffs  in  public  contracts  for 
architects  and  engineers.  It  has  also  announced 
some  simplification  measures  for  the  recognition 
of  professional  qualifications,  in  particular  for 
access to the teaching profession. 

for  all 

the  EU-weighted  average 

level  of  restrictiveness  is  higher  in  Luxembourg 
the 
than 
professions  analysed,  except  for  the  profession  of 
patent agent where the opposite is true and for the 
profession of tourist guide, which is not regulated 
(see  Graph  3.4.2).  Amongst 
the  professions 
analysed, restrictiveness is highest for lawyers. For 
all  these  professions,  with  the  exception  of  real 
estate  activities,  the  business  turnover  rate (67)is 
lower than the EU average and the average rate for 
the  overall  economy.  The  reform  implemented  in 
2011  showed  the  significant  impact  of  further 
liberalising professional services. (68) Over the last 
two  years  Luxembourg  has  made  some  progress 
mainly  regarding  the  professions  of  architect  and 
engineer. 
some 
shareholding  and  voting  right  requirements  for 

In  2015 

removed 

it  has 

(67)  Business churn rate is calculated as the ratio of the sum of 
newly  founded  and  closed  enterprises  to  the  total  number 
of enterprises in year t.  No data available for patent agent 
related activities. 

(68)  Luxembourg  conducted  in  2011  a  reform  to  facilitate 
access to the professions of arts, craft and industry as well 
as  to  some  liberal  professions.  It  brought  changes  to 
facilitate  the  access  to  the  professions  covered  with 
simplified administrative procedures and also to enlarge the 
scope  of  activities  of  the  professions.  Comparing  the  15 
months after the reform  with the 15  months preceding the 
reform it was found that the number of permits issued for 
new  businesses  increased  by  19%  and  the  number  of 
permits 
the 
broadening of activity increased by 172%. A total of 30 to 
40% of companies have benefited from the reform. 

for  existing  businesses  due 

issued 

to 

37 

Box 3.4.3: Selected highlights: National action plan to support SMEsLuxembourg adopted in March 2016 its 4th national action plan to support SMEs ('4ème Plan d'action national en faveur des PMEs'), a document setting out its SME policy. The plan is a comprehensive set of measures to improve the business environment for SMEs. It encompasses 99 measures aiming at: promoting and fostering entrepreneurship, develop smart regulation and adapting it to the economic development of Luxembourg and the evolution of the labour market, easing the access to finance, setting up a more innovation-friendly business environment and enable SME to internationalise. These measures include, for instance, actions to accelerate further administrative simplification e.g. by setting up the 'guichet.lu 2.0' which allows enterprises to submit online only once and in one place all documents required for tax declaration purposes, permits, statistical data, etc. The main business stakeholders (Chambre des Métiers, Fédération des artisans, CLC, et l’Horesca) provided their input during the preparation of the plan and have welcomed its adoption. They all agree that the adopted measures will enhance the business environment. Furthermore, they are active members of the body in charge of monitoring the implementation of the plan (Haut Comité pour le soutien des PME et de l’entrepreneuriat) There are over 31.000 SMEs in Luxembourg (99.6% of all businesses). SMEs play a critical role in Luxembourg's ‘non-financial business economy’, generating 72 % of its value added and more than two thirds of total employment (footnote). Supporting their development and growth will contribute to enhancing business dynamics and diversifying the economy. Source: European Commission (2016), SBA Fact sheet Luxembourg  
                                                           
 
  
 
 
 
 
 
3.4. Investment 

Graph 3.4.2:  Restrictiveness indicator, 2016, Luxembourg 

and the EU 

intention to propose a wide-reaching reform of the 
retail  establishment  framework.  According  to  the 
Luxembourg authorities, the draft proposal should 
be submitted to parliament for approval in the first 
quarter of 2017.  

the 

Luxembourg  has  also  adopted  measures  that 
operational 
improve 
help 
could 
environment  for  retail. 
  A  law  to  remove 
restrictions  on  sales  below  cost  and  end-of-
business sales was adopted at the end of 2016. (70) 
Luxembourg  also  authorised  extended  opening 
in 
hours  on  Sundays  and  bank  holidays 
Luxembourg city during a test period that ended in 
September  2016.  There  are  currently  no  plans  to 
extend  this  measure.  Luxembourg  has  adopted  an 
action  plan  (Pakt  Pro  Commerce)  to  revitalise 
small  retail  based  on  cooperation  with  local 
for  digitisation. (71) 
authorities  and 
Although the action plan does not involve changes 
to  the  legal  framework  for  retail,  it  may  lead  to 
in  productivity. 
improvements 
is  being 
implemented 
cooperation  with  business 
in 
stakeholders  and  features  measures  around  five 
axes. Measures have been launched under all axes 
but one. 

support 

It 

3.4.5.  INVESTMENT IN ROAD AND RAIL 

INFRASTRUCTURE 

an 

In the light of the significant projected increase 
in population and the size of the workforce, the 
provision 
transport 
of 
infrastructure 
challenge.  The 
remains  a 
significant  increase  in  the  number  of  cross-border 
workers, the lengthening of distances travelled and 
the  constant  enlargement  of  source  areas  add  to 
internal mobility requirements. 

adequate 

is  spent 

Luxembourg  is  among  the  EU  countries  where 
in  traffic,  entailing  a 
most  time 
significant  cost  to  the  economy  and  creating 
GHG  emissions  and  air  pollution,  see  Graph 
3.4.3.  This  is  noteworthy,  given  its  comparatively 
low  population  density  and  lack  of  any  large 

(70)  Law  7038  of  23  December  2016,  Loi  sur  les  ventes  en 
trompeuse  et 

la  publicité 

trottoir  et 

soldes  et  sur 
comparative. 

(71)  Pakt Pro Commerce, April 2016. 

(1) Numerical values on a scale from 0 to 6 are attributed for 
every restriction/variable. The higher the score, the more 
restrictive is the assessment. 
Source:  European Commission 

High  consumer  prices  and  mark-ups  point  to 
the  existence  of  restrictions  in  retail.  A  high 
level  of  restrictiveness  in  the  conditions  for  retail 
establishment  has  been  linked  with  low  levels  of 
competition in the sector, which in turn can have a 
negative  impact  on  consumer  choice  and  price 
levels  (European  Commission,  2015). While  the 
level of mark-ups is difficult to monitor, available 
evidence  shows  that  mark-ups  in  Luxembourg's 
retail  sector  are  the  highest  in  the  EU.  Consumer 
prices  are  also  among  the  highest.  Luxembourg 
considers that alleged territorial supply constraints 
play  an  important  role  in  pushing  up  consumer 
prices.  A  joint  consultation  with  the  Netherlands 
and Belgium was recently launched on the subject. 
The analysis of the replies received will take place 
in 2017. 

Luxembourg  appears  to  apply  particularly 
strict rules to the operation of shops, in addition 
to a restrictive framework for establishing new 
retail  outlets. (69)  The  conditions  for  establishing 
medium  to  large  retail  outlets  (over  400  square 
metres) in Luxembourg are particularly restrictive. 
to  stores  with  a 
Some  requirements  apply 
relatively 
the 
Luxembourg  authorities  recently  announced  their 

surface.  However, 

small 

(69)  Luxembourg 

recently 

the 
Commission and the OECD's assessment of restrictiveness 
of regulation for establishment of new retail outlets. 

scored  highest 

in  both 

38 

0.01.02.03.04.05.0AccountantArchitectCivil engineerLawyerPatent agentReal estate agentTourist guideEULU 
 
                                                           
                                                           
3.4. Investment 

shows 

analysis (74) 

Currently,  it  is  still  above  average.  However, 
Commission 
road 
investment  in  Luxembourg  has  been  at  or  below 
than  a 
their 
decade. Investment  in  the  rail  sector  has  also 
dipped  below  the  structural  rate  in  recent  years 
(Matha T.Y. et al., 2014). 

for  more 

structural 

rate (75) 

that 

In  spite  of  the  recent  underinvestment,  the 
provision  of 
infrastructure, 
land  transport 
measured  as  the  length  of  motorways  and  rail 
per person, appears to be comparatively high in 
the  neighbouring 
Luxembourg  compared 
countries. 
the  provision  of 
motorways appears to be relatively high compared 
to its neighbouring countries.  

In  particular, 

to 

Graph 3.4.4:  Motorway density 

Source: European Commission 

The provision of road infrastructure, while still 
adequate,  has  not  quite  kept  pace  with  the 
increase in traffic. The total length of motorways 
has  increased  by  about  40  percent  between  1998 
and 2015 (76), which roughly matches the increase 
in  passenger  traffic  in  the  same  period.  However, 

(74)  Up-dated  data  of "Infrastructure in  the  EU: Developments 
and  Impact  on  Growth",  European  Economy,  Occasional 
Papers, n. 203. 

(75)  The  structural  rate  refers  to  a  model-predicted  investment 
rate  which  accounts  for  country-specific  macro-economic 
and sector-related factors, including traffic intensity. 
(76)  Sources:  European  Commission  (2016)  EU  Transport  in 
Figures.  Statistical  Pocketbook  2016  and  Grand  Duchy  of 
Luxembourg, 
et  Chaussées: 
des 
http://www.pch.public.lu/fr/reseau-
routier/statistiques/index.html 

Portail 

Ponts 

to 

cities. (72)  Furthermore,  Luxembourg  has 
the 
highest motorisation rate in the EU. 92 % of cross-
border  commuters  use  a  car  to  get  to  work.  This 
the 
behaviour  could  partially  be  related 
favourable tax treatment of company cars, as well 
as to the low levels of transport taxes (see Section 
3.1.1.).  Peak-hour  congestion 
in  Luxembourg 
continues to constitute a major problem, above all 
in  the  capital  city  and  on  the  main  surrounding 
motorways  and  roads.  For  2014,  exceedances 
above  the  EU  air  quality  standards  have  been 
registered.  Furthermore,  target  values  and  long-
term  objectives  for  greenhouse  gas  emissions  (cf. 
section  3.1.1.)  and  ozone  concentrations  are 
exceeded. (73) 

Graph 3.4.3:  Hours lost in traffic 

Source: European Commission 

in 

road 

Investment 
infrastructure  has 
decreased (in GDP terms) since the start of the 
decade.  Following  an  investment  peak  in  2002, 
which  resulted  in  an  expansion  of  the  motorway 
network,  the  investment  rate  has  dropped  sharply 
to around 0.45% of GDP and has since fluctuated 
around  that  level.  The  current  investment  rate  is 
comparable  to  that  of  neighbouring  countries, 
where investments in road infrastructure decreased 
more  gradually  during  the  period  1998-2014.  In 
the  rail  sector,  the  investment  rate  has  fluctuated 
more.  During  part  of  the  reference  period,  it 
countries. 
exceeded 

neighbouring 

that 

of 

(72)  The  capital  city,  Luxembourg  City,  has  about  104,000 
inhabitants. Other settlements are towns of at most 32,000 
inhabitants.   

(73)  EIONET, The Air Quality Portal. 

39 

01020304050BENLDELUUK050100150200250300350199820002002200420062008201020122014BEDEFRLU 
 
                                                           
 
                                                           
3.4. Investment 

freight traffic by road (77) has almost tripled since 
1998.  Furthermore,  the  data  on  passenger  traffic 
includes  only  traffic  by  passenger  cars  registered 
in  Luxembourg.  Since  the  share  of  cross-border 
commuters  is  high  and  the  vast  majority  of  them 
use  the  private  car  to  commute,  the  actual  traffic 
on 
to  be 
considerably higher.  

the  domestic  network 

likely 

is 

The rail sector shows a rather different pattern. 
The total length of rail lines has remained virtually 
constant  during  1998-2014,  whereas  passenger 
traffic has grown by 83%. Freight traffic decreased 
to only 36% of its 2008 level, suggesting a shift of 
freight from rail to road during the period. 

further 

the  country's 

Against  this  background,  the  authorities  have 
recently  engaged  in  a  number  of  projects  to 
upgrade 
transport 
infrastructure,  both  rail (78)  and  road.  An 
investment  plan  was  launched  at  the  beginning  of 
the century with EUR 2,500 million spent on new 
projects. An even more ambitious investment plan 
was  started  in  2014  with  a  budget  of  EUR  400 
million per year for the coming years. 

The  extent  of  congestion 
in  Luxembourg 
contrasts  with  the  provision  of  the  motorway 
network,  which  in  quantitative  terms  appears 
adequate.  This  suggests,  in  addition  to  demand-
focused  policy,  that  currently  policy  coherence  is 
not  sufficiently  observed. 
the 
transport  efficiency(79),  air 
developments 
pollution,  traffic  congestion  and  the  provision  of 
housing  do  not  seem  to  always  go  hand  in  hand 
(see Section 3.1.1). 

In  particular, 

in 

(77)  Haulage performed within the territory of Luxembourg by 
any  vehicle,  irrespective  of  the  country  in  which  it  is 
registered.  Values  from  2005  are  directly  from  European 
Commission  (2016)  EU  Transport  in  Figures.  Statistical 
Pocketbook 2016. Values before 2005 are estimated based 
on the assumption that the ratio of haulage according to the 
territorial  principle  to  haulage  by  registered  vehicles  is 
constant and equal to the ratio in 2005. 
more 
for 

(78)  See 

detail: 

http://www.cfl.lu/espaces/infrastructure/en/les-grands-
projets/descriptif-des-projets 

(79)  Communication  on  the  European  Strategy  for  Low-
Emission  Mobility,  COM(2016)501  final  indicates  several 
measures:  promoting  multi-modality  and  public  transport 
and  to  accelerate  the  shift  to  a  more  sustainable  and  low-
emission mobility in terms of carbon and air pollutants  

40 

 
                                                           
3.4. Investment 

41 

Box 3.4.4: Investment challenges in LuxembourgSection 1. Macroeconomic perspective  Total investment in Luxembourg (measured as gross fixed capital formation) proved to be fairly resilient to the crisis. While public investment was above the EU average, business investment was below it. Favourable financial conditions favoured investment that is expected to accelerate. In particular, residential and non-residential construction investment is projected to remain robust, though decelerating somewhat, supported by household and government investment. By contrast, since both capacity utilisation and demand from the euro area remain low and in spite of the accommodative credit stance, the surge in equipment investment is mostly driven by specific sectors, in particular purchases by the aeronautic and satellite industry. Section 2. Assessment of barriers to investment and ongoing reforms   Barriers to private investment are relatively moderate overall, as confirmed by the European Commission's assessment (European Commission, 2015d). Some reforms have been adopted in the area of regulated professions and the housing supply, however reform measures to address the remaining barriers should be stepped up (see Section 3 for details). Main barriers to investment and priority actions underway  1. Business sector investment remains low compared to the euro area average. This could in part be due to the presence of a large financial sector and the low investment intensity associated with its activities. Nevertheless, the low level of investment in intangible capital, and in particular the sharp decrease in business R&D expenditure, contrasts starkly with public R&D intensity, which increased fivefold between 2000 and 2015. This points to a weakness in the framework conditions for cooperation between public and private research and of not completely adequate comprehensive approach to the innovation eco-system. 2. The sharp demographic and employment dynamics have also resulted in steady underinvestment in residential construction. Despite the strong demand for housing, the number of dwellings built has consistently remained below the estimated number required to keep up with the demand. This points to bottlenecks on the supply side, mainly to the incapacity to mobilise the land available for construction and the suboptimal procedure for granting building permits. Regulatory/ administrative burdenTaxationPublic administrationAccess to financePublic procurement /PPPsCooperation btw academia, research and businessJudicial systemFinancing of R&D&IInsolvency frameworkBusiness services / Regulated professionsCSRCompetition and regulatory frameworkRetailEPL & framework for labour contracts ConstructionCSRWages & wage settingDigital Economy / TelecomEducation EnergyLegend:TransportNo barrier to investment identifiedCSRInvestment barriers that are also subject to a CSRSome progressNo progressSubstantial progressLimited progressFully addressedPublic administration/ Business environmentFinancial Sector / TaxationR&D&ISector specific regulationLabour market/ Education 
 
 
 
 
 
ANNEX A 

Overview Table 

Commitments 

Summary assessment (80) 

2016 Country-specific recommendations (CSRs) 

CSR 1:  Ensure  the  long-term  sustainability  of 
public  pensions  by  increasing  the  effective 
retirement age, by limiting early retirement and 
increasing  incentives  to  work  longer,  and  by 
aligning the statutory retirement age to changes 
in life expectancy. 

Ensure  the  long-term  sustainability  of  public 
pensions 

by increasing the effective retirement age, 

limited  progress 

Luxembourg  has  made 
in 
addressing  CSR1.  Progress  has  limited  for  all 
subparts of the CSR and no progress has been made 
in  relation  to  the  recommendation  to  align  the 
statutory 
life 
expectancy. 

retirement  age 

to  changes 

in 

Limited  progress  in  ensuring  the  sustainability  of 
the  public  finances.  A  working  group  on  pensions 
was  set  up  in April  2016  with  the  task  of  carrying 
out a sustainability analysis of the pension system. 
In  early  December  2016  a report was published.  It 
contains  a  detailed  analysis  of  the  situation  of  the 
national  pension  system.  It  shows  inter  alia  that 
based  on  current  scenario  (the  Ageing  Working 
Group)  revenues  from  contributions  will  remain 
higher than pension expenditure up to 2022 (the last 
year 
contribution  period). 
Simulations  were  also  done  with  alternative 
scenarios.  These  simulations  show  that  under  less 
favourable 
demographic 
assumptions,  the  size  of  the  pension  challenge 
could be larger than currently estimated.  

economic 

current 

and 

the 

of 

in 

increasing 

Limited  progress 
the  effective 
retirement age. A law on reclassification of workers 
with working disabilities has been adopted in 2015 
and  is  being  implemented  since  the  beginning  of 
2016.  It  aims  to  keep  workers  with  disabilities  in 
the labour market. It is too early to assess its impact 

(80)  The following categories are used to assess progress in implementing the 2016 CSRs: 
No progress: The Member State has not credibly announced nor adopted any measures to address the CSR. Below a number of non-
exhaustive  typical  situations  that  could  be  covered  under  this,  to  be  interpreted  on  a  case  by  case  basis  taking  into  account 
country-specific conditions:  

(i)  no  legal,  administrative,  or  budgetary  measures  have  been  announced  in  the  National  Reform  Programme  or  in  other  official 
communication  to  the  national  Parliament  /  relevant  parliamentary  committees,  the  European  Commission,  or  announced  in 
public (e.g. in a press statement, information on government's website);  

(ii) no non-legislative acts have been presented by the governing or legislator body;  
(iii) the Member State has taken initial steps in addressing the CSR, such as commissioning a study or setting up a study group to 
analyse possible measures that would need to be taken (unless the CSR explicitly asks for orientations or exploratory actions), 
while clearly-specified measure(s) to address the CSR has not been proposed. 

Limited progress: The Member State has:  
i) announced certain measures but these only address the CSR to a limited extent;  
and/or  
ii) presented legislative acts in the governing or legislator body but these have not been adopted yet and substantial non-legislative 

further work is needed before the CSR will be implemented;  

iii) presented non-legislative acts, yet with no further follow-up in terms of implementation which is needed to address the CSR. 
Some  progress:  The  Member  State  has  adopted  measures  that  partly  address  the  CSR  and/or  the  Member  State  has  adopted 
measures that address the CSR, but a fair amount of work is still needed to fully address the CSR as only a few of the adopted 
measures have been implemented. For instance: adopted by national parliament; by ministerial decision; but no implementing 
decisions are in place. 

Substantial progress: The Member State has adopted measures that go a long way in addressing the CSR and most of which have 

been implemented. 

Fully implemented: The Member State has implemented all measures needed to address the CSR appropriately. 

42 

 
 
 
 
 
 
 
 
 
 
 
                                                           
by limiting early retirement and 

increasing incentives to work longer, 

and  by  aligning  the  statutory  retirement  age  to 
changes in life expectancy. 

CSR 2:  Remove  barriers  to  investment  and 
innovation  that  limit  economic  development  in 
the 
sector.  Address 
services 
bottlenecks that hamper housing investment. 

business 

Remove  barriers  to  investment  and  innovation 
that limit economic development in the business 
services sector.  

Address  bottlenecks 
investment. 

that  hamper  housing 

A. Overview Table 

however.  

Limited  progress  on  reforms  regarding  early 
to  modify  existing 
law 
retirement.  A  draft 
legislation  on  early  retirement 
to  be 
discussed in the Parliament. 

is  still 

Limited progress on increasing incentives to work 
longer.  A  legislative  initiative,  referred  to  as  `Age 
Pact´, which includes a whole package of measures 
to keep workers longer in employment, is tabled in 
the Parliament, but it has not been adopted yet. 

No  progress  in  aligning  the  statutory  retirement 
age  to  changes  in  life  expectancy.  There  are  no 
measures  to  link  the  effective  retirement  age  to 
changes in life expectancy. 

limited  progress 

Luxembourg  has  made 
in 
addressing  CSR 2.  Progress  has  been  limited  in 
removing  barriers 
investment,  while  some 
progress  has  been  made  in  addressing  bottlenecks 
to housing investment. 

to 

in 

removing  barriers 

Limited  progress 
to 
investment  and  innovation  that  limit  economic 
development  in  the  business  services  sector.  By 
decision  of  the  ‘Conseil  de  Gouvernement’  of  2 
September 2016, the fixed tariffs in public contracts 
for 
the  services  provided  by  architects  and 
engineers have been abolished. 

Some  progress  in  addressing  bottlenecks  that 
hamper  housing  investment.  Numerous  measures 
have  been  adopted  or  are  planned.  The  measures 
are:  i)  a  reform  of  local  government  financing  has 
been  adopted  in  December  2016.  It  links,  at  least 
partially,  the  financing  of  the  municipalities  to 
initiatives favouring housing investment; ii) a draft 
'Omnibus'  law  (n.  6704)  has  been  approved  at 
beginning  of  2017.  Among  others,  it  aims  at 
streamlining the building permits procedure; iii) the 
tax  reform  includes  measures  intended  to  provide 
incentives  to  increase  the  supply  of  houses  and 
construction  land  (temporary  tax  exemption  for 

43 

 
 
 
 
 
 
 
 
 
 
 
 
 
A. Overview Table 

50 %  of  the  capital  gain  realised  on  the  sale  of 
constructible land); and iv) an initiative to produce 
a  new  sectoral  housing  plan.  Nevertheless,  the 
challenge  ahead  for  the  Luxembourg  authorities 
remains sizeable.  

The  overall  employment  rate  of  the  resident 
population decreased  slightly  from  72.1 %  in 2014 
to  70.9 %  in  2015,  getting  more  distant  from  its 
target. 

1.31 % (2015) 

Luxembourg is not at all on track to reach its R&D 
intensity target for 2020, due to a sharp decrease in 
business  R&D  intensity  (from  1.46 %  of  GDP  in 
2000  to  0.67 %  in  2015).  Public  sector  R&D 
intensity  on  the  contrary  steadily  increased  from 
0.12 %  in  2000  to  0.64 %  in  2015.  This  fivefold 
increase  reflects  the  willingness  of  the  Grand-
Duchy  to  build  up  its  public  research  capacities 
from  a  situation  where,  30  years  ago,  the  public 
research system was in fact non-existent. 

to 

the 

According 
latest  national  projections 
submitted  to  the  Commission  and  taking  into 
account  existing  measures,  it  is  expected  that  non-
ETS emission will decrease by 15% between 2005 
and 2020 and then the target will be missed, (i.e. a 
projected shortfall of 5 percentage points). 

Europe 2020 (national targets and progress) 

Employment:  

73 % 

R&D: 

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) 

Greenhouse gas emissions: 

20 % compared to 2005 emission (from sources 
not covered by the Emission Trading System)° 

Renewable energy target: 

11 % 

Share  of  renewable  energy  in  all  modes  of 
transport 

Energy efficiency: 

Luxembourg  has  set  an  indicative  national 
energy efficiency target which implies reaching 
a 2020 level of 4.48 Mtoe, expressed in primary 
consumption  and  4.24  Mtoe  expressed  in  final 

Non-ETS 2015 target: -10 % 

In  2015,  the  share  of  renewable  energy  sources  in 
final  energy  consumption  (5.0  %)  was  above  the 
indicative trajectory for 2015-2016 (5.4 %). (81) As 
the  trajectory  will  become  steeper  towards  2020. 
Luxembourg  will  have  to  continue  to  promote 
renewable  energy  deployment  in  all  sectors  to 
achieve its renewable energy target. 

Luxembourg  has  made  good  progress  on  energy 
efficiency. The country reduced its primary energy 
consumption  by  -1%  from  4.19  Mtoe  in  2014  to 
4.14  Mtoe  in  2015.  Final  energy  consumption 
decreased  by  -0.3%  from  4  Mtoe  in  2014  to  3.99 
Mtoe  in  2015.  Even  if  Luxembourg  has  already 

(81)  Renewable energy shares for 2015 are approximations and not official data, reflecting the available data (04.10.2016). See the 
the  2016  Report  on  Renewable  Energy,  

in  Realisation  of 

Öko-Institut  Report:  Study  on  Technical  Assistance 
http://ec.europa.eu/energy/en/studies. 

44 

 
                                                           
energy consumption.   

Early school leaving: 

<10 % 

Tertiary education: 

>40 % (national target 66%) 

Poverty/social exclusion: 

reduction of the number of people threatened by 
poverty or social exclusion by 6 000 in 2020. 

A. Overview Table 

levels  of  primary  and  final  energy 
achieved 
consumption  which  are  below 
indicative 
national  2020  targets  (4.5  Mtoe  in  primary  energy 
final  energy 
consumption  and  4.2  Mtoe 
consumption)  it  would  need  to  make  an  effort  to 
keep these levels until 2020.  

the 

in 

The early school leaving rate rose by 3 percentage 
points in 2015, to 9.3%. While the rate is still below 
the  EU  average of  11%  and Luxembourg's  Europe 
2020 national target of  10%,  the  increase  from  the 
previous  year  is  substantial.  National  data  for 
2013/2014,  the  latest  year  available,  also  indicate 
an increase from the previous year and estimate the 
rate at more than 13%. 

The tertiary educational attainment rate among 30-
34 year olds stood at 52.3% in 2015, well above the 
EU  target  of  40%.  To  strengthen  its  knowledge 
economy, Luxembourg has set the target of further 
increasing the rate to 66 % by 2020. 

In  2015,  95000  people  were  at  risk  of  poverty  or 
social  exclusion  (starting  from  84.000  in  2011), 
1000 less than in 2014 but still well above the target 
set in 2012.  

45 

 
 
ANNEX B 

MIP Scoreboard 

Table B.1: 

The MIP scoreboard for Luxembourg 

Flags: b: break in time series. i: see metadata.           
"Note: 1) Unemployment rate: for 2006 i = Eurostat back-calculation to include 2011 Population Census results. 2) Youth 
unemployment rate: for 2006 i = Eurostat back-calculation to include 2011 Population Census results. 
Source: European Commission, Eurostat and Directorate General for Economic and Financial Affairs (for Real Effective 
Exchange Rate), and International Monetary Fund 

46 

Thresholds201020112012201320142015Current account balance, (% of GDP) 3 year average-4%/6%7.26.76.25.95.55.3-35%-20.529.152.244.433.535.8Real effective exchange rate - 42 trading partners, HICP deflator3 years % change±5% & ±11% 1.20.1-2.40.70.5-0.5Export market share - % of world exports5 years % change-6%3.6-3.4-9.63.811.322.9Nominal unit labour cost index (2010=100)3 years % change9% & 12% 16.510.35.97.14.80.66%4.00.72.23.44.16.114%-16.748.631.0-5.520.124.2133%302.2328.3351.2321.3327.9343.160%19.918.821.823.522.722.1Unemployment rate3 year average10%4.94.84.85.35.76.116.5%11.310.114.811.229.915.5-0.2%1.31.10.71.72.91.5b0.5%0.1-0.20.40.50.20.32%0.2-0.91.51.15.9-1.4Activity rate - % of total population aged 15-64 (3 years change in p.p)Long-term unemployment rate - % of active population aged 15-74 (3 years change in p.p)Youth unemployment rate - % of active population aged 15-24 (3 years change in p.p)External imbalances and competitivenessNew employment indicatorsNet international investment position (% of GDP)Deflated house prices (% y-o-y change)Total financial sector liabilities (% y-o-y change)Private sector credit flow as % of GDP, consolidatedPrivate sector debt as % of GDP, consolidatedGeneral government sector debt as % of GDPInternal imbalances 
 
 
 
 
 
ANNEX C 

Standard Tables 

Table C.1: 

Financial market indicators 

(1) Latest data Q2 2016. 
(2) Quarterly values are not annualised. 
* Measures in basis points 
Source: European Commission (long-term interest rates); World Bank (gross external debt); Eurostat (private debt); ECB (all 
other indicators). 

47 

201120122013201420152016Total assets of the banking sector (% of GDP)2565.22190.91973.61954.21957.91972.0Share of assets of the five largest banks (% of total assets)31.233.133.732.031.3-Foreign ownership of banking system (% of total assets)68.171.571.871.469.1-Financial soundness indicators:1)              - non-performing loans (% of total loans)---1.10.90.8              - capital adequacy ratio (%)17.821.924.419.620.920.7              - return on equity (%)2)2.77.06.47.27.23.4Bank loans to the private sector (year-on-year % change)1.5-6.5-4.83.25.49.6Lending for house purchase (year-on-year % change)8.97.26.77.06.26.4Loan to deposit ratio65.860.954.952.251.854.1Central Bank liquidity as % of liabilities1.51.31.20.50.60.6Private debt (% of GDP)328.3351.2321.3327.9343.1-Gross external debt (% of GDP)1) - public6.08.010.110.39.28.4    - private2574.64033.04606.75131.15741.05360.2Long-term interest rate spread versus Bund (basis points)*31.532.728.217.3-12.716.8Credit default swap spreads for sovereign securities (5-year)*------ 
 
 
 
 
 
C. Standard Tables 

Table C.2: 

Labour market and social indicators 

1 Unemployed persons are all those who were not employed but had actively sought work and were ready to begin working 
immediately or within 2 weeks.       
2 Long-term unemployed are peoples who have been unemployed for at least 12 months.       
3 Not in education employment or training.       
4 Average of first three quarters of 2016. Data for total unemployment and youth unemployment rates are seasonally 
adjusted.       
Source: European Commission (EU Labour Force Survey). 

48 

201120122013201420152016 4Employment rate(% of population aged 20-64)70.171.471.172.170.970.3Employment growth (% change from previous year)3.02.41.82.62.62.9Employment rate of women(% of female population aged 20-64)61.964.163.965.565.064.4Employment rate of men (% of male population aged 20-64)78.178.578.078.476.775.9Employment rate of older workers (% of population aged 55-64)39.341.040.542.538.439.2Part-time employment (% of total employment, aged 15-64)18.018.518.718.418.419.0Fixed-term employment (% of employees with a fixed term contract, aged 15-64)7.17.67.08.110.28.8Transitions from temporary to permanent employment30.732.434.236.931.6:Unemployment rate1 (% active population, age group 15-74)4.85.15.96.06.56.3Long-term unemployment rate2 (% of labour force)1.41.61.81.61.92.3Youth unemployment rate (% active population aged 15-24)16.418.016.922.316.619.1Youth NEET3 rate (% of population aged 15-24)4.75.95.06.36.2:Early leavers from education and training (% of pop. aged 18-24 with at most lower sec. educ. and not in further education or training)6.28.16.16.19.3:Tertiary educational attainment (% of population aged 30-34 having successfully completed tertiary education)48.249.652.552.752.3:Formal childcare (30 hours or over; % of population aged less than 3 years)28.027.024.030.0:: 
 
 
 
 
C. Standard Tables 

Table C.3: 

Labour market and social indicators (cont.) 

(1) People at risk of poverty or social exclusion: individuals who are at risk of poverty and/or suffering from severe material 
deprivation and/or living in households with zero or very low work intensity. 
(2) At-risk-of-poverty rate: proportion of people with an equivalised disposable income below 60 % of the national equivalised 
median income.  
(3) Proportion of people who experience at least four of the following forms of deprivation: not being able to 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: proportion of people aged 0-59 living in households where the 
adults (excluding dependent children) worked less than 20 % of their total work-time potential in the previous 12 months. 
(5) For EE, CY, MT, SI and SK, thresholds in nominal values in euros; harmonised index of consumer prices (HICP) = 100 in 2006 
(2007 survey refers to 2006 incomes). 
Source: For expenditure for social protection benefits ESSPROS; for social inclusion EU-SILC. 

49 

Expenditure on social protection benefits (% of GDP)201020112012201320142015Sickness/healthcare5.75.55.75.85.7:Disability2.52.52.52.52.5:Old age and survivors8.18.18.58.68.4:Family/children4.03.63.63.63.5:Unemployment1.21.11.31.51.5:Housing0.30.30.30.30.3:Social exclusion n.e.c.0.50.50.50.50.5:Total22.321.622.422.822.4:of which: means-tested benefits0.80.80.80.80.8:Social inclusion indicators201020112012201320142015People at risk of poverty or social exclusion1 (% of total population)17.116.818.419.019.018.5Children at risk of poverty or social exclusion  (% of people aged 0-17)22.321.724.626.026.423.0At-risk-of-poverty  rate2 (% of total population)14.513.615.115.916.415.3Severe material deprivation rate3  (% of total population)0.51.21.31.81.42.0Proportion of people living in low work intensity households4 (% of people aged 0-59)5.55.86.16.66.15.7In-work at-risk-of-poverty rate (% of persons employed)10.69.910.211.211.111.6Impact of social transfers (excluding pensions) on reducing poverty50.250.047.945.940.643.8Poverty thresholds, expressed in national currency at constant prices5181551777217261170431727017626Gross disposable income (households; growth %)5.03.94.2:::Inequality of income distribution (S80/S20 income quintile share ratio)4.14.04.14.64.44.3GINI coefficient before taxes and transfers48.247.048.650.348.5:GINI coefficient after taxes and transfers28.027.228.030.428.7: 
 
 
 
 
 
 
C. Standard Tables 

Table C.4: 

Product market performance and policy indicators 

1 The methodologies, including the assumptions, for this indicator are shown in detail at: 
http://www.doingbusiness.org/methodology.        
2 Average of the answer to question Q7B_a. "[Bank loan]: If you applied and tried to negotiate for this type of financing over 
the past six months, what was the outcome?". Answers were codified as follows: zero if received everything, one if received 
most of it, two if only received a limited part of it, three if refused or rejected and treated as missing values if the application is 
still pending or if the outcome is not known.       
3 Percentage population aged 15-64 having completed tertiary education.       
4 Percentage population aged 20-24 having attained at least upper secondary education.       
5 Index: 0 = not regulated; 6 = most regulated. The methodologies of the OECD product market regulation indicators are 
shown in detail at: http://www.oecd.org/competition/reform/indicatorsofproductmarketregulationhomepage.htm       
6 Aggregate OECD indicators of regulation in energy, transport and communications . 
Source: European Commission; World Bank — Doing Business (for enforcing contracts and time to start a business); OECD (for 
the product market regulation indicators); SAFE (for outcome of SMEs' applications for bank loans). 

50 

Performance indicators201020112012201320142015Labour productivity (real, per person employed, year-on-year % change)Labour productivity in industry2.62-11.444.9217.658.92-1.42Labour productivity in construction2.851.83-8.831.636.29-9.54Labour productivity in market services4.180.31-4.231.721.792.71Unit labour costs (ULC) (whole economy, year-on-year % change)ULC in industry-6.8412.54-2.41-14.81-6.670.81ULC in construction-1.88-2.2411.18-0.55-4.4710.58ULC in market services-2.372.116.381.200.52-2.22Business environment201020112012201320142015Time needed to enforce contracts1 (days)321.0321.0321.0321.0321.0321.0Time needed to start a business1 (days)16.516.516.516.516.516.5Outcome of applications by SMEs for bank loans2na0.18na0.290.000.32Research and innovation201020112012201320142015R&D intensity1.511.471.281.311.281.31Total public expenditure on education as % of GDP, for all levels of education combinednanananananaNumber of science & technology people employed as % of total employment343436384037Population having completed tertiary education3303233354035Young people with upper secondary education4737372777469Trade balance of high technology products as % of GDP1.910.90-0.86-1.60-1.42-3.25Product and service markets and competition200320082013OECD product market regulation (PMR)5, overallna1.441.46OECD PMR5, retail4.174.474.54OECD PMR5, professional services3.523.553.47OECD PMR5, network industries62.962.722.73 
 
 
 
 
 
C. Standard Tables 

Table C.5:  Green growth 

All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2005 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 material 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           
Weighting of energy in HICP: the proportion of "energy" items in the consumption basket used for the construction of the HICP         
Difference between energy price change and inflation: energy component of HICP, and total HICP inflation (annual % 
change)         
Real unit energy cost: real energy costs as a percentage of total value added for the economy         
Environmental taxes over labour taxes and GDP: from European Commission'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)          
Real unit energy costs for manufacturing industry excluding refining : real costs as a percentage of value added for  
manufacturing sectors         
Share of energy-intensive industries in the economy: share of gross value added of the energy-intensive industries in GDP         
Electricity and gas prices for medium-sized industrial users: consumption band 500–20 00MWh and 10 000–100 000 GJ; figures 
excl. VAT.         
Recycling rate of municipal waste: ratio of recycled and composted municipal waste to total municipal waste         
Public R&D for energy or for the environment: government spending on R&D for these categories as % of GDP         
Proportion of greenhouse gas (GHG) emissions covered by EU Emissions Trading System (ETS) (excluding aviation): based on 
greenhouse gas emissions  (excl land use, land use change and forestry) as reported by Member States to the European 
Environment Agency          
Transport energy intensity: final energy consumption of transport activity (kgoe) divided by transport industry gross value 
added (in 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. consumption of 
international bunker fuels         
Aggregated supplier concentration index:  covers oil, gas and coal. Smaller values indicate larger diversification and hence 
lower risk.         
Diversification of the energy mix: Herfindahl index over natural gas, total petrol products, nuclear heat, renewable energies 
and solid fuels         
* European Commission and European Environment Agency         

Source: European Commission (Eurostat) unless indicated otherwise 

51 

Green growth performance201020112012201320142015MacroeconomicEnergy intensity kgoe / €0.120.110.110.100.100.09Carbon intensity kg / €0.360.350.340.310.29-Resource intensity (reciprocal of resource productivity)kg / €0.320.320.320.330.330.35Waste intensity kg / €0.31-0.24-0.19-Energy balance of trade % GDP-3.6-4.4-4.8-4.0-3.4-Weighting of energy in HICP%11.3211.5211.5914.8514.4812.32Difference between energy price change and inflation %3.56.83.9-3.5-6.3-8.0Real unit of energy cost% of value added8.99.39.18.75.1-Ratio of environmental taxes to labour taxesratio0.150.150.140.130.12-Environmental taxes% GDP2.42.42.42.22.0-Sectoral Industry energy intensity kgoe / € 0.370.400.360.290.270.27Real unit energy cost for manufacturing industry excl. refining% of value added58.059.050.549.519.4-Share of energy-intensive industries in the economy% GDP------Electricity prices for medium-sized industrial users€ / kWh0.100.100.100.100.100.09Gas prices for medium-sized industrial users€ / kWh0.040.050.050.050.040.04Public R&D for energy % GDP0.010.010.010.010.01-Public R&D for environmental protection% GDP0.020.020.030.020.02-Municipal waste recycling rate%46.546.447.446.647.748.0Share of GHG emissions covered by ETS*%20.819.319.316.517.815.9Transport energy intensitykgoe / €1.821.981.961.771.611.39Transport carbon intensitykg / €4.444.964.964.453.93-Security of energy supplyEnergy import dependency%97.197.397.597.196.595.9Aggregated supplier concentration indexHHI3.02.82.82.72.9-Diversification of energy mixHHI0.450.460.460.460.45- 
 
 
 
 
 
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