Recommendation for a COUNCIL RECOMMENDATION on the 2017 National Reform Programme of Luxembourg and delivering a Council opinion on the 2017 Stability Programme of Luxembourg
Date: 2017-05-22
Institutions: European Commission, Secretariat-General
Subjects: Luxembourg, budgetary equilibrium, early retirement, economic policy, economic reform, employment policy, innovation, investment, service industry, stability programme

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   EUROPEAN COMMISSION  Brussels, 22.5.2017  COM(2017) 515 final   Recommendation for a COUNCIL RECOMMENDATION on the 2017 National Reform Programme of Luxembourg  and delivering a Council opinion on the 2017 Stability Programme of Luxembourg  
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2017 National Reform Programme of Luxembourg 

and delivering a Council opinion on the 2017 Stability Programme of Luxembourg 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Articles 121(2) and 148(4) thereof, 

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of 
the  surveillance  of  budgetary  positions  and  the  surveillance  and  coordination  of  economic 
policies,1 and in particular Article 5(2) thereof, 
Having regard to the Recommendation of the European Commission,2 
Having regard to the resolutions of the European Parliament,3 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

Having regard to the opinion of the Economic and Financial Committee, 

Having regard to the opinion of the Social Protection Committee, 

Having regard to the opinion of the Economic Policy Committee, 

Whereas: 

(1) 

On  16 November  2016,  the  Commission  adopted  the  Annual  Growth  Survey,4 
marking  the  start  of  the  2017  European  Semester  of  economic  policy  coordination. 
The priorities of the Annual Growth Survey were endorsed by the European Council 
on  9-10 March  2017.  On  16 November  2016,  on  the  basis  of  Regulation  (EU) 
No 1176/2011,  the  Commission  adopted  the  Alert  Mechanism  Report,5  in  which  it 
did  not  identify  Luxembourg  as  one  of  the  Member  States  for  which  an  in-depth 
review  would  be  carried  out.  On  the  same  day,  the  Commission  also  adopted  a 
recommendation for a Council Recommendation on the economic policy of the euro 
area.  That  Recommendation  was  endorsed  by  the  European  Council  on  9-
10 March 2017 and adopted by the Council on 21 March6.  

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OJ L 209, 2.8.1997, p. 1. 
COM(2017) 515 final. 
P8_ TA(2017)0038, P8_ TA(2017)0039, and P8_ TA(2017)0040. 
COM(2016) 725 final. 
COM(2016) 728 final. 
2017/C92/01 

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(2) 

(3) 

(4) 

(5) 

(6) 

As  a  country  whose  currency  is  the  euro  and  in  view  of  the  close  interlinkages 
between  the  economies  in  the  economic  and  monetary  union,  Luxembourg  should 
ensure the full and timely implementation of the Recommendation for the euro area 
which is reflected in recommendation 2 below. 
The  2017  country  report  for  Luxembourg7  was  published  on  22 February  2017.  It 
assessed  Luxembourg’s 
country-specific 
in 
recommendations adopted by the Council on 12 July 2016, the follow-up given to the 
recommendations adopted in previous years and Luxembourg’s progress towards its 
national Europe 2020 targets.  

addressing 

progress 

the 

On 28 April 2017, Luxembourg submitted its 2017 National Reform Programme and 
its  2017 Stability  Programme.  To  take  account  of  their  interlinkages,  the  two 
programmes have been assessed at the same time. 

The relevant country-specific recommendations have been taken into account in the 
Member States' programmes for the European Structural and Investment Funds (ESI 
Funds) covering the 2014-2020 period. As foreseen in the legislation governing the 
ESI Funds,8 where it is necessary to support the implementation of relevant country-
specific  recommendations,  the  Commission  may  request  a  Member  State  to  review 
and  amend  its  relevant  ESI  Funds  programmes.  The  Commission  has  provided 
further guidelines on the application of those rules.9 

Luxembourg is currently in the preventive arm of the Stability and Growth Pact. In 
its  2017  Stability  Programme  the  government  plans  a  decrease  in  the  headline 
surplus from 1.6% of GDP in 2016 to 0.2% of GDP in 2017, followed by a steady 
increase  thereafter,  reaching  a  surplus  of  1.2%  of  GDP  in  2021.  The  medium-term 
budgetary  objective  —  a  structural  deficit  of  0.5%  of  GDP  —  continues  to  be  met 
with  a  margin  throughout  the  programme  period.  According  to  the  stability 
programme, the government debt-to-GDP ratio is expected to remain well below the 
Treaty reference value of 60% of GDP. The macroeconomic scenario underpinning 
these  budgetary  projections  is  plausible,  with  the  exception  of  2018  when  it  is 
markedly  favourable  and  2021  when  it  is  markedly  cautious.  Based  on  the 
Commission  2017  spring  forecast,  the  structural  balance  is  forecast  to  register  a 
surplus of 0.4% of GDP in 2017 and 0.1% of GDP in 2018, broadly in line with the 
stability  programme  and  above  the  medium-term  budgetary  objective.  Overall,  the 
Council is of the opinion that Luxembourg is projected to comply with the provisions 
of the Stability and Growth Pact in 2017 and 2018.  

(7) 

Long-term  fiscal  sustainability  concerns  remain  given  the  projected  increase  in 
ageing costs. Under the 2012 pension reform, an exercise to monitor and evaluate the 
sustainability  of  the  pension  system  should  be  carried  out  every  5  years  from  the 
adoption  of  the  reform.  The  government  advanced  the  first  evaluation  to  2016. 

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SWD(2017) 81 final. 
Article  23  of  Regulation  (EU)  No  1303/2013  of  the  European  Parliament  and  of  the  Council  of  17 
December  2013  laying  down  common  provisions  on  the  European  Regional  Development  Fund,  the 
European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and 
the  European  Maritime  and  Fisheries  Fund  and  laying  down  general  provisions  on  the  European 
Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime 
and  Fisheries  Fund  and  repealing  Council  Regulation  (EC)  No  1083/2006,  OJ  L  347,  20.12.2013,  p. 
320. 
COM(2014) 494 final. 

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Although the review concluded that the pension system is still recording a recurrent 
surplus  which  allowed  sizeable  pension  reserves  to  be  accumulated,  the  pension 
system is expected to record a negative balance from 2023. According to the recent 
revised Eurostat population projections, the projected increase in population will be 
less  significant  than  previously  expected.  This  will  have  an  impact  on  the 
dependency ratio, which will increase faster than previously expected and lead to a 
higher  projected  increase  in  public  expenditure  for  pensions.  There  has  been  no 
progress  in  linking  statutory  retirement  age  to  life  expectancy,  as  previously 
recommended  by  the  Council.  Luxembourg  stands  out  as  the  only  Member  State 
where no increase of the statutory retirement age has been laid down for the period 
between 2013 and 2060. Luxembourg has the Union’s highest projected increase in 
the share of dependent population by 2060. Luxembourg has made limited progress 
on  early  retirement.  In  July  2015,  a  draft  law  modifying  early  retirement  schemes 
was  presented  to  Parliament,  where  it  is  still  pending.  Overall,  early  retirement 
remains  widespread  and  incentives  to  work  longer  remain  limited.  Following  the 
revision of  demographic prospects, Luxembourg faces further risks  related to  long-
term  care  expenditure.  This  is  already  at  one  of  the  highest  levels  among  Member 
States as a share of GDP and is projected to increase from 1.5 % to 3.2 % of GDP by 
2060 (more than doubling from the current level). A project of reform of the long-
term care insurance is still being discusses by the Parliament. 

The Luxembourg authorities have adopted a comprehensive tax reform that entered 
into  force  in  January  2017.  The  reform  introduced  changes  mostly  in  the  area  of 
direct taxation, both for individuals and corporations, aimed at gradually reducing the 
corporate  income  tax  rate  (with  the  goal  of  increasing  competitiveness)  and 
increasing  the  progressivity  of  personal  income  tax  (with  the  goal  of  increasing 
fairness). At the same time, the increase in certain tax expenditures risks narrowing 
the tax base. To improve the predictability of tax revenues, there is scope to further 
broaden  the  tax  base.  This  could  be  achieved  in  particular  by  revisiting the  current 
low  taxation  on  housing  and  making  greater  use  of  alternative  sources.  This  could 
include  ensuring  more  coherence  between  environmental 
the 
diversification objectives of the economy. 

taxation  and 

The  Luxembourg  authorities  have  sought  to  diversify  the  economy,  acknowledging 
the  risks  associated  with  heavy  dependence  on  the  financial  sector.  Reducing  the 
economy’s reliance on the financial sector remains a central long-term challenge. To 
tackle this, the diversification analysis needs to be translated into specific measures 
with a clearly defined timeline. Given the country’s high labour costs, activities with 
higher  added  value  offer  the  potential  to  unlock  alternative  sources  of  growth.  The 
successful  diversification  of  Luxembourg’s  economy  therefore  depends  to  a  large 
extent on sectors that are less sensitive to labour cost levels. These are largely based 
on research and innovation, which tend to be technology- and knowledge-intensive. 
Reducing  or  removing  barriers  to  investment  and  innovation  that  limit  economic 
development  would  unleash  the  potential  for  innovation  and  help  diversification. 
While  public  investment  is  above  the  euro  area  average,  private  investment  is 
underperforming.  Sustaining  a  high  level  of  investment  is  essential  to  maintaining 
growth prospects.  

(8) 

(9) 

(10) 

Further expanding the already successful non-financial service sector could also help 
diversify  the  economy.  High  regulatory  barriers  remain  in  the  business  services 
sector, in particular for accountants, architects, engineers and lawyers. For all these 
professions,  the  business  turnover  rate  is  lower  than  both  the  EU  average  and  the 

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(11) 

(12) 

(13) 

average rate for the overall economy. Restrictions on these professions may thus be 
harming  the  competitiveness  of  businesses  in  Luxembourg.  These  barriers  include 
the  wide  scope  of  activities  reserved  for  architects;  reserving  simple  tasks  such  as 
payroll activities or preparation of tax declarations for highly qualified professionals; 
reserving  legal  advice  for  lawyers;  and  legal  form  and  shareholding  requirements, 
incompatibility  rules  and  multidisciplinary  restrictions  for  lawyers  which  may  be 
disproportionate  in  relation  to  core  principles,  such  as  the  independence  of  the 
profession, and to the corresponding supervisory arrangements. 

Targeted  active  labour  market  policies  and  lifelong  learning  programmes,  in 
particular  for  older  workers,  whose  employment  rate  remains  among  the  lowest  in 
the  EU,  are  necessary  to  avoid  negative  impacts.  Measures  have  been  adopted  to 
improve  their  employability  and  labour  market  attachment.  A  law  on  the 
reclassification  of  workers  with  working  disabilities  has  been  implemented  since 
1 January 2016, increasing the possibilities for such workers to remain longer on the 
labour  market.  However,  a  comprehensive  strategy,  following  consultations  with 
social  partners,  is  yet  to  be  put  forward.  The  ‘age  pact’,  a  draft  law  submitted  to 
Parliament  in  April 2014  which  aims  to  encourage  firms  with  more  than  150 
employees  to  retain  older  workers,  has  still  not  been  adopted.  Upskilling 
opportunities through targeted active labour market policies and lifelong learning to 
support  older  workers  will  remain  important  for  the  success  of  such  policies. 
Investment  in  skills  is  crucial  to  reap  the  full  benefits  of  digitalisation  and  to 
maintain competitiveness. 

A substantial package of measures has been enacted to tackle the supply shortage in 
real  estate,  but  its  real  impact  has  yet  to  be  seen.  Incapacity  to  access  the  land 
available for construction, which is mostly owned by private individuals, appears to 
be one  of the main obstacles to increasing  housing supply. Limited  housing supply 
coupled  with  solid  demand  has  led  to  a  steady  increase  in  housing  prices.  This 
contributes to explaining the trend towards increasing household indebtedness, which 
is  mostly  mortgage  related.  Moreover,  despite  substantial  investment  in  transport 
infrastructure, tackling traffic congestion remains a challenge. This is all the more so 
as modern work practices, such as teleworking, are discouraged in the case of cross-
border  workers  by  the  fiscal  policies  in  neighbouring  countries.  Both  housing  and 
mobility  challenges  are  likely  to  put  additional  strain  on  efforts  to  diversify  the 
economy and increase competitiveness. They could also act as barriers to attracting 
high-skilled workers into the labour market. 

In  the  context  of  the  European  Semester,  the  Commission  has  carried  out  a 
comprehensive  analysis  of  Luxembourg’s  economic  policy  and  published  it  in  the 
2017  country  report.  It has  also  assessed  the  Stability  Programme  and  the  National 
Reform  Programme  and  the  follow-up  given  to  the  recommendations  addressed  to 
Luxembourg in previous years. It has taken into account not only their relevance for 
sustainable  fiscal  and  socioeconomic  policy  in  Luxembourg,  but  also  their 
compliance  with  EU  rules  and  guidance,  given  the  need  to  strengthen  the  EU’s 
overall  economic  governance  by  providing  EU-level  input  into  future  national 
decisions.  

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(14) 

In  the  light  of  this  assessment,  the  Council  has  examined  the  Stability  Programme 
and is of the opinion10 that Luxembourg is expected to comply with the Stability and 
Growth Pact, 

HEREBY RECOMMENDS that Luxembourg take action in 2017 and 2018 to: 

1. 

2. 

Strengthen  the  diversification  of  the  economy,  including  by  removing  barriers  to 
investment  and  innovation.  Remove  regulatory  restrictions  in  the  business  services 
sector. 

Ensure the long-term sustainability of the pension system, limit early retirement and 
increase the employment rate of older people. 

Done at Brussels, 

For the Council 
The President 

10 

Under Article 5(2) of Council Regulation (EC) No 1466/97. 

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