COMMISSION STAFF WORKING DOCUMENT Country Report Luxembourg 2018 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2018 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
Date: 2018-03-07
Institutions: European Commission, Secretariat-General
Subjects: Luxembourg, economic situation, education, investment, labour market, macroeconomics, public finance, social policy, structural adjustment, tax system

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 7.3.2018 SWD(2018) 214 final  COMMISSION STAFF WORKING DOCUMENT Country Report Luxembourg 2018 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2018 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(2018) 120 final}   
 
 
CONTENTS 

Executive summary 

1.  Economic situation and outlook 

2.  Progress with country-specific recommendations 

3.  Reform priorities 

3.1.  Public finances and taxation 

3.2.  Financial sector 

3.3.  Labour market, education and social policies 

3.4.   Investment and competitiveness 

3.5.   Sectoral policies 

Annex A Overview Table 

Annex B Macroeconomic Imbalance Procedure scoreboard  

Annex C Standard Tables 

References 

LIST OF TABLES 

Table 1.1: 

Key economic, financial and social indicators - Luxembourg 

Table 3.1.1:  Gross average replacement rate (% of average wage at retirement) 

Table 3.2.1: 

Financial soundness indicators, all banks in Luxembourg 

Table 3.5.1: 

Sector contribution to GHG emissions in 2015 

Table B.1: 

The MIP scoreboard for Luxembourg (AMR 2018) 

Table C.1: 

Financial market indicators 

Table C.2: 

Headline Social Scoreboard indicators 

Table C.3: 

Labour market and education indicators 

Table C.4: 

Social inclusion and health indicators 

Table C.5: 

Product market performance and policy indicators 

Table C.6: 

Green growth 

LIST OF GRAPHS  

Graph 1.1: 

Real GDP growth and contributions 

1 

3 

11 

16 

16 

21 

27 

35 

45 

48 

51 

52 

58 

9 

17 

22 

46 

51 

52 

53 

54 

55 

56 

57 

3 

 
 
 
 
 
Graph 1.2: 

Breakdown of potential GDP 

Graph 1.3: 

Real investment in residential construction 

Graph 1.4: 

Breakdown of inflation differentials against the euro area 

Graph 1.5: 

Breakdown of employment growth (year-on-year) 

Graph 1.6: 

Beveridge curve 

Graph 1.7: 

Breakdown of the current account balance 

Graph 1.8: 

Breakdown of NULC (2000=100) 

Graph 1.9: 

Non-financial corporations indebtedness (% of GDP) 

Graph 1.10:  Non-financial corporations indebtedness (% of GDP) 

Graph 1.10: 

Sectoral breakdown of the general government balance 

Graph 2.1:  Overall multiannual implementation of 2011-2017 CSRs to date 

Graph 3.1.1:  Age-related expenditure (as % of GDP) and population projections in selected 

Member States (2016-2070 % change) 

Graph 3.1.2:  Number of new pensions, by type (thousands) 

Graph 3.1.3:  Revenues from environmental taxes, 2005-2015 

Graph 3.2.1:  Size of the financial sector in comparison to GDP 

Graph 3.2.2:  Economic indicators –Real GDP and employment 

Graph 3.2.3:  Outstanding credit for house purchase (% of GDP) and House Price Indices, 

Luxembourg. 

Graph 3.2.4:  Households' debt (% of Households' disposable income), 2016 

Graph 3.2.5:  Mortgage credits - New contracts -adjustable rate share 

Graph 3.3.1:  Activity, unemployment and long-term unemployment rates 

Graph 3.3.2:  Activity rate by detailed age group 

Graph 3.3.3: 

In-work-poverty rate, groups 

Graph 3.4.1:  Main components of Luxembourg and EA19 value added at current market prices (% 

of GVA), by NACE Rev.2, 2016. 

Graph 3.4.2:  Evolution of business R&D intensity and public R&D intensity, 2000-2016 

Graph 3.4.3:  Eco-Innovation Index 2016 (EU=100) 

LIST OF BOXES 

Box 2.1: Summary Table on 2017 CSR assessment 

Box 2.2: Tangible results delivered through EU support to structural change in Luxembourg 

Box 3.3.1: Monitoring performance in light of the European Pillar of Social Rights 

Box 3.4.1: Analysis of the ICT sector 

Box 3.4.2: Policy highlights: the "Third Industrial Revolution" strategy 

Box 3.4.3: Investment challenges and reforms in Luxembourg 

3 

4 

4 

5 

5 

6 

7 

7 

7 

8 

11 

16 

17 

20 

21 

23 

24 

25 

25 

27 

29 

32 

35 

39 

43 

13 

15 

28 

37 

40 

44 

 
 
 
 
EXECUTIVE SUMMARY 

Luxembourg’s strong growth momentum offers 
the opportunity to ensure sustainable economic 
growth  and  improve  resilience.  Public  finances 
are  sound  and  the  labour  market  continues  to 
exhibit strong job creation and low unemployment 
rates.  Ensuring  that  labour  supply  and  skill  levels 
meet present and future labour market needs might 
improve  economic  resilience,  notably  by  helping 
to better address the long-term challenge to public 
finances. Luxembourg's economic resilience would 
be  further  bolstered  by  improving  the  private 
sector's  engagement 
transition. 
in 
Moreover,  complementing  the  current  reforms  to 
strengthen  the  banking  system  with  measures  that 
avoid  the  building-up  of  vulnerabilities  in  the 
housing  market  would  improve  the  resilience  of 
the economy (1). 

the  digital 

Luxembourg's  economy  continues  to  grow 
healthily.  The  economy  has  been  performing 
better than the euro area average since 2009. Real 
GDP  growth  averaged  3.2  %  in  2010-2016, 
compared with 1.1 % for the euro area as a whole. 
The  outlook  for  Luxembourg  continues  to  be 
favourable.  Growth  is  projected  to  have  reached 
3.4  %  in  2017,  after  3.1  %  in  2016,  and  it  is 
expected to pick up to 3.9 % in 2018. 

The financial sector remains the main economic 
sector  in  the  country.  The  sector  has  remained 
sound  and  profitable.  This  is  reflected  in  strong 
surpluses  in  both  the  services  balance  and  the 
overall  current  account  balance.  The  external 
sector  relative  contribution  to  real  GDP  growth 
represented 61 % on average in 2013-2016, despite 
recurrent  negative  trade  balances.  In  2016,  the 
current  account  balance  posted  a  surplus  of  4.8% 
of GDP. 

Public  finances  are  projected  to  remain  sound. 
The  implementation  of  the  tax  reform  might 
reduce  the  general  government  surplus  in  2017, 
which  reached  1.6%  in  2016.  In  2018,  buoyant 
revenue growth underpinned by strong underlying 

(1)  This report assesses Luxembourg’s economy in the light of 
the  European  Commission’s  Annual  Growth  Survey 
published  on  22  November  2017.  In  the  survey,  the 
Commission  calls  on  EU  Member  States  to  implement 
reforms  to  make  the  European  economy  more  productive, 
resilient and inclusive. In so doing, Member States should 
focus  their  efforts  on  the  three  elements  of  the  virtuous 
triangle  of  economic  policy  -  boosting 
investment, 
pursuing structural reforms and ensuring responsible fiscal 
policies. 

1 

economic  expansion  is  expected  to  be  offset  by 
growth  in  government  expenditure,  mainly  due  to 
infrastructure investments. 

the 

2017 

limited  progress in 
Luxembourg  has  made 
addressing 
country-specific 
recommendations.  The  government  has  made 
the  economy. 
some  progress  on  diversifying 
Limited  progress  has  been  made  in  removing 
regulatory  restrictions  in  the  business  services 
sector. Limited progress has been made on limiting 
early retirement and on increasing the employment 
rate of older people. 

target 

Regarding progress in reaching the national targets 
under the Europe 2020 strategy, Luxembourg is on 
track to reach the renewable energy target and the 
energy  efficiency 
in  2020.  However, 
Luxembourg  is  expected  to  miss  its  2020  target 
reductions in greenhouse gas emissions. Transport 
fuel  taxation  remains  low,  stimulating  traffic 
congestion  and  possibly  providing  incentives  to 
increase  consumption.  Little  progress  has  been 
made towards the targets for R&D investment and 
reducing  poverty  risk,  and  the  employment  rate, 
which remain below target. 

Luxembourg  performs  relatively  well  on  the 
indicators  of  the  Social  Scoreboard  supporting 
the  European  Pillar  of  Social  Rights. 
Unemployment and the share of young people not 
in  employment,  education  or  training  are  low. 
Childcare for very young  children  is widely used. 
Income  inequality  and  the  weakening  impact  of 
social transfers on poverty merit attention. 

Key structural issues analysed in this report, which 
point  to  particular  challenges  for  Luxembourg’s 
economy, are the following:  

a 

financial 
in 

  Luxembourg  has  a  healthy  financial  sector, 
for which risks can be assessed as contained. 
The whole economy benefits from the presence 
sector.  However, 
of 
large 
developments 
the  financial  sector  are 
expected to continue having a strong impact on 
the  country's  economic  performance.  Potential 
risks  can  also  arise  from  developments  in  the 
housing  market,  which  has  an  impact  on 
household  indebtedness.  The  government  has 
continued  to  strengthen  the  macro  prudential 
framework,  which 
the 
resilience of the sector. 

to  ensure 

is  key 

 
 
                                                           
Executive summary 

fuel 

this  growth.  However, 

but specific groups  still  face  challenges. The 
unemployment  rate  continues  to  go  down. 
Employment  growth  has  increased  in  2017, 
with  both  cross-border  and  resident  workers 
helping 
the 
employment  rate  of  older  workers  remains 
substantially below the EU average.  Upskilling 
is  crucial,  given  the  strong  demand  for  highly 
specialised  skills  and  several  steps  have  been 
taken  in  this  regard.  Getting  more  low-skilled 
and  older  workers 
is  also 
necessary.  

training 

into 

  Poverty  and  social  exclusion  risks  are 
increasing  but  they  are  still  among  the 
lowest 
in  the  EU.  People  with  migrant 
background  tend  to  have  far  fewer  job  and 
social  opportunities.  Social  transfers  remain 
essential  in  lifting  people  out  of  poverty, 
although  their  capacity  to  reduce  the  risk  of 
poverty  has  decreased  in  2016.  The  tax  and 
benefit  system  has  helped  keeping  income 
inequality  at  moderate  levels,  despite  recent 
increases in those levels.  

  Despite very high rates of tertiary education 
attainment,  efficiency  in  providing  basic 
skills is below the EU average. The impact of 
the  students’  socioeconomic  background  on 
their performance is one of the strongest in the 
EU,  pointing  to  high  educational  inequality. 
New policy initiatives have been introduced to 
close the achievement gap between pupils from 
different  backgrounds.  Their  effectiveness 
remains 
to  be  seen.  Adapting  vocational 
education  and  training  to  labour  market  needs 
remains challenging. 

  Some  indicators  suggest  that  Luxembourg's 
tax  rules  may  be  used  in  aggressive  tax 
planning  structures.  Luxembourg  has  taken 
steps to amend certain aspects of its tax system 
that may facilitate aggressive tax planning and 
is  engaged 
reform. 
However,  the absence  of withholding  taxes  on 
interest  payments  made  by 
royalties  and 
companies based in Luxembourg, or the lack of 
some  anti-abuse 
the 
country’s  tax  rules  may  still  be  used  in  tax 
avoidance structures. 

rules,  suggest 

international 

that 

tax 

in 

  House  prices  have  kept  on  rising.  This  may 
undermine  Luxembourg's  ability  to  attract  and 
retain  a  skilled  labour  force,  a  large  share  of 
which is made up of non-nationals. House price 
pressures  emerge  from  both  the  supply  and 
demand  side.  On  the  supply  side,  insufficient 
land  availability  and  lack  of  incentives  for 
private owners to sell land or buildings seem to 
represent  a  bottleneck  to  the  creation  of  new 
housing  units.  On  the  demand  side,  high 
population and employment growth, as well as, 
to  a  lesser  extent,  tax  policies  encouraging 
ownership push prices up. 

  The  rise  of  age-related  expenditure  poses  a 
threat  to  the  long-term  sustainability  of 
public finances. The operational balance of the 
pension system is projected to become negative 
by  2023,  with  the  deficit  widening  steadily 
over  the  medium  to  long  term.  However,  past 
and  current  surpluses  of  the  pension  system 
have been saved. These cumulated reserves are 
projected  to  extend  the  viability  of  the  system 
by about a further 20 years. 

in  R&D 

investment 

  Luxembourg  has  continued  to  pursue  its 
strategy  to  diversify  the  economy,  whereas 
business 
is  on  a 
declining  trend.  The  authorities  took  several 
initiatives to deploy the diversification strategy 
and  to  foster  investments  in  the  key  priority 
sectors.  Among  them,  important  achievements 
concern the ICT and space sectors. By contrast, 
expenditure in R&D remains highly dependent 
from  public  spending  and  is  not  leveraging 
private 
investments.  Therefore,  business 
investments  in  R&D  continued  to  decline, 
indicating  that  several  weaknesses  remain  in 
the  research  and  innovation  ecosystem,  which 
drag 
innovation 
down 
performance. 

Luxembourg's 

  The  business  environment  showed  some 
improvements,  but  barriers  remain  in  the 
business  services  sector.  Luxembourg  has 
simplify  administrative 
made  efforts 
formalities,  but  the  business  services  sector  is 
still 
the 
profession of lawyers.  

restrictive,  notably  as 

regards 

to 

  The labour market continues to enjoy strong 
job  creation  and  low  unemployment  rates, 

2 

 
 
1.  ECONOMIC SITUATION AND OUTLOOK 

Graph 1.2: 

Breakdown of potential GDP 

Economic growth 

Luxembourg's  dynamic  economy  has  been 
performing  better  than  the  euro  area  average 
since  the  2009  global  economic  recession.  Real 
GDP  growth  averaged  3.2 %  in  the  2010-2016, 
compared with 1.1 % for the euro area as a whole 
(Graph 1.1). Annual GDP figures have been higher 
but more volatile, and subject to  revisions as well 
(2). 

Graph 1.1: 

Real GDP growth and contributions 

Source: European Commission 

Potential growth 

Source: European Commission 

Economic activity is growing at a healthy pace, 
underpinned  by  sound  domestic  demand  and 
net  exports.  Recent  economic  trends  and  the 
outlook  for  Luxembourg  remain  favourable,  with 
the  latest  indicators  pointing  to  a  strengthening 
economic  momentum.  According 
the 
Commission  Winter  forecast  2018  economic 
growth is projected to have reached 3.4 % in 2017, 
after 3.1 % in 2016, and it is expected to pick up to 
3.9  %  in  2018,  before  slightly  decelerating  to  3.6 
% in 2019.  

to 

(2)  In  September  2015  STATEC 

revised 

the  estimate 
economic output for 2013 at 4.3 %, up from 2.0 %. In July 
2015, GDP growth for 2014 was estimated at 5.6 % to be 
revised  down  to  4.1  %  in  November.  In  October  2016, 
GDP growth for 2015 was revised down to 3.5% from the 
June estimate of 4.8%. In March 2017 GDP growth for the 
same year was revised up to 4.0%. Lately, GDP growth for 
2015 and 2016 were revised down to 2.9% and 3.1% from 
4.0% and 4.2%, respectively. 

it 

in 

reflects 

recovery.  Second, 

for  potential  growth.  The 

The favourable economic trends are reflected in 
estimates 
rapid 
recovery  of  estimates  for  potential  growth  after 
2010  first  reflects  the  sustained  contribution  of 
labour  (Graph  1.2).  The  main  shift 
this 
contribution  has  come  from  changes  in  hours 
worked,  which  in  turn  has  reduced  the  impact  on 
employment and fed into the labour contribution to 
the 
quick 
recapitalisation, with capital accumulation rising to 
2006-2007  levels  in  2010-2014,  before  losing 
labour  contribution 
the 
some 
increased.  Additionally,  it  reflects  a  worsening  in 
total  factor  productivity.  In  2009,  productivity 
gains  turned  into  losses,  and  have  remained 
negative  ever  since.  With  the  labour  contribution 
and capital intensity getting close to their pre-crisis 
levels,  estimates  for  potential  growth  remain 
around  1 pp.  below  those  levels.  The  estimated 
investment recovery in 2017 would improve labour 
productivity and support employment growth.  

intensity  as 

Private  consumption  is  projected  to  continue 
growing  moderately.  Private 
consumption 
increased  in  second  and  third  quarters  of  2017. 
This  trend  is  expected  to  continue,  mainly  on  the 
back  of  stronger  employment  and  moderate  real 
income  gains,  since  the  surge  in  consumer  prices 
has tempered the impact of income gains from the 
tax  reform  and  the  wage  indexation  applied  in 
January  2017.  In  2018,  sustained  employment 

3 

-6-4-202460910111213141516171819%, ppsInventories investmentInvestment (GFCF)ConsumptionNet exportsReal GDP growthReal GDP growth EAOutput gap-1.00.01.02.03.04.05.0020304050607080910111213141516Rate of change y-o-y (%)TFP ContributionCapital Accumulation ContributionHours worked per employee contributionEmployment contribution 
 
 
                                                           
 
 
1. Economic situation and outlook 

creation  and  some  real  income  gains,  from  the 
forthcoming wage indexation (expected in the first 
half  of  2018)  should  continue  to  support  private 
consumption.  In  2019,  consumption  growth  is 
projected 
to  ease  slightly,  with  employment 
creation  moderating  and  higher  underlying 
inflation taking a dent on real income gains. High 
increasing  debt 
indebtedness  and 
household 
burdens could also affect consumption growth 

Graph 1.3: 

Real investment in residential construction 

points  above  the  euro  area  average,  reflecting 
crude  oil  price  developments 
to  which 
Luxembourg  is  traditionally  more  sensitive 
(Graph  1.4).  Oil  price  pressures  are  expected  to 
continue  driving  inflation  in  2018.  In  2018, 
consumer  inflation  is  expected  to  ease  to  1.9  %. 
While  high  oil  price  pressures  should  continue 
feeding  into  higher  inflation,  their  impact  will  be 
partially  offset  by  some  subsidies  to  child  and 
healthcare services introduced in November 2017. 
As  oil  price  pressures  dissipate,  underlying 
inflation  should  progressively  drive  the  headline 
inflation  rate  to  1.6  %  in  2019,  with  the  expected 
picking-up  of  wage  growth  being  passed  on  to 
services  inflation.  While  positive  differentials  in 
the  other  underlying  components  are  expected  to 
remain  at  historical  levels,  this  may  lead  to  a 
narrowing of the difference in the overall inflation 
rate with the euro area average. 

Graph 1.4: 

Breakdown of inflation differentials against the 
euro area 

Source: European Commission 

in  construction 

is  projected  to 
Investment 
remain  buoyant  in  2017  and  2018  thanks  to 
public infrastructure projects and housing. The 
housing  investment-to-GDP  ratio  of  around  3.2% 
is  nevertheless  expected  to  remain  stable  despite 
the  high  demand  for  housing.  While  supply 
constraints  remain  entrenched,  price  pressures  are 
expected  to  build  up  further  (Graph  1.3)  (see 
Section  3.2.3).  ).  Ongoing  infrastructure  projects 
are forecast to drive up public investment in 2018. 
The public investment-to-GDP ratio of around 4 % 
is  expected  to  remain  among  the  highest  in  the 
euro area (see Section 3.4). 

External demand is expected to remain robust. 
The  external  sector,  led  by  financial  services 
exports will be supported by an improved external 
environment, especially in the euro area, even if a 
slight  slowdown  is  expected  in  2019,  in  line  with 
financial market prospects. 

Inflation 

Consumer  prices  rose  to  2.1  %  in  2017  from 
zero  average  in  2016,  which    is  0.6  percentage 

4 

Source: Eurostat 

Labour market 

Growth  of  the  Luxembourg  labour  market 
continues  to  accelerating.  According  to  national 
monthly  statistics,  employment  growth  increased 
by 3.3 % in 2017, from 3.0% in 2016 (Graph 1.5). 
This  momentum  is  expected  to  continue  in  2018 
although  progressively  stabilising  towards  2019. 
All  private  sectors  have  been  contributing  to  job 
creation  in  recent  quarters.  Resident  employment 
(used  for  computing  the  unemployment  rate)  rose 
markedly, helping to curb the unemployment rate. 
Unemployment  is  estimated  to  have  fallen  below 
the  6%  mark  in  2017,  from  6.3%  in  2016.  This 
downward 
slowdown 
is 
progressively and to stabilise towards 2019.  

forecast 

trend 

to 

2.03.04.05.06.07.00102030405060708091011121314151617Residential buildings investment-to-real GDP (%)Residential buildings investment-to-real GNI (%)EA esidential buildings investment-to-real GDP (%)-1.2-0.8-0.40.00.40.81.22012201320142015201620172018LU-EA IGD_NNRGLU-EA food_pLU-EA NRGLU-EA food_npLU-EA servLU-EA CP00 
 
 
1. Economic situation and outlook 

changed  unemployment 
the 
presence  of  skills  mismatches  between  demand 
and supply. 

indicating 

rate, 

Graph 1.6: 

Beveridge curve 

Source: EUROSTAT 

Social developments 

Luxembourg  shows  very  good  social  outcomes. 
The  overall  risk  of  poverty  or  social  exclusion 
(AROPE  rate),  at  19.7  %,  remains  relatively  low. 
A relatively high number of children under the age 
of  3  is  registered  for  formal  childcare,  which 
provides  incentives  for  both  parents  to  work.  It 
could  also  help  integrate  from  a  disadvantaged 
social background. 

Income  inequality  after  taxes  and  benefits 
increased  in  2016.  In  2016  the  richest  20 %  of 
households  in  Luxembourg  had  an  income  share 
five  times  that  of  the  poorest  20 %  (compared  to 
5.2  times  in  the  EU  as  a  whole).  Social  transfers 
have an important positive impact on the reduction 
of  poverty,  even  though  these  two  indicators 
experienced  noticeable  weakening  in  2016.  Over 
the  period  2010-2017  growth  in  per  capita  GDP 
outpaced  growth  in  household  disposable  income. 
Together  with  stagnating  social  indicators  (see 
Section  3.3.2)  this  suggests  that  the  economic 
recovery  has  not  yet  broadly  translated  into 
inclusive growth. The link between socioeconomic 
status  and  educational  outcomes  is  particularly 
strong in Luxembourg, as evidenced by PISA. This 
is  particularly  relevant  for  pupils  of  foreign 
nationality. 

The  good  recent  performance  in  job  creation 
hides  a  number  of  structural  shortcomings. 
Luxembourg  has  not  yet  reached  its  EU2020 
employment  rate  target  of  73  %,  which  stood  at 
70.7  %  in  2016  (and  at  71  %  in  2017Q2). 
Substantial  untapped  potential  remains,  stemming 
from low labour participation, which is particularly 
important among certain groups. The participation 
of  older  people  in  the  labour  market  is  low.    The 
labour  market  potential  of  women,  in  particular 
non-EU-born women, did not improve. Finally, the 
rate of young people not in employment, education 
or  training  (NEET)  fell  to  5.4  %  in  2016  and 
further 
in  2017Q2,  while  youth 
unemployment  remained  high  at  19.1%  in  2016, 
but  has  decreased  to  15.2%  in  2017.  As  the 
enrolment  rate  in  tertiary  education  is  very  high, 
this  implies  that  unemployment  is  concentrated 
primarily  among  low-skilled  young  people  in  this 
country.  This  and  other  structural  labour  market 
issues are discussed in Section 3.3. 

to  4.1% 

Graph 1.5: 

Breakdown of employment growth (year-on-
year) 

Source: STATEC 

The labour market robustness is apparent. Yet, 
indicators  remain  below  the  pre-crisis  levels. 
Although  job  creation  has  accelerated  since  2013, 
growth  remains  below  the  rates  recorded  in  the 
previous  upturn  (Graph  1.5),  especially  among 
cross-border  workers.  The  persistent  rise  in  the 
vacancy  rate  (Graph  1.6)  (mainly  in  specialised 
sectors)  is  raising  concerns  about  skilled-labour 
supply  shortages  and  could  constrain  employment 
growth  and  economic  growth  (see  Section  3.4). 
Moreover,  vacancies  could  not  be  covered  by  the 
national  jobseekers,  as  suggested  by  the  barely 

5 

-1012345670102030405060708091011121314151617Cross-border employmentResident employment010203040506070809101112131415160.00.20.40.60.81.01.21.41.60.02.04.06.08.0Job vacancy rate (%)Unemployment rate (%) 
 
 
External position  

A key feature of the Luxembourg economy is its 
substantial  exposure  to  international  capital 
flows  relative  to  the  size  of  its  economy. 
Luxembourg  has  the  largest  portfolio  investment 
flows  across  financial  centres.  Assets  under 
management of the funds industry, expressed as a 
percentage of national GDP, were around 7 800 in 
2016.  These  flows  partly  reflect  the  size  of  the 
country's  investment  funds  management  industry, 
which is constantly moving towards specialisation, 
diversification and expansion. 

The financial sector is a key driver of economic 
growth in Luxembourg, which is reflected in the 
current  account  balance.  It  accounts  for  ¼  of 
Luxembourg's GDP. The large size of the financial 
sector  leads  to  strong  surpluses  in  the  services 
balance, and ongoing comfortable surpluses in the 
current  account,  despite  sizeable  net  primary 
income  outflows  reflecting  the  large  number  of 
foreign corporations, workers and pensioners. The 
current account balance posted a surplus of 4.8 % 
of GDP in 2016 (Graph 1.7).  

Moreover, Luxembourg is a net creditor to the 
rest  of  the  world.  Its  net  assets  (net  international 
investment  position)  have 
to  around 
EUR 18.4 billion  (34.7  %  of  GDP).  The  net 
position  hides 
investment 
positions. At the end of 2016, gross external assets 
and  liabilities  reached  EUR  10.5  trillion  (around 
200 times the country's GDP).  

international 

large 

risen 

The  economy  heavy  reliance  on  the  financial 
sector  has  to  be  seen  in  the  context  of  the 
framework  and 
European  macro-prudential 
the  measures  adopted  by 
the  national 
authorities to reduce the potential impact of an 
adverse external shock. The national authorities 
in 
have 
reinforcing the macro prudential measures. Today, 
financial intermediaries are engaged in the process 
of adjusting to the new policy framework adopted 
in  2015,  and 
by 
complemented  by  reforms  at  European  level  (see 
Section 3.2.1). 

the  national  authorities 

taken  steps  since 

last  decade 

the 

1. Economic situation and outlook 

Graph 1.7: 

Breakdown of the current account balance 

Source: EUROSTAT 

Competitiveness 

The  government  has  been  implementing  a 
strategy  for  diversifying  the  economy,  by 
developing a few selected sectors. The sectors in 
focus  comprise  activities  with  high  value  added 
and  high  potential,  in  line  with  the  country's  high 
degree  of  specialisation  in  high  value  added 
activities, such as the financial sector. The strategy 
has  been  recently  strengthened.  Large  public 
investment  projects,  including  R&D,  and  market 
regulations,  among  other  measures  are  being 
implemented 
the  priority  sectors. 
However, 
this  has  not  prevented  private 
investment  in  R&D  and  innovation  performance, 
innovation 
as  measured  by 
scoreboard, to decline further (see Section 3.4).  

the  European 

to  develop 

challenge 

Among  other  factors,  possible  losses  in  cost 
the 
could 
competitiveness 
diversification  strategy.  The  steady  increase  in 
nominal unit labour costs (NULC) since 2000 has 
resulted in a significant differential compared with 
the euro area (see Graph 1.8). From 2000 to 2016, 
NULC  increased  by  a  cumulated  56 %,  almost 
twice as much as in the euro-area (28 %). Yet, this 
trend  stopped  and  the  cost  competitiveness  of  the 
country  started  to  improve  again  in  2013,  even  if 
the overall gap could not be reabsorbed, thanks to 
the period of stable wage moderation witnessed in 
most  recent  years,  ensuing  from  a  low  inflation 

6 

-50-40-30-20-1001020304050990001020304050607080910111213141516% of GDPCapital account (KA)Secondary income balancePrimary income balance  Trade balance - services  Trade balance - goodsTrade balanceCurrent account balance (CA)Net lending/borrowing (CA+KA) 
 
 
environment and from government intervention in 
the  wage  indexation  system.  In  2016,  nominal 
wage growth remained moderate at 1%. 

Graph 1.8: 

Breakdown of NULC (2000=100) 

Source: European Commission 

is  mostly  transferred 

Under  Luxembourg’s  wage-setting  system, 
inflation 
into  NULC 
through the indexation mechanism, which seeks 
to  keep  real  wages  unaffected  by  domestic  price 
inflation.  Even  so,  Luxembourg  has  cumulated 
positive  inflation  differentials  against  the  euro 
area. Moreover, labour productivity has not helped 
bring  down  rising  NULC.  This  partly  reflects 
strong  employment  growth,  mainly  from  large 
inflows  of  foreign  workers,  on  a  par  with 
economic  growth,  the  already  very  high  levels  of 
productivity  in  the  country,  and  the  effects  of 
labour  hoarding  at  the  onset  of  the  crisis.  A 
temporary  modulation  of  the  system  of  automatic 
wage indexation to inflation was applied in 2012-
2014.  Nonetheless,  nominal  wages  continued  to 
increase  marginally  above  the  euro  area  average, 
whereas  real  wages  actually  fell.  The  next  wage 
indexation is expected in the first half of 2018.  

Private indebtedness 

Private debt stands at a relatively high level, in 
particular  for  non-financial  companies.  Private 
sector debt stood at 344% of GDP in 2016. This is 
mostly due  to high  corporate  debt (282%  of  GDP 
in  2016).  However,  corporate  debt  figures  are 
inflated  by  widespread  intra-group  lending.  This 
line  with 
practice  has  been  expanding 
Luxembourg's 
financial  sector's  development. 
Corporate  consolidated  debt  stood  at  65.6  %  of 

in 

1. Economic situation and outlook 

GDP  in  2016  (Graph  1.9).  The  increase  in 
liabilities  generated  by  intra-group  inflates  the 
debt-to-GDP ratio, yet those liabilities are matched 
with equivalent assets. It turns out that the debt-to-
financial  asset  ratio  provides  for  a  better  measure 
of  companies'  financial  situation.  This  ratio 
remains  below  40  %  in  consolidated  terms, 
comparing favourably with other Member States. 

Credit  to  the  domestic  non-financial  private 
sector has remained strong despite a slowdown 
in  2017. 
to  non-financial 
companies grew by 4.5 %, compared to 12.0 % in 
2016 and 7.5 % in 2015. 

In  2017,  credit 

Although  household 
indebtedness  has  been 
rapidly increasing over the last 10 years, it also 
reflects  the  favourable  wealth  position  of 
households. While household debt has risen from 
39 % of GDP in 2000 to 62 % in 2016, the ratio of 
debt-to-assets  is  still  very  low  (36 %).  Yet,  in 
terms  of  disposable  income  household  debt  is 
estimated  at  165 %  in  2016,  according  to  sector 
national  accounts  figures,  recently  made  available 
by  the  STATEC.  Household  indebtedness  reflect 
real estate inflation, as around 80 % of households' 
debt  stems  from  mortgage  loans,  which  have 
registered  strong  growth  in  recent  years.  House 
prices  are  rising  in  real  terms,  after  a  slow  down 
marked  by  the  global  recession  in  2007  (see 
Section 3.2). 

Graph 1.9:  Non-financial corporations indebtedness (% of 

GDP) 

Source: Eurostat 

7 

901101301500001020304050607080910111213141516NULCGDP deflatorRULCReal WageLabour productivityNULC EA050100150200250300990001020304050607080910111213141516Debt / GDP non-consolidatedDebt / GDP consolidated 
 
 
 
 
1. Economic situation and outlook 

lower than the euro-area average (91.1 % of GDP). 
At the end of 2017, existing public guarantees are 
estimated  at  8.7  %  of  GDP,  5.9  %  of  which  are 
related to the financial sector. Given the low level 
of  public  debt  and  its  relatively  solid  economic 
together  with 
Luxembourg, 
fundamentals, 
Germany  and 
the  only 
the  Netherlands,  are 
countries in the euro area that still keep an ‘AAA’ 
rating from all the three major rating agencies. 

Graph 1.10:  Sectoral breakdown of the general 
government balance 

Source: EUROSTAT 

Public finances (3) 

The  general  government  surplus  is  expected  to 
have  declined  to  0.5  %  of  GDP  in  2017  (4) 
compared with a surplus 1.6 % of GDP in 2016. 
The  change  is  mostly  explained  by  the  impact  of 
the  tax  reform  enacted  by  the  government  at  the 
start of the year. The reforms are expected to shave 
revenues from households and corporates by about 
0.8  %  of  GDP.  Finally,  additional  revenues, 
equivalent to 0.3 % of GDP will be lost, due to a 
cut  from  30%  to  15%  in  the  share  of  VAT 
revenues that Luxembourg earns from e-commerce 
related  transactions.  Section  3.1.6  discusses  these 
issues in more detail. 

Expenditure  growth  is  also  projected  to  rise. 
This  is  a  result  of  the  automatic  public  wages 
indexation,  which  took  place  at  the  start  of  2017. 
On  top  of  that,  the  implementation  of  the  wage 
agreement  in  the  public  sector,  will  add  up  to  the 
wage bill. In 2018, the general government surplus 
is expected to marginally decline further. Buoyant 
revenue  growth  underpinned  by  strong  economic 
growth will be outpaced by growth in government 
expenditure,  especially  still  high  spending  for 
infrastructure investment. 

A  breakdown  by  sector  shows  that  the  overall 
surpluses  come  from  the  social  security  sector, 
while  the  central  government  accounts  tend  to 
record  deficits  (Graph  1.10).  Although  the  large 
central  government  deficits  recorded  from  the 
onset  of  the  financial  crisis  have  been  almost 
completely  absorbed,  the  deficit  is  projected  to 
widen  again  from  2017,  mostly  as  a  result  of  the 
implementation  of  the  comprehensive  tax  reform, 
the  projected 
while  higher  wage  bill  and 
investment  plans  will  add  up  on  the  expenditure 
side. 

Public debt is well below the euro area average. 
After  peaking  at  23.7  %  of  GDP  in  2013,  public 
debt  has  declined  to  20.8  %  of  GDP  in  2016, 
although 
increased 
somewhat in 2017. It remains more than four times 

is  projected 

to  have 

it 

(3)      The following assessment and estimates are based on the 
COM  Autumn  forecasts  2017.  Recent  developments 
suggest  that  the  general  government  balance  might  have 
recorded a higher surplus, as percentage of GDP, in 2017. 
(4)      Figures from the COM Opinion on DBP 2018, C (2017) 
8021  Final.  Recent  data  suggest 
the  general 
government balance might have recorded a higher surplus, 
as percentage of GDP, in 2017. 

that 

8 

-3.0-2.0-1.00.01.02.03.04.05.06.0020304050607080910111213141516% of GDPSocial security fundsLocal governmentCentral governmentGeneral government 
                                                           
 
 
1. Economic situation and outlook 

Table 1.1: 

Key economic, financial and social indicators - Luxembourg 

(1)  NIIP excluding direct investment and portfolio equity shares 
(2) Domestic banking groups and stand-alone banks, EU and non-EU foreign-controlled subsidiaries and EU and non-EU 
foreign-controlled branches.        
Source: Eurostat and ECB as of 30 Jan 2018, where available; European Commission for forecast figures (Winter forecast 2018 
9 
for real GDP and HICP, Autumn forecast 2017 otherwise)                                                                                                            

2004-072008-122013-1420152016201720182019Real GDP (y-o-y)5.10.24.72.93.13.43.93.6Potential growth (y-o-y)4.12.42.92.52.82.93.03.2Private consumption (y-o-y)1.51.62.23.32.4...Public consumption (y-o-y)3.02.12.92.62.0...Gross fixed capital formation (y-o-y)5.14.12.8-8.00.5...Exports of goods and services (y-o-y)9.31.99.56.92.7...Imports of goods and services (y-o-y) 9.13.19.77.12.1...Contribution to GDP growth:Domestic demand (y-o-y)2.01.61.7-0.11.1...Inventories (y-o-y)0.2-0.20.31.0-0.1...Net exports (y-o-y)2.9-1.22.71.92.0...Contribution to potential GDP growth:Total Labour (hours) (y-o-y)1.91.41.71.72.01.91.91.9Capital accumulation (y-o-y)1.31.11.10.90.91.01.01.0Total factor productivity (y-o-y)1.0-0.10.0-0.1-0.10.00.20.3Output gap1.2-2.9-2.8-1.2-0.9-0.40.10.2Unemployment rate4.64.96.06.56.36.15.96.0GDP deflator (y-o-y)3.93.21.71.3-1.32.32.31.9Harmonised index of consumer prices (HICP, y-o-y)3.22.71.20.10.02.11.91.6Nominal compensation per employee (y-o-y)4.02.02.23.00.72.92.52.0Labour productivity (real, person employed, y-o-y)1.7-2.32.40.30.0...Unit labour costs (ULC, whole economy, y-o-y)2.34.4-0.22.80.72.61.91.6Real unit labour costs (y-o-y)-1.51.1-1.81.42.00.3-0.4-0.2Real effective exchange rate (ULC, y-o-y)1.22.1-0.20.00.22.41.7-0.1Real effective exchange rate (HICP, y-o-y)1.10.11.0-2.50.61.01.4.Savings rate of households (net saving as percentage of net disposable income)10.813.314.614.614.9...Private credit flow, consolidated (% of GDP)45.05.126.446.77.2...Private sector debt, consolidated (% of GDP)219.3299.8315.0354.2354.9...of which household debt, consolidated (% of GDP)45.656.259.059.364.4...of which non-financial corporate debt, 173.6243.6256.0295.0290.5...Gross non-performing debt (% of total debt instruments and total loans and advances) (2)...0.90.7...Corporations, net lending (+) or net borrowing (-) (% of GDP)2.1-4.0-4.6-3.9-5.1-2.5-1.8-1.4Corporations, gross operating surplus (% of GDP)28.228.129.330.628.728.728.929.0Households, net lending (+) or net borrowing (-) (% of GDP)2.63.53.33.63.63.93.93.8Deflated house price index (y-o-y)8.11.33.65.35.9...Residential investment (% of GDP)3.23.43.43.03.2...Current account balance (% of GDP), balance of payments10.66.65.35.14.84.64.84.7Trade balance (% of GDP), balance of payments26.429.330.535.434.0...Terms of trade of goods and services (y-o-y)0.10.80.0-0.5-0.5-0.30.0-0.1Capital account balance (% of GDP)0.0-0.7-1.3-0.5-0.4...Net international investment position (% of GDP)10.29.141.737.734.7...Net marketable external debt (% of GDP) (1)-2167.1-1783.8-2923.0-3609.1-3802.0...Gross marketable external debt (% of GDP) (1)7892.37805.19089.510300.910878.8...Export performance vs. advanced countries (% change over 5 years)28.913.515.426.122.7...Export market share, goods and services (y-o-y)4.7-2.010.62.40.1...Net FDI flows (% of GDP)39.3-31.5-89.8297.9172.8...General government balance (% of GDP)1.20.61.21.41.60.50.30.4Structural budget balance (% of GDP)..2.41.72.00.60.30.3General government gross debt (% of GDP)7.518.223.222.020.823.723.022.9Tax-to-GDP ratio (%)38.039.039.338.439.639.238.938.8Tax rate for a single person earning the average wage (%)26.327.229.830.831.0...Tax rate for a single person earning 50% of the average wage (%)15.715.917.218.118.2...forecast 
 
   
 
 
1. Economic situation and outlook 

10 

 
2.  PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS 

the 

implementation  of 

Progress  with 
the 
recommendations  addressed  to  Luxembourg  in 
2017 has to be seen in a longer-term perspective 
since the introduction of the European Semester 
in 2011. Looking at the multi-annual assessment of 
the  implementation  of  the  CSRs  since  these  were 
first  adopted,  34 %  of  all  the  CSRs  addressed  to 
'some 
Luxembourg  have 
progress'. 66 % of these CSRs recorded 'limited' or 
'no progress' (see Graph 2.1). Substantial progress 
and  full  implementation  have  been  achieved  in 
several  areas  of  the  fiscal  policy,  for  instance 
preserving 
and 
fiscal 
strengthening fiscal governance.  

recorded  at 

position 

sound 

least 

a 

Graph 2.1:  Overall multiannual implementation of 2011-

2017 CSRs to date 

* The overall assessment of the country-specific 
recommendations related to fiscal policy excludes 
compliance with the Stability and Growth Pact 
** 2011 annual assessment: Different CSR assessment 
categories 
*** The multiannual CSR assessment looks at the 
implementation until 2018 Country Report since the CSRs 
were first adopted. 
Source: European Commission 

its 

strengthened 

the  past  years,  Luxembourg  has 
Over 
significantly 
budgetary 
framework.    In  2014,  Luxembourg  transposed  in 
national  legislation  the  requirements  of  the  2011 
Council  Directive  on  budgetary  frameworks  and 
the fiscal compact. In 2017, the authorities further 
adjusted  the  domestic  regulation  to  bring  it  into 
full  compliance  with  the  2011  Council  Directive 
on  budgetary  frameworks.  Since,  Luxembourg, 
which  is  under  the  preventive  arm,  has  remained 
committed  and  compliant  with  the  provisions  of 
the  Stability  and  Growth  Pact.  In  view  of  an 
expected  deterioration  of  the  fiscal  balance  in 
2015,  the  government  embarked  on  a  series  of 
corrective measures, targeting both the expenditure 
the  country's 
and  revenue  side, 

to  maintain 

Objective 

throughout 

Medium-Term 
the 
programming  period.  In  2016,  the  authorities 
decided  to  use  the  available  fiscal  space  to 
implement  a  tax  reform,  which  was  approved  in 
2016  an  entered  into  force  in  January  2017.  The 
reform  increased  households'  disposable  income, 
especially for lower income households. 

Several measures have been adopted to address 
the  long-term  sustainability  of  public  pensions, 
though their impact has been limited. A pension 
reform  was  adopted  in  2012,  but  its  impact  on 
pension  expenditure  has  been  limited.  A  law 
aiming at keeping workers with disabilities longer 
in  the  labour  market  entered  into  effect  at  the 
beginning  of  2016.  Additionally,  the  2017  tax 
reform  introduced  some  incentives  for  increasing 
working  time.  Finally,  a  reform  of  the  long-term 
care  public  insurance  is  to  take  effect  at  the 
beginning of 2018, in spite of which the cost of the 
scheme  is  projected  to  continue  growing  (on  the 
basis of latest dependency rate growth projection). 
More 
reforms  have  not  been 
considered yet or are pending approval, such as the 
so-called  'Age  Pact',  which  includes  a  whole 
package  of  measures  to  keep  workers  longer  in 
employment. Finally, no measures have been taken 
on  the  recommendation  for  aligning  the  statutory 
retirement age to changes in life expectancy.  

fundamental 

in 

the 

Some  progress  has  been  made  on  enhancing 
participation 
labour  market,  but 
challenges  remain.  The  main  efforts  have 
focussed on reducing youth unemployment, where 
progress has been substantial. Upskilling has been 
recently  addressed:  the  2015  evaluation  of  the 
vocational  education  and  training  system  had 
identified several fields for improvement. The law 
on  vocational  education  and  training,  amended  in 
2016  and  in  application  since  2016/2017,  aims  at 
improving  the  qualitative  skill  sets  and  study 
success rates of students. The employment of older 
workers  remains  among  the  lowest  in  the  EU, 
particularly  for  the  low-skilled,  who  are  also 
particularly  affected  by  long-term  unemployment 
(at  25.6  %  in  2016  for  International  Standard 
Classification  of  Education  –  ISCED  –  0-2,  but 
also  for  ISCED  3-4  at  34.6  %  and  ISCED  5-8  at 
62.6 %). 

Luxembourg  has  made  some  progress 
in 
addressing  bottlenecks  that  hamper  housing 

11 

7%59%18%5%11%No ProgressLimited ProgressSome ProgressSubstantial ProgressFull Implementation 
 
 
2. Progress with country-specific recommendations 

investment.  Numerous  measures  have  been 
adopted  or  are  planned,  especially  on  the  supply 
side, trying to increase the market offer. Recently, 
the  Parliament  endorsed  a  law  empowering  the 
"Fonds de Logement", a land management agency, 
to  support  the  supply  of  housing.  Additionally,  a 
reform  is  planned  to  enable  local  authorities  to 
require the landowner to build on their land within 
a  fixed  period  of  time.  Nevertheless,  supply 
remains  limited  and  the  challenge  ahead  for  the 
Luxembourg  authorities  continues  to  be  sizeable. 
House  prices  are  very  high  and  still  in  an 
increasing trend. 

Luxembourg  has  made  limited  progress  in 
reforming  the  wage-setting  system.  After  a 
modulation  of  the  automatic  wage  adjustment  to 
inflation  in  the  period  2013-2014,  no  further 
measures  have  been  adopted.  A  study  was 
published about the impact of the wage indexation 
on the evolution of labour cost. Based on the study 
conclusion  the  current  government  announced  its 
intention  to  consider  reviewing  the  existing  wage 
setting  mechanism  only  in  the  case  of  a  surge  in 
inflation pressures. 

Luxembourg  has  made  limited  progress (5)  in 
country-specific 
2017 
addressing 

the 

(5)  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 

recommendations.  The  government  has  made 
some  progress  on  strengthening  its  strategy  to 
diversify the economy, with large scale investment 
projects  and  sundry  other  measures  to  foster 
innovation.  Yet,  private  investment,  especially  on 
R&D,  and  innovation  remain  low  compared  with 
the euro area average. Progress has been limited in 
removing  regulatory  restrictions  in  the  business 
services sector. Several measures have been taken, 
although some barriers remain, notably concerning 
the  profession  of  lawyers.  On  ensuring  the  long-
term  sustainability  of  public  finances,  limited 
progress  has  been  made.  The  law  suppressing  the 
‘préretraite  de 
in 
November  2017  but  its  impact  on  the  average 
effective  retirement  age  and  on  expenditure  is 
difficult  to  assess  due  to  an  easing  of  restrictions 
on  other  kinds  of  early  retirement  schemes.  The 
remains 
employment 
particularly 
targeted 
measures,  at  39.6  %  in  2016  compared  to 55.3  % 
on  EU  average.  The  Age  Pact  to  foster  age 
management  measures 
is  still 
pending  approval  by  the  Parliament  since  its  first 
introduction in 2014. 

rate  of  older  workers 
in  spite  of  some 
low, 

solidarité’  was  adopted 

in  businesses 

overall  assessment  does  not  include  an  assessment  of 
compliance with the Stability and Growth Pact. 

12 

 
                                                           
                                                                                   
2. Progress with country-specific recommendations 

Box 2.1: Summary Table on 2017 CSR 
assessment 

Overall  assessment  of  progress  with  2017 
CSRs:  Limited 

Luxembourg 

CSR 1: Strengthen the diversification of the 
economy, including by removing barriers to 
innovation.  Remove 
investment 
regulatory  restrictions 
the  business 
services sector.  

and 

in 

CSR 2: Ensure the long-term sustainability 
of the pension system, limit early retirement 
and  increase  the  employment  rate  of  older 
people. 

Luxembourg  has  made 
addressing CSR1(1). 

some  progress 

to  diversify 

Some progress: The government has strengthened its 
strategy 
the  economy  and  some 
measures  have  been  adopted  to  foster  innovation. 
Yet,  private  investment,  especially  on  R&D,  and 
innovation remain low compared with the euro area 
average. 

Limited  progress:  Barriers  remain  in  the  business 
services sector, notably as regards the profession of 
lawyers. 

Luxembourg  has  made 
addressing CSR2. 

limited  progress 

Limited progress: Overall, the measures adopted to 
limit early retirement and increase the employment 
rate  of  older  people  have  had  a  limited  impact  on 
addressing  the  long-term  sustainability  of  public 
pensions.  Moreover,  the  latest  projections  adopted 
by the AWG suggest an aggravation of the impact 
long-term 
of  age-related  expenditure  on 
sustainability of public finances. 

the 

the 

law 

Limited  progress: 

suppressing 

the 
‘préretraite de solidarité’ was adopted in November 
2017  but  its  impact  on  the  average  effective 
retirement  age  and  on  expenditure  is  difficult  to 
assess  due  to  an  easing  of  restrictions  on  other 
kinds of early retirement schemes. 

Limited  progress: 

in  spite  of  some 

targeted 
measures,  the  employment  rate  of  older  workers 
remains  particularly  low  at  39.6  %  in  2016 
compared to 55.3 % on EU average. The Age Pact 
to foster age management measures in businesses is 
still  pending  approval  by  Parliament  since  its  first 
introduction in 2014. 

1 This does not include an assessment of compliance with the Stability and Growth Pact 

13 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2. Progress with country-specific recommendations 

ESI  Funds  address  key  challenges  to  inclusive 
growth  and  convergence  in  Luxembourg,  notably 
by  providing  sustainable  professional  integration 
of  jobseekers,  inactive  persons  and  young  people 
via  active  skills  development  and  better  access  to 

lifelong  learning  to  encourage  workers  aged  45+. 
ESI  Funds  also  support  entrepreneurship  in  the 
field  of  ICT  for  job  seekers  as  well  as  supporting 
R&D  and  innovation  via  the  Smart  Specialisation 
Strategy for research and innovation.  

14 

 
2. Progress with country-specific recommendations 

Box 2.2: Tangible results delivered through EU support to structural change in Luxembourg 

Luxembourg is a beneficiary of European Structural and Investment Funds (ESI Funds) support and 
can  receive  up  to  EUR  140  million  until  2020.  This  represents  around  1 %  of  public  investment (1) 
annually  over  the  period  2014-2018.  By  31  December  2017,  an  estimated  EUR 70 million  (50   %  of  the 
total)  was  allocated  to  projects  on  the  ground.  This  has  paved  the  way  for  enterprises  to  cooperate  with 
research institutions and over 30 researchers working in improved research infrastructure facilities.  

ESI  Funds  help  address 
implement  country-specific 
structural  policy  challenges  and 
recommendations.  Support  is  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.  Helping  answering  the  need  to  give 
incentives to older workers to work longer, the ESF supports measures to mentor job seekers and workers 
aged  45+.  The  ESF  also  supports  entrepreneurship  and  training  in  the  field  of  ICT  for  job  seekers,  for 
example with the training programme Fit4Coding which has received the award for "Best Practice" at the 
European Digital Skills Awards on 7 December 2017. 

Reforms were undertaken as  precondition for ESI Funds support (2). A Smart Specialisation Strategy 
for  research  and  innovation  was  developed  and  has  been  adopted  by  the  government.  Efforts  are  made  to 
complete all outstanding ex-ante conditionalities as soon as possible in order to avoid a possible suspension 
of interim payments. 

Luxembourg is advancing the take up of the European Fund for Strategic Investments (EFSI). As of 
December  2017,  overall  financing  volume  of  operations  approved  under  the  EFSI  amounted  to  EUR  89 
million,  which  is  expected  to  trigger  total  private  and  public  investment  of  EUR  284  million.  More 
specifically,  3  multi-country  projects  involving  Luxembourg  have  been  approved  so  far  under  the 
Infrastructure and Innovation Window, amounting to EUR 14 million in EIB financing under the EFSI. This 
is  expected  to  trigger  about  EUR  53  million  in  investments.  Under  the  SME  Window,  5  agreements  with 
financial  intermediaries  have  been  approved  so  far.  European  Investment  Fund  financing  enabled  by  the 
EFSI amounts to EUR 75 million, which is expected to mobilise approximatively EUR 231 million in total 
investment. Some 831 smaller companies or start-ups will benefit from this support. RDI ranks first in terms 
of operations and volume approved, followed by SMEs.  

Funding under Horizon 2020, the Connecting Europe Facility and other directly managed EU funds is 
additional to the ESI Funds. By the end of 2017, Luxembourg has signed agreements for EUR 72 million 
for projects under the Connecting Europe Facility.  

https://cohesiondata.ec.europa.eu/countries/LU 

(1) Public investment is defined as gross fixed capital formation + investment grants + national expenditure on agriculture 

and fisheries. 

(2)  Before  programmes  are  adopted,  Member  States  are  required  to  comply  with  a  number  of  so-called  ex-ante 

conditionalities, which aim at improving conditions for the majority of public investments areas. 

15 

 
 
 
 
 
 
3.  REFORM PRIORITIES 

3.1.  PUBLIC FINANCES AND TAXATION 

3.1.1.  LONG-TERM SUSTAINABILITY 

In the short-to-medium-term Luxembourg faces 
low  fiscal  sustainability  risks,  as  shown  by  both 
the debt sustainability analysis and the S1 indicator 
(European  Commission,  2018).  The  low  level  of 
the general government debt set at 20.3 % of GDP 
at end of 2016 (the second-lowest in the euro area) 
and the recurrent surpluses in the headline balance 
help to explain these results.  

The challenge for Luxembourg is the long-term 
sustainability of its public finances. The country 
is expected to face one of the sharpest increases 
in  the  EU  in  costs  related  to  an  ageing 
population from now to 2070. Specifically, this is 
indicated  by  the  fact  that  the  S2  long-term  fiscal 
sustainability gap indicator is relatively high, at 9.5 
percentage  points  of  GDP,  entirely  driven  by  the 
expected  increase  in  age-related  expenditure,  in 
particular  pensions  (6.5 pps  of  GDP)  and  health 
care  and  long-term  care  expenditure  (2.8 pps  of 
GDP) (6).  

3.1.2.  PENSION AND LONG-TERM CARE 

The  short-term 
financial  perspectives  are 
rather favourable  for  the  Luxembourg  pension 
system.  Luxembourg  has  yet  to  experience  the 
effects of an ageing population that have put other 
countries’ welfare systems under pressure. On the 
contrary, the continuous increase in the number of 
younger  active  foreigners  (both  immigrants  and 
cross-border  commuters)  has  a  positive  effect  on 
the  system  balance  and  a  modest  increase  in  the 
average  age  of  the  workforce  (see  country  report, 
2017).  In  2016,  revenues  from  contributions  were 
EUR 0.6 billon  in  excess  of  pension  expenditure 
and 
reserves 
system  has  accumulated 
equivalent to EUR 17.8 billion (33.6 % of GDP). 

the 

Concerns are set to arise only in the long term. 
According  to  the  latest  demographic  and  labour 
projections, total population will almost double by 

(6)  S1  and  S2  sustainability  indicators  are  based  on  the 
forthcoming  2018  Ageing  Report  (European  Commission, 
2018). 

2070.  This  will  prompt  a  proportional  increase  in 
age-related  expenditure  (Graph  3.1.1),  which  is 
projected to reach 31 % of GDP, up from 18 % in 
2016 
2018). 
(European  Commission-EPC, 
According  to  the  latest  projections  of  the  social 
security  Ministry,  the  operational  balance  of  the 
pension  system  is  projected  to  go  into  the  red  by 
2023, with the deficit widening steadily to -4% of 
GDP  by  2060.  However,  accumulated  reserves 
would  maintain  the  viability  of  the  system  for  a 
further  20  years,  before  been  fully  depleted  by 
2043 (Ministère de la sécurité sociale, 2016, p. 52).  

Graph 3.1.1:  Age-related expenditure (as % of GDP) and 
population projections in selected Member 
States (2016-2070 % change) 

Source: European Commission services 

to 

levers 

improve 

The  2016  actuarial  report  of  the  General 
Inspectorate  of  Social  Security  pointed  to 
long-term 
different 
sustainability:  i)  an  increase  in  the  contribution 
rate  (currently  set  at  24%);  ii)  a  change  in  the 
parameter contained in the formula for computing 
the pension benefit; iii) an increase of the eligible 
age  to  pension  (Ministère  de  la  sécurité  sociale, 
2016,  p.55).  Proposals  from  an  ad  hoc  group 
appointed by the government to carry out a review 
of the pension system could be presented in 2018. 

have 

reforms 

increased 

Previous 
the 
contribution  rates  and  made  some  changes  in 
the  calculation  of  pension  benefits.  Yet,  the 
in  pension-related  costs 
projected 
remains a challenge. The contribution rate stands 
the  wage  mass,  with 
currently  at  24 %  of 

increase 

16 

-50-2500255075PopulationA-R expenditure (% of GDP) 
 
                                                           
 
3.1. Public finances and taxation 

almost  doubled  between  2000  and  2016  (Graph 
3.1.2).  The  2012  reform  tightened  the  criteria  for 
not-paid credited period to be considered: for new 
pensioners,  only  education  periods  between  the 
age  of  20  and  27  instead  of  18-27  will  be  taken 
into  account  as  a  complementary  period. 
Additionally,  a  draft 
the 
‘peéretraite  de  solidarité’,  a  special  scheme 
allowing  people  to  retire  from  age  57  has  been 
recently  adopted.  These  topics  are  discussed  in 
Section 3.3.1 and Section 3.4.1. 

suppressing 

law 

Graph 3.1.2:  Number of new pensions, by type (thousands) 

Source: European Commission 

The  long-term  care  insurance  system  should 
remain  financially  stable  until  2030  if  the 
contribution rate is gradually raised from 1.4 % 
to  1.7  %,  according  to  an  analysis  carried  out  by 
the  General 
Inspectorate  of  Social  Security 
(IGSS)  (8). Following this analysis a reform of the 
system was finally adopted in 2017 and took effect 
from the 1st January 2018. In spite of the reform, 
the cost of the scheme is projected to increase over 
time  in  line  with  the  increase  in  the  share  of 
total  population. 
dependent  people  over 
According 
the 
to 
European  Commission  services,  long-term  care 
expenditure is estimated to reach 4.3 % of GDP by 
2070,  which  represents  an  increase  of  3.0  pps. 
Since  2013,  the  government  financing  provisions 
to  the  system  amount  to  40  %  of  total  annual 
expenditure. 

latest  projections  by 

the 

the 

the 

employers,  employees  and 
state  each 
contributing one third. Following the 2012 reform, 
the  rate  has  been  fixed  in  such  a  way  that 
contributions  cover  pension  payments  over  a 
period  of  10  years.  However,  based  on  the  latest 
projections, the contribution rate need be raised to 
37 %,  to  ensure  the  balance  of  the  system  by 
2060 (Ministère de la sécurité sociale, 2016, p.52). 
In  addition,  while 
the  2012  reform  already 
introduced  changes  to  the  calculation  method, 
which  provide  incentives  to  pursue  a  longer 
working career, the gross average replacement rate 
is  projected  to  remain  well  above  the  euro  area 
average,  see  Table  3.1.1.  In  2016,  Luxembourg 
recorded the highest benefit and replacement ratios 
in the EU. 

Table 3.1.1:  Gross average replacement rate (% of 

average wage at retirement) 

Source: 2018 Ageing report 

The  effective  retirement  age  is  far  below  the 
statutory  retirement  aged  fixed  at  65,  due  to  a 
number of available pre-retirement schemes. In 
2016, the average effective retirement age stood at 
60.2 (7).  In  the  same  year,  only  21.3 %  of  the 
newly  attributed  pensions  were  old-age  pensions 
(granted  at  65),  59.2 %  were  early  old-age 
pensions (average effective age: 59.8) and 19.5 % 
were  invalidity  pension  (average  effective  age: 
53.2)  (Ministère  de  la  sécurité  sociale,  2017). 
However, 
professional 
reclassification  scheme  for  persons  with  working 
disabilities,  which  took  effect  on  January  2016, 
could  possibly  introduce  a  drop  of  the  disability 
pensions. 

reform 

the 

of 

a 

Long-established incentives for early retirement 
are amongst the main factors underpinning old-
age workers early exit from the labour market. 
The  share  of  early  old-age  pensions  in  the  total 
number  of  new  pensions  attributed  every  year 

(7)  All personal pensions (old-age, early old-age and invalidity 
pensions)  have  been  considered  to  compute  the  effective 
retirement age. 

(8)  2013,  Study  on  the  financial  viability  and  the  long-term 

sustainability of the long-term care scheme. 

17 

20162070ChangeLU72.963.0-9.9BE40.237.1-3.1DE37.833.2-4.6FR45.435.6-9.9EA48.938.5-10.40123456789109092949698000204060810121416DisabilityOld-ageEarly old-age 
 
 
 
                                                           
 
                                                           
3.1. Public finances and taxation 

targeted  savings  for  the  2016-2018  period  were 
revised  downwards  by  25-35 %,  partly  linked  to 
the reconsideration of a number of reform steps in 
vocational  education  and  social  transfers.  The 
transparency of public finances would benefit from 
the  regular  publication  of  progress  reports  on 
implementation. 

3.1.5.  TAXATION 

The  overall  tax  burden  amounted  to  38.3 %  of 
GDP in 2016, close to the EU average of 38.9 % 
of  GDP  (European  Commission,  2017c).  Direct 
and  indirect  taxes  make  up  around  two  thirds  of 
total  tax  revenues  (with  the  biggest  contribution 
from  direct  taxation),  the  remainder  being  social 
contributions.  The  reform  of  Luxembourg's  tax 
system  adopted 
in  2016  focuses  mostly  on 
personal  income  tax  and  corporate  income  tax, 
with  the  stated  aim  of  delivering  greater  social 
equity,  efficiency,  simplicity  and  competitiveness. 
It is, however, too early to assess the actual effects 
of  the  reform,  which  entered  into  force  in  2017 
(with a few exceptions). 

Personal Income Taxation (PIT) 

According to the Luxembourg’s authorities, the 
personal income taxation reform was guided by 
the  principles  of  social  equity.  Most  reform 
measures entered into force in 2017 (see European 
Commission,  2017d);  a  few  others  have  done  so 
from 2018. In particular the tax reform will enable 
couples  to  opt  to  be  taxed  separately  (until  now, 
couples  have  been  taxed  jointly)  to  reduce  work 
disincentives  for  second  earners.  The  finance  bill 
for 2018 softens this regime by granting more time 
to  couples  to  opt  either  for  an  individual  or  a 
common taxation.  

Corporate Income Taxation (CIT) 

The  reform  of  corporate  taxation  sought  to 
boost competitiveness, for instance by lowering 
tax rates. A first decrease in the corporate income 
tax rate, from 21 % to 19 %, took place in 2017. A 
second decrease, to 18 %, will take place in 2018. 
As  a  whole,  and  including  the  surcharges,  this 
means  that  the  29.22 %  top  corporate  income  tax 
rate  will  go  down  to  26.01  %  in  2018.  The  rate 
applicable  to  corporations  with  a  taxable  income 
below  EUR 25 000  has  also  been  reduced,  from 

3.1.3.  FISCAL FRAMEWORK 

the 

adjusted 

authorities 

The 
domestic 
regulation  to  bring  it  into  full  compliance  with 
the  2011  Council  Directive  on  budgetary 
frameworks. As part of the 2017 budget process, 
amendments  were  adopted,  most  notably,  in  the 
following areas: (i) improving the transparency of 
public finances  by  establishing the requirement  to 
compare  systematically  the  official  macro-fiscal 
the  most  recent  Commission's 
scenario  with 
forecasts;  (ii) 
the  effectiveness  of 
increasing 
medium-term  budgetary  planning  by  explicitly 
prescribing  the  systematic  use  of  a  no-policy 
change scenario as a numerical benchmark, as well 
as  by  requiring  to  include  explanations  for  the 
successive  medium-term 
differences  between 
plans.  

The  substance  of  the  fiscal  policy  dialogue 
between  the  government  and  National  Council 
of  Public  Finances  is  promising.  Albeit  no  legal 
provisions  oblige  the  government  to  comply  with 
the  recommendations  of  the  NCPF  or  explain 
publicly any departures from them, the authorities 
formally committed to release their reactions to the 
NCPF's  opinions  and  findings,  also  to  ensure  full 
respect  with 
the  Fiscal  Compact (European 
Commission,  2017b).  In  the  Memorandum  of 
October 
Understanding 
concluded 
2017 (Ministry 
the 
government undertook to respond publicly within a 
deadline  of  two  months.  The  NCPF  noted  in  the 
latest  public  finance  assessment  (CNFP,  2017), 
that the government's information has improved, as 
agreed  in  the  Memorandum  of  Understanding, 
although the level of detail could be strengthened.  

in 
2017b), 

Finance, 

of 

3.1.4.  SPENDING REVIEW 

a 

answer 

implementation  of 

the  saving  steps 
The 
identified  by  the  2014  spending  review  is 
reported to be largely on track. According to the 
written 
Parliamentary 
to 
question (Ministry  of  Finance,  2016),  the  national 
authorities  are  progressing  with  the  realisation  of 
the 258 specific measures, most of them spending 
cuts integrated in the domestic budgetary planning. 
In  fact,  for  2015  (the  first  year  of  the  multi-year 
budgetary  strategy,  called 
the 
savings were  even overachieved by  close  to  10 % 
compared to the original plans. This being said, the 

'Zukunftspak'), 

18 

 
20 % to 15 %. Moreover, the 2018 budget offers a 
tax credit to companies for investments in acquired 
software.  

that 

(2.6 % 

indicators suggest 

Some 
country's 
corporate tax rules could be used by companies 
having  recourse  to  aggressive  tax  planning 
(ATP)  structures.  As  shown  in  a  study  (IHS, 
2018),  Luxembourg's  high  inward  and  outward 
FDI stocks (9) can only be partly explained by real 
economic  activities  taking  place  in  Luxembourg. 
The  high  level  of  dividend,  interest  and  royalty 
payments (10) as  percentage  of  GDP  suggest  that 
the country’s tax rules are used by companies that 
engage  in  aggressive  tax  planning.  The  large 
majority  of  FDI  is  held  by  'special  Purpose 
Entities' (11).  Corporate  income  taxes  represent 
4.6 % of GDP in Luxembourg, higher than the EU 
average 
in  2016).  The  absence  of 
withholding taxes on interest and royalty payments 
tax 
may 
altogether, if they are also not subject to tax in the 
recipient 
facilitate 
jurisdiction.  This  may 
aggressive  tax  planning  (12).  Furthermore,  there 
may  be  an  exemption  from  withholding  tax  on 
dividends paid to a company resident in a country 
that has a bilateral tax treaty with Luxembourg and 
is fully subject to an income tax comparable to the 
Luxembourg corporate income tax (Article 147 of 
the  income  taxation  law  –Loi  concernant  l'Impôt 
sur  le  Revenu).  To  be  applicable,  the  parent 
company  is  required  to  have  at  least  10 % 
participation or a participation with an acquisition 
cost  of  at 
for  an 
uninterrupted period of at least 12 months. 

those  payments  escaping 

least  EUR 1.2 million 

lead 

to 

(9)  The  inward  and  outward  FDI  stocks,  expressed  as  a 
percentage  of  GDP,  were  6  504  and  7  910  respectively  in 
2016 (the highest level in the EU). 

(10)  The royalties paid and received in 2016 amounted to 6.1% 
of  GDP  and  3.4%  of  GDP  respectively  (among  the  three 
highest  of  the  EU).  The  flows  of  dividends  paid  and 
received  (calculated  as  net  income  on  FDI)  amounted 
respectively to 87.7% of GDP and 130.3% of GDP in 2016 
(the highest of the EU). Interests received (calculated as net 
income on FDI) amounted to 15.5% of GDP (the highest of 
the EU). 

(11)  Around  95%  was  held  by  special  purpose  entities.  A 
special  purpose  entity  is  a  legal  entity  that  has  little  or  no 
employment,  operations  or  physical  presence 
the 
jurisdiction  where  it  is  located.  It  is  related  to  another 
corporation, often as its subsidiary, and is typically located 
in another jurisdiction. 

in 

(12)  For  more 

information  on 

interaction  between 
withholding tax and aggressive tax planning structures, see 
ZEW (2016). 

the 

3.1. Public finances and taxation 

Luxembourg has already taken measures and is 
continuing to amend some aspects of its system 
that  were  facilitating  corporate  tax  planning. 
The  patent  box  regime  applicable  to  intangibles 
constituted  after  31  December  2007  was  repealed 
from 1 July 2016 in line with Action 5 of the Base 
Erosion  and  Profit  Shifting  project  (BEPS)  (see 
OECD, 2015), as endorsed in the Code of Conduct 
for  Business  Taxation.  The  transitional  period  for 
the intangibles already benefiting from the regime 
ends  on  30  June  2021.  A  proposal  to  introduce  a 
new  patent  box  regime  was  adopted.  Its  main 
features  will  be  reviewed  at  a  later  stage  in  line 
with the Code of Conduct. Under the new "nexus" 
regime,  there  will  need  to  be  a  stronger  link 
between  the  intellectual  property  that  can  benefit 
from  the  regime,  and  the  R&D  that  created  it.  In 
addition, Luxembourg has engaged in international 
tax  reform.  While  the  economic  evidence  on  the 
effectiveness  of  patent  boxes  as  a  means  to 
encourage R&D remains limited (13), they may be 
used  as  tax  competition  tools  (14).  Like  all  EU 
Member  States,  Luxembourg  will  transpose  the 
provisions  of  the  Anti-Tax  Avoidance  Directives 
into  national  law  by  the  end  of  2018  and  2019. 
This  will  introduce  new  anti-abuse  rules (15).  It 
will  be  important  to  assess  to  what  extent  the 
measures already enacted (16), in conjunction with 
the  effect  of  the  transposition  of  the  Anti-Tax 
Avoidance  Directives,  further  limit  the  scope  for 
aggressive tax planning in Luxembourg. 

Value added tax (VAT) 

Previously, 

The  EU  destination  rules  on  VAT  of  electronic 
services,  applied  in  2015,  were  a  challenge  for 
Luxembourg. 
from 
electronic services represented more than 25 % of 
total  VAT  revenues  (EUR 1 077 million  in  2014). 
As  a  consequence,  and  anticipating  a  fall  in  VAT 
revenues,  Luxembourg  raised  its  VAT  rate  from 
15 % to 17 % from 1 January 2015.  While during 

revenues 

(13) CBP (2014), A Study on R&D Tax Incentives 
(14)  Alstadsaeter, A. et al., (2017). 
(15)  Such  as  the  lack  of  controlled  foreign  company  rules  or 

rules countering hybrid mismatches. 

(16)  For  example,  Luxembourg  introduced  a  new  article  in  its 
tax  legislation  that  provides  more  guidance  on  how  to 
apply  the  arm's  length  principle  formalised  on  1  January 
2015  (European  Commission,  2017b).  This  measure  was 
strengthened  by  the  Circular  adopted  in  2016  on  transfer 
pricing  for 
transactions  (Circulaire  du 
directeur  des  contributions  L.I.R.  n°  56/1  –  56bis/1  du  27 
décembre 2016). 

intercompany 

19 

 
                                                           
                                                           
3.1. Public finances and taxation 

Graph 3.1.3:  Revenues from environmental taxes, 2005-

2015 

Source: European Commission 

The  2016  tax  reform  includes  measures  to 
encourage  a  "sustainable  mobility",  supporting 
the  purchase  of  electric  cars,  pedelecs  and 
bicycles (20).  The  use  of  less  polluting  vehicles  is 
also  encouraged  by  a  re-evaluation  system  that 
less  polluting  cars  for 
lowers 
employers,  incentivising  employers  to  opt  for 
those vehicles as a benefit in kind (21). 

the  costs  of 

In  addition,  the  2018  Budget  provides  for  two 
measures  to  encourage  sustainable  mobility: (i) 
a  deduction  of  EUR  2,500  for 
individuals 
acquiring  hybrid  cars  for  private  use  whose 
emissions  do  not  exceed  50  g  CO2/km;  (ii)  the 
introduction  of  a  tax  credit  for  investment  by 
companies  in  electric  cars  with  zero  emissions  or 
hydrogen  fuel cell cars.  However,  measures  taken 
in favour of more "sustainable mobility" are likely 
to have limited impact as long as conventional fuel 
prices are relatively lower. 

(20)  Since  1  January  2017,  zero  emission  vehicles  (battery 
electric and fuel cell electric vehicles) as well as bikes and 
pedelec  bikes  benefit  from  a  tax  allowance  of  5,000  EUR 
and 300 EUR, respectively. 

(21)  For company cars, the valuation of the benefit in kind has 
been differentiated depending on the CO2 emissions of the 
car.  The  current  rate  of  1.5  %  of  the  commercial  value  of 
the  car  has  been  replaced  with  a  range  of  percentages 
between 0.5 % and 1.8 %. 

the transition years, VAT revenues from electronic 
services  can  still  be  partially 
retained  by 
Luxembourg,  the  share  in  total  VAT  collected 
decreased  to  16 %  and  11 %  in  2015  and  2016 
respectively.  Still, 
total  VAT  revenues  have 
remained broadly stable, amounting to EUR 3 465 
million  in  2016  and  EUR  3 461  million  in  2015 
(17), compared with EUR 3 624 million in 2014. 

Environmental and energy taxation  

Luxembourg has witnessed a steady decrease in 
its  environmental  tax  revenues  share  in  GDP 
over  the  last  10  years.  In  2015,  it  amounted  to 
1.9 %  of  GDP  (EU28  average:  2.4 %)  (Graph 
3.1.3).  Transport  fuel  taxes  make  up  the  largest 
proportion of environmental taxes in Luxembourg 
by far, reaching 1.7 % of GDP in 2015. Revenues 
from 
transport  (excluding  fuels) 
represented just 0.1 % of GDP in 2015.  

taxation  on 

to 

impact,  while  contributing 

Transport fuel tax rates are among the lowest in 
the  EU  and  provide  an  incentive  for  increased 
fuel  consumption,  including  cross-border  sales. 
This  results  in  highly  negative  ecological  and 
health 
traffic 
to  3.5.4) (18). 
congestion  (see  Sections  3.5.1 
Moreover,  the  tax  rate  on  diesel,  when  used  as  a 
propellant,  is  72%  of  that  on  unleaded  petrol, 
despite  diesel  having  a  higher  carbon  content  and 
higher  negative  environmental 
than 
unleaded  petrol  (European  Commission,  2017e). 
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 (19).  

impact 

(17)  See  Rapports  annuels  2014,  2015  et  2016  de 

l'administration de l'enregistrement et des domaines. 

the  benefits 

(18)  Total costs of fuel consumptions (considering national and 
international  negative  ecological  and  health 
impact) 
amounted  to  approximately  EUR  3.5  billion  per  year,  in 
2012,  while 
taxes  and 
employment)  amounted  to  EUR  2.1  billion.  "Ermittlung 
und Bewertung der positiven und negativen Wirkungen des 
Treibstoffverkaufs  unter  besonderer  Berücksichtigung 
negativer  externer  Umwelt-  und  Gesundheitseffekte  – 
maßnahmeninduzierte 
und 
Status 
Veränderungen,  Government 
25 
November 2016". 

of  Luxembourg, 

terms  of 

2012 

quo 

(in 

(19)  European Automobile Manufacturers' Association. 

20 

0.00.51.01.52.02.53.03.54.04.55.0HRDKSIELITNLCYFIMTBGEELVHUPLUKPTROATSEFRBECZIEDEESLULTSKEA-19EU-2820052015 
                                                           
 
                                                           
3.2.  FINANCIAL SECTOR 

3.2.1.  FINANCIAL SECTOR  

Luxembourg  has  a  large,  international  and 
diversified  financial  centre.  Expressed  as  a 
multiple  of  national  GDP,  Luxembourg's  bank 
assets  are  by  far  the  highest  in  Europe.  Yet,  in 
absolute terms, Belgium's banking sector is bigger. 
Investment  funds  are  the  most  important financial 
intermediaries.  Luxembourg  is  the  largest  fund 
administration  centre  worldwide  after  the  USA 
(Graph  3.2.1).  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 (22). 

Graph 3.2.1:  Size of the financial sector in comparison to 

GDP 

Source: STATEC, CSSF, ECB, June 2017 aggregates, 2016 GDP 

in 

sector 

financial 

international 

investment  funds 

is 
The 
Luxembourg's  main  economic  driver.  In  2016, 
the  sector  accounted  for  27.3 %  of  the  total  value 
added.  Beyond  this  figure,  more  than  half  of 
legal  entities  are 
Europe's 
domiciled 
Luxembourg's 
Luxembourg. 
specialisation  as  an  international  financial  centre 
explains  the  structure  of  its  banking  sector.  More 
than 90% of banks are branches or subsidiaries of 
global  banking  groups,  providing  depository  and 
custom  services  to  the  funds  and  maintaining 
strong financial links with their parent institutions. 
Only  seven  institutions  are  domestically  oriented 
commercial banks, together accounting for 85% of 
the  total  amount  of  liabilities  from  domestic  non-
financial  corporations  and  households,  including 

(22)  According 

to 

the  2016  annual 

the 
Commissariat  aux  Assurances,  Luxembourg’s  insurance 
commission, the sector’s balance sheet total came to EUR 
219 billion in 2016, or more than four times GDP. 

report 

from 

mortgages.  When 
to  money  under 
it  comes 
management,  Luxembourg's  fund  industry  has  a 
market  share  of  26 %  Europe-wide,  2 pps  higher 
than  in  2006.  Assets  under  management  of  the 
fund  industry  reached  EUR 4.1 trillion  in  early 
December  2017,  up  from  EUR  3.7 trillion  at  the 
start  of  the  year.  The  10.5 %  expansion  was  a 
combination  of  net  investment  inflows  and,  to  a 
lesser  extent,  market  valuations.  Partly  thanks  to 
Luxembourg's active FinTech scene, Invest Europe 
shows  that  in  2016  venture  capital  funds  amounts 
invested  in  Luxembourg  were  0.048 %  of  GDP 
which is about twice the European average. 

appears  highly 

The  economy  heavy  reliance  on  the  financial 
sector  has  to  be  seen  in  the  context  of  the 
European macro-prudential framework and the 
measures adopted by the national authorities to 
reduce  the  potential  impact  of  an  adverse 
external  shock.  Luxembourg’s  large  financial 
interconnected,  both 
sector 
domestically  and  internationally.  Assets  under 
management of the funds industry, expressed as a 
multiple of national GDP, amount to around 7 800 
and  the  structure  and  composition  of  the  funds 
industry  makes  it  sensitive  to  developments  and 
volatility  in  international  financial  markets  (BCL, 
2017,  p.113).  Financial  connections  with  the 
domestic  banking  sector  are  found  within  the 
interbank  network.  Specifically,  domestic  banks 
appear to receive regular funding from a couple of 
the 
funds'  depositaries  actively  operating 
four 
interbank  market.  On 
depositary  institutions  have  been  identified  as 
systemically important.  

these  grounds, 

in 

could 

possibly 

A  large-scale  redemption  shock  on  the  fund 
sector  could  potentially  spread  to  the  domestic 
banking  system,  especially  if  the  funds  run  on 
bank deposits, given the relatively high amount of 
funds'  deposits  held  by  domestic  institutions.  The 
impact  of  such  redemption  shock  on  the  funding 
intermediaries 
the 
channelling of needed financial resources. In such 
scenario,  banks  would  correct  their  balances  by 
fire-selling  assets  through  the  interbank  network, 
which  could  suffer  losses  hindering  its  financing 
provisioning  to  other  banks,  thereby  posing  a 
threat  to  financial  stability.  With  most  domestic 
commercial banks holding strong links towards the 
real  sector  of  the  economy,  those  risks  could 
potentially  spread  to  the  economy,  which  justifies 
reinforce  macro-
the  government  efforts 

affect 

to 

21 

 
 
 
                                                           
Today, 

regulations. 

prudential 
financial 
intermediaries  are  engaged  in  the  process  of 
adjusting to the new policy framework adopted by 
the national authorities in 2015 and complemented 
by reforms at European and international level. 

For 

instance, 

implemented. 

Luxembourg  has  further  implemented  macro-
prudential  measures.  In  2016,  in  the  context  of 
the  EU  framework,  Luxembourg  completed  the 
implementation  of  a  national  macro-prudential 
framework and additional reinforcing measures are 
being 
the 
countercyclical  capital  buffer  (CCyB),  which  had 
been calibrated at 0%, has been maintained at this 
level  at  each  quarterly  re-setting,  as  measured  by 
the  credit-to-GDP  gap.  The  designated  national 
authority (Commission de Surveillance du Secteur 
Financier  –  CSSF)  has  set  the  capital  buffer 
requirements  at  between  0.5 %  and  2 %  for  the 
other systemically important institutions, currently 
involving  eight  institutions,  which  will  be  fully 
applied in 2019 after a phase-in period. Finally, in 
2017  the  central  bank  endorsed  the  reporting 
requirements  of  granular  data  on  credit  and  credit 
risk. 

13 

past 

over 

While  the  outstanding  stock  of  mortgages  has 
quadrupled 
years, 
the 
Luxembourg  banks  remain  resilient.  Mortgage 
debt  as  a  percentage  of  GDP  remains  moderate. 
The  tests  of  resilience,  run  bi-annually  by  the 
European  and  national  supervisors,  on  the  seven 
banks  granting  more  than  99 %  of  domestic 
mortgages (23)  highlight  that  domestically  active 
banks are generally well positioned to withstand a 
real  estate  shock.  Under  the  projected  scenario,  it 
would  thus  cost  less  than  1 %  of  GDP  to 
recapitalise  domestically  active  banks  to  regain 
capital  minima,  as  Luxembourg's  banks  have 
ample capital buffers to draw on before regulatory 
minima are reached (see Table 3.2.1). 

(23)  Within  that  exercise  a  sensitivity  analysis  calculate  how 
much  capital  would  be  needed  in  order  to  restore  Capital 
Requirements  Regulation  (CRR)  and  Directive  (CRD  IV) 
scenario 
in  a 
solvency 
(assuming the default rate would rise up to 25 % combined 
with a price correction of up to 50%). 

requirements 

"worst-case" 

3.2. Financial sector 

Table 3.2.1: 

Financial soundness indicators, all banks in 
Luxembourg 

*ECB aggregated balance sheet: loans excl to gov and MFI 
/ deposits excl from gov and MFI 
**For comparability only annual values are presented 
Source: ECB CBD 

to  monitor 

from 
(Comité  du  risque  systémique) 

Luxembourg  is  introducing  additional  macro-
prudential  measures 
credit 
development.  The  government  has  adopted  a 
the  national  macro-prudential 
proposal 
authority 
to 
introduce  a  number  of  mortgage  borrower-based 
tools (Ministry of Finance, 2017). The draft bill is 
currently pending approval in the Parliament. The 
tools  proposed  are:  the  loan-to-income  limit,  the 
loan-to-value  limit,  the  debt-to-income  limit,  the 
debt  service-to-income-limit  and 
the  maturity 
limitation.  As  regards  the  sharing  of  roles  and 
responsibilities  between  the  authorities,  the  draft 
bill  proposes  to  build  on  the  existing  decision 
modalities set out in the national macro prudential 
framework.  With 
increasing 
comparability  of  reporting  data,  the  CSSF  is  also 
considering  imposing  a  common  loan-to-income 
and 
loan-to-value  definitions  on  domestically 
active  mortgage  granting  banks,  hence  following 
up  on  recommendations  issued  by  the  European 
Systemic Risk Board in 2016. 

view 

on 

a 

3.2.2.  HOUSING DEVELOPMENTS 

Fast-growing  housing  prices  in  combination 
with  increasing  household  indebtedness  are 
raising  concerns  about  the  sustainability  of 
households'  debt.  Prices  are  currently  at  an 
unprecedentedly high level and are increasing both 
in  relation  to  income  and  rents.  An  adverse 
economic  or  financial  shock  may  challenge  the 
sustainability of the ongoing upturn in the property 
market.  In  particular,  deteriorating  economic 
growth  prospects,  tightening  financing  conditions 
or rising long-term interest rates could worsen the 
debt  servicing  capacity  of  households,  and  might 
represent  a  risk  for  the  seven  domestic  banks 
is  highly 
where  property-related 

exposure 

22 

(%)20102011201220132014201520162017Q2Non-performing debt0.0---1.10.90.70.6Non-performing loans----1.41.10.80.7Non-performing loans NFC----4.83.11.81.7Non-performing loans HH----2.01.82.22.0Coverage ratio----30.838.537.738.6Loan to deposit ratio*69.065.860.954.952.251.854.152.5Tier 1 ratio15.115.318.621.318.520.223.621.5Capital adequacy ratio17.817.821.924.419.620.924.322.2Return on equity**8.12.77.06.47.27.27.5-Return on assets**0.50.20.50.50.50.60.6- 
                                                           
 
 
 
3.2. Financial sector 

(population growth, net migration, household size), 
and  housing  finance  indicators  (mortgage  loans' 
availability,  interest  rates,  borrower-based  limits). 
On  the  supply  side,  the  factors  affecting  house 
price  trends  are  dwellings  investment,  building 
permits,  construction  costs,  employment  in  the 
construction  sector,  business  sentiment  in  the 
construction sector and taxation. 

Demand drivers 

Demographics  are  one  of  the  main  drivers  of 
housing  demand.  Since  2000,  Luxembourg's 
economy has grown strongly. Economic output has 
increased  almost  by  60 %  compared  to  around 
19 %  in  the  euro  area.  This  performance  was 
mostly  based  on  a  parallel  strong  increase  in 
employment  (indicating  almost  no  productivity 
gains),  as  Graph  3.2.2  shows.  The  population 
increase  has  been  accompanied  by  a  growing 
number  of  cross-border  workers.  This  pool  of 
workers  adds  extra  potential  demand,  helping  to 
maintain the pressure on house prices. 

Graph 3.2.2:  Economic indicators –Real GDP and 

employment 

Source: Eurostat 

Lower 
interest 
rates  make 
for  higher 
rates  have  eased 
interest 
mortgages.  Low 
financing  conditions  and  supported  house  price 
increases.  Outstanding  credit  for  house  purchases 
as  percentage  of  GDP  is  much  higher  and,  since 
2007, has been growing faster in Luxembourg than 
in  the  euro  area  as  a  whole  (Graph  3.2.3).  At  21 
years,  average  mortgage  maturity  is  relatively 

concentrated.  On  these  grounds,  in  November 
2016  the  European  Systemic  Risk  Board  issued 
warnings  and  recommendations  to  8  Member 
States, including Luxembourg. However, given the 
underlying  momentum  in  the  residential  property 
introduced 
market,  Luxembourg  has  already 
relevant  macro-prudential  measures 
to  reduce 
significantly  potential  risks  to  financial  stability. 
Recently,  a  proposal  was  adopted  by 
the 
government,  including  a  set  of  relevant  measures 
to  avoid  a  build-up  of  household  vulnerability, 
although it needs to be approved by the Parliament 
and details on the benchmarks are not known (see 
Section 3.2.1). 

House prices 

has 

bank 

central 

estimated 

Residential  real  estate  prices  appear  to  be 
moderately overvalued and are increasing at an 
annual  real  rate  of  5.9 %.  Several  institutions 
the  degree  of 
have  published  measures  of 
overvaluation  in  Luxembourg's  residential  real 
estate,  with  figures  covering  a  wide  range 
depending on the methodology applied. The ESRB 
pointed  to  a  valuation  gap  over  the  fundamentals 
of 18 %, based on the price-to-income ratio and of 
9 % based on an econometric model, by end 2016 
(ESRB, 2017, p.46). In its short-term estimates, the 
an 
national 
overvaluation  of  8.5 %  on  average  since  2015, 
5.7 % in Q3 2016 (BCL 2017, p.137). Based on an 
average  of  the  price-to-income  ratio,  the  price-to-
rent  ratio  and  a  fundamental  model,  the  overall 
valuation  gap  computed  by 
the  European 
Commission  services 
(European  Commission, 
2017f)  is  larger,  at  close  to  28 %.  Overall, 
valuation  gaps  based  on  the  price-to-income  ratio 
and  the  price-to-rent  ratio  return  significantly 
higher  values 
from 
econometric  models.  Other  issues  suggested  by 
this  indicator,  such  as  the  increasing  vulnerability 
of  households,  or  the  market  possibly  evolving 
under  non-equilibrium  conditions,  warrant  a  close 
monitoring,  as  their  cumulative  interactions  could 
amplify  the  impact  on  the  economy of  a  potential 
significant shock. 

results  obtained 

than 

The  protracted  increase  in  house  prices  seems 
to  be  the  result  of  a  significant  mismatch 
between  housing  supply  and  demand.  On  the 
demand 
drive 
residential  property  price  dynamics:  wealth 
(disposable  income,  employment),  demographics 

fundamentals 

several 

side, 

23 

1001101201301401501600001020304050607080910111213141516LU - GDPEA19 -GDPLU - EmploymentEA19 - Employment 
 
3.2. Financial sector 

short  in  Luxembourg.  The  average  loan-to-value 
ratio  is  low  at  48 %  for  the  stock  of  mortgages, 
rising to 67 % at origination. 

Graph 3.2.3:  Outstanding credit for house purchase (% of 
GDP) and House Price Indices, Luxembourg. 

to  be 

the  existing  housing 

p.17).  Besides, 
stock 
deterioration  entails  that  around  2 200  dwellings 
need 
replaced  annually.  Since  2015 
construction  investment  prospect  (as  measured  by 
the number of residential building permits granted 
published by Eurostat) has remained rather stable. 
After an upward trend from Q3 2015 to Q2 2016 it 
has decreased to its previous level.  

to 

The  scarcity  of  supply  has  been  attributed  to 
several  factors,  mainly  the  lack  of  available 
land. A recent census has revealed that in 2013 the 
private sector owned around 92 % of the surface of 
the country defined as urbanised or to be urbanised 
according 
the  general  development  plans. 
Private  owners  are  seeing  the  price  of  their  land 
increase  in  tandem  with  house  prices,  which  are 
forecast  to  add  at  least  6 %  in  value  every  year 
until  the  end  of  the  decade  (L'Observatoire  de 
l'Habitat,  2015).  Consequently,  private  land  or 
house  owners  do  not  seem  to  have  incentives  to 
sell,  lacking  alternative  investments  with  such  a 
risk-return ratio. 

The  recently  adopted  tax  reform  contains 
measures to promote the placing on the market 
of properties 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. Based on the 2018 Budget Law, the 
measures  has  been  extended  until  31  December 
2018.  Given  that  this  measure  is  time-limited  to 
less  than  2  years  and  given  the  continuous  trend 
towards  higher  prices,  it  is  not  certain  that  it  will 
significantly increase the housing supply. 

The  authorities  are  planning  additional 
measures  to  increase  the  housing  supply.  In 
2017,  the  government  approved  an  update  of  the 
social housing programme. The update foresees 18 
additional projects for building 149 housing units, 
of which 58 are to be sold and 91 to be rented. In 
the  same  line,  the  Parliament  modified,  with  the 
effect  as  of 1 January 2018, the  eligibility criteria 
for  households  to  receive  a  rent  subsidy.  As  a 
consequence,  29 000  instead  of  currently  18 000 
households  will  be  eligible  for  the  subsidy.  In 
addition,  the  planned  reform  of  the  19  July  2004 
law  will  introduce  a  new  type  of  contract,  called 
Baulandvertrag.  Under  this  contract,  the  local 
authorities will be able to require that landowners 
build on their land within a fixed period of time. If 
the  land  is  not  used,  local  authorities  will  be  able 

Source: ECB 

fiscal 

Recent  policies  appear  to  have  encouraged 
house  ownership  over  renting  even  further. 
Subsidies  and 
incentives  have  been 
introduced  over  time,  reflecting  the  government's 
intention  to  increase  the  supply  of  both  housing 
and  building  land  and  to  make  property  more 
accessible. Measures within the recent tax reform, 
enacted  since  January  2017,  could  potentially  tilt 
the  system  bias  further  in  favour  of  ownership. 
Recurrent  property  taxes  on  housing  are  also  low 
(see  Section  3.2.2  of  2017  Country  report). 
Housing-related  tax  advantages  such  as  low  tax 
rates  on  real  estate  properties,  combined  with 
interest  tax  reliefs,  lower  the  marginal  cost  of 
owner-occupied  housing  and  consequently  favour 
ownership.  Given  the  rigidity  of  supply,  these  tax 
advantages  are  likely  to  be  capitalised  into  house 
prices. 

Supply side constrains 

The supply of housing and building land cannot 
meet  the  strong  demand.  House-building  has 
suffered  from  underinvestment.  Over  the  last  20 
years  an  annual  average  of  only  2 600  housing 
units  have  been  built  a  year,  while  the  number  of 
new properties required to keep up with constantly 
growing demand is estimated at 6 300 (BCL, 2017, 

24 

02040608010012001020304050607003Q304Q305Q306Q307Q308Q309Q310Q311Q312Q313Q314Q315Q316Q32015=100Percent of GDPMFI loans for house purchase, %GDPEA MFI loans for house purchase, %GDPReal House Price Index (2015=100), right axisNominal House Price Index (2015=100), right axis 
 
3.2. Financial sector 

deposits)  covers  more 
than  household  debt. 
Additionally,  the  policy  measures  implemented  to 
shield  the  banking  sector  form  direct  exposure  to 
the  housing  market  are  assessed  to  be  appropriate 
and sufficient (see Section 3.2.1). Yet, as far as the 
fundamental causes are not addressed, house prices 
and 
to  continue 
expanding,  as  it  was  the  case  in  the  first  three 
quarters of 2017. 

indebtedness  are  deemed 

to  support 

to impose penalties, such as reclassifying the land 
as  unsuitable  for building. Lastly,  the  government 
intervenes  directly 
the  supply  of 
affordable housing through the national affordable 
housing 
des 
Habitations  Bon  Marché")  and  recently,  through 
the  housing  fund  ("Fonds  de  Logement"),  which 
was restructured in 2017.  

("Société  Nationale 

agency 

3.2.3.  HOUSEHOLD INDEBTEDNESS CONCERNS 

Graph 3.2.5:  Mortgage credits - New contracts -adjustable 

rate share 

The  increase  in  house  prices  has  repercussions 
for  household  debt,  as  more  than  80 %  of  that 
debt  stems  from  mortgages  (BCL,  2017,  p.23). 
The  household  debt-to-GDP  ratio  has  increased 
more  quickly  in  Luxembourg  than  in  euro  area 
households.  Additionally, 
ratio 
underestimates  the  debt  burden  of  households, 
given  the  large  number  of  international  firms  and 
to  GDP. 
cross-border  workers  contributing 
Indebtedness  as  a  percentage  of  household's 
disposable  income  stands  at  above  160 %,  one  of 
the higher in the EU (Graph 3.2.4).  

the  GDP 

Graph 3.2.4:  Households' debt (% of Households' 

disposable income), 2016 

Source: ECB 

New  borrowers  are  better  shielded  against 
changes  in  interest  rates,  but  most  outstanding 
mortgages  remain  exposed.  The  share  of  new 
mortgages  with  a  fixed  rate  has  sharply  increased 
since 2009 in Luxembourg. It stood at 60 % at the 
end of 2016 (Graph 3.2.5). However, as adjustable 
rate mortgages dominated earlier, they still account 
for  around  70 %  of  all  current  mortgages.  One 
mitigating  factor  could  be  that  adjustable  rate 
mortgages are more frequently chosen by the most 
affluent 
lower-income 
households  have  a  preference  for  fixed  rate 
mortgages.  Such  preference  is  explained  by  the 
historically  low  interest  rates  (making  fixed  rate 
mortgages 
lower-income 
households),  coupled  with  higher  risk-averseness 
and expectations of future interest rates hikes.   

households,  while 

affordable 

to 

The  debt  burden  of  households  may  conceal 
quite  different  situations,  depending  on  how 
financial  vulnerability 
is  distributed  across 
individual  households.  Household-level  micro-

Source: Eurostat 

Existing  factors  can  mitigate  the  potential 
impact  of  adverse  developments  on  financial 
stability  and  on  the  economy  as  a  whole.  For 
instance, household financial wealth has increased 
at  almost  the  same  pace  as  debt,  as  the  ratio  of 
it  has 
total  financial  assets  shows: 
debt-to 
increased  from  32.1%  in  2000  to 35.6 %  in  2016. 
Moreover,  household  liquid  wealth  (currency  and 

25 

050100150200250300DKNLCYSEIELUUKPTFIESBEFRELATDEEEITSKCZPLSILTBGHULVROEA-19EU-280%10%20%30%40%50%60%70%80%90%100%091011121314151617 
 
 
3.2. Financial sector 

on 

overall 

households’ 

data,  from 
the  households'  consumption  and 
financing  survey (ECB,  2016)  provide  additional 
insights 
financial 
vulnerability.  The  average  debt-to-assets  ratio  in 
Luxembourg  suggests  a  low  insolvency  risk. 
However,  when  considering  net  wealth  quintiles, 
the  ratio  peaks  in  the  second  quintile,  a  possible 
sign of limited access to credit among low-income 
households.  In  addition,  the  median  debt-income 
ratio,  which  is  a  common  measure  of  medium  to 
long-term  debt  sustainability,  at  71.8 % 
in 
Luxembourg,  is  higher  than  in  the  euro  area. 
Moreover, households in the second lowest income 
distribution  quintile  have  a  much  higher  ratio  in 
Luxembourg  than  in  the  euro  area,  a  feature  that 
seems to confirm a degree of vulnerability for the 
poorer  households  in  Luxembourg.  Finally,  the 
median 
for 
households with debt payments is 13.5 %, but rises 
to  16.7 %  for  households  in  the  third  net  wealth 
quintile.  It  reaches  27.5 %  among  households  in 
the bottom quintile. 

service-to-income 

ratio 

debt 

26 

 
3.3.  LABOUR MARKET, EDUCATION AND SOCIAL POLICIES 

3.3.1.  LABOUR MARKET 

Graph 3.3.1:  Activity, unemployment and long-term 

unemployment rates 

Luxembourg  continues  to  experience  sustained 
job creation and a low unemployment rate. The 
most  dynamic  sector  is  business  services,  while 
industrial  employment  has  also  been  growing, 
though  moderately,  since  2015,  amid  wage 
moderation  and  improved  cost  competiveness  in 
the  whole  economy.  The  positive  employment 
growth  recorded  in  2016  (+  3  pps)  (STATEC, 
2017)  benefited  both  cross-border  workers,  who 
represent 45 % of the labour force (+4.3 pps), and, 
(+2.1  pps). 
to  a 
Nevertheless,  in  the  third  quarter  of  2017  the 
employment  rate  reached  71.8%,  which  is  against 
a  national  target  of  73  %.  The  Nominal  Unit 
Labour  Costs  (NULC)  further  decreased  in  2016, 
mainly driven by productivity gains (+1.1 ppt.) and 
moderate wage growth (+ 0.4 ppt. in compensation 
per employee) lagging behind productivity growth. 

lesser  extent, 

residents 

In 

the  2017 

(Graph  3.3.1). 

Following  a  continuous  increase  since  2010, 
unemployment fell for the first time in 2016 (to 
6.3 %) 
the 
unemployment  rate  fell  further  to  5.7%.  At  the 
same  time  the  long-term  unemployment,  although 
still low at 2.2%, reached its highest level in 2016, 
both  as  a  share  of  the  active  population  and  as  a 
share  of  total  unemployment  (34.6  %),  and  kept 
increasing  in  2017.  The  self-employed  accounted 
for  less  than  10  %  of  total  employment  in  2016, 
which  is  below  the  EU  average  of  14  %.  Youth 
increased 
unemployment 
slightly  to  19.1  %  in  2016,  just  above  the  EU 
average,  but  decreased  to  15.2 %  in  2017.  The 
activity  rate  of  the  young  is  decidedly  low  –  at 
24.9  %  against  33.8  %  on  average  in  the  EU  in 
2016.  This  is  mainly  due  to  the  very  high  rate  of 
enrolment  in  education  or  training  for  those  aged 
15 to 24.  

(age  group  15-24) 

Notes: 
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  

Old-age employment 

The employment rate of older workers remains 
a  key  challenge  despite  targeted  activation 
policies. At 39.6 % in 2016 and 38.6% in 2017Q2, 
it  is  very  low  compared  to  the  EU  average 
(55.3 %)  (Graph  3.3.2),  including  for  those  with 
the  highest  educational  attainment.  29.2 %  of 
jobseekers  are  older  than  50  and  among  those, 
42.4 %  are  disabled  or  have  a  reduced  work 
capacity.  The  poor  labour  market  performance  of 
older  workers  can  be  partly  attributed  to  high 
financial  disincentives 
to  work,  which  are 
comparatively higher for this group (see European 
Commission  2017,  page  29,  table  3.3.1).  A  law 
suppressing  the  ‘préretraite  de  solidarité’  scheme 
was  adopted  in  2017.  However,  its  net  impact  on 
the  effective  retirement  age  average  and  on 
expenditure is still not clear; restrictions have been 
eased  on  other  kinds  of  early  retirement  schemes, 
such  as  those  for  ‘shift  workers’,  ‘night  workers’ 
and ‘gradual retirement’.  

27 

646668707274767805101520252001200220032004200520062007200820092010201120122013201420152016Activity 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) 
 
 
 
 
3.3. Labour market, education and social policies 

Box 3.3.1: Monitoring performance in light of the European Pillar of Social Rights 

The  European  Pillar  of  Social  Rights,  proclaimed  on  17  November  2017  by the European  Parliament,  the 
Council  and  the  European  Commission,  sets  out  20  principles  and  rights  to  benefit  citizens  in  the  EU.  In 
light  of  the  legacy  of  the  crisis  and  changes  in  our  societies  driven  by  population  ageing,  digitisation  and 
new ways of working, the Pillar serves as a compass for a renewed process of convergence towards better 
working and living conditions 

Luxembourg  performs  relatively  well  on  the 
indicators  of  the  Social  Scoreboard  (24) 
supporting  the  European  Pillar  of  Social 
Rights.  Luxembourg  has  very  good  outcomes 
on  unemployment  and  young  people  not  in 
employment,  education  or  training,  but  also  as 
concerns  childcare  provision  for  very  young 
children  and  digital  skills.  The  overall  risk  of 
poverty  or  social  exclusion  rate  remains  below 
the  EU  average;  social  transfers  have  a  strong 
impact  on  poverty  reduction.  Income  inequality 
is  relatively  contained,  but  has  experienced  a 
stronger increase in 2016. 

in  2016 
The  overall  employment  rate 
continues to be comparatively low. The female 
employment  rate  has  not  increased  since  2014, 
while  the  male  employment  rate  has  been 
stagnating since the beginning of the crisis. The 
is 
of 
rate 
employment 
considerably lower.  

older  workers 

Luxembourg  has  good  outcomes  on  social 
protection  and  inclusion,  including  childcare. 
In  2017  it  introduced  several  new  measures  on 
early  childhood  education  and  care.  The  country 
has  increased  its  public  investment  in  this  area 
that  has  translated  into  a  very  high  number  of 
available  places 
and  good 
affordability  of  the  services  offered  (such  as 
childcare vouchers for free or at a very low fee for low income groups). These measures can have a positive 
impact  on  the  reconciliation  of  the  work-life  balance  as  well  as  on  the  integration  of  children  of  migrant 
background. 

childcare 

in 

24 The Social Scoreboard includes 14 headline indicators, of which 12 are currently used to compare Member States performance. 
The indicators "participants in active labour market policies per 100 persons wanting to work" and "compensation of employees 
per hour worked (in EUR)" are not used due to technical concerns by Member States. Possible alternatives will be discussed in 
the relevant Committees. Abbreviation: GDHI – gross disposable household income.  

28 

Early leavers from education and training (% of population aged 18-24)Better than averageGender employment gapOn averageIncome quintile ratio (S80/S20)To watchAt risk of poverty or social exclusion (in %)Good but to monitorYouth NEET (% of total population aged 15-24)Best performers  Employment rate (% population aged 20-64)To watchUnemployment rate (% population aged 15-74)Better than averageGDHI per capita growth N/AImpact of social transfers (other than pensions) on poverty reductionTo watchChildren aged less than 3 years in formal childcareBest performers  Self-reported unmet need for medical care Better than averageIndividuals' level of digital skillsBest performers  Equal opportunities and access to the labour marketDynamic labour markets and fair working conditionsSocial protection and inclusionLUXEMBOURGMembersStates'areclassifiedaccordingtoastatisticalmethodologyagreedwiththeEMCOandSPCCommittees.Themethodologylooksjointlyatlevelsandchangesoftheindicators in comparison with the respective EU averages, and classifies Member States insevencategories(from"bestperformers"to"criticalsituations").Forinstance,acountrycanbeflaggedas"betterthanaverage"iftheleveloftheindicatorisclosetoEUaverage,butitisimprovingfast.Formethodologicaldetails,pleaseconsultthedraftJoint Employment Report 2018, COM (2017) 674 final. NEET:neitherinemploymentnorineducationortraining;GDHI:grossdisposablehousehold income. 
                                                           
 
 
 
 
 
 
 
 
 
 
3.3. Labour market, education and social policies 

there 

is  no 

indication  yet  of 

62%  and  49%  of  participants  finding  a  job, 
although 
the 
sustainability  and  quality  of  such  jobs.  The  on-
going  study  on  active  labour  market  policies 
(ALMPs)  in  Luxembourg,  co-financed  by  the 
European  Social  Fund,  is  expected  to  include 
impact assessment studies for all ALMPs. 

Labour market participation of women 

in 

the 

increase 

The female employment rate increased steadily 
over the last decade. It fell behind the EU average 
in  2016  (65.1  %  versus  65.3  %)  for  the  first  time 
since  2011,  but  has  increased  again  to  66.8%  in 
2017Q2.  Luxembourg  experienced  a  slight  but 
almost  continuous 
female 
employment  rate  (increasing  by  5  pps  between 
2008 and 2016), coupled with a male employment 
rate  that  has  been  stagnating  since  2011  and  that 
reached  its  lowest  rate  in  10  years  in  2016  (at 
76.1 %,  3.1  percentage  points  below  its  peak  in 
2010),  with  a  further  decrease  to  75.1%  in 
2017Q2.  The  overall  gender  employment  gap  is 
just above the EU average and is declining (down 
10  percentage  points  since  2005).  The  increase  in 
the  female  employment  rate  is  registered  mainly 
among  women  with  more  than  one  child,  the 
lowest female employment rate involves women in 
a  relationship  without  children  and  the  highest 
single women with children. A new draft piece of 
legislation  introduces  a  more  flexible  scheme  for 
part-time  work  in  the  public  sector,  enabling 
people  to  work  from  40  %  to  90  %.  The  gender 
gap  in  part-time  employment  is  28.7  pps.  (as 
compared  to  23.2  pps  for  the  EU-28),  with 
consequences  on  the  career  prospects  of  women, 
their  wage 
pension 
entitlements.  The  tax  reform,  which  will  give 
married  or  co-habiting  couples  the  option  to  file 
jointly  or  separately on  their  tax return, will  enter 
into  force  in  2018  and  is  expected  to  reduce 
disincentives  to  work  for  second  earners  (see 
Section 3.1.6). 

ensuing 

levels 

and 

The  labour  market  performance  of  non-EU-
born  women  remains  particularly  weak  as 
compared  to  nationals.  Their  employment  rate 
(age group 20-64) was 52 % in 2016 (same as the 
EU  average),  much 
their  male 
counterparts  (68.8%)  and  the  employment  rate  of 
Luxembourg  women 
low 
performance  can  be  attributed  to  several  factors, 
quality 
including 

(64.8%).  This 

difficulties 

accessing 

lower 

than 

in 

Unemployment  benefits  may 
also  provide 
disincentives  to  work  as  for  unemployed  people 
aged 50 years and more the benefit period is in fact 
prolonged  by  either  12,  9  or  6  months  with  a 
contribution  period  of  respectively  30,  25  or  20 
years  (and  a  maximum  threshold  of  150%  of  the 
minimum  wage).  After  55  years  of  age,  a  further 
prolongation  of  6  months  is  granted  without 
special conditions for unemployed hard-to-employ. 

Graph 3.3.2:  Activity rate by detailed age group 

Source: Eurostat (LFS) 

to  work 

longer.  Against 

Factors  such  as  salary,  health  or  working 
conditions also play a major role in employees' 
this 
decisions 
background,  age  management  should  also  help 
keep  senior  workers  in  work  and  increase  their 
effective  retirement  age.  However  the  draft  bill 
introduced  in  2014  is  still  pending  in  parliament 
(see  European  Commission,  2017,  section  3.3.1, 
page 29). 42.3 % of the long-term unemployed are 
over 50 years old. The new set of measures to fight 
long-term  unemployment,  adopted  in  July  2017, 
aims to create subsidised permanent jobs for long-
term job seekers (aged 30 and older) that match the 
new needs of employers (municipalities and social 
enterprises). The law contains a specific provision 
for  people  older  than  50  in  the  form  of  a  total 
refund  of  wage  labour  costs  until  retirement.  The 
profiling tool for job seekers takes age into account 
among  risk  factors  associated  with  long  term 
unemployment.  Since  the  beginning  of  2017, 
mandatory  information  sessions  about  activation 
and  training  measures  target  older  job  seekers 
based  on  their  qualifications  level  and  language 
skills.  Initial  results  of  the  professionalization 
placement programme (six-week work placement) 
and  reintegration  employment  contracts  show  that 

29 

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

education  and  in  the  recognition  of  qualifications.  
Access  to  quality  early  childhood  education  and 
care  for  children  of  immigrants  could  help  for  a 
better integration. It would be interesting to follow 
up  on  the  extent  to  which  they  actually  use  these 
ECEC measures. 

agreement  with 
the  Luxembourg  Employers' 
Association on the recruitment of job seekers. The 
target  set  by  the  first  agreement  (to  recruit  more 
than  5000  jobseekers  over  3  years  compared  to 
2014) has almost been reached. 

Training and upskilling 

active 

policies 

Since  2016,  there  has  been  a  greater  focus  on 
training and upskilling opportunities in the mix 
of 
in 
labour  market 
Luxembourg.  The  employment  rate  of  the  low-
skilled  workers,  while  above  the  EU  average  of 
54.3 %, has been more or less stagnant for several 
years.  The  Public  Employment  Service  (PES) 
reported  a  +55.6 %  increase  in  jobseeker  training 
in  2016  as  compared  to  2015,  which  represent 
around  30%  of  the  total  measures  undertaken. 
However,  despite  an  increasing  number  of  job 
offers processed by the PES in 2016, together with 
the dynamism of the employers’ department, there 
were still no candidates for 25 % of the job offers 
(and 32 % in 2015). This was the case in particular 
in  IT,  banking  and  finance,  which  require  more 
specialised skills. This implies that there are skills 
mismatches in the labour market. 

In  2017,  to  tackle  skills  shortages,  greater 
emphasis  was  put  on  improving  job  seeker 
training  in  relation  to  the  needs  of  the  labour 
market, particularly in the digital field. The PES 
the  Luxembourg 
worked  more  closely  with 
Lifelong  Learning  Centre (25)  to  improve  job 
seeker  access  to  further  learning  and  increase  the 
provision  of  training  that  facilitates  transitions  in 
the  labour  market.  This  includes  specific  training 
to  configure  and  manage 
sessions  on  how 
computer networks, customised digital training and 
European  Computer  Driving  Licence  courses.  A 
partnership was also set up with Open Classrooms, 
the European leader in digital professional training 
to  promote  employment  opportunities  for  job 
seekers  in  the  digital  sector.  This  complements 
other  partnerships  or  work  in  this  field  (such  as 
the 
"Fit4Coding",  which 
European  Social  Fund,  and  has  a  very  high 
placement  rate  of  above  80%,  or  "Start  and 
Code").  The  close  cooperation  developed  by  the 
to  a  new 
PES  with  employers  should 

is  co-financed  by 

lead 

The 

Upskilling 

Adult  participation  in  learning  is  high,  but 
could be strengthened for low-skilled and older 
workers  to  improve  their  employability.  Adult 
participation in learning, at 16.8 %, is much higher 
than the EU average. However, it is extremely low 
among  older  workers  (7.8 %  for  those  above  50 
years  old)  and  low-skilled  workers  (6.9 %),  thus 
increasing  the  risk  of  outdated  skills  and  early 
retirement. 
Pathways 
Recommendation (26)  proposes  several  steps  to 
address the low-skilled adult population. These are 
also  being  undertaken 
in  Luxembourg.  The 
government  intends  to  progressively  implement 
the  national 
lifelong-learning  strategy  which 
addresses  participation  and  quality  issues  in  adult 
education.  Since  September  2017,  the  Second 
Chance  School  offers  training  comparable  to  the 
last year of upper secondary education. This leads 
to  a  diploma  for  entry  to  higher  education.  On 
public  support  for  training  in  businesses,  an 
amendment  to  the  labour  law (27)  in  2017  might 
reduce  the  incentives  for  businesses  to  promote 
life-long  learning  as  it  reduced  basic  co-financing 
paid  by  the  State  to  15 %.  However,  the  level  of 
support  rises  to  35 %  for  employees  without  a 
recognised  qualification  and  those  aged  45  and 
above. There are also specific financing provisions 
depending on company size, with the highest level 
of co-financing being available to SMEs. 

Digitisation and a high demand for digital skills 
imply  further  training  measures.  According  to 
the  European  Skills  Index (28)(Cedefop,  2017), 

(26)  Adopted by the Council on 19 December 2016  
       (2016/C 484/01). 
(27)  Loi  du  29  août  2017  portant  modification  du  Code  du 

travail. 

(28)  The  Cedefop's  European  Skills  Index  measures 

the 
comparative  performance  of  the  skills  formation  and 
matching  system  across  EU  Member  States.  This  is  a 
composite index with three pillars, each of which measures 
a  different  aspect  of  a  country's  skills  formation  and 
matching system: 

Pillar  1 

'Development'  measures 

training  and  education 

activities, 

Pillar 2 'Activation' measures the transition of people into work, 

and participation in the labour market, 

(25)  The  training  centre  of  the  Workers  Chamber  ("Chambre 

des salariés"). 

30 

 
                                                           
                                                           
3.3. Labour market, education and social policies 

people  (aged  16-24),  from  25.3  %  to  29.4  %  (29) 
(18.4 % in 2008). 

Children  and  young  people  are  those  most 
exposed  to  the  risk  of  poverty  or  social 
exclusion;  this  risk  generally  decreases  with 
age.  For  the  population  as  a  whole,  the  AROPE 
rate  increased  from  18.5 %  in  2015  to  19.7 %  in 
2016  (15.5 %  in  2008),  and  fell  slightly  from 
23.0 %  to  22.7 %  for  those  aged  0-17  (although 
still  above  the  20.9 %  recorded  in  2008).  Severe 
material  deprivation  among  children  and  young 
people  remained  low,  at  1 %.  Households  with 
children have a higher at-risk-of-poverty rate than 
households  without 
children.  Single-parent 
families were at the highest risk of poverty in 2015 
(44.6 %),  and  this  risk  increases  with  the  number 
of  children.  For  instance,  families  and  children 
made  greater  use  of  social  grocery  stores. 
However,  the  above-mentioned  figures  describe 
the situation for cash benefits, but benefits in kind, 
which Luxembourg has focused on since 2006, are 
generally  not  reflected  in  poverty  indicators.  For 
instance, access to public transport or school books 
are free of charge for children in Luxembourg. 

shown 

The  in-work  poverty  rate  in  Luxembourg  is 
above the EU average despite benefits available 
to  low  income  groups.  The  overall  at-risk-of-
poverty  rate  among  workers  has  increased  in 
recent years (from 9.4 % in 2008 to 12 % in 2016, 
as 
in  Graph  3.3.3).  Single-parent 
households experienced the highest risk of in-work 
poverty, at 36.2 %. For the year 2015, the median 
equivalent  income  was  EUR  35,270  per  year;  the 
annual  risk  of  poverty  threshold  is  therefore 
EUR 21 162.  While  Luxembourg  performs  well 
with  regard  to  adequacy  of  minimum  income 
benefits  overall 
at-risk-of-poverty 
threshold  in  Luxembourg  is  above  the  minimum 
income (RMG – Revenu Minimum Garanti) level. 
Other benefits are available to low income groups 
and RMG beneficiaries, such as childcare vouchers 
and the housing benefit (the income threshold will 
be higher and the eligibility criteria less strict from 
2018  onwards).  People  with  modest  incomes  no 
longer  have  to  pay  healthcare  expenses  up-front. 
Free  of  charge  access  to  public  transport  and  free 

(30), 

the 

for 

the  government 

Luxembourg is ranked among the best performers, 
in particular as concerns the Skills Matching pillar 
of  the  Index.  However,  the  country  has  a  good 
information  and  communications 
record 
technology specialists and a high share of hard-to-
fill  vacancies  in  this  field  due  to  a  growing 
the  Digital  Lëtzebuerg 
demand.  As  part  of 
to 
is  committed 
Initiative, 
addressing the high demand for ICT professionals 
and  has  launched  the  Luxembourg  Digital  Skills 
Bridge Programme, which kicks off in 2018 with a 
pilot  project 
financial 
compensation  for  upskilling  some  600  employees 
in IT training. Other occupations such as financial 
and  administration  experts,  medical  doctors  and 
technical and logistics engineers suffer from skills 
and labour shortages. 

offering  businesses 

Against this background, recent statistics by the 
national 
statistical  office  on  professional 
training suggest high involvement in training by 
firms. In 2015, 77% of enterprises were providing 
training  to  their  employees,  and  those  training 
measures  benefited  62%  of  employees  (i.e.  more 
than  170,000  persons).  The  training  took  1.2%  of 
working  time,  (the  double  compared  to  20  years 
ago)  and,  on  average,  35  hours  of  training  were 
followed.  Fields  of  training  were  techniques  and 
practices  specific  to  a  particular  task  (75%  of 
enterprises), client relations (23%), IT tools (21%), 
managerial skills (19%) and languages (17%). 

3.3.2.  SOCIAL POLICIES 

Luxembourg  shows  very  good  social  outcomes. 
The overall risk of poverty or social exclusion rate 
(AROPE)  is  relatively  low  (19.7 %)  and  social 
transfers  have  a  favourable  impact  on  poverty 
reduction (39.1 %). However, the current situation 
has  not  yet  returned  to  the  pre-crisis  levels.  With 
the  poverty 
income 
reduction  capacity  of  social  transfers  fell  by  4 
percentage  points  in  2016.  However,  the  AROPE 
rate has increased for elderly (aged 65 and above), 
from 8.2 % in 2015 to 9.1 % in 2016 (significantly 
above  5.4  %  recorded  in  2008),  and  for  young 

inequality  on 

the  rise, 

Pillar 3 'Matching' measures the degree of successful matching 
of  skills  that  is  the  extent  to  which  skills  are  effectively 
matched in the labour market. 

(29)  There is a break in series registered for these observations 
30    According  to  the  benchmarking  exercise  in  the  area  of 
minimum  income  schemes  conducted  within  the  Social 
Protection  Committee,  see  the  draft  Joint  Employment 
Report 2018. 

31 

 
                                                                                   
                                                           
3.3. Labour market, education and social policies 

of  charge  or  very  cheap  access  to  social  and 
cultural  activities  and  education  and  training  are 
also offered to RMG beneficiaries. 

Graph 3.3.3:  In-work-poverty rate, groups 

In-work-poverty rate (% of employed). Employed who have 
an equivalised disposable income below 60% of the 
national equivalised median income. 
Source: Eurostat 

Luxembourg  has  one  of  the  lowest  at-risk-of-
poverty rates in the EU for the population aged 
65  and  above  (9%  in  2016  against  14.7%  on  EU 
average). According to analysis carried out for the 
upcoming  Pension  Adequacy  Report,  the  net 
average replacement rate amounts to 97.5% for an 
average 
after  40  years  of 
contribution  period,  which  places  Luxembourg  at 
the  top  of  all  EU  countries.  Also  the  gender  gap, 
that  has  been  larger  than  the  EU–average,  is 
reduced in the period 2008-2016. 

retired-earner 

Social transfers play a key role in reducing the 
at-risk-of-poverty  rate  in  Luxembourg.  Social 
transfers have a strong effect reducing poverty. On 
unemployment  benefits,  Luxembourg  ranks  above 
the EU average for indicators related to coverage, 
adequacy  and  duration  (for  a  1-year  work 
record)(31).  The  proposed  social  inclusion  income 
scheme  (REVIS  –  Revenu  d’inclusion  sociale)  is 
currently  being  reviewed  following  comments 
from social partners and institutional stakeholders. 
In  Luxembourg,  the  social  partners  are  largely 

(31)  According  to  the  benchmarking  exercise  in  the  area  of 
unemployment  benefits  and  active  labour  market  policies 
conducted  within  the  EMCO  Committee.  See  the  draft 
Joint Employment Report 2018 for details. 

involved 
the 
implementation of social policies. 

in 

legislative  process  and 

the 

The  REVIS  reform  aims  at  reducing  the  high 
inactivity  traps  generated  by  the  current 
minimum income scheme, to address the problem 
of  housing  cost  overburden  for  beneficiaries  and 
the insufficient income for one parent households. 
In  order  to  improve  the  situation  of  children  and 
one-parent  households,  the  proposed  amount  per 
child  will  increase,  and  there  will  be  an  extra 
increase  for  children  of  one  parent  families. 
Simulations conducted for six family types (single 
person, one-earner couple and two-earners couple, 
without children and with two children), based on 
the  OECD  tax  and  benefit  model,  show  that  the 
REVIS would improve the adequacy of the social 
safety  net  for  households  with  children,  while  the 
reform  would  introduce  little  changes  for  those 
without  children.  Financial  incentives  to  work 
would  be  slightly  weaker  after  the  reform  as  the 
difference  between  incomes  in-work  and  out-of-
work is reduced for those belonging to households 
with  children.  For  those  without  children,  this  is 
only  true  at  low  earnings  levels.  Yet,  the  strong 
activation  component  of  the  new  scheme,  and  the 
improved  accompanying  measures  and  services 
attached to it, is expected to largely overcome the 
possible side-effects of the reform in this respect. 

from  migrant  backgrounds 

People 
face 
particularly  poor  labour  market  and  social 
outcomes  as  compared  to  nationals:  a  low 
employment  rate  affecting  women  in  particular, 
high  unemployment  (14.2%  in  2016),  below-
average  incomes  and  very  high  at-risk-of-poverty 
or social exclusion (46.1% in 2016). The gap in in-
work poverty rates between native born and people 
born  outside  of  the  EU  exceeded  20  pp  in 
Luxembourg,  the  highest  in  the  EU  (6.6%  versus 
39.2%  in  Luxembourg  as  opposed  to  8.7%  and 
26.9% in the EU as a whole). This situation can be 
attributed to the fact that people born outside of the 
EU might lack a recognition of their degrees, have 
lower  qualifications  or  do  not  master  sufficiently 
the  official  languages  of  the  country.  These 
elements prevent them from finding a job, or give 
them  access  to  jobs  that  are  less  paid.  Given  the 
significant  size  of  the  population  born  outside  of 
the EU in Luxembourg (11.4 % of the population) 
and  the  fact  that  migrants  tend  to  be  of  relatively 
young  age  and  represent  a  higher  proportion  of 
prime-age  workers,  better  integration  of  migrants 

32 

051015202530354045200520062007200820092010201120122013201420152016% of employedTotalTemporaryPart-timeLone parents 
 
                                                           
would  benefit  both  economic  growth  and  social 
cohesion. 

to 

improve 

inter-ministerial  committee  and 
of 

the 
Reforms  are  underway 
employment  and  social  outcomes  of  refugees 
and  other  migrants  in  Luxembourg.  A  new 
multiannual national action plan on integration, the 
"Accompanied  Integration  Course"  was  approved 
by  the  Council  of  Government  in  March  2017.  It 
was developed by the Luxembourg Reception and 
Integration  Agency  (OLAI)  in  collaboration  with 
an 
in  direct 
relevant 
consultation  with 
stakeholders. The action plan is based on two axes: 
(i)  the  reception  and  follow-up  of  applicants  for 
international protection;  and (ii)  the  integration of 
non-Luxembourg  residents.  People  applying  for 
refugee status take a compulsory medical test, then 
follow  a  16  hours  course  on  the  Luxembourg 
society,  the  school  system,  etc.  Childcare  is 
covered  so  that  women  can  take  part.  Language 
courses and job coaching are offered to those who 
obtaining  refugee  status.  There  are  also  seminars 
on how to find housing and a job.  

number 

a 

3.3. Labour market, education and social policies 

Controlling 

background. 

educational  outcomes  is  particularly  strong.  It 
outweighs  (by  2.7  times)  the  impact  of  the 
language  spoken  at  home  (MENJE  and 
the 
University  of  Luxembourg  2016)  and  even  the 
immigrant 
for 
socioeconomic  status,  the  performance  gap  of  the 
children  of  immigrants  is  reduced  by  two  thirds. 
The performance gap between non-immigrants and 
first-generation  immigrants  is  around  the  EU 
average, but second-generation pupils do not catch 
up  with  non-immigrants.  Pupils  of 
foreign 
nationality are less frequently oriented towards the 
higher tracks of secondary education. The majority 
(63.2 %)  of  pupils  of  foreign  nationality  who  do 
attend  general  secondary  education  go  to  schools 
that  do  not  follow 
the  national  curriculum 
(MENJE,  2016).  As  most  of  these  schools  charge 
tuition  fees,  this  option  is  available  mainly  to 
pupils  with  a  higher  socioeconomic  status. 
Changing  tracks  is  extremely  rare  (Klapproth  et 
al., 2013). The difference in the language regimes 
of  the  general  and  technical  tracks  of  secondary 
education also plays a role in orientation decisions 
and narrows  the  scope for  switching.  As of 2016-
2017 the orientation process was reformed to give 
parents a say in the decision. 

3.3.3.  EDUCATION AND VOCATIONAL 

TRAINING  

The  basic  skills  outcomes  of  15-year-olds  are 
significantly  below  the  EU  average.  While  the 
cumulative  spending  per  student  over  their school 
life  up  to  age  15  is  the  highest  among  EU 
countries,  Luxembourg  had  an  above  EU-average 
share  of  low  achievers  (25.9%  vs  20.6%)  and  a 
below  EU-average  share  of  top  performers  (6.9% 
vs  7.6%) 
for 
(PISA). 
International 
Performance  worsened  between  2012  and  2015, 
especially  in  reading  and  science  (for  more  detail 
(see European Commission 2017, 3.3.2). 

in  2015  OECD  Programme 

Student  Assessment 

is  a 

There 
strong  relationship  between 
socioeconomic  background  and  academic 
performance.  How  pupils’  perform  at  school  is 
heavily influenced by their ability to cope with the 
trilingual system, especially for those who speak a 
different  language  than  Luxembourgish  at  home 
(see European Commission 2017, 3.3.2, page 31). 
In  2014/2015,  this  group  represented  57 %  of  the 
school  population 
l’Éducation 
Nationale,  de  l’Enfance  et  de  la  Jeunesse/MENJE 
2016). The link between socioeconomic status and 

(Ministère  de 

Luxembourg's  early  school  leaving  rate 
is 
significantly  below  the  EU  average,  although 
national surveys indicate a steady increase. The  
early  school  leaving  (ESL)  rate,  as  measured  by 
the Labour Force Survey in line with standard EU 
practice,  decreased  by  3.8  percentage  points  in 
2016, to 5.5 %. However, caution is needed when 
interpreting this data because of the limited sample 
size  in  Luxembourg.  National  estimates  based  on 
the actual number of young people not completing 
the 
upper  secondary  education 
number  of  dropouts  have  been  rising  since  2009 
and was 13.5 % in 2015 (Ministère de l’Éducation 
Nationale, de l’Enfance et de la Jeunesse (MENJE) 
2017a). Repeating a year is not uncommon and is a 
key  factor  behind  early  school  leaving  (MENJE, 
2017a).  Across  school  types,  repeating  a  year  is 
particularly high (61 %) among pupils in technical 
secondary  education  (MENJE  2016–  see  also 
European  Commission  2017, 
section  3.3.2, 
page 31). 

indicate 

that 

the 
initiatives  aim 
New  policy 
achievement gaps between pupils from different 
backgrounds  and  reduce  early  school  leaving. 
The  law  on  early  childhood  education  and  care 

to  close 

33 

 
3.3. Labour market, education and social policies 

the 

adopted  in  July  2017  introduced  multilingual 
education  for  children  aged  1  to  4.  The  law  also 
links 
in  early 
funding  of  participation 
childhood  education  and  care  to  better  access  and 
quality  offered  by  providers.  As  of  September 
2016,  a  three-year  induction  period  has  been 
introduced for all new teachers, and the number of 
hours  of  compulsory  continuing  professional 
development has been doubled to 48 hours every 3 
years. The law on secondary education adopted in 
July 2017 introduced several measures to improve 
school quality and better to adapt the school offer 
to  the  needs  of  an  increasingly  diverse  school 
population. 

Participation 
in  vocational  education  and 
training  is  high,  but  is  characterised  by  failure 
at  school.  The  proportion  of  upper  secondary 
students  (ISCED  3)  in  vocational  education  and 
training (VET) was well above the EU average in 
2015 (61.4 % versus 47.3 %), and the employment 
rate  of  recent  VET  graduates  was  near  the  EU 
average  (78.5 %  as  against  75 %  in  2014).  Issues 
include students repeating a year and early school 
leaving  rates.  The  amended  VET  law,  in  force 
since  2016-2017,  aims  to  improve  the  qualitative 
skill sets and study success rates of students. Initial 
assessments  are  being  carried  out,  which  include 
by  seeking  the  views  of  social  partners.  To  better 
match  supply  and  demand  and  prevent  youth 
unemployment, 
the  Chamber  of  Commerce 
launched  the  'Talent  Check'  initiative  in  2016  to 
help  students  choose  a  suitable  training  place. 
Companies  can  also  make  use  of  candidates’  test 
results when selecting apprentices. Important steps 
were  also  taken  to  ensure  that  VET  teachers  and 
trainers receive the latest training (Cedefop, 2017). 

34 

 
 
3.4. INVESTMENT AND COMPETITIVENESS 

3.4.1.  DIVERSIFICATION OF THE ECONOMY 

Reducing  the  economy’s  strong  dependence  on 
one  economic  sector  remains  a  key  long  term 
challenge.  The  economy  of  Luxembourg  today 
largely relies on the financial services industry (see 
Section 3.2.1), which in 2016 accounted for 27.3% 
of the country total added-value (Graph 3.4.1.). By 
contrast,  industrial  activities  continue  to  represent 
a  relatively  minor  share  of  Luxembourg’s  added-
value 
activities, 
manufacturing has remained stable in recent years, 
both in terms of gross added-value and number of 
jobs.  The  construction  sector  employs  the  two 
thirds  of  the  country’s  craft  labour  force  and  saw 
its  number  of  operating  firms  steadily  increasing 
over  the  last  decades.  Finally,  the  automotive 
sector  is  important,  by  representing  around  50 
operating companies and 10 000 employees. 

(32).  Within 

industrial 

Graph 3.4.1:  Main components of Luxembourg and EA19 
value added at current market prices (% of 
GVA), by NACE Rev.2, 2016. 

Source: Eurostat 

Over  the  last  years,  Luxembourg  has  boosted 
its  strategy  to  diversify  the  economy.  The 
authorities have identified five key priority sectors 
characterized  by  knowledge-intensive  activities 
that  are  in  accord  with  the  country  salary  levels 
and  technological  development:  information  and 
the  space 
communication 
industry; 
(including 
health-technologies 
biomedicine);  logistics  and  eco-technologies.  In 

technologies  (ICT); 

(32)  Amounting  to  7.24  %  in  2016,  this  was  a  slight  increase 

compared to 2015 (7.01 %). 

added-value, 

2014,  the  priority  sectors  represented  around  the 
10.5%  of  Luxembourg's 
and 
represented  around  33  000  jobs  within  2  830 
companies  (cf.  Observatoire  de  la  compétitivité 
2017).  Among  the  diversification  priority  sectors, 
the  ICT  industry  accounted  for  both  the  highest 
share  of  added-value  and  the  highest  number  of 
operating  firms  (2  054)  and  employees  (16  493) 
(cf.  Observatoire  de  la  compétitivité  2017).  The 
logistics  sector  has  showed  improvements,  with  a 
sustained growth of freights transport (see Section 
3.5.1).  Luxembourg  is  ranked  one  of  the  highest 
the  World  Bank's  Logistic 
worldwide 
Performance Indicator (LPI). In the area of health-
technologies  and  eco-technologies  there  are  still 
few players, but the expected establishment of new 
operating  institutions  may  foster  growth  in  these 
sectors,  notably 
industry. 
Additionally, in December 2017, Luxembourg has 
Innovation  Smart 
adopted 
the 
foresees 
Specialisation  Strategy,  which 
implementation  of  action  plans  in  priority  areas, 
such as ICT and the circular economy. 

its  Research  and 

the  biomedical 

in 

in 

and 

have 

strong 

underpinned 

technological 
Investment 
infrastructure 
good 
performance  on  ICT.  The  country  is  endowed 
with  competitive  infrastructures  with  high  speed 
connectivity,  including  fiber  optic  networks  to  all 
major  European  POPs 
(e.g.  Teralink  and 
Luxconnect),  internet  exchange  points  (e.g.  LIX 
and  LU-CIX)  and  satellite  connectivity  (SES). 
Currently,  two  main  areas  of  investments  and 
specialization  are  datacentres  and  secure  IT 
environment. Several actors and initiatives in place 
are stimulating investments in the ICT sector. For 
example,  the  Luxembourg  ICT  Cluster  and  the 
ICTLuxembourg  platform  serve  to  boost  new 
business opportunities, to bring together the actors 
and  to  represent  the  interests  in  the  sector. 
Luxembourg 
competitive 
a 
framework  for  the  development  and  attraction  of 
talents,  and  skilled  people  represent  today  an 
important  share  of  the  labour  force.  However, 
skilled  labour  unfulfilled  demand  (33)  is  currently 
the  main  barriers  for 
perceived  as  one  of 

highly 

offers 

(33)  In  2016,  although  a  high  share  of  ICT  specialists  in  the 
country,  59%  of  firms  reported  to  have  hard-to-fill 
vacancies  for  ICT  specialists,  well  above  the  33%  of  the 
EU average (Eurostat). 

35 

010203040506070IndustryConstruction &Real EstateServices(includingFinancialServices)FinancialServicesLUEA19 
 
 
                                                           
                                                           
3.4. Investment and competitiveness 

Luxembourg is also pursuing its diversification 
strategy  with  respect  to  the  other  key  priority 
sectors.  An  Innovation  Hub  in  the  area  of 
environmental  technologies  will  be  launched  in 
January  2018.  Concerning  health-technologies, 
there  are  currently  on-going  several  research 
investments,  particularly  in  the  domains  of  life-
sciences  and  personalized  medicine.  Whereas 
those investments have resulted in the creation of a 
pole  of  scientific  excellence  in  Immunology, 
Neurodegenerative  diseases  and  Oncology,  the 
critical  mass  of  companies  in  the  sector  remains 
low.  Additionally,  the  launch  of  a  biotechnology 
incubator in Esch-sur-Alzette is expected soon. 

a 

of 

forward-looking 

Luxembourg  continues  to  deploy  its  Third 
Industrial Revolution Strategy and its outcomes 
are  expected  in  the  medium-long  term,  as  a 
result 
process. 
Luxembourg  officially  launched  in  September 
2015  its  Third  Industrial  Revolution  (also  known 
as Rifkin Strategy) project (see Sections 3.5.1 and 
3.5.3).  This  project  aims  at  defining  a  new  long 
term economic model in which three technologies 
converge:  new  information  and  communication 
technologies,  new  sources  of  energy,  and  new 
modes of transportation. A strategic study released 
in  November  2016  (henceforth  "Rifkin  Study") 
and 
proposed 
recommendations  along  the  following  nine  axes: 
energy; mobility; building; food; industry; finance; 
smart  economy;  circular  economy;  prosumers  and 
social model.  

229  measures, 

projects 

investment by firms in Luxembourg (34) and might 
be  further  stretched  as  the  diversification  is 
implemented.  

On the space sector, recent initiatives are trying 
to  position  Luxembourg  at  the  forefront  of  the 
industry,  in  particular  building  on  its  existing 
in  satellite  communications  for  TV 
strength 
broadcast  and  through  the  adoption  in  2017  of  a 
regulatory and legal framework for the exploration 
and  use  of  space  resources  (within  the  initiative 
SpaceResources.lu).  The  vision  is  to  build-up  an 
ecosystem  for  private  firms  to  invest  in  the  space 
domain  and  to  create  new  space-related  business 
opportunities.  Another  example  of  Luxemburg's 
space  activities  is  the  establishment  of  a  Public-
Private  Partnership  LUXGOVSAT  between  SES, 
one of the major global satellite operators, and the 
Luxemburg  government.  LuxGovSat  targets  the 
satellite  communications  market  for  Government 
and  defence  users.  A  first  satellite  GovSat-1  has 
been  launched  in  January  2018.  Additionally,  the 
space industry is attracting risk capital companies, 
and  a  new  space  agency  fund  should  be  launched 
next  year.  Despite  the  fact  that  this  industry 
remains  relatively  small  in  absolute  terms  with  a 
limited  number  of  enterprises  and  still  limited 
weight in terms of employment (0.2 %), the space 
industry  represents  a  relatively  high  share  of  the 
economy  when  compared 
the  other  EU 
countries  (1.8  %  of  added-value  according  to 
Observatoire de la compétitivité, 2017) (35). 

to 

(34)  See e.g.: EIB Group Survey on Investment and Investment 
Finance  Country  Overview:  Luxembourg  ©  European 
Investment Bank (EIB), 2017. http://www.eib.org/eibis       

35)      Statistics  are  available  up  to  2014  and  may  not  reflect 
recent  changes  due  to  major initiatives  in  the space  sector 
over the last years. 

36 

 
                                                           
 
3.4. Investment and competitiveness 

Box 3.4.1: Analysis of the ICT sector 

Luxembourg  has  embarked  on  a  strategy  of  diversification  of  its  economy  towards  the 
digital  economy.  This  strategy  is  covered  by  an  umbrella  initiative  called  "Digital 
Luxembourg". 

The ICT sector accounted for 5.9 % of GDP in 2014, well above the European average (4.2 % in 
2014),  placing  Luxembourg  third  in  Europe  after  Ireland  and  Sweden.  Similarly,  Luxembourg 
ranks third for ICT value-added growth between 2006 and 2014. 

Luxembourg's  ambition  is  to  become  the  "digital  hub"  of  Europe.  To  this  end  it  has  installed 
efficient  infrastructures  on  its  territory.  It  also  promotes  the  establishment  of  data  centres.  The 
European  Commission  has  decided  to  have  its  data  hosted  by  the  European  Reliance  Business 
Centre (EBRC) in Betzdorf; Google is also considering the possibility of setting up a large data 
centre in Luxembourg. 

Similarly, Luxembourg promotes the establishment of companies in the ICT sector, particularly 
start-ups,  through  different  incentive  policies.  The  Digital  Tech  Fund  was  set  up  in  2016  to 
finance the development of start-ups in the ICT sector. Building on Luxembourg's experience in 
the  financial  sector,  the  Luxembourg  House  of  FinTech  (LHoFT)  was  opened  in  2017  to 
accommodate  newly  created  companies  in  the  field  of  financial  technologies;  it  relies  on  a 
network of public and private sector partners. 

However,  this  favourable  environment  for  the  development  of  the  ICT  sector  could  be 
hampered by a shortage of highly skilled ICT workers in the medium term. 

Luxembourg is at the top of the European Union for digital skills. Luxembourg is leading by the 
number  of  Internet  users:  96  %  of  individuals  aged  16  to  74  had  access  to  the  Internet  at  least 
once a week in 2016 (well above the European average: 81 %). Luxembourg is also the European 
leader in general digital skills: 85 % of individuals aged 16-74 had at least basic digital skills in 
2016 (well above the EU average of 57 %). 

In professional  digital  skills,  the  situation  is  more  contrasted. On  the  one  hand,  Luxembourg  is 
one  of  the  leading  European  countries  for  the  number  of  ICT  specialists:  ICT  specialists 
represented 4.6 % of total employment in 2015 (above the European average: 3.5 %). However, 
Luxembourg  companies  are  struggling  to  recruit  ICT  specialists:  65 %  of  the  companies  that 
recruited or tried to recruit reported difficulties in filling their vacancies in 2016 (third place in 
Europe, European average: 48 %). 

In response to this shortage, the Luxembourg government has initiated policies and programmes 
for formal education and vocational training. The "digital (4) education" policy was launched in 
2015  for  primary  and  secondary  education.  Following  the  European  initiative  of  the  European 
Commission, a national coalition for digital skills and jobs was launched in May 2017.  

37 

 
3.4.2.  INNOVATION 

Luxembourgish authorities have been investing 
heavily  to  develop  the  public  research  system 
over the last two decades. However, these efforts 
have not led yet to a substantial increase in private 
R&D  investments  and  to  the  further  increase  of 
innovation  performance  as  measured  by 
the 
European  innovation  scoreboard.  Filling  the  gap 
between  R&D  spending  and  market-creating 
innovation  may  foster  innovation  in  the  key 
the 
therefore 
priority 
Luxembourg diversification strategy. 

strengthening 

sectors, 

Together  with  an 
increasing  public  R&D 
intensity,  Luxemburg  has  built  a  high-
performance  public  R&D 
system.  Public 
expenditure  on  R&D  has  been  multiplied  by  five 
since  2000  to  reach  0.60%  of  the  GDP,  nearly 
closing the gap with the EU average (0.70%). This 
increase,  which  is  expected  to  continue  with  the 
additional  budget  allocation  for  R&D  announced 
by the national authorities (36), allowed to achieve 
a  scientific  performance  of  the  public  research 
system  above  the  EU  average  (for  instance, 
Luxembourg scientific publications are more cited 
worldwide than the EU average (37).  

This  success  is  due  for  a  large  part  to  the 
international openness (38) and attractiveness of 
the Luxembourg public research system, which 
has  become  of  a  pole  of  attraction  for  excellent 
researchers (39).  While  the  bulk  of  the  funding  is 
made  of  institutional  funding,  the  Luxembourg 
National  Research  Fund  (FNR)  dedicated  in  2016 
94 million euro to support researchers and research 
institutions through project grants. As an example, 
through 
the  PRIDE  programme,  135  PhD 
candidates  from  all  over  the  world  were  awarded 
with  a  grant  in  a  limited  number  of  fields  of 

(36)  The  Government  of  Luxembourg  has  announced  an 
additional  amount  of  205  million  euro  for  research  and 
development in the four next years. 

(37)  The 

share  of  highly-cited  Luxembourg 

scientific 
publications  (publications  among  the  top  10%  most  cited 
publications  worldwide)  in  all  Luxembourg  scientific 
publications  rose  from  5.5  %  in  2000  to  11.6  %  in  2015, 
compared to an EU average of 10.1 %. 

(38)  In 2016, Luxembourg ranked 1st among Member States on 
(as 

international  scientific  co-publications 

the 
percentage of total scientific publications). 

total 

(39)  87%  of  scientists  in  Luxembourg  are  non-Luxembourg 

nationals. 

excellence,  in  order  to  achieve  critical  mass  in 
those fields (40).  

In  contrast,  the  sharp  drop  of  companies’ 
investment  in  R&D  continues  to  be  a  key 
challenge  and  several  persistent  weaknesses  in 
the  research  and  innovation  ecosystem  drag 
down  Luxembourg's  innovation  performance. 
With  a declining  trend  since  2006, business  R&D 
intensity  reached  its  bottom  (0.64%  of  GDP)  in 
2016  and  is  now  well  below  the  EU  average 
(1.31%).  The  structure  of 
the  Luxembourg 
economy  partly  explains  the  low  business  R&D 
intensity.  Sectors  that  account  for  the  bulk  of  the 
Luxembourg GDP (services, in particular financial 
sector)  invest  traditionally  less  in  R&D,  and  even 
less in Luxembourg than in the rest of the EU. In 
Luxembourg, 
investments  on 
added-value  is  0.1%  in  financial  and  insurance 
services  (EU  average:  0.4%)  and  0.7%  in  Non-
financial  businesses  (EU  average:  1.5%).  By 
contrast,  for  the  Industry  (including  energy),  this 
ratio is higher in Luxembourg (7.2%) than the EU 
average (5.6%) (41).  

the  ratio  R&D 

The  innovation  performance  of  the  Grand-
Duchy as measured in the European Innovation 
Scoreboard  is  also  on  declining  trend  since 
2013 (42) (and has further decreased by 4% in 2016 
compared  to  the  previous  year).  Symptoms  of  the 
weakness  of 
research  and 
the  Luxembourg 
innovation (R&I) ecosystem can be seen in several 
Luxembourg's 
indicators. 
performance  on  the  key  indicators  related  to 
public-private  cooperation  remains  significantly 
the  EU  averages (43).  The  share  of 
below 
employment 
in 
innovative sectors remains also below EU average, 
despite some progress in recent years (44). Finally, 
the 
it  has  also 

fast-growing  enterprises 

that  most  of 

to  be  noted 

instance, 

For 

in 

(40)  https://www.fnr.lu/funding-instruments/pride/ 
(41)  (Data 
l’Idée  du  mois  n°18 
from:  Publication  de 
"Recherche,  Développement 
le 
et 
Luxembourg  au  «  milieu  du  gué  »",  Fondation  IDEA 
2017). 

Innovation 

: 

(42)  2017 

European 

Innovation 

Scoreboard. 

http://ec.europa.eu/docsroom/documents/23930. 

(43)  Luxembourg ranks in the 25th position among EU Member 
States  in  the  public  expenditure  on  R&D  (GOVERD  plus 
HERD)  financed  by  business  enterprise,  as  %  of  GDP.  It 
can also be noted that the share of public-private scientific 
co-publications  among  total  publications  has  been  on 
decreasing  trends  in  recent  years,  reaching  only  0.5%  in 
2015. 

(44)  Luxembourg: 4.2%, EU average: 4.8% (Eurostat, 2015). 

38 

 
 
                                                           
                                                           
3.4. Investment and competitiveness 

increase  from  10%  to  25%  the  funding  available 
for  programmes  fostering  public-private  links  in 
research.  Shared  research  infrastructure,  such  as 
the High Performance Computing –focused on Big 
Data  applications–  and  the  National  Composites 
Centre  –in  the  field  of  innovative  materials–  are 
examples  of  measures  that  help  to  foster  a  closer 
collaboration between companies and the scientific 
community.  

for 

and 

projects 

schemes 

the  aid 

reinforcing 

A  new  law  was  adopted  in  May  2017 (46)  that 
renews 
research, 
development  and  innovation,  broadening  the 
scope  of  public  aid  available.  It  also  provides 
new  schemes  aiming  at  enhancing  public-private 
collaboration 
the 
innovation  capacity  in  SMEs.  Moreover,  shared 
research  infrastructures  between  the  public  and 
private  sectors  are  subject  to  receive  aid  schemes 
innovation  agency, 
as  well.  The  national 
to  manage  several 
Luxinnovation,  continues 
programmes that give companies access to external 
expertise 
and 
competitiveness.  SMEs  can  receive  support  for 
4 
improving 
Innovation) (47),  increasing  innovative  activities 
(Fit 4 Growth) (48) or developing digital tools (Fit4 
Digital (49).  While  all  these  are  very  positive 
initiatives, weaknesses in the business environment 
need also to be tackled to uplift R&I ecosystem. 

performance 

innovation 

innovation 

increase 

(Fit 

to 

on 

Scoreboard's indicators (45) on innovation in SMEs 
are 
including 
commercialisation  of  innovation,  especially  on-
line. 

declining 

trend, 

a 

Graph 3.4.2:  Evolution of business R&D intensity and public 

R&D intensity, 2000-2016 

 (1) Business R&D intensity: Business enterprise expenditure on 
R&D (BERD) as % of GDP. 
(2) Public R&D intensity: Government intramural expenditure 
on R&D (GOVERD) plus higher education  
 expenditure on R&D (HERD) as % of GDP. 
(3) Business R&D intensity: Break in series between 2012 and 
the previous years. 
(4) Public R&D intensity: Break in series between 2009 and 
the previous years. 
(5) Business R&D intensity: The values for 2001 and 2002 were 
estimated by DGRTD. 
(6) Public R&D intensity: The value for 2002 was estimated by 
DG RTD. 

Source: DG Research and Innovation - Unit for the Analysis 
and Monitoring of National Research and Innovation Policies                                                             

(46)  New 

law 

A series of pertinent measures have been taken 
in  the  last  years  to  foster  business  R&I.  The 
Government of Luxembourg has notably launched 
several  initiatives  to  strengthen  science-business 
collaboration.  For  instance,  the  new  performance 
contract of the FNR for the period 2018-2021 will 

(45)  2017 

European 

Innovation 

Scoreboard 

http://ec.europa.eu/docsroom/documents/23930. 

May 

2017: 

of 
http://legilux.public.lu/eli/etat/leg/loi/2017/05/17/a544/jo 
(47)  In 2016, 15 SMEs participated in ‘Fit 4 Innovation’. Since 
the  launching  of  the  programme  in  2013,  44  diagnostics 
developed.  
projects 
and 
https://www.luxinnovation.lu/innovate-in-
luxembourg/performance-programmes/fit-4-innovation/ 
was 

launched 
https://www.luxinnovation.lu/innovate-in-
luxembourg/performance-programmes/fit-4-growth/ 

(48)  Fit 

Growth 

2016:  

have 

been 

25 

in 

4 

(49)  Fit  4  Digital  was  launched  in  2016  and  Ten  companies 
phase: 

joined 
pilot 
the 
ttps://www.luxinnovation.lu/innovate-in-
luxembourg/performance-programmes/fit-4-digital/ 

39 

Public R&D intensityBusiness R&D intensity0.00.30.60.91.21.50001020304050607080910111213141516R&D intensity (R&D expenditure as % of GDP) 
 
 
                                                           
 
                                                           
3.4. Investment and competitiveness 

Box 3.4.2: Policy highlights: the "Third Industrial Revolution" strategy 

In  2015,  Luxembourg  decided  to  launch  a  new  long-term  strategy  to  "prepare  the  country  to  the 
challenges  of  the  future"  by  deeply  reviewing  the  current  economic  and  social  models,  through  a 
forward-looking  process  and  with  a  cross-disciplinary  approach.  The  Government  together  with  the 
Chamber  of  Commerce  and  Inspiring  More  Sustainability  (Luxembourg's  leading  network  on  Corporate 
Responsibility)  asked  the  US  economist  Jeremy  Rifkin  to  prepare  a  strategy  study.  The  strategy  was 
established  with  the  government  acting  as  a  facilitator  in  cooperation  with  almost  300 stakeholders  from 
universities and enterprises, as well as civil society. It has been presented to the public by Mr Rifkin himself 
in November 2016. 

The  goal  of  the  strategy  is  to  make  Luxembourg  economy  more  sustainable  and  interconnected,  by 
creating  digital  ecosystems,  at  the  meeting  point  of  existing  and  future  technologies.  The  strategy 
covers the areas of IT, clean energy and transport. Social, cultural and environmental narratives converge 
with economic theory and business practices, aiming at reconceiving the traditional economic development 
model  within a larger frame  of quality of  life. Also,  the  strategy  has  a  strong  focus  on  reducing  ecological 
footprint  and  addressing  climate  change.  The  specific  topics  of  the  strategy  are:  sharing,  digitisation, 
renewable energies, Internet of things, smart economy, circular economy and telework. The study identifies 
nine  challenges,  among  which  six  are  sectoral  (energy,  mobility,  construction  engineering,  industry,  food 
industry, finance) and three horizontal (smart economy, circular economy, social model). In total, the strategy 
recommends 229 measures, strategic recommendations and projects allowing the country to prepare for the 
Third Industrial Revolution process.  

Subsequently,  the  Government  announced  the  launch  of  the  first  9  measures  in  the  areas  of  national 
energy  internet,  mobility  (including  electro-mobility  and  zero-emission  vehicles),  smart,  sustainable  and 
circular  districts  and  cities,  sustainable  food  production,  shared  technology  platforms,  promotion  of 
sustainable  development  finance,  HPC  infrastructure,  and  promotion  of  circular  economy  via  public 
procurement. A Government Committee for Strategic Follow-up on Strategy was set up to oversee the work 
of the nine thematic platforms (1) engaged in analysing, discussing and, if need be, enhancing the measures 
and proposals presented in the strategy. The Committee, chaired by the Vice-Prime Minister and Minister of 
Economy, comprises representatives of trade unions, professional representations, the Union of Luxembourg 
Enterprises, the Chamber of Commerce, and other stakeholders.  

The  Third  Industrial  Revolution  strategy  is  expected  to  radically  change  the  current  economic  and 
social models in the long term. In November 2017 a first intermediary report produced one year after the 
publication of the Rifkin study presented, inter alia, the state of play of the priority projects (implementation 
of  HPC  infrastructure,  pilot  project  of  a  sustainable,  circular  and  zero-energy  town,  University  research 
project  "Eco-construction  For  Sustainable    development"),  as  well  as  of  the  cross-cutting  themes  (data 
protection, sharing economy). The report was discussed with the public, with representatives of Chambers of 
Agriculture,  Commerce,  civil  servants  and  public  employees,  trades  and  employees,  as  well  as,  with 
Members  of  the  Parliament.  For  a  proper  deployment  of  the  strategy,  it  is  important  that  all  relevant 
stakeholders carry on by ensuring a balanced development of both economic and social challenges.  

(1)  National Board for Sustainable Construction, Energiezukunft Lëtzebuerg, High-Level Group for TIR Industry, Circular 
Economy,  Mobility,  Luxembourg  Sustainable  Development  Finance  Platform,  Sustainable  Intensification  of 
Agriculture, as well as Labour, Employment and Social Affairs. 

40 

 
 
the 

economic  diversification  policy 

Still,  Luxembourg  lacks  an  integrated  strategy 
for research and innovation, as identified by the 
OECD in 2016. The key role that R&I has to play 
is 
in 
acknowledged  by  the  Luxembourgish  authorities. 
The  Smart  Specialisation  Strategy  was  finally 
adopted  on  December  2017,  after  being  delayed 
for  several  months.  National  authorities  have 
announced  that  a  national  R&I  strategy,  currently 
under design, will be presented in 2018. A holistic 
approach to the whole R&I ecosystem is essential 
to support Luxembourg with its efforts to diversify 
the economy. 

3.4.3.  BUSINESS ENVIRONMENT AND BUSINESS 

SERVICES 

in 

and 

recent 

grown 

are  not 

procedures 

consistently 

The  Luxembourg  business  environment 
is 
improving,  although  certain  barriers  persist 
(see Box 3.4.3). The number of registered business 
has 
years. 
Administrative 
government 
regulations 
considered  particularly 
burdensome  or  complex.  Start-up  procedures  are 
seen  as  easily  accessible  by  entrepreneurs,  and 
considerable  progress  has  been  made  both  in  the 
area  of  e-government  and  in  the  entrepreneurs-
services.  The  main 
government 
obstacles  in  the  business  environment remain  the 
high costs to start and to transfer a business along 
with  the  absence  of  a  solid  legal  framework  to 
address  company  failures  (in  terms  of  "Second 
Chance"  the  country  performs  relatively  worse 
than  other  areas).  An  "early  warning  system"  to 
prevent  company  failures 
is  currently  under 
preparation. A major challenge remains the smooth 
transfer  of  businesses,  given  that  half  of  the 
employees  in  craft  are  working  in  firms  that  will 
be transmitted in the upcoming decade.   

interaction 

entrepreneurship 

Various  initiatives  to  foster  the  creation  of 
businesses  and  innovative  start-ups  have  been 
launched,  but 
remains 
relatively  weak.  The  implementation  of  new 
legislative  acts  is  expected  to  facilitate  business 
creation.  Among  them,  the  Law  on  social  impact 
companies (50)  (December  2016)  is  expected  to 
foster the creation of businesses proposing socially 
innovative  activities.  Additionally,  the  Law  on 

(50)  Loi  du  12  décembre  2016  portant  création  des  sociétés 

d’impact sociétal. 

simplified  liability  companies (51)  (entered  into 
force  in  January  2017)  has  further  reduced  the 
minimum  social  capital  requirement  to  €  1  to 
establish  a  new  business.  In  October  2016,  the 
Ministry  of  the  Economy  and  the  Chamber  of 
Commerce 
of 
Entrepreneurship, which through a single platform 
brings  together  the  stakeholders  involved  in  the 
business  creation  process,  thus  further  facilitating 
the  administrative  process  required  to  open  one’s 
own new business. 

founded 

House 

the 

Fit 

the 

In  addition,  the  government  has  launched  a 
comprehensive  range  of  measures  to  foster  the 
creation of innovative start-ups. In January 2016, 
the ‘ICT Seed Fund’ was launched to finance new 
innovative high-tech businesses in the ICT sector.  
Other  entrepreneurship-related  initiatives  are  the 
Entrepreneurial 
4 
Schools, 
Entrepreneurship  programme,  6zéro1,  the  House 
of  Biohealth,  and  the  Technoport.  However,  it  is 
still  too  early  to  clearly  quantify  the  potential 
impact  of  all  these  efforts  that  may  not  yet  have 
translated  into  a  stronger  entrepreneurial  culture. 
Luxembourg’s  entrepreneurial  activity  is  mainly 
driven  by  opportunity  and  the  country  unveils  by 
far the highest share of foreign-born entrepreneurs 
in  the  EU  (53.2%  vis-à-vis  9.4%).  A  minor  quota 
of adults (12%) has entrepreneurial intentions and 
the  self-employment  rate  (8.7%)  is  significantly 
lower than the EU average (14%). 

The regulatory framework for business services 
has  been  improved.  The  changes  concerned 
essentially 
the  professions  of  architects  and 
engineers,  with  the  suppression  of  shareholding 
and  voting  right  requirements (52)  for  companies 
exercising  those  activities  and  the  abolition  of 
fixed  tariffs  in  public  contracts  (Decision  of  the 
Council  of  Government  of  29  July  2016). 
Luxembourg is currently assessing the necessity to 
further  modify  the  rules  of  these  two  professions. 
Luxembourg 
administrative 
formalities  by  adopting  in  March  2017  the  so-
called  Omnibus  law,  which  allows  a  systematic 
horizontal  screening  of  administrative  procedures. 

simplified 

also 

(51)  Loi  du  23  juillet  2016,  la  société  à  responsabilité  limitée 

simplifiée (SARL-S). 

(52)  Projet  de  loi  n°  6795  portant  modification  de  la  loi  du  13 
décembre  1989  portant  organisation  des  professions 
d'architecte  et  d'ingénieur-conseil  (dépôt  en  mars  2015, 
nécessité de revoir le projet de loi, avec des modifications 
prévues fin 2017) 

41 

 
 
                                                           
                                                           
3.4. Investment and competitiveness 

for  authorising  trade  fairs  and  markets,  advisory 
and  economic  advisory,  and  (iv)  clarification  of 
scope  of  application  for  legal  provisions  on 
discounts. 

3.4.4.  CIRCULAR ECONOMY  

and 

sharing 

information,  an 

The  circular  economy  is  high  on  the  agenda  of 
the Luxemburgish government. In order to unite 
all  relevant  stakeholders  and  coordinate  their 
actions  and 
inter-
ministerial  committee  “Strategic  group  for  a 
circular  economy”  was  set  up  in  2015.  The  Third 
National  Plan 
resource 
for  waste 
management (54)  takes  into  account  the  evolution 
of waste management in recent years and proposes 
management  modalities  in  line  with  the  waste 
the  circular  economy 
hierarchy  and  with 
principles.  The  plan 
includes  a  number  of 
measures  for  the  different  waste  streams,  going 
beyond  the  rates  prescribed  by  existing  or  draft 
obligations  of  EU  law.  The  circular  economy  is 
also  fostered  by  the  government  through  the 
development of economic activity zones and ‘eco-
neighbourhoods’ based on circular principles.  

Regarding the good practices, Fit4Circularity is 
a  new  support  scheme  created  in  2015  by 
LuxInnovation  (National  Agency  for  Innovation 
and  Research).  Fit4Circularity  is  dedicated  to 
helping  SMEs  that  are  willing  to  make  a  more 
sustainable 
substantial 
development  practices,  i.e.  to  use  raw  materials 
more  efficiently,  maximise  the  use  of  renewable 
sources,  develop  innovative  products  and  services 
for sustainable growth, reduce energy consumption 
and increase reusability.  

commitment 

to 

Luxembourg performs above the EU average in 
resource  efficiency  and  ranks  second  in  the  Eco-
Innovation Scoreboard 2016 (Graph 3.4.3). 

(54)  Plan  national  de  gestion  des  déchets  et  des  ressources 

(PNGDR): 
http://environnement.public.lu/content/dam/environnement
/documents/offall_a_ressourcen/pngd/projet-plan-
pngdr.pdf  

Draft adopted by the Government on 27 October 2017, subject 
to  public  consultation  from  10  November  2017  to  02 
January 2018. 

In 

the 

addition,  Luxembourg 

Particular  efforts  concern 
reduction  of 
administrative  delays  and  costs,  improvements  of 
e-procedures  and  abolition  of  no-longer  justified 
also 
procedures. 
envisages  adopting  some  simplification  measures 
for  the  recognition  of  professional  qualifications, 
in particular for access to the teaching profession. 
Finally  Luxembourg  has  undertaken  a  regulatory 
horizontal  work  in  order  to  reform  the  provisions 
on the right of establishment with a view to adopt a 
draft bill during the first semester 2018. 

But  regulatory  barriers  remain  in  business 
services.  The  profession  of  lawyer  is  particularly 
concerned by highly restrictive regulations in term 
of shareholding requirements, incompatibility rules 
and  multidisciplinary  restrictions.  In  addition,  the 
wide  scope  of activities  reserved,  in particular  for 
architects,  also  represents  important  obstacles.  As 
regards  professional  insurance  requirements,  the 
specific  equivalence  assessment 
absence  of 
procedure  allowing  equivalent  insurance  coverage 
of  service  providers  (natural  and  legal  persons) 
from other Member States may be also a source of 
restrictions for foreign services providers.  

removing 

Further  measures  in  the  retail  sector  have 
reduced  restrictions.  Since  2016,  Luxembourg 
has  been  adopting  several  measures (53)  which 
primarily  attempt  at 
the  existing 
operational  restrictions  in  the  retail  sector,  with  a 
focus both on facilitating end of business sales and 
on  authorising  sales  below  cost.  Next  to  this,  the 
Benelux Union is currently investigating the issue 
of territorial supply constraints, which includes, for 
example,  business  practices  that  could  lead  to  a 
fragmentation  of  the  market  and  end-up  in  higher 
prices for consumers. The results of this survey are 
expected by early 2018. 

In  December  2017, 
the  government  has 
announced  a  proposal  to  introduce  a  series  of 
administrative  simplifications 
in  the  retail 
sector.  The  simplifications  include  notably:  (i) 
abrogation  of  the  authorisation  requirement  for 
large  retail  areas,  (ii)  abolition  of  the  requirement 
to  have  3  years  of  professional  experience,  or  to 
hold  a  DAP  (diploma  of  vocational  aptitude)  for 
persons wishing to engage in commercial activities 
and  services,  (iii)  abolition  of  special  provisions 

(53)  Loi  du  23  décembre  2016  sur  les  ventes  en  soldes  et  sur 

trottoir et la publicité trompeuse et comparative. 

42 

 
                                                           
                                                           
3.4. Investment and competitiveness 

Graph 3.4.3:  Eco-Innovation Index 2016 (EU=100) 

Source: Eco-innovation Observatory: Eco-Innovation 
scoreboard 2016 

43 

050100150BGHUMTROCYPLEEHRBELTSKLTNLPTELESIEFRCZEUATSIITUKSEDKFILUDE 
 
 
3.4. Investment and competitiveness 

Box 3.4.3: Investment challenges and reforms in Luxembourg 

Section 1. Macroeconomic perspective 

Total  investment  in  Luxembourg  (measured  by  total  gross  fixed  capital  formation)  is  largely  driven  by  the 
huge  and  irregular  equipment  investments  of  the  satellite  and  aircraft  industry  (all  of  which  are  imported). 
Investment in dwellings recovered in 2016, after decreasing in previous years and it is expected to continue 
growing, though at a slower pace (see Section 3.2). Public investment as percentage of GDP stands among 
the highest in the EU and it is projected to increase further. The role of the public sector is also crucial in the 
ongoing strategy to diversify the economy; with large investment plans being announced and implemented to 
further develop priority sectors (see Section 3.4.1). By contrast, private investment remains among the lowest 
in the EU, partly reflecting a long-term trend of low investment in the three largest sectors (relative to their 
value added), which represent 45% of GVA. 

Section 2. Assessment of barriers to investment and ongoing reforms  

The  Luxembourg  business  environment  is  improving,  although  certain  barriers  persist.  The  regulatory 
framework,  in  particular,  has  been  improved,  but  barriers  remain  in  business  services.  The  inadequate 
insolvency  framework,  which  leads  to  higher  entry  costs  and  uncertainty  and  may  discourage  investment, 
especially in  the  case  of  small  firms and  start-ups,  has  to  be  improved  (European  Commission,  2015).  The 
strategy  for  the  diversification  of  the  economy  has  focused  on  high-technology  activities.  For  instance,  the 
government  is  deploying  an  ICT  hosting  infrastructure  and  a  supportive  regulatory  framework,  seeking  to 
attract highly innovative and R&D firms. Although progress has been sizeable (see Box 3.4.1), this has not 
prevented  private  investment in R&D  to  decline  further,  indicating  that  other  obstacles  remain  in  this area. 
Additionally, the economy is highly dependent on high-skill sectors, such as the financial sector. Therefore, 
additional efforts will be needed to attract and retain larger numbers of skilled workers.                 

 Main barriers to investment and priority actions underway 

1.  A dedicated strategy towards skilled labour is a priority to avoid the potential risk of significant shortages 
having an impact on the economy. Several measures implemented or under discussion, such as alignment of 
education and training programs, increasing housing supply and improving transport systems, among other 
policies, could be jointly assessed from this perspective.   

2.  Restrictive  regulations  in  some  services  increase  uncertainty  linked  to  investment.  Enforcing  the 

announced measures will foster competition and investment (see Section 3.4.3). 

3.  The success of the diversification strategy also depends on private innovation and entrepreneurship, which 
perform  weaker  compared  with  the  EU  average.  An  integrated  strategy  for  research  and  innovation  that 
ensures all business sectors step in and harness the potential of the new technological systems is needed to 
leverage the diversification strategy to foster private R&D investment and innovation.  

44 

Regulatory administrative burdenTaxationPublic administrationAccess to financePublic procurement /PPPsCooperation bt academia, research and businessJudicial systemFinancing of R&D&IInsolvency frameworkBusiness services / Regulated professionsCSRCompetition and regulatory frameworkRetailEPL & framework for labour contractsConstructionWages & wage settingDigital Economy / TelecomEducationEnergyTransportLegend:No barrier to investment identifiedCSRInvestment barriers that are also subject to a CSRSSome progressNo progressSubstantial progressLimited progressFully addressedPublic admin/Business environmentFinancial Sector / TaxationR&D&ISector specific regulationLabour market/Education 
 
3.5. SECTORAL POLICIES 

3.5.1.  TRANSPORT POLICY 

launched 

the  Government 

The  large  projected  increase  in  population and 
size of the workforce poses a challenge in terms 
of providing a suitable transport infrastructure. 
The  significant  increase  in  the  number  of  cross-
border  workers,  the  lengthening  of  distances 
travelled  and  the  ongoing  enlargement  of  source 
areas add to the internal mobility requirements. In 
2011, 
the  Global 
Strategy  for  Sustainable  Mobility  of  National  and 
Cross-border  Employees,  the  so-called  Mobilité 
Durable  (MoDu).  This  strategy  aims  to  provide 
long-term  solutions  to  mobility  problems.  For 
instance,  one  objective  of  this  strategy  is  to 
reorganise  public 
into  multi-modal 
transport 
polycentric  network,  such  as  the  railway  at  the 
national  level  or  the  tramway  in  the  capital.  The 
initiative  promotes  the  strengthening  of  existing 
infrastructure  and  new  ways  of  organising 
transport.  In  2015,  the  strategy  paper  Third 
Industrial  Revolution  added to  the  existing  MoDu 
strategy,  with  a  disruptive  model  based  on  the 
convergence  of 
transport 
networks  (see  Box  3.4.2).  In  spring  2018,  the 
Ministry  of  Sustainable  Development 
and 
Infrastructure  will  present  the  updated  MoDu 
strategy,  which  also  take  into  account  the  recent 
developments  of  digitisation  and  decarbonisation 
of transport in general. 

ICT,  energy  and 

The car is still the favourite means of transport. 
Luxembourg  has  the  highest  number  of  cars  per 
capita (672 vehicles per 1 000 inhabitants), which 
can  be  explained  by  the  high  income  level  and  a 
high  number  of  company  cars,  but  also  cultural 
aspects.  The  current  strategies  recognize  the  need 
to  fight  congestion  at  peak  hours  by  imposing 
restrictions  on  using 
the  car,  but  also  by 
developing  alternative  solutions  such  as  multi-
modal  transport  or  carpooling.  Park  and  ride 
stations are being developed at the national border, 
at  regional  level  and  around  the  capital.  Their 
capacity will be doubled within a decade. 

Significant  investments  have  been  made  to 
improve  public  transport,  and  in  particular  the 
rail  passenger  transport,  which  has  increased 
significantly  (up  65  %  between  2000  and  2014). 
trains, 
invested 
Luxembourg  has 
modernisation and new railway stations around the 
capital.  Despite  these  improvements,  commuting 
time at peak hours could be further improved.  

in  more 

While  the  focus  of  future  urban  transport 
investments  will  be  on  public 
transport, 
including  rail  and  buses,  it  will  also  promote 
soft transport. The 2015 national cycling network 
law  aims  at  privileging  ride 
to  work  and 
connection  of  cycling  with  other  transport  modes.  
On  10  December  2017,  new  means  of  transport 
and  transport  infrastructures  have  been  put  into 
operation  in  the  city  of  Luxembourg:  a  tram  line 
(with  further  extensions  foreseen  by  2020),  new 
exchange stations, a new cycling path, new railway 
stations and a funicular.  

transport  solutions  and 

The  longer-term  Rifkin  Strategy  is  aiming  for 
all new vehicles to be electric by 2050. Together 
with  smart 
limiting 
transport  needs,  it  should  contribute  to  clean  and 
sustainable  transport.  The  first  plug-in  hybrid 
regional buses started running end of 2016 and the 
City of Luxembourg started operated its own plug-
in  hybrid  buses  in  the  beginning  of  2017.  Since 
May  2017,  the  entire  bus  network  of  the  City  of 
Differdange  is  operated  by  battery  electric  buses. 
In  2017,  new  financial  incentives  for  buying  new 
low  emission  vehicles  have  been 
zero  and 
introduced.  A  public 
infrastructure  of  1.600 
charging points (22kW) is being implemented until 
2020.  

The  Ministry  of  Sustainable  Development  and 
Infrastructures  commissioned  a 
large-scale 
study  (LuxMobil)  involving  40 000  commuters 
in  Luxembourg  and  45 000  cross-border 
commuters  to  explore  what  are  the  current  daily 
mobility  habits  of  people  in  Luxemburg.  In  its 
opinion of 11 July 2017, the Economic and Social 
Council  of  Luxembourg  concluded  that  ongoing 
activities  in  the  transport  sector  need  to  be 
centralised,  such  as 
the  ‘Cellule  modèle  de 
transport’  which  is  responsible  for  planning  and 
modelling,  or  the  ‘Observatoire  de  la  mobilité’.  It 
also recommended improving transport statistics to 
better  monitor  the  implementation  of  the  different 
measures taken on transport. 

freight 

terms  of 

transport, 

large 
In 
intermodal  terminal  Bettembourg-Dudelange 
was  opened 
initiative  will 
in  2017.  This 
strengthen the competitiveness of CFL and make a 
significant contribution to sustainable transport. 

the 

45 

 
 
3.5. Sectoral policies 

nitrogen  dioxide  concentrations  and  greenhouse 
gas  emissions  in  Luxembourg,  such  as  access 
restrictions  for  transport  (low  emission  zones  or 
congestion charges). 

Table 3.5.1:  Sector contribution to GHG emissions in 2015 

Source: European Environment Agency 

The  national  air  quality  programme  was 
adopted  by  the  Government  in  2017  and  a 
second  action  plan,  the  "Climate  Pact",  is  on 
preparation to reduce carbon dioxide emissions. 
The  National  Air  Pollution  Control  Programme, 
due  by  April  2019  under  the  new  National 
Emission  Ceilings  Directive (56),  together  with  a 
Low  Carbon  Development  Strategy  under 
preparation,  will  be  key  tools  for  Luxembourg  to 
pursue  synergies  and  co-benefits  from  ambitions 
on  clean  energy  and  clean  air,  and  the  promotion 
of  sustainable  mobility,  with  a  view  also  to 
investments in transport infrastructure and housing 
policy. 

3.5.3.  ENERGY POLICY 

3.5.2.  ENVIRONMENTAL POLICY 

Air pollution and traffic congestion continue to 
be  a  challenge  for  Luxembourg.  Long-term 
measurements  show  certain  periods  over  the  year 
with  high  dust  and  high  ozone  concentration,  but 
the main issue in Luxembourg City is still nitrogen 
dioxide  concentrations,  greenhouse  gas  emissions 
and  traffic  as  the  main  source  thereof.  Under  the 
Effort  Sharing  Decision (55),  Luxembourg's  target 
is  to  reduce by  20%  its  greenhouse  gas  emissions 
by  2020  (compared  to  2005).  Between  2005  and 
2016,  Luxembourg's  greenhouse  gas  emissions 
declined  by  16%.  It  will  comply  with  its  legal 
emission  reduction  obligations  as  it  will  bank  a 
surplus  of  annual  emission  allocations  over  the 
period  2013-2020.  However,  according  to  the 
latest  national  projections,  Luxembourg's  existing 
domestic measures will not be sufficient to meet its 
Effort  Sharing  Decision  target  in  the  year  2020, 
tough  it  will  be  possible  to  buy  or  transfer 
emission  allocations  from  other  Member  States  at 
this 
time.  Overall,  greenhouse  gas  emission 
reductions  are  projected  to  be  limited  to  17.4% 
against  the  country's  binding  target  of  20%  (i.e.  a 
gap of 2.6%).  

In  2015,  more  than  half  (55%)  of  greenhouse 
gas  emissions  came  from  the  transport  sector 
(see  Table  3.5.1).  This  is  much  higher  proportion 
than  the  EU's  average  (21%)  and  most  of  these 
emissions are linked to fuel exports (+/- 70%). The 
are 
main 
Luxembourg's  geographical  situation  as  a  transit 
country and the taxation of transport fuels which is 
among the lowest tax rates in the EU. 

phenomenon 

reasons 

this 

for 

tramline, 

on  modernisation 

The Sustainable Mobility Strategy (MoDu) aims 
at  addressing  these  challenges.  It  focuses  on 
providing better public transport by constructing a 
new 
and 
decarbonisation  of  the  bus  fleet  and  on  avoiding 
the  need  for  buses  transiting  between  the  city 
centre  by  building  a  more  polycentric  public 
transport 
strengthening 
and 
(see  Section  3.5.1). 
multimodal  connections 
However,  there  is  a  need  for  short-term  actions 
that  can  contribute  to  the  immediate  reduction  of 

network 

by 

energy 

system 

inland  consumption 

is  highly 
Luxembourg’s 
dependent  on  other  countries.  Nearly  all  of 
Luxembourg’s  gross 
is 
covered  by  energy  imports  (95.9 %  in  2015).  Its 
electricity grid is very well interconnected with the 
networks of neighbouring Member States, and the 
country  participates  in  regional  market  coupling 
(in  electricity  day-ahead  markets).  While  the 
power generation market is relatively concentrated, 
the wholesale gas market is not. For electricity and 
gas,  household  prices  are  below  the  EU  average; 

(55)  Decision N° 406/2009/EC of the European Parliament and 
of  the  council  of  23  April  2009  on  the  effort  of  Member 
States to reduce their greenhouse gas emissions to meet the 
Community's 
reduction 
commitments up to 2020. 

greenhouse 

emission 

gas 

(56)  Directive (EU) 2016/2284 of the European Parliament and 
of  the  Council  of  14  December  2016  on  the  reduction  of 
national  emissions  of  certain  atmospheric  pollutants, 
amending  Directive  2003/35/EC  and  repealing  Directive 
2001/81/EC. 

46 

Largest Sectors of GHG EmIssions in 2015LUEU 28Energy/power industry5%31%Transport55%21%Industry17%20%Agriculture7%12%Residencial/commercial15%13%Waste1%3%Other0%0% 
                                                           
 
 
 
                                                           
3.5. Sectoral policies 

Renewable energy and energy efficiency are key 
parts  of  Luxembourg's  strategy  for  a  Third 
Industrial  Revolution  (see  Section  3.4.1  and  Box 
3.4.2).  Given  the  country's  relatively  small  size, 
there  may  be  practical  barriers 
to  develop 
renewable  energy  generation  on  its  own  territory. 
Current EU proposals on electricity market reform 
and  renewable  energies,  once  adopted,  will  foster 
the  integration  of  Member  States’  markets  and 
vein, 
cross-border 
Luxembourg 
two 
already 
cooperation  agreements  with  Lithuania  and  with 
Estonia  on  the  statistical  transfer  of  renewable 
energy.  The  agreements  stipulate  that  Lithuania 
and Estonia will each transfer a certain amount of 
surplus renewable energy between 2018 and 2020 
to  help  Luxembourg  fulfil  its  2020  national 
renewable energy target. 

cooperation. 
has 

In 
concluded 

that 

3.5.4.  CROSS-BORDER INTEGRATION 

Cross-border workers represent about 45 % of 
Luxembourg's labour force, living in one of the 
three  Luxembourg's  neighbouring  countries. 
Half of cross-border workers live in France, 25 % 
in  Germany  and  25 % 
in  Belgium.  The 
interregional  cooperation  of  the  Grand  Region, 
gathering 11.5 millions of inhabitants and 170 000 
cross-border  workers  working  in  Luxembourg, 
represents  a  successful  economic  integration.  The 
high  degree  of  integration  achieved  through  the 
past  years  in  products,  capital  and  labour  markets 
between  Luxembourg 
neighbours 
its 
represents a high potential for growth. 

and 

While  Luxembourg  greatly  benefits  from  free 
movement  of  workers,  differences  in  national 
social  security  legislations  remain.  This  is  the 
case  on  criteria  for  benefits  allowance  (invalidity 
benefit,  pensions,  etc.),  issues  related  to  non-
exportability  of  certain  benefits  (long-term  care 
insurance, 
and 
supplementary  pensions)  and  the  access  to  cross-
border  health  care  for  family  members  of  cross-
border  workers  and  for  retired  cross-border 
workers 
addition, 
mismatches in direct taxation systems between the 
country  of  residence  and  Luxembourg  may  create 
disadvantages. 

(see  Section  3.1.2). 

pre-retirement 

benefits 

In 

they were also lower in 2016 compared with 2015, 
thanks  to  the  decrease  of  the  price  of  the  energy 
component (57).  Switching  rates (58)  remain  very 
low  for  both  electricity  and  gas,  but  consumer 
satisfaction is above the EU average. For the more 
modest  households,  energy  also  has  a  better 
affordability  than  in  the  EU  as  a  whole.  The 
distinctive feature of Luxembourg's energy profile 
is  the  preponderance  of  oil  in  the  energy  mix 
(71.3 %  of  gross  inland  consumption  excluding 
electricity  and  derived  heat  exchanges  in  2015) 
and  of  transport  in  final  energy  consumption 
(60.7 %  in  2015).  This  can  be  explained  by  an 
important  number  of  inbound  commuters  and  the 
relatively  advantageous  taxation of  transport  fuels 
(see Section 3.1.4. and Section 3.5.2). 

for 

Luxembourg  has  set  itself  an  indicative  energy 
efficiency  target  of  4.5 Mtoe  for  primary  energy 
consumption  and  4.2 Mtoe 
final  energy 
consumption  in  2020.  In  2016,  Luxembourg's 
primary  energy  consumption  stood  at  4.16  Mtoe, 
and  its  final  energy  consumption  stood  at  4.04 
Mtoe.  Thus,  current  consumption  is  below  the 
2020  target.  Policy  measures  in  this  area  include 
high efficiency standards that will be implemented 
in  approx.  8,000  newly  constructed  buildings  per 
year  and  the  "Climate  pact"  initiative  (Klimapakt) 
under  which  the  country's  municipalities  commit 
to applying energy management systems. 

target 

Luxembourg  has  a  national 
for 
renewable energy of 11 % in 2020, expressed in 
terms of the renewable energy share in gross final 
energy consumption. In 2016, the country's actual 
renewable  energy  share  reached  5.4  %,  which  is 
equivalent  to  the  indicative  trajectory  (5.4  %). 
Luxembourg  has  different  measures  in  place  to 
promote  the  use  of  renewable  energy,  notably 
the  production  of 
premium  payments 
for 
renewable  electricity, 
the 
tariffs  for 
injection  of  biogas  in  the  natural  gas  grid,  and 
financial incentives for households. There are also 
procedural  facilitations  for  renewable  developers, 
such as a one-stop shop and a maximum time limit 
for authorisation procedures.  

feed-in 

(57)  Household  energy  prices  are  broken  down  in  three 

components: energy, network, and taxes and levies. 

(58)  The switching rate describes the readiness of consumers to 

switch to another energy supplier. 

47 

 
                                                           
ANNEX A OVERVIEW TABLE 

Commitments  

Summary assessment (59) 

2017 country-specific recommendations (CSRs)  

CSR  1:  Strengthen 
economy, 
investment  and 
restrictions in the business services sector.  

the  diversification  of 
removing  barriers 

innovation.  Remove 

the 
to 
regulatory 

including  by 

Some  progress  Luxembourg  has  made  some 
progress  on  diversifying  the  economy  by  taking 
actions  to  foster  investments  in  the  key  priority 
sectors.  By  contrast,  private  investment  in  R&D 
continued 
several 
weaknesses  remain  in  the  research  and  innovation 
ecosystem,  which  drag  down  Luxembourg's 
innovation  performance.  Additionally,  barriers 
remain in the business services sector, which may be  
hindering  private investment 

to  decline, 

indicating 

that 

the  diversification  of 

the  economy, 
Strengthen 
including  by  removing  barriers  to  investment  and 
innovation.  

Some Progress The government has strengthened its 
strategy to diversify the economy and some measures 
have been adopted to foster innovation. Yet, private 
investment,  especially  on  R&D,  and  innovation 
remain low compared with the euro area average.  

Remove  regulatory  restrictions 
services sector.  

in 

the  business 

Limited  Progress  Limited  progress  has  been 
achieved  in  removing  regulatory  restrictions  in  the 
business 
some 
services 
professions such as lawyers.  

sectors,  notably 

in 

CSR  2:  Ensure  the  long-term  sustainability  of  the 
pension  system,  limit  early  retirement  and  increase 
the employment rate of older people.  

Limited  Progress  The  measures  adopted  to  limit 
early retirement and increase the employment rate of 
older people have had a limited impact on addressing 
the  long-term  sustainability  of  public  pensions. 
Moreover, the latest projections adopted by the EPC-
AWG  suggest  an  aggravation  of  the  impact  of  age-

(59)  The following categories are used to assess progress in implementing the 2017 country-specific recommendations (CSRs): 
No progress: The Member State has not credibly announced nor adopted any measures to address the CSR. This category covers a 
number  of  typical  situations,  to  be  interpreted  on  a  case-by-case  basis  taking  into  account  country-specific  conditions.  They 
include the following: 

no legal, administrative, or budgetary measures have been announced  
in the national reform programme, 
in any other official communication to the national Parliament/relevant parliamentary committees or the European Commission,  
publicly (e.g. in a press statement or on the government's website);  
no non-legislative acts have been presented by the governing or legislative body;   
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 to be taken (unless the CSR explicitly asks for orientations or exploratory actions). However, it has 
not proposed any clearly-specified measure(s) to address the CSR. 

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

legislative work is needed before the CSR is implemented;  

presented non-legislative acts, but has not followed these up with the implementation needed to address the CSR. 
Some progress: The Member State has adopted measures  
that partly address the CSR; and/or  
that address the CSR, but a fair amount of work is still needed to address the CSR fully as only a few of the measures have been 
implemented. For instance, a measure or measures have been adopted by the national Parliament or by ministerial decision, but 
no implementing decisions are in place. 

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

have been implemented. 

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

48 

 
 
                                                           
A. Overview Table 

related expenditure on the long-term sustainability of 
public finances. 

Ensure  the  long-term  sustainability  of  the  pension 
system,  

Limited Progress The latest projections adopted by 
the EPC-AWG suggest an aggravation of the impact 
of  age-related  expenditure  on 
long-term 
sustainability of public finances. 

the 

limit early retirement  

law 

suppressing 

Limited  Progress  The 
the 
‘préretraite  de  solidarité’  was  adopted  in  November 
2017  but  its 
the  average  effective 
retirement  age  and  on  expenditure  is  difficult  to 
assess due to an easing of restrictions on other kinds 
of early retirement schemes.  

impact  on 

and increase the employment rate of older people.   Limited  Progress  In  spite  of  some 

targeted 
measures,  the  employment  rate  of  older  workers 
remains particularly low at 39.6 % in 2016 compared 
to 55.3 % on EU average. The Age Pact to foster age 
management measures in businesses seems stalled in 
Parliament since its first introduction in 2014.  

Europe 2020 (national targets and progress) 

Employment rate target set in the NRP: 73 %.  

the  resident 
The  overall  employment  rate  of 
population decreased slightly from 70.9 % in 2015 to 
70.7 % in 2016, getting more distant from its target. 

R&D target set in the NRP:  

Current national value: 1.3% of GDP in 2015. 

2.3 %-2.6 %  of  GDP,  of  which  0.7 %  to  0.9 %  for 
public spending (1.6%-1.7% for private sector) 

The  decrease 
in  R&D  expenditure  made  by 
companies  over  the  last  few  years  contrasts  sharply 
with  the  intensity  of  public  R  &  D,  which  has 
increased  five-fold  over  the  last  fifteen  years.  The 
low level of R & D expenditure by companies could 
be  due,  at  least  in  part,  to  the  presence  of  a  large 
financial  sector  in  Luxembourg  (25%  of  GDP)  and 
the  low  investment  intensity  that  characterizes  these 
activities. 

National greenhouse gas (GHG) emissions target:  

Current national value: 10.30 Mt CO2 in 2015 

 -20 %  in  2020  compared  to  2005  emission  (from 
sources  not  covered  by 
the  Emission  Trading 
System)  

It is only from 2018 that Luxembourg should record 
an  "emissions  gap" 
its  AAQE. 
However,  "reserve"  or  "deficit"  calculations  are 
subject to considerable uncertainty. 

in  relation 

to 

49 

 
 
 
 
A. Overview Table 

2020 Renewable energy target: 11 % 

Share of renewable energy in all modes of transport: 
10% 

In  2016,  Luxembourg  experienced  an  accelerated 
growth  of  its  renewable  energy  production.  The 
country's overall renewable energy share for that year 
reached  5.4  %,  which  is  equivalent  to  the  indicative 
trajectory.  Luxembourg  has  recently  complemented 
its  domestic  policy  measures  with  two  cooperation 
agreements  with  Lithuania  and  with  Estonia  on  the 
statistical  transfer  of  renewable  energy.  This  will 
improve the prospect of fulfilling the 2020 target. 

The renewable energy share in transport in 2016 was 
5.9 %. 

Energy efficiency, 2020 energy consumption targets:  

Luxembourg  has  set  an  indicative  national  energy 
efficiency target which implies reaching a 2020 level 
of  4.5  Mtoe,  expressed  in  primary  consumption  and 
4.2 Mtoe expressed in final energy consumption.   

The 

primary 

Luxembourg  has  made  good  progress  on  energy 
efficiency. 
energy 
country's 
consumption  stood  at  4.16  Mtoe  in  2016.  Final 
energy  consumption  reached  4.04  Mtoe  in  2016. 
Continued  efforts  are  needed  to  keep  current  levels 
and achieve its indicative national 2020 targets of 4.5 
Mtoe in primary energy consumption and 4.2 in final 
energy consumption. One of the main instruments to 
contribute  to  the  target  is  the  energy  efficiency 
obligation mechanism put in place in 2015. 

Early school/training leaving target: 

<10 % 

Tertiary education target: 

 >40 %  (national  target  66%)          of  population  aged 
30-34.  

The  early  school  leaving  rate  decreased  by  3.8 
percentage points in 2016, to 5.5 %.  While the rate is 
still below the EU average of 11% and Luxembourg's 
Europe 2020 national target of 10%, national data for 
2015,  the  latest  year  available,  indicate  an  increase 
from the previous year and estimate the rate at more 
than 13.5%. 

The tertiary educational attainment rate among 30-34 
year olds increased to 54.6% in 2016 from 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. 

Target  for  reducing  the  number  of  people  at  risk  of 
poverty or social exclusion, expressed as an absolute 
number of people: 6 000  (base year 2008: XX).  

In  2016,  95000  people  were  at  risk  of  poverty  or 
social  exclusion  (starting  from  78.000  in  2012), 
16000  more  than  in  2015  and  still  well  above  the 
target set in 2012. 

50 

 
 
ANNEX B MACROECONOMIC IMBALANCE PROCEDURE 

SCOREBOARD  

Table B.1: 

The MIP scoreboard for Luxembourg (AMR 2018) 

Flags:b:Break in series.  
1) This table provides data as published under the Alert Mechanism Report 2018, which reports data as of 24 Oct 2017. Please 
note that figures reported in this table may therefore differ from more recent data elsewhere in this document. 
2) International investment position has been revised downwards in 2015 following the revised treatment of Euro banknotes in 
national Balance of payments/International investment position statistics. 
3) House price index: e = source NSI&NCB estimates. 
4) Unemployment rate: i = Eurostat back-calculation to include 2011 Population Census results. 
5) Private sector debt, private sector credit flow: due to improved sources and methods, there are significant revisions in the 
time series. The main impact is a downward revision in levels of private sector debt for years 2007 to 2014. 
Source: European Commission 2017, Statistical Annex to the Alert Mechanism Report 2018, SWD(2017) 661. 

51 

Thresholds201120122013201420152016Current account balance, % of GDP 3 year average-4%/6%6.6 6.1 5.7 5.4 5.2 5.0 Net international investment position% of GDP-35%28.9 49.5 51.5 31.9 37.7 34.7 Real effective exchange rate - 42 trading partners, HICP deflator3 year % change±5% (EA) ±11% (Non-EA)0.1 -2.4 0.8 0.5 -0.5 -1.5 Export market share - % of world exports5 year % change-6%-3.7 -9.8 3.9 11.8 24.3 26.2 Nominal unit labour cost index (2010=100)3 year % change9% (EA) 12% (Non-EA)8.8 5.9 7.6 4.2 2.3 2.5 House price index (2015=100), deflated 1 year % change6%0.5 2.2 3.3 3.9 5.3 5.9 Private sector credit flow, consolidated% of GDP14%20.0 24.7 27.3 24.7 47.0 1.5 Private sector debt, consolidated% of GDP133%277.0 295.5 305.0 313.0 348.6 343.6 General government gross debt% of GDP60%18.7 22.0 23.7 22.7 22.0 20.8 Unemployment rate3 year average10%4.8 4.8 5.3 5.7 6.1 6.3 Total financial sector liabilities, non-consolidated1 year % change16.5%11.0 13.2 10.4 33.1 12.2 7.5 Activity rate - % of total population aged 15-643 year change in pp-0.2 pp1.1 0.7b1.7 2.9 1.5b0.1 Long-term unemployment rate - % of active population aged 15-743 year change in pp0.5 pp-0.2 0.4 0.5 0.2 0.3b0.4 Youth unemployment rate - % of active population aged 15-243 year change in pp2 pp-0.9 1.5 1.1 5.9 -1.4 2.2 External imbalances and competitivenessInternal imbalancesEmployment indicators 
 
 
 
 
 
ANNEX C STANDARD TABLES 

Table C.1: 

Financial market indicators 

(1) Latest data Q3 2017. Includes not only banks but all monetary financial institutions excluding central banks 
(2) Latest data Q2 2017. 
(3) As per ECB definition of gross non-performing debt instruments 
(4) Quarterly values are not annualised 
* Measured in basis points. 
Source: European Commission (long-term interest rates); World Bank (gross external debt); Eurostat (private debt); ECB (all 
other indicators). 

52 

201220132014201520162017Total assets of the banking sector (% of GDP)(1)2180.71967.41926.01924.61993.61850.5Share of assets of the five largest banks (% of total assets)33.133.732.031.327.6-Foreign ownership of banking system (% of total assets)(2)87.887.588.487.987.887.3Financial soundness indicators:2)              - non-performing loans (% of total loans)(3)--1.10.90.70.6              - capital adequacy ratio (%)21.924.419.620.924.322.2              - return on equity (%)(4)7.06.47.27.27.53.4Bank loans to the private sector (year-on-year % change)(1)-6.5-4.83.25.48.05.4Lending for house purchase (year-on-year % change)(1)7.26.77.06.26.57.6Loan to deposit ratio(1)60.954.952.251.854.154.7Central Bank liquidity as % of liabilities--0.50.60.70.9Private debt (% of GDP)295.5305.0313.0348.6343.6-Gross external debt (% of GDP)(2) - public8.010.010.19.08.410.6    - private4014.14592.15057.25643.46120.55617.4Long-term interest rate spread versus Bund (basis points)*32.728.217.3-12.716.623.0Credit default swap spreads for sovereign securities (5-year)*------ 
 
 
 
 
 
 
C. Standard Tables 

Table C.2: 

Headline Social Scoreboard indicators 

† The Social Scoreboard includes 14 headline indicators, of which 12 are currently used to compare Member States 
performance. The indicators "participants in active labour market policies per 100 persons wanting to work" and 
"compensation of employees per hour worked (in EUR)" are not used due to technical concerns by Member States. Possible 
alternatives will be discussed in the relevant Committees. 
(1) People at risk of poverty or social exclusion (AROPE): individuals who are at risk of poverty (AROP) and/or suffering from 
severe material deprivation (SMD) and/or living in households with zero or very low work intensity (LWI).       
(2) Unemployed persons are all those who were not employed but had actively sought work and were ready to begin 
working immediately or within two weeks.       
(3) Gross disposable household income is defined in unadjusted terms, according to the draft Joint Employment Report 2018.       
(4) Reduction in percentage of the risk of poverty rate, due to social transfers (calculated comparing at-risk-of poverty rates 
before social transfers with those after transfers; pensions are not considered as social transfers in the calculation).       
(5) Average of first three quarters of 2017 for the employment rate and gender employment gap. 
Source: Eurostat 

53 

201220132014201520162017 5Equal opportunities and access to the labour marketEarly leavers from education and training (% of population aged 18-24)8.16.16.19.35.5:Gender employment gap (pps)14.414.112.911.711.07.7Income inequality, measured as quintile share ratio (S80/S20)4.14.64.44.35.0:At-risk-of-poverty or social exclusion rate1 (AROPE)18.419.019.018.519.8:Young people neither in employment nor in education and training (% of population aged 15-24)5.95.06.36.25.4:Dynamic labour markets and fair working conditions†Employment rate (20-64 years)71.471.172.170.970.771.5Unemployment rate2 (15-74 years)5.15.96.06.56.35.7Gross disposable income of households in real terms per capita3 (Index 2008=100) ::100.6101.4101.7:Public support / Social protection and inclusionImpact of social transfers (excluding pensions) on poverty reduction447.945.940.643.839.1:Children aged less than 3 years in formal childcare48.047.049.051.850.9:Self-reported unmet need for medical care0.70.90.80.90.4:Individuals who have basic or above basic overall digital skills (% of population aged 16-74):::86.086.085.0 
 
 
 
 
C. Standard Tables 

Table C.3: 

Labour market and education indicators 

* Non-scoreboard indicator       
(1) Long-term unemployed are people who have been unemployed for at least 12 months.       
(2) Difference between the average gross hourly earnings of male paid employees and of female paid employees as a 
percentage of average gross hourly earnings of male paid employees. It is defined as "unadjusted", as it does not correct for 
the distribution of individual characteristics (and thus gives an overall picture of gender inequalities in terms of pay). All 
employees working in firms with ten or more employees, without restrictions for age and hours worked, are included.       
(3) PISA (OECD) results for low achievement in mathematics for 15 year-olds.       
(4) Impact of socio-economic and cultural status on PISA (OECD) scores. Values for 2012 and 2015 refer respectively to 
mathematics and science.       
(5) Average of first three quarters of 2017, unless for the youth unemployment rate (annual figure). 
Source: Eurostat, OECD 

54 

Labour market indicators201220132014201520162017 5Activity rate (15-64)69.469.870.870.970.0:Employment in current job by durationFrom 0 to 11 months11.311.012.213.311.3:From 12 to 23 months9.28.88.69.010.1:From 24 to 59 months18.518.017.218.317.6:60 months or over60.061.160.656.958.0:Employment growth* (% change from previous year)2.41.82.62.63.03.3Employment rate of women(% of female population aged 20-64)64.163.965.565.065.167.6Employment rate of men (% of male population aged 20-64)78.578.078.476.776.175.3Employment rate of older workers* (% of population aged 55-64)41.040.542.538.439.639.8Part-time employment* (% of total employment, aged 15-64)18.518.718.418.419.219.6Fixed-term employment* (% of employees with a fixed term contract, aged 15-64)7.67.08.110.29.09.2Transition rate from temporary to permanent employment(3-year average)29.732.434.534.2::Long-term unemployment rate1 (% of labour force)1.61.81.61.92.22.2Youth unemployment rate (% active population aged 15-24)18.016.922.316.619.115.2Gender gap in part-time employment31.230.730.628.328.629.1Gender pay gap2 (in undadjusted form)7.06.25.45.5::Education and training indicators201220132014201520162017Adult participation in learning(% of people aged 25-64 participating in education and  training)14.214.614.518.016.8:Underachievement in education324.3::25.8::Tertiary educational attainment (% of population aged 30-34 having successfully completed tertiary education)49.652.552.752.354.6:Variation in performance explained by students' socio-economic status418.3::20.8:: 
 
 
 
 
C. Standard Tables 

Table C.4: 

Social inclusion and health indicators 

*  Non-scoreboard indicator 
(1) At-risk-of-poverty rate (AROP): proportion of people with an equivalised disposable income below 60 % of the national 
equivalised median income.  
(2) 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. 
(3) Percentage of total population living in overcrowded dwellings and exhibiting housing deprivation. 
(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) Ratio of the median individual gross pensions of people aged 65-74 relative to the median individual gross earnings of 
people aged 50-59. 
(6) Fixed broadband take up (33%), mobile broadband take up (22%), speed (33%) and affordability (11%), from the Digital 
Scoreboard.Source: Eurostat, OECD 

55 

201220132014201520162017Expenditure on social protection benefits* (% of GDP)Sickness/healthcare5.75.85.65.4::Disability2.52.52.52.4::Old age and survivors8.58.58.38.4::Family/children3.63.63.43.4::Unemployment1.31.51.41.4::Housing0.30.30.30.3::Social exclusion n.e.c.0.50.50.50.5::Total22.322.722.121.7::of which: means-tested benefits0.80.80.80.8::General government expenditure by function (% of GDP, COFOG)Social protection18.718.618.018.118.2:Health4.95.25.04.74.8:Education5.85.14.94.84.8:Out-of-pocket expenditure on healthcare (% of total health expenditure)10.410.310.510.6::Children at risk of poverty or social exclusion (% of people aged 0-17)*24.626.026.423.022.7:At-risk-of-poverty  rate1 (% of total population)15.115.916.415.316.5:In-work at-risk-of-poverty rate (% of persons employed)10.211.211.111.612.0:Severe material deprivation rate2  (% of total population)1.31.81.42.01.6:Severe housing deprivation rate3, by tenure statusOwner, with mortgage or loan0.90.60.60.40.9:Tenant, rent at market price6.05.95.76.06.6:Proportion of people living in low work intensity households4 (% of people aged 0-59)6.16.66.15.76.6:Poverty thresholds, expressed in national currency at constant prices*1726117043172701762616890:Healthy life years (at the age of 65)Females11.910.610.88.7::Males11.610.911.310.7::Aggregate replacement ratio for pensions5 (at the age of 65)0.80.80.90.80.9:Connectivity dimension of the Digital Economy and Society Inedex (DESI)6::62.671.074.478.8GINI coefficient before taxes and transfers*48.650.348.548.1::GINI coefficient after taxes and transfers*28.030.428.728.5:: 
 
 
 
 
 
C. Standard Tables 

Table C.5: 

Product market performance and policy indicators 

(1) The methodologies, including the assumptions, for this indicator are shown in detail here: 
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 don't know.       
(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 here: http://www.oecd.org/competition/reform/indicatorsofproductmarketregulationhomepage.htm       
(6) Aggregate OECD indicators of regulation in energy, transport and communications (ETCR).       
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)."       

56 

Performance Indicators2010201120122013201420152016Labour productivity (real, per person employed, year-on-year % change)Labour productivity in Industry1.28-9.434.8515.4610.791.70-3.00Labour productivity in Construction2.042.79-9.050.784.791.21-0.04Labour productivity in Market Services5.061.26-4.711.203.00-0.10-1.75Unit labour costs (ULC) (whole economy, year-on-year % change)ULC in Industry-4.1010.52-2.36-12.21-10.31-0.232.74ULC in Construction-2.14-2.9711.390.65-3.36-0.711.23ULC in Market Services-2.541.176.861.86-1.143.152.96Business Environment2010201120122013201420152016Time needed to enforce contracts(1) (days)321.0321.0321.0321.0321.0321.0321.0Time needed to start a business(1) (days)16.516.516.516.516.516.516.5Outcome of applications by SMEs for bank loans(2)na0.18na0.290.000.320.56Research and innovation2010201120122013201420152016R&D intensity1.501.461.271.301.261.271.24General government expenditure on education as % of GDP5.705.605.805.104.904.804.80Persons with tertiary education and/or employed in science and technology as % of total employment34343638403737Population having completed tertiary education(3)30323335403536Young people with upper secondary level education(4)73737277746977Trade balance of high technology products as % of GDP1.900.89-0.86-1.59-1.40-3.20naProduct and service markets and competition200320082013OECD product market regulation (PMR)(5), overall1.601.441.46OECD PMR5, retail4.174.474.54OECD PMR5, professional services3.523.553.47OECD PMR5, network industries(6)2.962.722.73 
 
 
 
 
 
C. Standard Tables 

Table C.6:  Green growth 

All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2010 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 % of total value added for the economy 
Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in 2010 EUR)  
Real unit energy costs for manufacturing industry excluding refining : real costs as % 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 GHG emissions covered by EU emissions trading system (ETS) (excluding aviation): based on GHG 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 2010 EUR) 
Transport carbon intensity: GHG 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 covering natural gas, total petrol products, nuclear heat, renewable 
energies and solid fuels 
* European Commission and European Environment Agency 
Source: European Commission and European Environment Agency (Share of GHG emissions covered by ETS); European 
Commission (Environmental taxes over labour taxes and GDP); Eurostat (all other indicators) 

57 

Green growth performance201120122013201420152016MacroeconomicEnergy intensity kgoe / €0.110.110.100.090.090.09Carbon intensity kg / €0.290.290.260.240.22-Resource intensity (reciprocal of resource productivity)kg / €0.260.260.260.260.270.26Waste intensity kg / €-0.20-0.16--Energy balance of trade % GDP-4.4-4.8-4.0-3.3-2.2-1.8Weighting of energy in HICP%11.5211.5914.8514.4812.3210.93Difference between energy price change and inflation %6.83.9-3.5-6.3-8.0-8.2Real unit of energy cost% of value added9.39.18.75.1--Ratio of environmental taxes to labour taxesratio0.150.140.130.120.11-Environmental taxes% GDP2.42.42.22.01.81.8Sectoral Industry energy intensity kgoe / € 0.300.270.230.210.190.21Real unit energy cost for manufacturing industry excl. refining% of value added59.050.549.519.4--Share of energy-intensive industries in the economy% GDP------Electricity prices for medium-sized industrial users€ / kWh0.100.100.100.100.090.09Gas prices for medium-sized industrial users€ / kWh0.050.050.050.040.040.03Public R&D for energy % GDP0.010.010.000.000.000.00Public R&D for environmental protection% GDP0.020.030.020.020.020.01Municipal waste recycling rate%46.447.446.647.747.448.3Share of GHG emissions covered by ETS*%19.319.316.517.815.915.0Transport energy intensitykgoe / €1.681.651.501.341.141.10Transport carbon intensitykg / €4.264.193.783.282.68-Security of energy supplyEnergy import dependency%97.397.597.196.595.996.1Aggregated supplier concentration indexHHI2.82.82.72.92.7-Diversification of energy mixHHI0.460.460.460.450.430.43 
 
 
 
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