Recommendation for a COUNCIL RECOMMENDATION on the 2018 National Reform Programme of Luxembourg and delivering a Council opinion on the 2018 Stability Programme of Luxembourg
Date: 2018-05-23
Institutions: European Commission, Secretariat-General
Subjects: Luxembourg, budgetary equilibrium, early retirement, economic growth, economic policy, economic reform, investment, research and development, service industry, stability programme

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   EUROPEAN COMMISSION  Brussels, 23.5.2018 COM(2018) 415 final  Recommendation for a COUNCIL RECOMMENDATION on the 2018 National Reform Programme of Luxembourg  and delivering a Council opinion on the 2018 Stability Programme of Luxembourg  
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2018 National Reform Programme of Luxembourg 

and delivering a Council opinion on the 2018 Stability Programme of Luxembourg 

THE COUNCIL OF THE EUROPEAN UNION, 

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

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of 
the  surveillance  of  budgetary  positions  and  the  surveillance  and  coordination  of  economic 
policies1, and in particular Article 5(2) thereof, 
Having regard to the recommendation of the European Commission2, 
Having regard to the resolutions of the European Parliament3, 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

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

Having regard to the opinion of the Social Protection Committee, 

Having regard to the opinion of the Economic Policy Committee, 

Whereas: 

(1) 

On 22 November 2017, the Commission adopted the Annual Growth Survey, marking 
the start of the 2018 European Semester of economic policy coordination. It took due 
account  of  the  European  Pillar  of  Social  Rights,  proclaimed  by  the  European 
Parliament, the Council and the Commission on 17 November 2017. The priorities of 
the  Annual  Growth  Survey  were  endorsed  by  the  European  Council  on  22  March 
2018.  On  22  November  2017,  on  the  basis  of  Regulation  (EU)  No  1176/2011,  the 
Commission  also  adopted  the  Alert  Mechanism  Report,  in  which  it  did  not  identify 
Luxembourg  as  one  of  the  Member  States  for  which  an  in-depth  review  would  be 
carried out. On the same  day, the Commission  also adopted a recommendation for a 
Council recommendation on the economic policy of the euro area, which was endorsed 
by the European  Council on 22 March 2018. On  14 May  2018, the Council adopted 
the recommendation on the economic policy of the euro area (‘recommendation for the 
euro area’). 

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OJ L 209, 2.8.1997, p. 1. 
COM(2018) 415 final. 
P8_TA(2018)0077 and P8_TA(2018)0078. 

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(2) 

(3) 

(4) 

(5) 

(6) 

As a Member State whose currency is the euro and in view of the close interlinkages 
between  the  economies  in  the  economic  and  monetary  union,  Luxembourg  should 
ensure  the  full  and  timely  implementation  of  the  recommendation  on  the  economic 
policy for the euro area, as reflected in the recommendations (1) to (2) below. 
The 2018 country report for Luxembourg4 was published on 7 March 2018. It assessed 
some  progress  in  addressing  the  country-specific  recommendations  adopted  by  the 
Council  on  11  July  2017,  the  follow-up  given  to  the  recommendations  adopted  in 
previous years and Luxembourg's progress towards its national Europe 2020 targets.  

On 30 April 2018, Luxembourg submitted its 2018 National Reform Programme and 
its  2018  Stability  Programme.  To  take  account  of  their  interlinkages,  the  two 
programmes have been assessed at the same time. 

Relevant country-specific recommendations have been addressed in the programming 
of  the  European  Structural  and  Investment  Funds  for  the  2014-2020  period.  As 
foreseen in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament 
and  of  the  Council5,  where  it  is  necessary  to  support  the  implementation  of  relevant 
Council  recommendations,  the  Commission  may  request  a  Member  State  to  review 
and propose amendments to its Partnership Agreement and relevant programmes. The 
Commission has provided further details on how it would make use of that provision 
in  guidelines  on  the  application  of  the  measures  linking  the  effectiveness  of  the 
European Structural and Investment Funds to sound economic governance6.  

Luxembourg is currently in the preventive arm of the Stability and Growth Pact. In its 
2018  Stability  Programme,  the  government  plans  a  decrease  in  the  headline  surplus 
from 1.5 % of GDP in 2017 to 1.1 % of GDP in 2018, followed by an almost steady 
increase  thereafter,  reaching  a  surplus  of  2.4 %  of  GDP  in  2022.  The  medium-term 
budgetary  objective  —  a  structural  deficit  of  0.5 %  of  GDP  —  continues  to  be  met 
with  a  margin  throughout  the  programme  period.  According  to  the  2018  Stability 
Programme, the government debt-to-GDP ratio is expected to remain well below the 
60 %-of-GDP  Treaty  reference  value.  The  macroeconomic  scenario  underpinning 
those  budgetary  projections  is  favourable  for  the  period  up  to  2020  and  plausible 
thereafter.  Based  on  the  Commission  2018  spring  forecast,  the  structural  balance  is 
forecast  to  register  a  surplus  of  0.8 %  of  GDP  in  2018  and  0.3 %  of  GDP  in  2019, 
lower, in particular for 2019, than in the 2018 Stability Programme, but still above the 
medium-term  budgetary  objective.  Overall,  the  Council  is  of  the  opinion  that 
Luxembourg  is  projected  to  comply  with  the  provisions  of  the  Stability  and  Growth 
Pact in 2018 and 2019. 

(7) 

Luxembourg's economy is continuing to grow healthily and has performed better than 
the euro area average since the 2009 global recession. The financial sector remains the 
key  driver  of  economic  growth  and  continues  to  be  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 

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SWD(2018) 214 final. 
Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 
laying  down  common  provisions  on  the  European  Regional  Development  Fund,  the  European  Social 
Fund,  the  Cohesion  Fund,  the  European  Agricultural  Fund  for  Rural  Development  and  the  European 
Maritime  and  Fisheries  Fund  and  laying  down  general  provisions  on  the  European  Regional 
Development  Fund,  the  European  Social  Fund,  the  Cohesion  Fund  and  the  European  Maritime  and 
Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320). 
COM(2014) 494 final. 

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(8) 

(9) 

represented 61 % on average in 2013-2016, despite recurrent negative trade balances. 
Luxembourg  is  a  net  creditor  to  the  rest  of  the  world  and  at  the  end  of  2016,  gross 
external assets and liabilities reached EUR 10.5 trillion. The national authorities have 
further implemented macro-prudential and oversight measures and concerned financial 
intermediaries are adjusting to the changing national and EU policy framework.  

As  indicated  in  the  2018  euro  area  recommendation,  the  fight  against  aggressive  tax 
planning  strategies  is  essential  to  prevent  distortions  of  competition  between  firms, 
provide fair treatment of taxpayers and safeguard public finances. Spill-over effects of 
taxpayers'  aggressive  planning  strategies  between  Member  States  call  for  a 
coordinated action of national policies to complement EU legislation. Despite the size 
of  its  financial  sector,  the  high  level  of  dividend,  interest  and  royalty  payments  as  a 
percentage  of  GDP  suggest  that  the  country’s  tax  rules  are  used  by  companies  that 
engage in aggressive tax planning. The majority of foreign direct investment is held by 
'special purpose entities'. The absence of withholding taxes on outbound (i.e. from EU 
residents to third country residents) interest and royalty payments and the exemption 
from withholding taxes on dividend payments under certain circumstances may lead to 
those  payments  escaping  tax  altogether,  if  they  are  also  not  subject  to  tax  in  the 
recipient  jurisdiction.  The  Commission  takes  note  of  the  positive  step  taken  by 
Luxembourg (i.e. adoption of a patent box regime compliant with international rules). 
Based on recent exchanges, the Commission will continue its constructive dialogue to 
fight against taxpayers aggressive planning strategies.  

The Luxembourg authorities have for several decades actively sought to diversify the 
economy,  by  developing  selected  sectors,  including  the  ICT  industry  and  the  space 
sector. Given the country’s high labour costs, activities with higher added value offer 
the potential to unlock alternative sources of growth. The successful diversification of 
Luxembourg’s  economy  therefore  depends  to  a  large  extent  on  sectors  that  are  less 
sensitive  to  labour  cost  levels.  These  are  largely  based  on  research  and  innovation, 
which tend to be technology- and knowledge-intensive. This strategy has been recently 
strengthened.  Large  public 
including  R&D  and  market 
investment  projects, 
regulations,  among  other  measures,  are  being  implemented  to  develop  these  priority 
sectors.  Between  2000  and  2016,  Luxembourg  has  increased  its  public  R&D 
expenditure fivefold, reaching 0.60 % of GDP. These investments have led the country 
to  rapidly  build  a  well-performing  public  research  system.  However,  while  public 
R&D  investment  is  above  the  euro-area  average,  private  investment  in  R&D  and 
innovation  performance,  as  measured  by  the  European  innovation  scoreboard,  has 
continued  to  decline.  The  structure  of  the  Luxembourg  economy  partly  explains  the 
lower business R&D intensity in an international comparison, as sectors that account 
for the bulk of the Luxembourg GDP (services and in particular the financial sector) 
traditionally  invest  less  in  R&D.  Nevertheless,  this  trend  is  more  pronounced  in 
Luxembourg  as  compared  to  the  EU  average  and  business  R&D  intensity  has 
decreased to 0.64 % of GDP in 2016, from 1.5 % of GDP in 2000. The declining trend 
of private investment indicates that obstacles remain in this area. This also points to a 
lack of leverage from public R&D efforts on business investment. Consequently, the 
building-up  of  public  research  capacities  needs  to  be  better  integrated  in  a 
comprehensive  approach  to  the  innovation  eco-system.  In  2017,  a  new  law  was 
adopted  to  renew  the  aid  schemes  for  research,  development  and  innovation, 
broadening the scope of public aid available. 

(10)  Luxembourg  is  expected  to  miss  its  2020  target  for  reducing  greenhouse  gas 
emissions. Air pollution and traffic congestion at peak-hour are major problems for the 

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country, exacerbating nitrogen dioxide concentrations and greenhouse gas emissions. 
In 2015, more than half of greenhouse gas emissions came from the transport sector. 
The low transport fuel taxation, the high number of company cars and the high level of 
house  prices are amongst  the main factors  stimulating the high levels of car use  and 
increased  number  of  cross-border  workers.  Transport  fuel  tax  rates  are  among  the 
lowest in the EU and provide an incentive for increased fuel consumption, including 
cross-border sales. Nevertheless, recent measures have encouraged the development of 
a  more  sustainable  mobility,  notably  through  the  2016  tax  reform,  but  also  through 
significant  investment  in  public  transport.  The most  urgent  challenges are  notably to 
complete and upgrade rail infrastructures. 

(11)  Luxembourg  remains  committed  to  reduce  regulatory  restrictions  in  the  business 
services sector. Recent measures particularly focused on the professions of architects 
and  engineers,  and  additional  reforms  to  further  reduce  restrictions  in  these  two 
professions  have  been  announced.  In  addition, the  so-called  omnibus  law  adopted  in 
March  2017  introduced  administrative  simplification  measures  (i.e.  allowing  for 
horizontal  screening  for  administrative  procedures).  However,  regulatory  barriers 
remain  in  the  business  services  sector.  The  absence  of  a  specific  equivalence 
assessment  procedure  for  professional  insurance  requirements,  allowing  equivalent 
insurance coverage by service providers from other Member States may be a source of 
restrictions.  The  profession  of  lawyer  is  particularly  affected  by  regulations  that  are 
highly restrictive compared to the EU average. The wide scope of the reserved activity 
impacts  the  provision  of  legal  consultancy  services  by  lawyers  or  other  service 
providers,  in  particular  for  online  services.  Other  restrictions  include  legal  form  and 
shareholding requirements, incompatibility rules and multidisciplinary restrictions. 

(12)  Concerns  remain  about  the  long-term  sustainability  of  public  finances  due  to  the 
projected  increase  in  ageing  costs.  Luxembourg  has  a  high  projected  increase  in  the 
proportion of old-age population that will be dependent by 2070 and, according to the 
latest  projections  of  the  Social  Security  Ministry,  the  operational  balance  of  the 
pension  system  will  be  running  a  deficit  by  2023.  Nevertheless,  past  and  current 
surpluses  of  the  pension  system  have  been  saved  and  accumulated  reserves  would 
maintain  the  viability  of  the  system  for  a  further  20  years.  According  to  the  2018 
Ageing Report, age-related costs are expected to increase by 13 pps of GDP between 
2016  and  2070,  exceeding  the  sustainability  thresholds  and  particularly  driven  by 
pensions (8.9 pps of GDP). Expenditure on long-term care as a proportion of GDP is 
one of the highest among Member States. In spite of the reform adopted in 2017, it is 
projected to increase by 3 pps from the current level by 2070.  

(13)  The  employment  rate  of  older  people  remains  particularly  low  and  further  measures 
are  needed  to  improve  their  employability  and  labour  market  opportunities.  This  is 
also  important  to  ensure  the  long-term  sustainability  of  public  finances.  Early 
retirement  schemes  encouraging  workers  to  leave  employment  remain  widespread, 
with  59.2 %  of  newly  attributed  pensions  being  early  old-age  pensions.  A  law 
suppressing  one  early  retirement  scheme  was  passed  in  December  2017  but  its  net 
impact  on  the  average  effective  retirement  age  and  on  expenditure  is  uncertain  as  it 
eases conditions on other early retirement schemes. This poor labour market outcome 
can  also  be  partly  attributed  to  financial  disincentives  to  work,  which  are 
comparatively  high  for  this  group.  Encouraging  the  employment  of  older  workers 
requires a comprehensive strategy including measures to help workers remain in active 
employment for longer. The ‘Age Pact’, a draft law submitted to Parliament in April 
2014, which aims to encourage firms with more than 150 employees to hire and retain 

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older  workers  through  age  management  measures,  is  still  pending  in  Parliament.  As 
regards  education,  Luxembourg  needs  to  address  the  strong  impact  of  students' 
socioeconomic  background  on  their  education  outcomes.  This  is  also  important  to 
respond to the strong demand for highly specialised skills.   

(14)  Real estate prices have continued to rise. This may undermine Luxembourg's ability to 
attract and retain a skilled labour force, a large proportion of which is made up of non-
nationals.  House  price  pressures  emerge  from  a  fundamental  supply  and  demand 
mismatch. 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.  Further  work  is  needed  to  encourage  housing  investment,  by 
increasing incentives to promote real estate sales, improving administrative procedures 
to  grant  building  permits  and  providing  affordable  social  housing.  The  recently 
adopted  tax  reform  on  capital  gains  on  real  estate  sales  and  the  update  of  the  social 
housing  programme  is  unlikely  to  increase  the  house  supply,  given  the  continuous 
trend  towards  higher  prices.  On  the  demand  side,  high  population  and  employment 
growth push prices up. The housing market situation also exacerbates the problem of 
traffic  congestion  and  pollution.  In  addition,  the  increase  in  house  prices  has 
repercussions on household indebtedness, raising concerns about the sustainability of 
household debt. Household indebtedness has rapidly increased over the last 10 years to 
reach an estimated 165 % of disposable income in 2016, reflecting real estate inflation, 
as  around  80 %  of  household  debt  stems  from  mortgage 
loans.  However, 
Luxembourg's  supervisors  are  introducing  relevant  macro-prudential  measures  and 
recommendations  issues  by  the  European  Systemic  Risk  Board  to  reduce  potential 
vulnerabilities and risks to financial stability. Following the proposals of the national 
systemic risk committee, the government has also recently presented a set of measures, 
including borrowing-based limitations, to avoid a build-up of household vulnerability, 
although this still needs to be approved by Parliament. 

(15) 

In  the  context  of  the  2018  European  Semester,  the  Commission  has  carried  out  a 
comprehensive  analysis  of  Luxembourg’s  economic  policy  and  published  it  in  the 
2018 country report. It has also assessed the 2018 Stability Programme and the 2018 
National  Reform  Programme  and  the  follow-up  given  to  the  recommendations 
addressed to Luxembourg in previous years. The Commission has taken into account 
not  only  their  relevance  for  sustainable  fiscal  and  socioeconomic  policy  in 
Luxembourg but also the extent to which they comply with Union rules and guidance, 
given  the  need  to  strengthen  the  Union’s  overall  economic  governance  by  providing 
Union-level input for future national decisions.  

(16) 

In  the  light  of  this  assessment,  the  Council  has  examined  the  2018  Stability 
Programme  and  is  of  the  opinion  that  Luxembourg  is  expected  to  comply  with  the 
Stability and Growth Pact. 

HEREBY RECOMMENDS that Luxembourg take action in 2018 and 2019 to: 

1. 

Increase  the  employment  rate  of  older  people  by  enhancing  their  employment 
opportunities and employability while further limiting early retirement, with a view 
to also improving the long-term sustainability of the pension system. 

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2. 

Further reduce regulatory restrictions in the business services sector.  

Done at Brussels, 

For the Council 
The President 

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