COMMISSION STAFF WORKING DOCUMENT Country Report Luxembourg 2019 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2019 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: 2019-02-27
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, 27.2.2019  SWD(2019) 1015 final  COMMISSION STAFF WORKING DOCUMENT Country Report Luxembourg 2019 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2019 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(2019) 150 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.   Competitiveness reforms and investment 

Annex A: Overview Table 

Annex B: Commission Debt Sustainability Analysis and fiscal risks 

Annex C: Standard Tables 

Annex D: Investment Guidance on Cohesion Policy Funding 2021-2027 for 

Luxembourg 

REFERENCES 

LIST OF TABLES 

Table 1.1: 

Key economic and financial indicators - Luxembourg 

Table 2.1: 

Summary Table on 2018 country-specific recommendations assessment 

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 3.2.2:  Distribution of investment funds per specialisation (% market share) 

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 

1 

3 

7 

15 

19 

19 

25 

32 

40 

50 

53 

54 

60 

63 

14 

17 

20 

26 

27 

54 

55 

56 

57 

58 

59 

 
 
 
 
LIST OF GRAPHS 

Graph 1.1: 

Breakdown of real GDP growth 

Graph 1.2: 

Composition of investment spending (% GDP) 

Graph 1.3: 

Breakdown of potential GDP growth 

Graph 1.4: 

Consumer inflation 

Graph 1.5: 

Beveridge curve 

Graph 1.6: 

Breakdown of value added content in exports (% of GDP) 

Graph 1.7:  Market share decomposition: contribution of export shares' drivers to exports market 

share growth (% cumulated) 

Graph 1.8: 

Decomposition of external position (current and capital accounts) - Luxembourg 

Graph 1.9: 

Decomposition of Debt by Sector (non-consolidated) - Luxembourg 

Graph 2.1:  Overall multiannual implementation of 2011-2018 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:  Environmental tax revenues as a share of GDP (2016) 

Graph 3.2.1:  Household debt and leverage ratios 

Graph 3.2.2:  Housing prices overvaluation gap with respect to income, rents and fundamentals 

Graph 3.3.1:  Activity, unemployment, long-term unemployment, youth unemployment and not in 

employment and education or training rates 

Graph 3.3.2:  Employment rate by age group in Luxembourg 

Graph 3.3.3:  At-risk-of-poverty or social exclusion rate and its components in Luxembourg 

Graph 3.4.1: 

Targets and emissions under the effort-sharing legislation - Luxembourg (percentage 

change from 2005) 

LIST OF BOXES 

Box 2.1: EU funds and programmes contribute to addressing structural challenges and to fostering 

growth and competitiveness in Luxembourg 

Box 3.2.1: The rental market in Luxembourg 

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

Box 3.4.1: Investment challenges and reforms in Luxembourg 

7 

7 

8 

9 

9 

11 

11 

12 

12 

15 

19 

21 

22 

28 

29 

32 

32 

36 

45 

18 

30 

33 

41 

2 

 
 
 
 
 
EXECUTIVE SUMMARY 

While  recent  economic  trends  in  Luxembourg 
pointed  to  a  moderate  economic  expansion,  
prospects  are  now  clouded  by  a  deteriorated 
external  environment,  to  which  the  economy  is 
highly sensitive. Although the economy is forecast 
to  continue  growing,  this  could  signal  a  need  for 
Luxembourg  to  step  up  efforts  to  address  key 
structural  issues  potentially  hindering  a  more 
sustainable  economic  growth.  At 
the  current 
juncture, public  finances remain sound  and  strong 
job  creation  is  feeding  into  low  unemployment. 
The  country  could  bolster 
its  economy  and 
improve  the  conditions  for  sustainable  growth  by 
ensuring that labour supply and skills levels match 
labour  market  needs.  This,  in  turn,  would  help  to 
better  address  the  long-term  health  of  public 
finances. The resilience of the economy would also 
be  strengthened  by  further  diversification  efforts 
through  engaging 
the  domestic  business  and 
investment community in the current technological 
and  digital  transformation.  Private  and  public 
investment is needed to foster innovation, improve 
housing and transport infrastructure, and  stimulate 
inclusive skills development. (1) 

After  slowing  to  1.5 %  in  2017,  GDP  growth 
picked  up  again  and  is  estimated  to  have 
reached  3.0 % 
in  2018.  Growth  has  been 
supported  by  a  sizeable  expansion  in  exports  of 
(mainly  financial)  services,  Luxembourg’s  main 
economic  driver,  which  had  been  exceptionally 
weak  in  2017.  Private  consumption  growth  also 
strengthened in 2018, building on an improvement 
in 
labour  market  and  higher  disposable 
incomes as a result of taxation reforms and  a new 
wage indexation from August 2018.  

the 

Growth  is  projected  to  decelerate  to  2.5 %  in 
2019. The slowdown in world trade, and euro area 
GDP growth, has contributed to higher volatility in 
financial  markets.  A  broad  set  of  indicators 
suggesting that these trends may continue in 2019 
has  weakened  growth  prospects  for  financial 

(1)  This report assesses Luxembourg’s economy in light of the 
European Commission’s Annual Growth Survey published 
on 21 November 2018. 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  —  delivering  high-quality  investment, 
efforts  on  productivity  growth, 
focusing 
reforms 
inclusiveness  and 
institutional  quality  and  ensuring 
macroeconomic stability and sound public finance. 

3 

services  and  the  economy  as  a  whole.  Therefore, 
external  trade  is  expected  to  weaken  markedly. 
This  should  drive  down  GDP  growth  despite 
supportive  domestic  demand,  which  is  forecast  to 
provide the main contribution to growth in 2019. 

Business  investment  is  set  to  remain  subdued, 
lower  expectations  of  economic 
reflecting 
growth  and  greater  uncertainty.  Business 
investment  is  projected  to  remain  below  11 %  of 
GDP,  one  of  the  lowest  rates  in  the  EU,  while 
residential investment is also  set to remain low  in 
the  high  demand  for  housing. 
contrast  with 
Productivity remains among the highest in the EU 
but it has declined since 2014, as GDP  has grown 
more  slowly  than  employment.  While  the  recent 
downward  revisions  of  past  GDP  growth  seem  to 
reflect  exceptional  events  and  methodological 
changes, 
the 
reliability  of  statistics  in  general  and  productivity 
figures in particular.  

they  cast  additional  doubts  on 

Luxembourg’s  public  finances  remain  sound. 
The  general  government  balance  is  estimated  to 
have  posted  a  surplus  of  around  1.3%  of  GDP  in 
2018  and  it  is  forecast  to  remain  in  surplus  in 
2019.  General  government  debt  is  expected  to 
continue to fall in 2019, from around 21 % of GDP 
in 2018 (well below the 60 % threshold). However, 
significant  budgetary  challenges  could  remain  in 
the long term, with population ageing and growing 
benefit ratios driving up spending on pensions and 
healthcare. 

on 

and 

investments (2) 

sustainable 

remains  high  and 

stimulating 
improve 
the 

Focussing 
fostering 
digitisation  and  innovation,  improving  housing 
transport 
supply 
skills 
and 
infrastructure, 
economic 
development  would 
resilience,  and 
long-term 
strengthen 
potential  growth  of  Luxembourg.  Public 
focussed  on 
investment 
knowledge-intensive  sectors,  including  a  strong 
Information  and  Communication  Technology 
sector.  However,  this  has  not  spilled  over,  nor 
in 
helped 
innovation and digitisation, which remains low and 
appears  insufficient  to  support  the  transition  to  a 
data-driven economy, and to improve significantly 
the low levels of economic digital  integration and 
firms 
sluggish  productivity  growth.  While 

stimulate  private 

investment 

to 

(2)  Both private and public investment. 

 
 
                                                           
                                                           
Executive summary 

indicators  on 

supporting  the  European  Pillar  of  Social 
Rights.  The labour market is performing very 
well,  and  social 
inequality, 
poverty  and  exclusion,  remain  close  to  or 
above  the  EU  average,  despite  some  signs  of 
weakening.  Significant  skills  shortages  have 
emerged  recently  in  certain  sectors  and  school 
strongly 
pupils’ 
influenced by their socio-economic status. 

opportunities 

still 

are 

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

challenges 

  Despite  recent  reforms,  pension-related  and 
long-term  care  costs  are  still  expected  to 
increase  markedly  in  the  long  term.  Recent 
projections of long-term trends in pensions and 
long term care expenditure point to risks to the 
sustainability  of  public  finances.  In  its  2018 
report,  the  government’s  pensions  working 
group  discussed  various  ways  to  improve 
long-term 
the 
contribution  rate  could  be  increased  gradually, 
the  pensionable  age  could  be  raised  to  take 
account  of  longer  life  expectancy,  and  phased 
retirement  could  be  encouraged.  The  report 
suggests a multi-pronged strategy of calibrated 
long-term 
reforms 
sustainability  of  the  system  while  minimising 
the 
the  economy  and 
pensioners. 

impacts  on  both 

sustainability 

guarantee 

pension 

the 

to 

– 

of 

long-term 

sustainability 

  Projected  increases  in  expenditure  threaten 
the 
the 
healthcare  system.  The  2018  reform  of  long-
term  care  insurance  is  expected  to  ensure 
financial  viability  until  2030.  The  government 
finances  40 %  of  long-term  care  expenditure. 
The  reform  will  gradually  increase  workers’ 
contributions  to  the  healthcare  system  from 
1.4 % of the wage base to 1.7 %, keeping costs 
in line with the proportion of dependent people. 

is 

close 

  Luxembourg’s total tax burden as a share of 
the  EU  average. 
GDP 
to 
Luxembourg’s  corporate  income  tax  revenues 
are above the EU average while revenues from 
taxes  on  consumption,  recurrent  property  and 
environmentally  oriented  taxes  are  all  below 
the EU average as a share of GDP. The recent 
coalition  agreement  has  announced  a  number 

investments 

investments 

increasingly  perceive  the  shortage  of  qualified 
workforce  as  an  obstacle  to  investment,  heavy 
traffic  congestion  and  insufficient  housing  supply 
may  also  be  negatively  affecting  the  country’s 
attractiveness  (see  Section  3.2),  which  calls  for 
significant 
in  construction  and 
sustainable  transport  infrastructure  (see  Section 
in  education  and 
3.4).  Effective 
training  are  needed  to  make  the  most  of  people’s 
potential  and 
inclusion  and 
employability, and foster technological and digital 
transformations 
improve  productivity  and 
long-term  growth  potential  (see  Section  3.3). 
Annex D identifies key priorities for support by the 
European  Regional  Development  Fund  and  the 
European  Social  Fund  Plus  for  the  2021-2027 
period in Luxembourg, building on the analysis of 
investment  needs  and  challenges  outlined  in  this 
report. 

improve 

thus 

to 

limited 
Overall,  Luxembourg  has  made 
progress in addressing the 2018 country-specific 
recommendations.  

There  has  been  limited  progress  in  the  following 
areas: 

 

Increasing employment among older people, by 
enhancing  their  employment  opportunities  and 
employability,  and 
limiting  early 
retirement. 

further 

  Further  reducing  regulatory  restrictions  in  the 
business  services  sector.  Such  restrictions 
remain above the EU average in most regulated 
professions. 

Regarding  Luxembourg’s  progress  towards  its 
national  targets  under  the  Europe  2020  strategy, 
the  employment  rate  target  of  73 %  is  still  out  of 
reach despite substantial job creation. Luxembourg 
the  municipal  waste 
almost  complies  with 
recycling target of 50 % and is broadly on track to 
reach  the  targets  for  energy  efficiency.  On  the 
other hand, it is at risk of failing to meet the targets 
for reducing the risk of poverty or social exclusion, 
early  school  leaving,  post-secondary  educational 
attainment, research and development intensity and 
reducing greenhouse gas emissions. 

  Luxembourg  performs  overall  well  on  most 
the  Social  Scoreboard 

indicators 

of 

4 

 
 
of  tax  reforms  in  support  of  the  country’s 
environmental commitments.  

that  may  facilitate 

  Luxembourg’s  tax  rules  appear  to  be  used 
by  multinationals  engaged  in  aggressive  tax 
planning  structures,  but  some  steps  are 
being  taken  to  limit  such  practices.  Some 
tax  planning 
elements 
include  the  absence  of  withholding  taxes  on 
interests  and  royalties  as  well  as  possible 
exemption 
However, 
Luxembourg  has  taken  steps  to  amend  aspects 
of  its  tax  system  to  curb  aggressive  tax 
planning, 
implementing 
European and internationally agreed initiatives. 

in  particular  by 

dividends. 

on 

solid  capital 

  As  one  of  the  world’s  largest  financial 
centres, Luxembourg is deeply integrated in 
the  international  financial  industry’s  global 
value  chain.  The  financial  sector  is  the  main 
engine  of  the  country’s  economy,  accounting 
for  25 %  of  GDP,  11 %  of  employment  and 
21%  of  fiscal  revenues.  Luxembourg’s  banks 
display 
ratios.  Despite  a 
weakening in 2017 and 2018, their profitability 
remains  comfortable  and  reflects  a  diversified 
revenue mix. Banks need to deposit large sums 
at  the  Central  Bank  to  comply  with  liquidity 
ratios. Recent stress tests have found that banks 
would  be  able  to  withstand  real-estate  price 
shocks  and  high  default  rates.  Potential  risks 
stemming from the interconnectedness between 
banks and funds appear limited. 

stems 

  Despite being wealthy at the aggregate level, 
households  have  high 
levels  of  debt 
compared to their incomes. Rising household 
from 
indebtedness 
increasing  property  prices,  as  mortgage  loans 
account  for  around  80 %  of  household  debt. 
Increasing debt means that some lower income 
households  may  struggle  to  make  ends  meet, 
particularly if interest rates go up or if there is 
an economic downturn. 

particular 

in 

  House  prices  continued  to  rise  in  2017  and 
the first half of 2018,  but not as much as  in 
previous  years.  Rising  rents  and  property 
prices  could  affect  competitiveness  and 
social  inclusion.  The  strong  housing  demand 
remains 
growth, 
favourable  financing  conditions  and  a  large 

population 

driven 

by 

Executive summary 

cross-border  workforce.  Housing  supply  and 
investment  appear  insufficient,  constrained  by 
insufficient  land  availability  and  low  housing 
density,  largely  due  to  a  lack  of  incentives  for 
landowners  to  build  new  housing.  The  supply 
of  social  housing  also  appears  insufficient  and 
points  to  a  need  for  significant  investment  to 
alleviate rising tensions in the housing market. 

  Luxembourg  plans  to  take  measures  to 
stimulate  housing  supply.  These 
include 
changes  to  urban  planning  laws  to  increase 
building  areas  and  develop  affordable  and 
social  housing.  Other  measures  involving  land 
purchase,  new  tax  incentives  and  technical 
assistance  for  municipalities  should  increase 
the  amount  of  land  available  for  building. 
Planned  incentives  are  expected  to  encourage 
owners  to  sell  or  rent  out  properties  that  are 
currently vacant. Public authorities may also be 
given  stronger  powers  for  the  compulsory 
purchase  or  exchange  of  land  to  unblock 
development projects. 

  Unemployment 

is 

low  and  the  current 
favourable  economic  environment  results  in 
strong jobs creation. However, certain groups 
are  still  less  likely  to  find  work.  People  aged 
over  50,  people  with  disability  and  workers 
with reduced working capacity make up a large 
share  of  the  long-term  unemployed.  Many 
employment  measures  aim  to  help  the  most 
vulnerable jobseekers (in particular those aged 
45-50 or more) back into work.  

  Nevertheless,  the  employment  rate  among 
older  workers  has  stagnated  since  2010  and 
remains among the lowest in the EU (39.8% 
in  2017).  Limited  progress  has  been  made  on 
reducing early retirement and targeted policies 
have  so  far  failed  to  encourage  significantly 
more  older  people  to  work  or  look  for  a  job. 
Age management strategies, which should also 
help  to  keep  older  workers  in  employment, 
have not been a legislative priority so far. 

  Although  social  benefits  play  a  pivotal  role 
in lifting people out of poverty, their impact 
has  weakened  further  and  inequality  got 
income 
in  2016.  The  minimum 
worse 
arrangements  are  being  reformed  to  tackle 
social  exclusion  (in  particular  for  households 

5 

 
 
Executive summary 

suggesting  a  high  level  of  market  integration, 
in particular for financial activities. 

in 

investment 

  Luxembourg  has  kept  up  its  efforts  to 
strengthen  knowledge-intensive  sectors  and 
pursue  its  economic diversification  strategy. 
Stronger  private 
research, 
technological  innovation  and  digitisation  can 
be  key  drivers  of  productivity  growth  and  of 
the  transition  to  a  data-driven  economy.  The 
weak  connection  between  the  public  science 
base and businesses calls for action to promote 
knowledge  transfer  to  firms.  The  lack  of  a 
national  research  and  innovation  strategy  and 
stagnant  public  support  for  business  research 
and development investments, are among other 
that  prevent  Luxembourg  from 
challenges 
exploiting  the  full  potential  of  its  innovation 
eco-system. 

and 

jobs 

through 

  Ambitious  climate  and  energy  policies  can 
provide Luxembourg with  opportunities for 
growth 
increased 
productivity,  diversification  of  exports  and 
business  creation.  Additional  measures,  as 
envisaged  in  the  new  coalition  agreement, 
could  contribute  to  bridge  the  gap  to  reach 
Luxembourg’s  2020  and  2030  decarbonisation 
targets.   

  Regulatory  barriers  remain  in  the  business 
services  sector,  and  some  bottlenecks  weigh 
on  the  business  environment.  Regulatory 
restrictions  in  business  services  remain  above 
the  EU  average  for  several  economically 
important  professions.  Measures  have  been 
taken to ease restrictions in the retail sector.  

  Luxembourg’s  location  at  the  crossroads  of 
one of the EU’s  most economically dynamic 
regions  gives  rise  to  significant  mobility 
issues.  Traffic  congestion,  low  air  quality  or 
long  commuting  times  affect  many  cross-
border  workers.  The  projected  increase  in 
population  and  the  number  of  commuters  will 
in 
require 
infrastructure,  including,  education  and  health 
services. 

investments 

significant 

with  children),  encourage  people  to  look  for 
work  or  training  and  remove  disincentives  to 
work.  The  Revenu  d’inclusion  sociale  scheme 
replaced the previous scheme in January 2019. 
Its  success  will  depend  largely  on  whether 
beneficiaries can find successful pathways back 
to work. 

  Luxembourg  is  among  the  best  performers 
in  the  EU  in  terms  of  tertiary  education 
attainment,  but  the  basic  skills  of  15-year-
olds are below the EU average. Performance 
is  strongly  influenced  by  students’  linguistic 
background and socio-economic status. Several 
measures  have  been 
the 
performance  gaps  among  pupils  of  different 
backgrounds. 

to  close 

taken 

  To  become  more  employable,  people  need 
skills and training that are more in line with 
employers’  needs.  The  public  employment 
service  has  stepped  up  its  cooperation  with 
employers  to  ensure  that  their  needs  are  met. 
Investing 
including 
in  skills  development, 
training  courses  for  jobseekers  (in  particular 
those aged 30-45), in response to requests from 
employers, remains a priority. 

its 

involvement 

  Overall  productivity  has  remained  high, 
even in the difficult 2007-2010 period, but no 
significant  gains  have  been  recorded  since 
2014.  Luxembourg’s  productivity  gains  were 
in  global 
obtained  from 
(largely  financial)  markets.  However,  cost 
indicators  are  worsening, 
competitiveness 
partly  reflecting 
the  sluggish  productivity 
growth. The cost of labour, per unit of output, 
grew  by  5.2 %  in  2017,  after  very  limited 
increases  in  previous  years  (around  1%,  on 
average,  between  2013  and  2016).  This  was 
due  to  a  further  decline  in  labour  productivity 
coupled  with  a  wage  indexation,  triggered 
(from  January  2017)  by  a  sharp  rise 
in 
inflation. However, these trends eased in 2018.  

  Luxembourg’s  export  market  shares  for 
goods  and  services  exports  recorded  a  net 
loss  of  4.5 %  in  2017.  Luxembourg  is  highly 
dependent  on  the  contribution  of  foreign  trade 
to  economic  activity,  domestic  employment 
and  public 
inputs 
account  for  70  %  of  the  country’s  trade, 

Intermediate 

finances. 

6 

 
 
1.  ECONOMIC SITUATION AND OUTLOOK 

GDP growth 

After  slowing  to  1.5 %  in  2017,  GDP  growth 
picked  up  again  and  is  estimated  to  have 
reached  3.0 % 
in  2018.  Growth  has  been 
supported  by  a  sizeable  expansion  in  exports  of 
services  (mainly  financial),  Luxembourg's  main 
economic  driver,  which  had  been  exceptionally 
weak  in  2017  (Graph  1.1).  However,  historical 
figures  need  to  be  taken  with  caution  given  the 
frequent and substantial revisions to Luxembourg's 
national  accounts  data (3).  Private  consumption 
growth  also  strengthened  in  2018,  on  the  back  of 
an  improvement  in  the  labour  market  and  higher 
disposable incomes as a result of taxation reforms 
and new wage indexation from August. 

Graph 1.1: 

Breakdown of real GDP growth 

has  weakened  growth  prospects  for  financial 
services  and  the  economy  as  a  whole.  Therefore, 
external  trade  is  expected  to  weaken  markedly. 
This,  in  turn,  should  drive  down  GDP  growth, 
despite  supportive  domestic  demand,  which  is 
forecast to be the main growth driver in 2019.  

in  2018,  reflects 

The  recovery  of  net  exports  of  goods  and 
services 
somewhat  a 
normalisation,  after  an  exceptionally  weak 
outcome  in  the  previous  year.  Nevertheless, 
growth is projected to drop subsequently as the 
external  environment  becomes  less  supportive. 
Exports  rebounded  in  2018,  after  stagnating  over 
2016 and 2017. These developments mainly reflect 
a recovered dynamism in the financial sector after 
a  period  of  reduced  activity, 
the 
exceptional  exit  of  a  few  large  companies,  which 
ceased  activities  in  the  place.  Although  these 
developments  did  not  change  significantly  the 
weight of the financial sector in the economy, they 
entailed  a  reduction  in  the  balance  of  externally 
oriented  operators.  Increased  uncertainty  and  less 
support  expected  from  the  external  environment 
are  projected  to  moderate  the  external  sector 
contribution to GDP growth. 

including 

Graph 1.2:  Composition of investment spending (% GDP) 

Source: European Commission 

According to the Commission's winter forecast, 
growth  is  projected  to  decelerate  to  2.5 %  in 
2019. The slowdown in world trade, and euro area 
GDP growth, has contributed to higher volatility in 
financial  markets.  A  broad  set  of  indicators 
suggesting that these trends may continue in 2019 

(3)  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 %. In 
March 2018, GDP growth for 2015 and 2016 were revised 
down  to  2.9  %  and  3.1  %  from  4.0  %  and  4.2  %, 
respectively.  In  October  2018,  the  estimate  for  2016  was 
further revised down to 2.4 % from 3.1 % and growth for 
2017  was  also  lowered  to  1.5  %  from  its  first  estimate  of 
2.3 %. 

Source: European Commission 

The  deceleration  projected 
for  business 
investment  reflects  lower  expectations  about 
economic  growth  amidst  increased  external 
uncertainty  (Graph  1.2).  Some  cyclical  effect  is 

7 

-6-4-20246091011121314151617181920%, ppsInventories investmentNet exportsInvestment (GFCF)ConsumptionReal GDP (yoy %)EA-19 real GDP (yoy %)forecasts1015202505101595979901030507091113151719fHousing investmentPublic investmerntBusiness investmentTotal investment (right) 
 
 
 
                                                           
 
 
 
1. Economic situation and outlook 

skilled labour shortages are being reported in some 
sectors,  it  seems  to  exist  also  some  inconsistency 
between  the  revised  national  accounts  and  the 
results of the business and labour surveys. Indeed, 
the frequent revisions of national accounts-data are 
witness  of  the  uncertainty  surrounding  national 
accounts  statistics,  which  need  to  be  taken  with 
caution,  including  the  fall  in  productivity  growth. 
Overall,  Luxembourg  continued  showing  among 
the highest levels in labour productivity, real GDP 
per head and trade openness in the EU. 

Graph 1.3: 

Breakdown of potential GDP growth 

Source: European Commission 

Inflation 

The  Harmonised  Index  of  Consumer  Prices 
inflation  fell  marginally  to  2.0  %  in  2018  from 
2.1%  in  2017,  slightly  above  the  euro  area, 
where  the  average  was  1.8  %  (Graph  1.4). 
Inflation was sustained mainly by mainly oil price 
movements.  Oil  prices  are  assumed 
to  ease 
significantly  in  2019,  which  should  drive  down 
headline inflation to 1.6%, although this effect will 
gradually  dissipate  in  2020.  At  the  same  time, 
domestic price pressures, including from past wage 
increases,  are  set  to  reassert  their  influence  and 
headline  inflation  should  increase  from  1.6%  in 
2019 to 1.8% in 2020. 

also  expected,  as  growth  will  slow  down  and 
should  stay  close  to  potential.  The  business 
investment-to-GDP  ratio  is  projected  to  remain 
below 11 %, which is one of the lowest in the EU. 

remains 

low.  The 

Investment  in  construction  has  been  buoyant 
thanks  to  public  infrastructure  projects  and 
non-residential  buildings.  However,  residential 
construction 
housing 
investment-to-GDP  ratio  of  around  3.2%  should 
remain stable despite the high demand for housing. 
While supply constraints remain entrenched, price 
pressures  are  expected  to  build  up  further  (see 
section 3.2.3). As the government investment cycle 
gets  started,  following  the  general  elections  in 
2018, public investment might slowdown in 2019. 
Nevertheless,  the  public  investment-to-GDP  ratio 
is  expected  to  remain  stable  at  around  4.0  %  of 
GDP, which is among the highest in the EU. 

Potential growth 

Potential  growth  has  halved  compared  to  pre-
crisis  records,  due  to  total  factor  productivity 
slowdown.  Annual  estimates  of 
slowdown 
potential  GDP  growth  were  revised  down  by 
0.4 pps on average, between 2010 and 2017, albeit 
significantly  more  in  2016  and  2017.  Potential 
GDP  growth  averaged  2.1 %  in  the  period  2010-
2017, compared with 4.1% in 2001-2007. A larger 
decline  in  total  factor  productivity  underlays  the 
new  estimates  of  potential  growth  (Graph  1.3). 
Revised  data  also  suggest  that  the  decline  in 
productivity since the global crisis has been larger 
(see  Country  Report,  2018)  and 
its  pace 
accelerated  in  the  four  years  to  2014.  Large 
productivity losses in 2015, 2016 and 2017 deserve 
special  attention,  as  they  were  concurrent  with 
exports  stagnation  and  GDP  slowdown,  amid  an 
allegedly supportive economic environment.  

a 

of 

in 

degradation 

Lower  growth  coupled  with  high  job  intensity 
resulted 
labour 
productivity.  This  might  point  initially  to  a 
situation of labour hoarding (4). However, statistics 
on  firms'  results  show  that  profitability  was 
maintained  overall  and,  in  particular,  in  the 
banking  sector.  Notwithstanding  the  likelihood  of 
some  labour  hoarding  behaviour  by  firms,  as 

(4)  Labour hoarding refers to the practice in which a company 
does  not  lay  off  employees  when  it  otherwise  would  (as 
during an economic slowdown). 

8 

-1.50.01.53.04.502030405060708091011121314151617Rate of change y-o-y (%)Total factors' productivity contributionCapital accumulation contributionHours worked per person employed contributionEmployment contributionPotential GDP growth (yoy %) 
                                                           
 
 
1. Economic situation and outlook 

rate  of  older  workers 

employment 
remains 
substantially  below  the  EU  average.  Part  time 
underemployment  has  increased  but  remains  at 
relatively low levels compared with other Member 
States.  In  time,  labour  market  shortages  have 
become  more  apparent  in  some  industries  and 
evidence  points  also  to  lower  matching  capacity. 
Estimates  of  the  Beveridge  curve  hint  at  two 
outward  shifts  and  higher  steepness  of  the  curve 
over 2010-2012 and 2013-2018 and a deterioration 
of  matching  mechanisms  (Graph  1.5).  Such 
evidence  indicates  the  possibility  of  shortages 
arising  at  higher  levels  of  unemployment  under 
intense recruitment needs (5).  

Graph 1.5: 

Beveridge curve 

Source: European Commission 

of 

closure 

expected 

the 
Despite 
the 
unemployment  gap (6), 
there  remain  some 
important  ‘pockets’  of  untapped  capacity.  The 
most  significant  ones  stem  from  low  participation 
of  older  people,  immigrants  and  women  (in 
particular non-EU-born women), as well as among 

Graph 1.4:  Consumer inflation 

Source: European Commission 

Labour market 

Luxembourg  labour  market  is  growing  at  a 
robust  pace.  Employment  growth  accelerated 
markedly  over  the  first  half  of  2018,  to  near  4 % 
(y-o-y)  in  July,  when  it  started  decelerating.  On 
average  it  increased  by  3.7%  in  2018,  after  3.4 % 
in  2017.  This  growth  momentum  appears  to  have 
moderated,  with  employment  growth  stabilising 
progressively. The unemployment rate continues to 
fall,  also  helped  recently  by  a  deceleration  in 
active  population,  which  is  largely  driven  by 
inflows  of  new  residents,  especially  from  border 
for 
countries.  Resident 
is  rising 
the  unemployment  rate) 
computing 
markedly, helping to curb the unemployment rate. 
Unemployment fell to 5.3% in 2018, from 5.6 % in 
2017.  This  downward 
to 
slowdown progressively, stabilising towards 2019. 
Youth  unemployment  decreased  from  19.1%  in 
2016  to  15.2%  in  2017  and  reached  12.3%  in  the 
last quarter of 2018 while the rate of young people 
not  in  employment,  education  or  training  is  very 
low. 

employment 

forecast 

(used 

trend 

is 

Notwithstanding  the  recent 
labour  market 
reforms  and  the  good  performance  in  terms  of 
job  creation,  additional  efforts  are  needed  to 
improve  inclusion  of  certain  population  groups 
the 
in 

labour  market. 

In  particular, 

the 

(5)  Drumetz, F. and R. Lecat (2018). ‘Is the French 
labour market under pressure?’. Banque de France, 
Eco Notepad. June 
(6)  The  unemployment  gap  is  computed  as  the  difference 
the 
between 
corresponding  estimate  of  the  non-accelerating  wage  rate 
of unemployment.  

the  actual  unemployment 

rate  and 

9 

-1.50.01.53.0-3.0-1.50.01.53.04.56.0050607080910111213141516171819LU vs. EA  Underlying inflation (righ)LU - Overall inflationEA - Overall inflation0.00.20.40.60.81.01.21.41.61.8-1.00.01.02.0Job vacancy rate (%)Unemployment gap (%)2001-20092010-20122013-20182018 
 
 
 
 
                                                           
in 

arising 

business 

surveys) 

lower  skill 

those  with 
levels.  The  observed 
outward shift of the Beveridge curve since 2010 is 
consistent  with  evidence  of  labour  shortages  (as 
at 
reported 
comparatively higher levels of unemployment due 
to lower  matching capacity (e.g. skills  mismatch). 
Such  shortages  are  also  compatible  with  the 
prevalence of lower employment rates than before 
the  crisis  among  those  with  lower  skills,  which 
together with lower matching efficiency, amplifies 
frictions in job-to-job transitions between different 
sectors.  Demographic  policies  would  need  to 
concur with education and training policies, taking 
a holistic approach to consider both the challenges 
and possibilities of changes in demography as well 
as in the digital economy, in order to sustain social 
cohesion and public finances, as population ageing 
remains a challenge in the long term. 

Social developments 

social 

exclusion 

Poverty  and 
risks  are 
increasing but they are still among the lowest in 
the EU. Income inequality remained stable in 2017 
at  the  level  just  below  the  EU  average  but  the 
overall  risk  of  poverty  or  social  exclusion 
(AROPE) situated at 21.5% in 2017, below the EU 
average  (22.5%),  but  it  is  trending  upward.  In 
2017,  in-work  poverty  was  the  second  highest  in 
the EU. The number of persons affected by the risk 
of poverty or social exclusion amounted to roughly 
126,000 in 2017 while Luxembourg’s Europe 2020 
target  corresponds  to  around  half  of  them,  a 
maximum of 66,000 persons at risk. 

Social  transfers  play  a  pivotal  role  in  lifting 
people  out  of  poverty.  Yet  their  impact  has 
weakened  further,  against  the  rise  in  market 
inequality (7).  Furthermore, 
income 
link 
between  socioeconomic  status  and  educational 
strong 
outcomes 
in 
educational 
Luxembourg,  pointing 
inequality. 

particularly 
to  high 

remains 

the 

taxation  or 

(7)  Market-driven  inequality  is  defined  as  an  increase  in 
income  inequality  that  results  from  the  labour  market, 
before 
transfers.  Market-driven 
inequality,  as  measured  by  the  spreads  in  average  hourly 
earnings by skill group (US$ PPP at constant prices), is the 
highest  among  developed  economies  (according  to  the 
OECD Job Quality Database). 

income 

1. Economic situation and outlook 

Competitiveness 

Cost competitiveness conditions appear to have 
become  less  favourable  in  Luxembourg.  Unit 
labour  costs  picked  up  in  2017  to  5.2%,  after  a 
very  contained  increase  in  previous  years  (around 
1 %  on  average  between  2013  and  2016).  Wage 
increases,  prompted  by  a  sharp  acceleration  of 
inflation through the  wage indexation mechanism, 
which together with additional productivity losses, 
explain 
increase.  However,  a  visible 
deceleration in  unit labour costs  growth  has taken 
place over 2018. 

this 

Exports  market  shares  of  goods  and  services 
recorded  a  net  loss  of  4.5%  in  2017.  However, 
figures might be not fully consistent, partly due 
to methodological changes in the series. Gains in 
Luxembourg's exports market shares of goods and 
services  have  trended  down  steadily  since  2014, 
before recording a net loss of 4.5% in 2017. These 
developments  have  become  visible  with  the  latest 
statistical revision,  which also points to a  reduced 
activity  in  the  external  sector,  where  the  bulk  of 
the  revision  was  concentrated.  However,  as 
mentioned  above,  some  consistency  issues  are 
apparent  in  the  national  accounts-data.  To  some 
extent  it  owes  to  methodological  changes (8), 
which had a significant impact on exports reported 
under  the  National  Accounts  of  Luxembourg (9). 
This  might  also  help  explaining  the  apparent 
inconsistency  in  productivity,  employment  and 
profit developments in Luxembourg. 

Intermediate  inputs  account  for  70%  of  the 
country's  trade,  suggesting  a  high  level  of 
market  integration,  largely  related  to  financial 
activities. OECD Trade in Value-Added indicators 
(TiVA) suggest that around 70% of operating costs 
are  determined  by  intermediate  inputs  (140 %  of 
GDP)  (Graph  1.6),  of  which  more  than  60%  are 
imported.  On  this  regard,  the  country  is  deeply 
integrated in global value chains, as it features the 
highest  global  value  chains  participation  across 
OECD  countries.  Recent  studies  show  that  global 
value chains participation is most significant in the 

(8)  Notably aiming at correcting for double accounting effects, 
to improve the measure of activity in the external sector. 
(9)  This  is  mainly  due  to  the  particularly  high  share  of 
intermediate  goods  and  services  that  are  imported  and 
exported  (including  re-imports  and  re-exports  with  or 
without 
the  final 
consumer.  See  e.g.:  Whats  New?  Differences  between  the 
2018 and 2016 editions of TiVA indicators (OECD 2018). 

transformation)  before 

they  reach 

10 

 
                                                           
                                                           
1. Economic situation and outlook 

levels  of  market 

over the period 1999-2014. As suggested in Graph 
1.7,  at  high 
integration, 
production becomes the main adjustment variable, 
the  pressure  on  profit  margins  (11). 
easing 
However,  high  market  integration  also  implies 
higher  exposure 
to  external  shocks,  whereas 
barriers to trade have a cumulative impact on costs 
thus  on  productivity.  In  this  vein,  the  recent 
in  aggregate  productivity 
apparent  slowdown 
warrants 
close  monitoring.  Specifically, 
comparing relative performance across sectors and 
relative  contributions 
integration, 
productivity  and  economic  growth,  may  help 
identifying  potential  productivity  gaps  and 
investment needs in Luxembourg (see section 3).  

to  market 

a 

Graph 1.7:  Market share decomposition: contribution of 
export shares' drivers to exports market share 
growth (% cumulated) 

Source: European Commission. Data from CompNet 
(October 2016). 

External position 

The current account balance recorded a surplus 
of  4.9 %  of  GDP  in  2017  from  5.1 %  in  2016. 
The  current  account  balance  continued  on  a  slow 
decreasing trend in 2017, which turned up in 2018, 
to  around  5.5%  of  GDP.  This  is  explained  by  the 

(11)  Offshoring  a  large  number  of  activities  allows  setting 
output  as  the  adjustment  variable  between  mark-ups  and 
production  costs,  as  the  large  shares  of  imports  of 
intermediate inputs embedded in production costs play as a 
buffer, offsetting revenue losses. 

financial  sector (10),  starting  at  an  early  stage  and 
since  constantly  evolving  towards  specialisation, 
diversification  and  expansion.  Trade  related  to 
financial  intermediate  services,  such  as  the  ones 
provided  by  the  funds  management  agencies, 
depositary banks or a varied range of professionals 
abroad,  is  much  higher  than  the  value  added 
generated in the country. 

Graph 1.6: 

Breakdown of value added content in exports 
(% of GDP) 

Source: European Commission calculations, OECD-TiVA 
database (December 2018). 

trade 

Luxembourg shows high dependence to foreign 
trade,  as  it  contributes  strongly  to  economic 
activity and domestic employment. Luxembourg 
shows one the highest levels of market integration 
related 
among  OECD  countries,  with 
activities  also  attracting  a  high 
share  of 
employment.  Recently,  market  deepening  has 
increased further, helping Luxembourg to keep the 
high  TFP  levels  accumulated  in  the  past  from 
access  to  external  markets.  However,  the  later 
seem less closely related to innovation investment 
and  might  be  less  supportive  for  future  growth. 
Moreover, effective access to international markets 
varies  across  sectors  and  firms, 
to 
productivity gaps that cumulate over time.  

leading 

Overall  productivity  has  been  kept  at  a  high 
level  in  Luxembourg,  even  in  the  period  2007-
2010.  Productivity  growth  was  barely  changed 

(10)  See,  e.g.:  What  place  does  Luxembourg  hold  in  global 

value chains? Working paper n° 120, BCL, 2018. 

11 

040801201602000506070809101112131415Foreign VA in exports (% of GDP)Domestic VA in intermediate exports (% of GDP)Domestic VA in exports for final use (% of GDP)Gross exports (yoy %)-30.0-20.0-10.00.010.020.030.099-1499 -0707- 1010-14Price competitivenesMarket competitorsNon-price factorsDemand shiftsExtensive marginMarket share (% cum.) 
 
                                                           
 
 
                                                           
1. Economic situation and outlook 

intercompany  debt  due  to  the  large  presence  of 
multinational companies. In addition, a significant 
active  deleveraging  took  place  in  2016  and  2017, 
which  might  be  partly  linked  to  a  few  large 
companies  ending  operations 
in  Luxembourg 
(Graph 1.9).  

Graph 1.9:  Decomposition of Debt by Sector (non-

consolidated) - Luxembourg 

Source: European Commission 

remains 

indebtedness 

Despite a favourable aggregate wealth position, 
households' 
high 
compared to income. Household indebtedness has 
rapidly  increased  over  the  last  10  years.  While 
household  debt  has  risen  from  39  %  of  GDP  in 
2000 to 67 % in 2017, the ratio of debt-to-assets is 
still  very  low  (36  %).  Yet,  household  debt  is 
estimated at 178 % of income in 2017, among the 
highest in the EU. Household indebtedness reflects 
real  estate  inflation,  as  around  80%  of  it  stems 
from mortgage loans. House prices have continued 
rising  in  2017  and  in  the  first  half  of  2018, 
although  more  moderately  than  in  previous  years. 
(see  section  3.2.3).  At  the  same  time,  rising 
indebtedness  generates  some  concerns  as  to  the 
solvency  risks  related  to  households  with  lower 
income,  notably  in  case  of  rising  interest  rates  or 
economic downturn (see section 3.2.2). 

Public finance 

Luxembourg's  public  finances  remain  sound. 
The  general  government  balance  is  estimated  to 

increase  in  the  secondary  income  surplus  (Graph 
1.8). The current account balance is driven by the 
surplus  of 
the  balance  of  services,  which 
corresponds mostly to financial services related to 
the  funds  industry.  Concomitantly,  the  primary 
income  deficit  reflects  mainly  the  returns  on 
investment in the funds industry. 

Moreover, Luxembourg is a net creditor  to the 
rest of the world. Its  net assets,  measured by  net 
international  investment  position,  have  risen  to 
around EUR 26.4 billion (47.0 % of GDP). The net 
position  encloses  large  international  investment 
assets.  At  the  end  of  2018,  gross  external  assets 
and  liabilities  reached  EUR  10.5  trillion  (around 
200  times  the  country's  GDP).  Net  investment 
flows to the fund industry have stagnated since the 
first  half  of  2018,  after  increasing  markedly  in 
2017, which might be due to increased uncertainty, 
with  valuations  signalling  higher  volatility  in 
financial markets.  

Graph 1.8:  Decomposition of external position (current 

and capital accounts) - Luxembourg 

Note:* indicates estimate based on quarterly data. 
Source: European Commission 

Private debt 

Private debt remains at high level, in particular 
for non-financial companies, although most of it 
is intragroup lending. Private sector debt stood at 
323%  of  GDP  in  2017.  This  is  mostly  due  to  a 
high  non-financial  corporate  debt  (257 %  of  GDP 
in  2017),  most  of  which  is  linked  to  cross-border 

12 

-60-40-20020406000010203040506070809101112131415161718*% of GDPCapital accountSecondary income balancePrimary income balance  Trade balance - services  Trade balance - goodsTrade balanceCurrent account balance (CA)Net lending/borrowing (CA+KA)01002003004005006007000405060708091011121314151617% of GDPFinancial corporationsGovernmentHouseholdNon financial corporationsPrivate sectorPrivate sector EU28 
 
 
 
 
1. Economic situation and outlook 

have  posted  a  surplus  of  around  1.8%  of  GDP  in 
2018  and  it  is  forecast  to  remain  in  surplus  in 
2019.  General  government  debt  is  expected  to 
continue to fall in 2019, from around 21 % of GDP 
in 2018 (well below the 60 % threshold). However, 
significant  budgetary  challenges  are  likely  to 
remain  in  the  long  term,  with  population  ageing 
growing  and  growing  benefit  ratios  driving  up 
spending on pensions and healthcare.  

13 

 
1. Economic situation and outlook 

Table 1.1: 

Key economic and financial 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.  
(3) The tax-to-GDP indicator includes imputed social contributions and hence differs from the tax-to-GDP indicator used in the 
section on taxation.   
Source: Eurostat and ECB as of 31-1-2019, where available; European Commission for forecast figures (Winter forecast 2019 for 
real GDP and HICP, Autumn forecast 2018 otherwise) 

14 

2004-072008-122013-1520162017201820192020Real GDP (y-o-y)5.10.24.02.41.53.02.52.6Potential growth (y-o-y)3.92.22.22.12.52.62.72.8Private consumption (y-o-y)1.51.63.11.73.0...Public consumption (y-o-y)3.02.12.82.53.1...Gross fixed capital formation (y-o-y)5.14.10.010.44.0...Exports of goods and services (y-o-y)9.31.98.83.8-1.9...Imports of goods and services (y-o-y) 9.13.19.44.5-2.2...Contribution to GDP growth:Domestic demand (y-o-y)2.01.61.52.82.2...Inventories (y-o-y)0.2-0.20.6-0.4-0.5...Net exports (y-o-y)2.9-1.21.90.0-0.1...Contribution to potential GDP growth:Total Labour (hours) (y-o-y)1.91.41.62.01.91.91.91.9Capital accumulation (y-o-y)1.11.21.31.11.61.61.51.5Total factor productivity (y-o-y)0.9-0.4-0.6-1.0-1.0-0.9-0.7-0.5Output gap0.9-3.0-1.70.4-0.50.00.30.2Unemployment rate4.64.96.16.35.65.35.25.2GDP deflator (y-o-y)3.93.21.30.92.22.01.81.7Harmonised index of consumer prices (HICP, y-o-y)3.22.70.80.02.12.01.61.8Nominal compensation per employee (y-o-y)4.02.02.50.93.32.22.62.3Labour productivity (real, person employed, y-o-y)1.7-2.31.6-0.6-1.8...Unit labour costs (ULC, whole economy, y-o-y)2.34.40.91.55.22.72.82.4Real unit labour costs (y-o-y)-1.51.1-0.50.63.00.70.90.7Real effective exchange rate (ULC, y-o-y)1.22.10.01.35.01.80.80.5Real effective exchange rate (HICP, y-o-y)1.00.1-0.20.81.11.5-0.5-0.2Savings rate of households (net saving as percentage of net disposable income)10.813.314.613.720.7...Private credit flow, consolidated (% of GDP)40.95.326.823.6-15.0...Private sector debt, consolidated (% of GDP)220.3301.4331.1344.8316.4...of which household debt, consolidated (% of GDP)46.757.761.063.766.0...of which non-financial corporate debt, consolidated (% of GDP)173.6243.7270.2281.0250.4...Gross non-performing debt (% of total debt instruments and total loans and advances) (2)...0.70.6...Corporations, net lending (+) or net borrowing (-) (% of GDP)2.1-4.0-4.3-2.8-1.7-4.1-3.9-3.6Corporations, gross operating surplus (% of GDP)28.228.128.829.027.226.926.325.9Households, net lending (+) or net borrowing (-) (% of GDP)2.63.53.33.24.35.85.55.3Deflated house price index (y-o-y)8.11.35.511.43.9...Residential investment (% of GDP)3.23.43.53.33.2...Current account balance (% of GDP), balance of payments10.66.65.25.14.94.84.33.8Trade balance (% of GDP), balance of payments26.429.333.935.533.6...Terms of trade of goods and services (y-o-y)0.10.8-0.20.9-0.50.1-0.10.0Capital account balance (% of GDP)0.0-0.7-1.0-0.4-0.4...Net international investment position (% of GDP)10.29.444.646.947.0...NIIP excluding non-defaultable instruments (% of GDP) (1)-2167.1-1783.8-3276.2-3775.9-3947.3...IIP liabilities excluding non-defaultable instruments (% of GDP) (1)7892.37805.19669.610844.610980.7...Export performance vs. advanced countries (% change over 5 years)28.914.422.622.714.5...Export market share, goods and services (y-o-y)..9.20.7-4.5...Net FDI flows (% of GDP)39.3-31.5-16.9-37.8-45.7...General government balance (% of GDP)1.20.61.21.61.41.31.20.9Structural budget balance (% of GDP)..2.01.41.61.31.10.8General government gross debt (% of GDP)7.618.222.920.723.021.420.820.6Tax-to-GDP ratio (%) (3)38.039.039.139.440.340.841.141.5Tax rate for a single person earning the average wage (%)26.327.230.131.0....Tax rate for a single person earning 50% of the average wage (%)15.715.917.518.2....forecast 
 
  
 
 
 
2.  PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS 

of 

the  multi-annual 

assessment 
the 

(12),  34 %  of  all 

Since  the  start  of  the  European  Semester  in 
2011 
country-specific 
recommendations  addressed  to  Luxembourg 
have recorded at least ‘some progress'. Looking 
at 
the 
of 
implementation 
country-specific 
recommendations  (CSRs)  since  these  were  first 
the  country-specific 
adopted,  34  %  of  all 
recommendations  addressed  to  Luxembourg  have 
recorded  at  least  'some  progress'.  66  %  of  these 
country-specific 
recorded 
'limited'  or  'no  progress'  (Graph  2.1).  Substantial 
progress  and  full 
implementation  have  been 
achieved  in  several  areas  of  the  fiscal  policy,  for 
instance  preserving  a  sound  fiscal  position  and 
strengthening fiscal governance. 

recommendations 

Graph 2.1:  Overall multiannual implementation of 2011-

2018 CSRs to date 

Level of implementation today of 2011-2018 CSRs 
* 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 2019 Country Report since the CSRs 
were first adopted. 
*** The multiannual CSR assessment looks at the 
implementation until 2019 Country Report since the CSRs 
were first adopted. 
Source: European Commission 

the  past  years,  Luxembourg  has 
Over 
significantly 
budgetary 
framework.  In  2014,  Luxembourg  transposed  in 
national  legislation  the  requirements  of  the  2011 

strengthened 

its 

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

past, see in particular section 3. 

Since 

budgetary 

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 
then, 
frameworks. 
Luxembourg,  which  is  under  the  preventive  arm, 
has  remained  committed  and  compliant  with  the 
provisions  of  the  Stability  and  Growth  Pact.  The 
implementation of the savings measures identified 
by  the  2014  spending  review  is  largely  on  track. 
The national authorities have implemented 80% of 
the measures identified in the review, most of them 
spending cuts integrated in the domestic budgetary 
planning.  After  overachieving  savings  target  in 
2015  (the  first  year  of  the  multi-year  budgetary 
strategy),  the  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.   

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.  A  reform  of  the  long-term  care 
public  insurance  was  enacted  at  the  beginning  of 
2018, which keeps the evolution of long-term care 
costs  in  line  with  that  of  the  share  of  dependent 
people  in  the  total  population.  Meanwhile,  the 
expenditure  projections 
reveal  a  heightened 
requirement  for  long-term  care  spending  in  the 
de 
future.  Additionally, 
solidarité’,  a  special  scheme  allowing  people  to 
retire  from  the  age  of  57,  was  abrogated  in  2018 
but  its  impact  might  not  be  significant,  as  some 
restrictions on other kinds of early retirement were 
loosened.    The  employment  rate  of  older  workers 
has  stagnated  since  2010  and  remains  among  the 
lowest 
in  2017).  More 
fundamental 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  senior  workers  longer  in  employment. 
Finally,  no  measures  have  been  taken  on  the 
recommendation 
statutory 
for 
retirement age to changes in life expectancy. 

the  EU  (39.8% 

‘pré-retraite 

aligning 

the 

the 

in 

15 

No Progress7%Limited Progress59%Some Progress18%Substantial Progress5%Full Implementation11% 
 
 
                                                           
2. Progress with country-specific recommendations 

Luxembourg  has  made  some  progress  on 
strengthening 
its  strategy  to  diversify  the 
economy.  Public  investment  remains  high  and 
remain 
foster 
other  measures 
activated.  Yet,  private  investment,  especially  on 
innovative  technologies  and  digitisation,  remains 
low compared with the euro area average. 

innovation 

to 

the 

Luxembourg  has  made  limited  progress (13)  in 
addressing 
country-specific 
2018 
recommendations. In addition to limited progress 
on  employment  of  older  workers  as  outlined 
above,  Progress  has  been  limited  in  removing 
regulatory  restrictions  in  the  business  services 
sector. Several measures have been taken, although 
some  regulatory  restrictions  remain  above  EU 
weighted  average  in  several  regulated  professions 
(according  to  available  indicators).  Luxembourg 
engaged  in  further  reforming  the  profession  of 
architects (a new draft law is envisaged in the first 
half  of  2019).  With  the  law  of  18  July  2018, 
Luxembourg 
for 
professional  qualifications  to  obtain  a  standard 
business license. 

requirement 

removed 

the 

(13)  Information  on  the  level  of  progress  and  actions  taken  to 
address  the  policy  advice  in  each  respective  subpart  of  a 
CSR is presented in the Overview Table in the Annex. This 
overall  assessment  does  not  include  an  assessment  of 
compliance with the Stability and Growth Pact.  

in 

the 

has 

been 

Some  progress  has  been  made  on  enhancing 
participation 
labour  market,  but 
challenges  remain.  The  main  efforts  have 
focussed on reducing youth unemployment, where 
progress 
substantial.  Regarding 
upskilling,    has  been  recently  addressed:  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. 
In  2017  45.84%  of  the  inactive  were  low-skilled 
(ISCED  0-2)  while  only  12.02%  of  the  inactive 
were high-skilled (ISCED 5-8). 

Luxembourg  has  made  some  progress 
in 
addressing  bottlenecks  that  hamper  housing 
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.  Measures  are 
also  envisaged  to  increase  the  land  available  for 
real  estate  development,  through  land  purchase, 
new  tax  incentives  and  technical  assistance  to 
municipalities.  New  incentives  are  envisaged  to 
bring  to  the  market  properties  that  are  currently 
vacant. Public authorities may also obtain stronger 
powers to expropriate or exchange land to unblock 
development 
supply 
remains  limited  and  the  challenge  ahead  for  the 
Luxembourg  authorities  continues  to  be  sizeable. 
House prices have continued rising in 2017 and in 
the  first  half  of  2018,  although  more  moderately 
than in previous years.   

projects.  Nevertheless, 

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. 

16 

 
                                                           
2. Progress with country-specific recommendations 

Table 2.1: 

Summary Table on 2018 country-specific recommendations assessment 

Source: European Commission 

17 

Luxembourg  Overall assessment of progress with 2018 CSRs: Limited Limited progress CSR 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.  Limited Progress  Increase the employment rate of older people by enhancing their employment opportunities and employability   Limited Progress: The employment rate of older workers has stagnated since 2010 and remains the second lowest in the EU (39.8% in 2017). Some labour demand oriented policies have been implemented so far, which are having positive results on other population groups, but have failed to improve substantially older workers' participation in the labour market.  while further limiting early retirement,   Limited Progress: The average effective retirement age stood at 60.2 in 2016, well below the statutory age of 65. 59.2 % were early old-age pensions (average effective age: 59.8). Additionally, the ‘pre-retraite de solidarité’, a special scheme allowing people to retire from the age of 57, was abrogated in 2018 but its impact on the average effective retirement age and on expenditure is still difficult to assess due to an easing of restrictions on other kinds of early retirement schemes. No further measures intending to provide incentives for senior workers to stay longer at work have been announced so far.  with a view to also improving the long-term sustainability of the pension system.   Limited Progress: No evolution since 2017. The 2016 reform of the professional reclassification scheme for persons with working disabilities is expected to reduce the share of disability pensions and the ‘pré-retraite de solidarité’, a special scheme allowing people to retire from the age of 57, was abrogated in 2018 but its impact on the average effective retirement age and on expenditure is still difficult to assess due to an easing of restrictions on other kinds of early retirement schemes. No further measures intending to provide incentives for senior workers to stay longer at work have been announced so far. In 2018, the working group on pensions mandated by the Government concluded that the pension system appears to be not sustainable, amid high uncertainty levels, in the long term projections at unchanged policies.  CSR 2: Further reduce regulatory restrictions in the business services sector.  Limited Progress  Regulatory restrictions remain above EU weighted average in several regulated professions (according to available indicators). Luxembourg engaged in further reforming the profession of architects (a new draft law is envisaged in the first half of 2019). With the law of 18 July 2018, Luxembourg removed the requirement for professional qualifications to obtain a standard business license.    
 
 
 
 
 
 
 
2. Progress with country-specific recommendations 

Box 2.1: EU funds and programmes contribute to addressing structural challenges and to 
fostering growth and competitiveness in Luxembourg 

Financial  allocation  from  the  European  Structural  and  Investment  Funds  (ESIF),  aimed  to  support 
Luxembourg  in  facing  development  challenges,  amounts  to  up  to  EUR  140  million  in  the  current 
Multiannual Financial Framework, equivalent to around 1% of all public investment per year on average. 
As of the end of 2018, 56 % of the total has already been allocated to specific projects. In addition, EUR 
66.1  million  was  allocated  to  specific  projects  on  strategic  transport  networks  through  a  dedicated  EU 
funding  instrument,  the  Connecting  Europe  Facility.  Furthermore,  numerous  Luxembourg  research 
institutions,  innovative  firms  and  individual  researchers  benefited  from  other  EU  funding  instruments, 
notably Horizon 2020 which provided EUR 87.57 million.  

EU  funding  has  helped  to  address  certain  policy  challenges  identified  in  the  2018  CSRs.  Given 
Luxembourg's relatively modest ESIF allocation, the programmes concentrate on addressing specific aspects 
of the issues identified in recent years in the context of the European Semester. Increasing R&D investment 
is  of  crucial  importance  for  creating  greater  economic  diversification  and  increasing  the  number  of  Small 
and  Medium  size  Enterprises  involved  in  research.  Support  is  provided  to  the  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 to answer the need to provide incentives to older workers to work longer, the European Social Fund 
supports measures to mentor job seekers and workers aged 45+.  

The  Commission  can  provide  tailor-made  technical  support  upon  a  Member  State's  request  via  the 
Structural Reform Support Programme to help Member States implement growth-sustaining reforms to 
address challenges identified in the European Semester process or other national reforms. In Luxembourg, 
for example, work has started on providing technical support to help the authorities develop a comparative 
and benchmarking study on the General Law of Customs and Excise with a focus on some parts of the law, 
which should be aligned with good European and international practices to  make them  more  efficient and 
operational. 

EU  funding  contributes  to  mobilisation  of  private  investment.  In  Luxembourg,  total  financing  under 
European Fund for Strategic Investment (EFSI) amounts to EUR 123 million and is set to trigger EUR 623 
million  in  additional  private  and  public  investments.  Luxembourg  ranks  18th  as  to  the  overall  volume  of 
approved operations as a share of GDP. Under the Infrastructure and Investment window the 7 projects (1) 
approved were financed by the European Investment Bank with EFSI backing, for a total of approximately 
EUR  30  million  set  to  trigger  EUR  343  million  in  total  investment.  Under  the  small  and  medium-sized 
enterprises  component,  the  6  approved  agreements  with  intermediary  banks  or  funds  financed  by  the 
European  Investment  Fund  with  EFSI  backing  reached  EUR  93  million  in  total  financing,  set  to  trigger 
approximately EUR 280 million in investments with some 977 small and medium-sized enterprises and mid-
cap companies expected to benefit from improved access to finance. An example of EFSI-backed project in 
the country is “Flen Pharma”, a small and medium-sized enterprise which develops medical devices to care 
for wounds. Thanks to EFSI financing, the company has been able to expand its Research and Development 
department and hire extra highly-skilled staff. 

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

(1)  All multi-country projects. 

18 

 
 
 
 
 
 
 
 
3.  REFORM PRIORITIES 

3.1.  PUBLIC FINANCES AND TAXATION 

3.1.1.  LONG TERM SUSTAINABILITY 

Fiscal  sustainability  risks  remain  low  on  the 
short  to  medium  term.  The  debt  sustainability 
analysis,  as  well  as  the  S0  (14)  and  the  S1  (15) 
indicators, in the Fiscal Sustainability Report 2018 
(European  Commission,  2019)  point  to  low  risks, 
due to the low public debt (21.6 % of GDP at end 
initial  budgetary 
favourable 
2018)  and 
position. 

the 

fiscal 

Risk  indicators  related  to  Luxembourg’s  long-
remain  high. 
sustainability 
term 
Luxembourg  is  projected  to  face  a  rise  in  ageing-
related costs up until 2070. This is highlighted by a 
high  S2 
fiscal  sustainability  gap 
indicator (16), at 8.1 percentage points of GDP. It is 
entirely  driven  by  the  expected  increase  in  age-
related expenditure, in particular pensions (5.8 pps 
of  GDP)  and  health  care  and  long-term  care 
expenditure (2.8 pps of GDP). 

long-term 

3.1.2.  PENSION, HEALTHCARE AND LONG-TERM 

CARE 

The  pension  system  is  expected  to  remain  in  a 
favourable  position  in  the  short  to  medium 
term (17).  Luxembourg's  population  is  ageing  at  a 

(14)  The S0 indicator aims at an early detection of fiscal stress 
stemming from risks within a one-year horizon, making use 
of the signalling power of its components. 

(15)  The  S1  indicator  measures  the  required  fiscal  adjustment 
needed  between  2021  and  2025  to  bring  the  public  debt 
ratio down to 60% of GDP by 2033. 

(16)  The  S2  indicator  shows  the  adjustment  to  the  current 
structural  primary  balance  required  to  fulfil  the  infinite 
horizon inter-temporal budget constraint, including paying 
for  any  additional  expenditure  arising  from  an  ageing 
population. 

(17)  Pension  expenditure  projections  are  computed  by  each 
Member  state  with  an  agreed  methodology  and  peer 
review.  However,  national  budgetary  projections  are  all 
based  on  a  common  set  of  population  and  labour  market 
projections  and  a  common  methodology,  computed  by 
Eurostat and the AWG for each Member state and the main 
aggregates.  None  of  these  variables  includes  cross-border 
workers.  These  are  added  in  the  commonly  agreed  
methodology 
the 
by 
Commission 
their  pension 
expenditure projections. At the initial projection period the 
current  share  of  cross-border  workers  is  taken  (which  is 
currently  around 41.1%  of  domestic employment)  and the 

the  computation  of 

for  Luxembourg 

proposed 

for 

slower rate than neighbouring countries due to the 
inflow  of  foreign  workers  (both 
continuous 
immigrants  and  cross-border  commuters),  which 
increases  pension  contributions  while  only 
modestly  raising  the  average  workforce  age  (see 
country report, 2017). In 2017, the pension system 
recorded a surplus of EUR 1.0 billion, pushing its 
accumulated reserves to EUR 19 billion. 

Concerns are set to arise on the long term. The 
overall  population  and  resident  labour  force  are 
projected  to  increase  to  1  million  and  0.4  million 
respectively  by  2070  (Graph  3.1.1),  which  should 
(European 
push  up  age-related  expenditure 
Commission, 2019). According to the government-
appointed  pension  working  group,  the  operational 
balance  of  the  general  pension  scheme  for  the 
private  sector  is  projected  to  become  gradually 
negative  and  eventually  reach -7.6%  of  GDP  by 
2070. Accumulated reserves are expected to ensure 
the viability of the system  until 2041 (Rapport du 
groupe de travail pensions, 2018).  

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

Source: Eurostat, European Commission 

Despite  recent  reforms,  pension-related  costs 
are  still  expected  to  increase  markedly.  The 
contribution  rate  is  currently  24 %  of  the  wage 
mass,  with  employers,  employees  and  the  state 
each  contributing  one  third.  Following  the  2012 
that 
reform, 

rate  has  been 

fixed 

the 

so 

assumption is made that the share remains unchanged over 
the projection period.  

19 

-50.0-25.00.025.050.075.0PopulationA-R expenditure (% of GDP) 
 
                                                           
 
                                                                                   
3.1. Public finances and taxation 

granted  to  those  aged  65  or  older  (Graph  3.1.2), 
57.5 %  were  early  old-age  pensions  (average 
effective  age:  59.9)  and  17.6  %  were  invalidity 
pensions  (average  effective  age:  53.0)  (Ministère 
de  la  sécurité  sociale,  2018).  However,  the  2016 
reform  of  the  professional  reclassification  scheme 
for persons with working disabilities could reduce 
the  share  of  disability  pensions.  Additionally,  the 
‘pré-retraite  de  solidarité’,  one  of 
the  pre-
retirement  schemes allowing people to retire from 
the age of 57, was abrogated in 2018.  

the  EU  average 

the  EU  average 

Projected  increases  in  health  care  expenditure 
threaten  the  long-term  sustainability  of  the 
system.  Luxembourg’s  per  capita  spending  on 
health care has consistently been the highest in the 
EU  since  2012.  Total  and  public  per  capita 
expenditure  accounted  respectively  for  141%  and 
146%  of 
in  2015.  Total 
expenditure on health accounted for 6.1% of GDP 
(10.2%). 
in  2015,  below 
According  to  the  Ageing  Report  2018,  public 
health  expenditure  in  Luxembourg  is  going  to 
increase  by  1.2  pps  (Ageing  Working  Group 
Reference  Scenario)  or  even  by  1.7  pps  (Ageing 
Working Group Risk Scenario) by 2070, which is 
going  to  add  to  age-related  spending  due  to 
pensions  and  long-term  care.  In  2016,  public 
health  spending  (in  per  capita  Purchasing  power 
standard) was above the EU average for all but one 
spending  function (19),  while  cost-sharing  across 
services remains limited. 

There appears to be some scope to increase the 
efficiency  of  the  hospital  system.  Hospital  bed 
occupancy rate is low, inpatient discharge rates are 
below the EU average and decreased over the last 
ten years, while the average length of stay is above 
the EU average. This may partly be a consequence 
of  a  financing  system  based  on  global  hospital 
budgets,  which  does  not  directly 
incentivise 
by 
savings.  Activity-based 
contrast,  can  lead  to  a  more  efficient  use  of 
resources.  Public  pharmaceuticals  spending  is 
below  EU  average  as  a  share  of  GDP  but  above 
average  in  per  capita  Purchasing  power  standard 
terms, while out-of-pocket payments are the lowest 
in the EU.  

reimbursement, 

contributions  cover  pension  payments  over  a 
period  of  10  years.  However,  based  on  the  latest 
simulations, the contribution rate needs to increase 
to  37 %  to  prevent  the  reserve  of  the  general 
pension scheme to fall below the legal threshold of 
1.5 
times  annual  pension  expenditure  by 
2070 (Ministère  de  la  sécurité  sociale,  2018).  The 
2012  reform  also  introduced  changes  to  the 
benefits  calculation  method,  incentivising  longer 
working  careers.  Nevertheless,  the  gross  average 
replacement rate is projected to remain well above 
the  euro  area  average,  (Table  3.1.1).  In  2017, 
Luxembourg  recorded  the  highest  benefit  and 
replacement ratios in the EU. 

In  its  2018  report,  the  government-appointed 
pension  working  group  discusses  possible 
solutions  to  improve  long-term  sustainability. 
According to the report, the contribution rate could 
be  gradually  increased,  while  the  formula  for 
computing  pension  benefits  could  be  further 
adjusted.  In  parallel,  the  eligible  age  to  pension 
could be increased to take into account longer life 
expectancy,  while  gradual  retirement  could  be 
encouraged.  The  report  suggests  a  multi-pronged 
strategy  of  calibrated  reforms  to  guarantee  the 
long-term  sustainability  of 
the  system  while 
minimising  the  impact  on  the  economy.  The 
conclusions  of  the  report  are  expected  to  guide 
future evolutions of the pension system legislation. 
The next evaluation of the general pension scheme 
is expected to be issued in 2022. 

Table 3.1.1:  Gross average replacement rate (% of 

average wage at retirement) 

Source: 2018 Ageing report 

Pre-retirement  schemes  which  contribute  to 
early exit from the labour market age are being 
reconsidered.  In  2017,  the  average  effective 
retirement  age  stood  at  61.5 (18),  below 
the 
statutory  age  of  65.  Only  24.9 %  of  new  personal 
pensions  (average  effective  age:  60.0)  were 

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

(19)  Inpatient  curative  care,  expenditure  on  day-cases, 
services,  medical  goods, 

outpatient  care,  ancillary 
prevention and administrative spending 

20 

20162070ChangeLU72.963.0-9.9BE40.237.1-3.1DE37.833.2-4.6FR45.435.6-9.9EA48.938.5-10.4 
 
 
 
                                                           
                                                           
3.1. Public finances and taxation 

negotiated in 2017. Due to this change, the hourly 
fees paid by long-term care insurance will increase 
in 2018, raising the budget by an estimated 5% on 
a  permanent  basis.  In  combination  the  long-term 
care  reform,  long-term  care  spending  is  expected 
to  increase  to  8.2%  of  expenditures  in  2018.  In 
addition,  Luxembourg 
is  characterised  by  a 
relatively  costly  provision  of  institutional  care. 
Although  there  are  more  beneficiaries  of  home 
care  setting,  the  number  of  persons  in  residential 
care has been increasing rapidly and is projected to 
accelerate  and  push 
long-term  care  spending 
up (20).  

3.1.3.  FISCAL FRAMEWORK 

evaluation 

of  macroeconomic 

The  mandate of the National Council of Public 
Finances,  Luxembourg’s 
independent  fiscal 
body, was broadened in 2017 to include the ex-
and 
post 
budgetary  forecasts  (21).  The  first  such  analysis 
by the Council was published in June 2018(22) and 
was based on 10 to 20 years-worth of forecast data 
(1996-2016). The analysis covered projections for 
real  growth,  employment  and  unemployment, 
inflation and nominal general government balance. 
In its analysis, the Council identified a pessimistic 
bias  in  the  projections  for  the  budget  balance  and 
employment,  leading  to  upward  revisions  in  the 
years  following  their  first  publication.  On  an 
institutional  note,  the  mandate  of  the  members  of 
the Council came to its end in November 2018 and 
the new composition is currently awaiting approval 
by Parliament. 

The  authorities  provided  their  answer  to  the 
public  finances  evaluation  formulated  by  the 
National Council of Public Finances. In line with 
the  Memorandum  of  Understanding  concluded  in 
October 2017, the Ministry of Finance provided a 
public  response  to  the  recommendations  of  the 
Council’s report of June 2018 on the evaluation of 

(20)  Pacolet,  J.  and  F.  De  Wispelaere  (2018),  ESPN  Thematic 
Report  on  challenges  in  long-term  care  –  Luxembourg. 
Brussels:  European  Commission  -  Directorate-General  for 
Employment, Social Affairs and Inclusion 

(21)  On  December  15 2017,  the  budget  law  for  2018  amended 
the  law  of  12  July  2014  on  the  coordination  and 
governance of public finances 

(22)  Evaluation de la fiabilité des prévisions macroéconomiques 
et 
(https://cnfp.public.lu/dam-
assets/documents/actualites/2018/fiabilit%C3%A9_juin201
8/2b-evaluation-fiabilite-juin2018.pdf) 

budgétaires 

projections 

expenditure 

reveal 
a 
The 
heightened  requirement  for 
long-term  care 
spending  in  the  future.  As  far  as  demographic 
drivers are concerned, the "Ageing Working Group 
reference scenario" forecasts public expenditure on 
long-term care  as  share of GDP to grow  from 1.3 
to  4.1,  increasing  by  2.8  pps.  According  to  this 
scenario,  the  projected  increase  for  Luxembourg 
over the  period 2016-2070, 219%, is considerably 
higher than the EU average of 73%. The  "Ageing 
Working  Group  risk  scenario",  which  captures 
additional cost drivers to demographic and health-
status  related  factors,  projects  an  increase  of  even 
bigger  magnitude 
(5.2  pps)  bringing  public 
spending on long-term care from 1.3% to 6.5% of 
GDP  by  2070,  an  increase  of  405%,  again  well 
above the EU average of 170%. 

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

Source: European Commission 

The long-term care insurance system reform  is 
expected  to  ensure 
the  system's  financial 
viability  until  2030.  The  government  finances 
40 %  of  long-term  care  expenditure  (excluding 
long-term  care 
additional  contributions).  The 
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. 

Meanwhile  recent  measures  and  the  projected 
long-term  care  use  patterns 
evolution  of 
increase  pressure  on  the  budget.  A  new 
collective 
important 
an 
the  career  of  nurses  was 
revalorisation  of 

agreement  with 

21 

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3.1. Public finances and taxation 

total 

and  as  a  share  of 
taxation),  while 
environmental taxes have gradually decreased over 
the  last  ten  years  (while  they  remained  stable  on 
average for the EU). 

Luxembourg’s  revenue  from  environmentally 
related  taxes  remains  the  lowest  in  the  EU. 
Environmental  taxes  accounted  for  1.8%  of  GDP 
in 2016, well below the EU average of 2.44% see 
Graph 3.1.3). This is due to the low revenues from 
both  transport  taxes  and  taxes  on  pollution  and 
resources.  Moreover,  environmental  taxes  are  not 
indexed, which could lead to a gradual reduction in 
revenues  over  time  (in  %  of  GDP).  Finally, 
Luxembourg  applies  a  reduced  Value  Added  Tax  
rate of 8% on natural gas and electricity, 14 % on 
heating  fuel  oil  and  17%  on  other  fossil  fuels, 
which  has  adverse  effects  on  energy  consumption 
and  is  not  necessarily  the  most  targeted  and  cost-
efficient support for well-off population groups.  

Graph 3.1.3:  Environmental tax revenues as a share of GDP 

(2016) 

Source: Eurostat, European Commission 

Transport fuel tax rates are among the lowest in 
the  EU,  which  provides  a  disincentive  for 
reducing fuel consumption. While revenues from 
transport fuel taxes are well above the EU average 
(1.6% vs 1.3% of GDP in the EU on average), tax 
rates  on  transport  fuels  are  low  compared  to  EU 
averages. They are also considerably lower than in 
neighbouring countries, inducing cross-border fuel 
purchasing  which  enables  the  country  to  raise 
sizeable  tax  revenues  despite  very  low  rates.  This 

public  finances.  The  public  position  was 
in 
apparent  disagreement  with  the  main  Council’s 
recommendation on the appropriateness of running 
budgetary  surplusses  beyond  the  Stability  and 
Growth  Pact  benchmarks,  in  seek  the  long-term 
sustainability of public finances, and it refused the 
recommendations  on  the  macroeconomic  scenario 
underlying  the  budgetary  projections,  as  it  lays 
under the  responsibility of the STATEC, which is 
an independent body. 

3.1.4.  SPENDING REVIEW 

domestic 

track.  The  national 

The  implementation  of  the  savings  measures 
identified by the 2014 spending review is largely 
authorities  have 
on 
implemented 80% of the measures identified in the 
review,  most  of  them  spending  cuts  integrated  in 
the 
planning.  After 
overachieving savings target in 2015 (the first year 
of  the  multi-year  budgetary  strategy),  the  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.   

budgetary 

3.1.5.  TAXATION 

taxation 

supportive 

With a total tax burden close to the EU average, 
Luxembourg’s  corporate  income  tax  revenues 
are  above  the  EU  average  while  growth  and 
environment 
remain 
moderate.  The  overall  tax  burden  amounted  to 
38.9 % of GDP in 2017, close to the EU average of 
39  %  of  GDP.  Slightly  less  than  half  of  the 
revenues  come  from  labour  taxation  (17.3%  of 
GDP  vs  19.4  %  in  the  EU  in  2017)  and  the  tax 
wedge  on  labour (23)  for  average  and  low-income 
earners  was  below  the  EU  average  in  2017.  The 
high  level  of  corporate  income  taxation  revenues 
and  large  contribution  from  the  financial  services 
sector  reflect  Luxembourg’s  international  position 
as  a  global 
from 
consumption  taxes,  recurrent  taxes  on  immovable 
property  and  environmental  taxes  were  all  below 
the  EU  average  in  2017  (both  in  terms  of  GDP, 

financial  hub.  Revenues 

(23)  The tax wedge on labour is defined as the sum of personal 
income  taxes  and  employee  and  employer  social  security 
contributions  net  of  family  allowances,  expressed  as  a 
percentage of total labour costs (the sum of the gross wage 
and social security contributions paid by the employer).  

22 

0.01.02.03.04.05.0DKSIELLVHRITNLFIEECYMTBGHUPLPTEU28UKATROFRBESECZLTDEESIESKLU 
                                                           
 
3.1. Public finances and taxation 

mainly  due  to  the  tax  base,  which  stems  from  a 
scale  that  dates  back  to  1941  and  is  not  aligned 
with  current  market  values.  Not  updating  the  tax 
base  regularly  gives  support  to  rising  property 
prices,  particularly  for  housing  (see  also  section 
3.2.3).  Moreover,  the  tax  rate  on  real  estate 
transactions  is  high,  which  may  affect  transaction 
rather  volatile 
decisions,  while  generating 
revenues.  A  shift  away  from  transaction  taxes 
towards recurrent property taxes would maintain a 
constant  level  of  revenue  while  reducing  the 
distortions caused by transaction taxes. Moreover, 
the Luxembourg tax system tends to favour owner-
occupied housing, as it is one of the few countries 
still  providing  mortgage  interest  deductibility. 
Home  ownership  is  further  favoured  by  the 
absence  of  imputed  rent  taxation,  which  was 
abolished in 2017.  

tax 

sought 

income 

lowering 

In  2016,  Luxembourg  adopted  significant 
reforms of its corporate income tax. The reform 
to  boost 
of  corporate 
competitiveness  by  gradually 
the 
statutory  rate  to  18%  in  2018.  Including  the 
surcharges,  this  represents  a  26.01  %  corporate 
income  tax  rate  in  2018,  above  the  EU  average. 
The  tax  burden  effectively  paid  by  companies  is 
however impacted, not only by the tax rate but also 
by  the  definition  of  the  tax  base  and  possible  tax 
incentives. Among others, the reform provided for 
amendments to the tax credits for investments. The 
rate  applicable  to  corporations  with  a  taxable 
income below EUR 25 000 has been reduced from 
20  %  to  15  %.  The  recent  coalition  agreement 
envisages  lowering  the  statutory  rate  to  17%  in 
2019,  while  the  threshold  for  corporations  to 
benefit  from  the  low  corporate  income  tax  rate  of 
15 % will be increased from EUR 25 000 to EUR 
175 000. 

contributes  to  traffic  congestion  (see  also  in 
Section 3.4.3), with highly negative ecological and 
health impact. Moreover, the level of tax on diesel 
is  also  low  compared  to  unleaded  petrol,  despite 
diesel  having  higher  carbon  content,  while  some 
tax  exemptions  remain  in  place  in  the  country  for 
the  use  of  fossil  fuels  in  agriculture,  horticulture, 
or  for  heating  purposes (24).  Nonetheless,  the  use 
of  alternative  fuels  in  new  passenger  cars  sold  in 
Luxembourg has increased over the past few years. 
The  share of  new passenger  cars using alternative 
fuels  (mostly  electric  vehicles)  was  three  times 
higher in 2016 than in 2012 (25).  

On  environmentally  related  taxes,  the  recent 
coalition agreement envisages a number of new 
measures.  Revenues  generated  by  an  increase  of 
the energy taxation would help decrease the fiscal 
contribution  of  natural  persons.  The  taxation  of 
fuels  and  mazut  would  be  adapted,  starting  from 
2019,  to  comply  with  the  objectives  under  the 
Paris  Agreement.  The  current  tax  incentives  for 
electric  vehicles  would  be  replaced  by  targeted 
subsidies,  and  tax  incentives  for  zero-emission  or 
low-emission vehicles would be reinforced. 

collection 

administration  of  VAT 

Despite  a  particularly  effective  Value  Added 
Tax (VAT) collection, the economic efficiency of 
Luxembourg’s  VAT  system  is  limited  by  a 
number  of  reduced  rates  and  exemption (26). 
The 
is 
particularly  effective  as  Luxembourg  consistently 
displays one of the lowest VAT compliance gap in 
the  EU  (0.83%  in  2016  vs  12.3%  in  the  EU). 
Nevertheless,  the  standard  VAT  rate  of  17% 
applied in Luxembourg is the lowest in the EU. A 
super-reduced  (3%),  a  reduced  (8%),  as  well  as  a 
(14%)  also  exist.  Along  with 
parking  rate 
numerous  non-compulsory  exemptions,  these  lead 
to a large actionable policy gap (33% in 2016). 

The more efficient, recurrent property taxes are 
low  and  based  on  outdated  property  values. 
Revenues  from  recurrent  property  taxes  were 
among  the  lowest  in  the  EU  in  2017.  This  is 

(24)  OECD,  Inventory  of  Support  Measures  for  Fossil  Fuels, 

2018. 

(25)  European  Commission,  Transport  in  the  European  Union 

Current Trends and Issues, 2018, pp.27-28. 

(26)  Tax  efficiency  minimises  the  cost  of  complying  with  the 
tax  code  by  reducing  its  administrative  burden  and  by 
minimising  any  distortions  in  the  economy  caused  by  the 
tax. 

High capital flows, coupled with the absence of 
withholding taxes on interests and royalties and 
possible  exemption  on  dividends,  may  be  an 
indication  that  Luxembourg’s  tax  rules  are 
used by companies that engage in aggressive tax 
planning.  Inward  and  outward  foreign  direct 
investments are among the highest in the EU, with 
a  majority  linked  to  special  purpose  entities  (27). 

(27)  A special purpose entity is a legal entity that has little or no 
employment,  operations  or  physical  presence  in  the 
jurisdiction  where  it  is  located.  It  is  related  to  another 
corporation, often as its subsidiary, and is typically located 
in another jurisdiction (see European Commission, 2018). 

23 

 
                                                           
                                                           
3.1. Public finances and taxation 

a 

located 

in  non-cooperative 

introduced in the same bill, changes to its tax laws 
aiming  at  making  the  recognition  of  a  permanent 
establishment  abroad  more  stringent  (34)  and 
the  use  of 
avoiding  some  abuses  linked  to 
(35).  Regarding  outbound 
convertible 
loans 
circular 
per 
payments, 
recent 
as 
(“circulaire”) (36), 
related 
transactions  with 
tax 
companies 
jurisdictions  listed  by  the  EU  will  have  to  be 
reported  and  will  be  subject  to  greater  scrutiny. 
These  measures  apply  from  transactions  made  in 
2018  and  it  is  therefore  too  early  to  assess  their 
effects.  In  order  to  translate  into  its  double  tax 
treaties  the  outcome  of  the  G20/OECD  Base 
Erosion and Profit Shifting project, Luxembourg’s 
Parliament adopted a bill to ratify the Multilateral 
Convention  to  Implement  Tax  Treaty  Related 
Measures  to  Prevent  Base  Erosion  and  Profit 
Shifting  (‘Multilateral  Instrument’).  Luxembourg 
has chosen to apply the  Multilateral Instrument to 
all  its  treaty  partners  but  has  put  reservations  on 
numerous  articles  not 
the 
minimum  standard.  This  means  that  these  anti-
abuse rules will not necessarily apply in a constant 
manner as their impacts will rather rely on whether 
Luxembourg’s treaty partners have also signed the 
Multilateral 
and  with  which 
reservations.  Luxembourg  will  rely  on  bilateral 
negotiations  to  amend  Treaty  provisions  in  line 
with  the  Base  Erosion  and  Profit  Shifting  results. 
This  negotiation  process  may  take  time  to  be 
completed.  The  actual  review  by  Luxembourg  of 
its  double  tax  treaties  therefore  deserves  to  be 
analysed.  Moreover,  anti-abuse  clauses  regarding 
the exemption of withholding taxes have also been 
introduced  in  a  number  of  tax  treaties.  No 
information  is  available  yet  on  whether  these 
clauses have been applied and with which results. 

forming  part  of 

Instrument 

not the hybrid mismatches measures of ATAD 2, which are 
due to enter into force from 2020 onwards. 

(34)  Luxembourg  would  require  a  taxpayer  to  prove  that  the 
other  state  is  also  recognizing  a  permanent  establishment 
before  granting  an  exemption  based  on  the  applicable 
double tax treaty.  

(35)  This  provision  would  forbid  the  tax-free  exchange  or 
conversion  of  a  convertible  loan  for  participations  or 
equity. 

(36)  Circulaire  du  7  mai  2018  relative  aux  mesures  défensives 
en relation avec la liste de l'Union européenne des pays et 
territoires non coopératifs à des fins fiscales. 

the 

The level of capital flows (dividends, interest, but 
also  royalties)  are  also  among  the  highest  in  the 
EU, and at a high level compared to the size of the 
economy (28).  Luxembourg 
is  a  small  open 
economy,  with  a  large  financial  sector,  which 
partly  explains  those  financial  flows  and  foreign 
direct  investment  stocks.  These  flows  can  also  be 
large  presence  of  foreign-
explained  by 
in  Luxembourg  which 
controlled  companies 
undertake 
treasury 
financing  or 
intra-group 
operations  (29).  The  absence  of  withholding  taxes 
on outbound interest and royalty payments, and the 
tax  on 
possible  exemption  from  withholding 
dividends  with  treaty  partners  (30),  may  lead  to 
those payments escaping tax altogether if they are 
not  subject  to  tax  in  the  recipient  jurisdiction 
either. 

through 

(ATAD  1)  was  adopted  by 

Luxembourg  is  acting  to  curb  aggressive  tax 
planning 
implementation  of 
the 
European and internationally agreed initiatives. 
The  law  to  transpose  the  Anti-Tax  Avoidance 
Directive 
the 
Parliament  in  December  2018.  It  strengthens 
existing  anti-abuse  rules  (in  particular  the  exit 
taxation)(31)  and  general  anti-abuse  rules)  and 
introduces  new  anti-abuse  rules,  in  particular 
controlled-foreign  companies  rules  (32),  interest 
tackle  hybrid 
limitation 
mismatches.(33).  In  addition,  Luxembourg  also 

rules  and 

rules 

to 

(28)  See European Commission, 2018. 
(29)  IMF (2018), Article IV Consultation  
(30)  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).  In  practice,  an  income 
tax  is  considered  comparable  if  it  applies  to  a  similar  tax 
base,  with  a  statutory  rate  which  is  at  least  half  of 
Luxembourg’s corporate income tax rate. To be applicable, 
the  parent  company  is  required  to  have  at  least  10  % 
participation or a participation with an acquisition cost of at 
least EUR 1.2 million for an uninterrupted period of at least 
12 months. In addition, Luxembourg implemented the anti-
abuse  clause  provided  for  in  the  revised  parent-subsidiary 
directive.  Furthermore,  specific  anti-abuse  clauses  have 
been included in some bilateral tax treaties. 
(31)  Exit tax rules will be applicable from 2020. 
(32)  Regarding 

rules, 
Luxembourg  chose  the  “transactional”  approach,  whereby 
non-distributed  income  of  controlled-foreign  companies 
arising  from  non-genuine  arrangements  which  have  been 
put  in  place  for  the  essential  purpose  of  obtaining  a  tax 
advantage would be targeted. 

controlled-foreign 

companies 

the 

(33)  This  provision  would  cover  intra-EU  hybrid  instruments 
and  hybrid  entity  mismatches  envisaged  in  ATAD  1,  but 

24 

 
                                                           
                                                                                   
3.2.  FINANCIAL SECTOR 

3.2.1.  FINANCIAL SECTOR 

Luxembourg  is  among  the  largest  financial 
centres  in  the  world,  a  platform  for  fund 
administration,  private  banking  services  and 
foreign  currency  operations.  The  country  hosts 
numerous  banks  and  insurers,  with  most  banks 
(132 out of 136) belonging to a foreign group. Half 
of them are custodian banks working with the fund 
industry.  The  other  half, 
smaller 
in  wealth 
institutions,  are  mostly  specialised 
management. 
classic 
Seven 
domestically-focused  retail  banks (37).  After  the 
USA,  Luxembourg  is  the  second-biggest  fund 
administration centre worldwide. 

typically 

entities 

are 

record 

sector, 

to  GDP  while 

The  financial  sector  is  Luxembourg’s  main 
economic engine. The sector accounts for 25 % of 
GDP,  11  %  of  employment  and  21%  of  fiscal 
revenues  (Cour  des  Comptes,  2018).  Within  the 
the  main 
banks 
financial 
contribution 
the  balance  of 
payments  largely  reflects  the  activity  of  the  funds 
industry.  Luxembourg's  funds  account  for  26.8% 
of  money  under  management  in  Europe,  reaching 
EUR 4,065 billion in December 2018, 71 times the 
GDP of the country. Although the number of bank 
employees  has  remained  broadly  stable  at  around 
26,000  since  2010,  employment  has  grown  in  the 
financial  auxiliary  services(38)  (professionels  du 
secteur  financier).  Despite  competitive  salaries, 
the  financial  sector  also  encounters  problems  in 
recruiting  and  retaining  talent  due  to  structural 
mobility  problems  and  expensive  real  estate 
market. 

sector 

financial 

Luxembourg’s 
is  deeply 
integrated  in  a  financial  global  value  chain. 
Luxembourg’s participation in global value chains 
in  financial  activities  started  at  an  early  stage. 
Specialisation  policies  implemented  in  the  past 
early 
in 
were 

instrumental 

sector's 

the 

(37)  The  distinction  between  domestically  and  externally 
oriented  credit  institutions  has  especial  relevance  in 
Luxembourg.  The  five  domestic  banks  operating  in  the 
Place  are  traditional  deposit  taking  institutions  and  the 
domestic loan providers in Luxembourg. In this sense, they 
actively contribute to economic growth and they are deeply 
rooted in its society. On a different note, they are relevant 
for  the  macroeconomic  monitoring,  due  to  its  close 
relationship with the domestic sector. By contrast the other 
institutions  have  no  direct  connection  with  the  domestic 
economy of Luxembourg. 

(38)  Professionels  du  secteur  financier  are  also  supervised  by 
the Commission de surveillance du secteur financier. 

a 

favourable 

environment 

development,  as  well  as  in  allowing  Luxembourg 
to  capture 
the  financial 
large  benefits  from 
industry’s  global  value  chains  (for  instance  in 
terms  of  technology  or  price  transfers).  Global 
value  chains  might  have  played  an  important  role 
in  Luxembourg's  evolution  as  a  global  financial 
hub,  with 
for 
multinationals  and  financial  firms'  offshoring 
activities.  This  is  also  suggested  by  the  high 
content of imported intermediate inputs in external 
demand, as well as the high inward Foreign Direct 
Investment  stocks  (360.9  %  of  GDP,  excluding 
Special  Purpose  Entities (39),  the  highest  in  the 
EU). However, long global value chains also imply 
a  higher  exposure  to  external  shocks,  including 
global value chains disruptions, which could add to 
in  destination  markets,  mainly 
the  volatility 
financial.  

Luxembourg’s  banks  display  solid  capital 
ratios.  Luxembourg's  capital  conservation  buffer 
was  front-loaded  and  is  at  2.5%.  Additionally,  7 
banks must respect an O-SSI buffer (40) of 0.5% of 
risk-weighted assets and one bank a buffer of 1%. 
The  countercyclical  capital  buffer  was  introduced 
in  2016  and  has  been  fixed  at  0.25%  for  the  first 
quarter  of  2019,  applicable  from  1  January  2020 
onwards.  The  profitability  of  banks  remains 
comfortable,  despite  a  weakening  in  2017  and 
2018.  Net  profits  have  shrunk  recently,  dragged 
down  by  lower  non-recurrent  income  due  to 
extraordinary  operations  and  increasing  volatility 
in  financial  markets. These developments are also 
reflected in the profitability indicators (see Return 
on  Equity  and  Return  on  Assets  in  Table  3.2.1). 
Over  the  past  years  the  share  of  commission  and 
fee  income  over  total  income  has  increased 
markedly  (from  43%  in  2010  to  58%  in  2017), 
in  a 
reflecting  higher 
rates. 
context  of  historically 

income  diversification 
interest 
low 

(39)  Special Purpose Entities (SPEs) are entities whose role is to 
facilitate the internal financing of a multinational enterprise 
but that have little or no physical presence in an economy. 
Excluding  such  entities  provides  a  better  measure  of  FDI 
having an impact on the economy. 

(40)  The O-SII (other systemically important institution) buffer 
is calculated depending on banks size, interconnectedness, 
complexity, cross-border activity and its importance in the 
relevant  financial  system  infrastructure.  It  can  reach  a 
maximum  of  2%.  National  supervisors  must  follow  EBA 
guidelines  in  its  calculation.  Buffers  in  Luxembourg  will 
increase  to  0.5%  in  2019  when  the  phasing-in  period  is 
over. 

25 

 
 
                                                           
                                                           
 
 
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  

Operational costs have also increased, as financial 
institutions  adapt  to  the  changing  technological 
and  regulatory  environment  and  try  to  attract 
skilled  workers  despite  mobility  issues  and  high 
house prices. 

real 

sizeable 

Recent  stress  tests  highlight  banks’  capacity  to 
withstand  real  estate  price  shocks  and  high 
default  rates.  Solvency  ratios  remained  well 
above  the  regulatory  thresholds  and  showed  high 
resilience,  both  quantitatively  and  qualitatively. 
With  a  CET1  ratio  at  21.2 %,  Luxembourg 
banking system has sufficient own funds to absorb 
shocks.  Regular  stress  tests  (41)  run  by  the 
Commission  de  surveillance  du  secteur  financier 
highlighted that the 5 domestically-oriented banks, 
loans,  could 
which  hold  90%  of  mortgage 
withstand  dramatic  increases  in  mortgage  defaults 
combined  with 
estate  price 
corrections  without  significantly  falling  below 
requirements 
regulatory 
(European  Commission,  2018).  Losses  would 
mainly stem from relatively recent vintages of high 
loan-to-value  mortgages  for  which  banks  need  to 
set  aside  extra  capital.  This  is  notably  due  to  the 
steep  rise  in  housing  prices  over  the  past  years. 
The  supervisor  has  floored  mortgage  risk  weights 
at  15%  for  banks  applying  the  internal  risk  based 
approach,  although 
in  place  as  a 
this 
recommendation  (European  Systemic  Risk  Board, 
2018). For banks applying the standard approach, a 
higher risk weight applies to the part of a mortgage 
exceeding  80%  of  the  value  of  the  collateral.  A 
introducing  stricter  borrower-based 
draft 
measures awaits parliamentary approval. 

capital  minimum 

law 

is 

(41)  Sensitivity  analysis  on  default  rates  augmenting 

in 
incremental  steps  by  2.5%-points  up  to  a  25%-  increase 
and price corrections in incremental steps by 5%-points up 
to a 50% price fall.  

Banks need to deposit large sums at the Central 
Bank  to  comply  with  liquidity  ratios  (42).  Most 
banks  in  Luxembourg  do  not  take  deposits  and 
cannot  rely  on  them  to  fulfil  liquidity  ratios.  In 
addition,  Luxembourg  government  bonds,  another 
major component to fulfil those ratios, are in short 
supply.  Hence,  in  order  to  fulfil  either  ratio  most 
banks have to resort to depositing with the Central 
Bank.  Indeed,  banks’  significantly  increased  their 
deposits at the  Central Bank in recent  years,  from 
EUR 16 billion at end 2014 to EUR 131 billion at 
the end of the third quarter of  2018, reflecting the 
phasing  in  period  for  compliance  with  the  new 
international liquidity requirements.  

Most funds in Luxembourg invest only in equity 
and/or  bonds,  benefiting  from  a  network  of 
specialised  service  providers.  Luxembourg’s 
funds  are  mostly  “plain  vanilla”  funds  (Table 
3.2.2),  i.e.  they  only  invest  in  equity,  bonds  or  a 
combination of both. Fund of funds, money market 
and  real  estate  funds  are  smaller  in  size.  Private 
equity  and  venture  capital  funds  keep  increasing 
their  share  of  money  under  management.  Most 
plain vanilla funds choose to domicile their fund in 
Luxembourg  due  to  the  eco-system  surrounding 
the  funds  industry.  This  includes  roughly  8,000 
audit  professionals,  many  legal  specialists  and  IT 
providers,  as  well  as  around  70  custodian  banks. 

(42)  Net  Stable  Funding  Ratio  and  Liquidity  Coverage  Ratio. 
Both ratios demand from banks to hold enough sufficiently 
liquid  assets  to  survive  a 30 day  stress  period:  The  NSFR 
divides available stable funding (assets the banks currently 
holds  are  weighted  according  to their  projected  value  in a 
liquidity  stress  scenario)  through  required  stable  funding. 
The  LCR  has  3  subcategories  with  decreasing  levels  of 
quality: level 1, level 2A and level 2B assets. Level 1 assets 
are  not discounted  when  calculating  the  LCR,  while  level 
2A  and  level  2B  assets  have  a  15%  and  50%  discount, 
respectively. Level 1 includes sovereign bonds and central 
banks’ deposits. 

26 

(%)20112012201320142015201620172018Q2Non-performing loans---1.41.10.80.70.7Coverage ratio---30.838.537.738.533.3Loan to deposit ratio*65.860.954.952.251.854.152.5naTier 1 ratio15.318.621.318.520.223.621.921.9Capital adequacy ratio17.821.924.419.620.924.322.622.5Return on equity**2.77.06.47.27.27.56.35.5Return on assets**0.20.50.50.50.60.60.50.5 
                                                           
                                                           
 
 
 
3.2. Financial sector 

deposits  with  the  Central  Bank.  Finally,  the  very 
diversification of investment funds and their large 
holding  of  very  liquid  securities  make  a  run  on 
funds  highly  unlikely  under  normal  market 
conditions,  as  sufficient  time  is  generally  allowed 
between a redemption query and the  final pay-out 
to  prevent 
the 
Commission  de  surveillance  du  secteur  financier 
has  started  internal  work  to  better  assess  the 
potential  risks  on  system-wide  liquidity  stemming 
from investment funds liquidity shocks. 

liquidity  shortfalls.  However, 

full 

time 

4,000 

equivalents 

The insurance sector is diversified and growing. 
Luxembourg hosts 45 life insurance companies, 49 
non-life  insurers  and  202  re-insurers.  The  sector 
employs 
in 
Luxembourg,  and  its  total  assets  accounted  for 
EUR 235 billion in 2017, 3.2% more than in 2016. 
The  bulk  of  the  balance  sheet  (EUR  179  billion) 
was held by the life-insurance sector, while 90% of 
premiums  came  from  non-residents.  Profits  grew 
for  life  insurance,  remained  stable  for  non-life 
insurance,  but  fell  80%  for  re-insurers  due  to  the 
impact  of  several  natural  catastrophes.  Several 
insurers  have  decided  to  relocate  some  activities 
from  the  United  Kingdom  to  Luxembourg  in 
recent  months.  This  notably 
the 
competitiveness  of  the  country's  tax  environment, 
which  allows  for  generous  deductions,  and  the 
advantages  of  providing  a  specialised  focus 
through a dedicated supervisory entity. 

reflects 

3.2.2.  PRIVATE SECTOR INDEBTEDNESS 

Corporate  indebtedness  remains  high  due  to 
Luxembourg's  position  as  an 
international 
treasury centre, but leverage can be assessed as 
moderate.  The  non-consolidated  debt  of  non-
financial  corporations  accounted  for  3.5  times 
GDP as of June 2018, down from 3.8 in 2015. This 
remains very high, well above the EU average. The 
ratio of gross consolidated corporat debt, as a share 
of  GDP,  is  also  well  above  prudential  and 
fundamental-based  benchmarks (43),  with  gaps  of 
132% and 166% of GDP respectively in 2017. As 
explained  in  previous  reports,  this  high  level  of 
indebtedness stems from Luxembourg's position as 
treasury  centre  and 
an 

international  business 

(43)  Methodology  to  compute  the  fundamentals-based  and  the 
prudential  benchmarks  based  on  Bricongne,  J.  C.,  L. 
Coutinho and N. Philiponnet (2018) 

That environment shortens considerably the time it 
takes to set up a fund.  

total  bank 

Custodian  banks  manage  investment  funds’ 
treasury  operations.  Investment  funds  rely  on 
custodian  banks  to  provide  treasury  management 
and  overdraft  facilities.  Investment  funds  held 
EUR  124  billion  of  deposits  in  Luxembourg's 
banks,  or  17%  of 
in 
December 2017 (Banque Centrale du Luxembourg, 
2018). By contrast, funds accounted for only 1% of 
banks' assets, mostly short term loans for cash flow 
their  size  and 
management.  Given  notably 
interconnectedness  with  the  domestic  financial 
sector,  some  custodian  banks  are  considered  as 
other  systematically  important  institutions  by  the 
banking  supervisor  and  must  therefore  comply 
with additional capital buffers. 

liabilities, 

Table 3.2.2:  Distribution of investment funds per 

specialisation (% market share) 

Source: European Commission 

from 

banks 

between 

stemming 

the 
The  potential  risks 
and 
interconnectedness 
investment funds appear limited. Concerns have 
been  raised  regarding  the  potential  risks  for 
domestic banks and the real economy in a scenario 
of severe liquidity crisis in the funds industry (IMF 
FSAP,  2017,  European  Commission,  2018, 
Banque  Centrale  du  Luxembourg,  2017).  Such 
risks  appear  limited  as  they  are  mitigated  by 
several  elements.  First,  the  risks  of  potential 
liquidity  shortfalls  in  domestic  banks  through  the 
interbank  market  were  identified  using  extreme 
stress test assumptions (IMF, 2017). Second, most 
banks  in  Luxembourg  benefit  from  potentially 
sizeable  intragroup  liquidity  support  from  their 
parent  institutions  in  case  of  stress.  Third,  the 
recent  activation  of  international  regulations  on 
liquidity  has  improved  the  enforcing  power  of 
to  ensure 
sufficient 
supervisory  authorities 
liquidity 
financial 
levels  are  maintained  by 
institutions,  which  is  also  reflected  by  large 

27 

Equity30.6Fixed income28.5Mixed (Equity-Fixed income)22.5Money market funds7.2Funds of funds5.9Real estate1.6Private equity and venture capital2.1Others1.6 
 
 
 
                                                           
3.2. Financial sector 

reflects  large  amounts  of  intra-company  cross-
border  loans.  Liabilities  are  therefore  usually 
matched  by  equivalent  assets,  which  is  illustrated 
by  the  relatively  moderate  leverage  ratios  when 
comparing debt to equity or financial assets.  

Graph 3.2.1:  Household debt and leverage ratios 

(40% 

remains 

indebtedness 

financial  assets 

Despite a favourable aggregate wealth position, 
high 
households' 
compared to income. Household  debt is growing 
slowly  and  accounts  for  a  moderate  share  of 
households' 
in  2017) 
highlighting  the  largely  positive  aggregate  net 
asset  position  of  households  of  about  100%  of 
GDP. However, debt accounted for 178 % of gross 
disposable income, one of the highest levels in the 
EU, as mortgage loans registered sustained growth 
in  recent  years  thanks  to  low  interest  rates  and 
surging  property  prices.  As  illustrated  in  previous 
reports 
rising 
(European  Commission,  2018) 
indebtedness  generates  some  concerns  as  to  the 
income  households, 
solvency  risks  for  lower 
notably in case of rising interest rates or economic 
downturn.  This  was  notably  pointed  out  by  the 
European Systemic Risk Board in its 2016 warning 
about  the  medium  term  risks  linked  to  household 
indebtedness and residential prices. 

A  package  of  borrower-based  prudential 
measures  is  intended  to  address  concerns  over 
some  households’  solvency.  The  government  has 
proposed  the  introduction  of  mortgage  borrower-
based tools, placing limits on loan to value, loan to 
income,  debt  to  income,  debt  service-to-income 
ratio, and loan maturities (44). The proposal allows 
the  financial  sector  supervisor  (la  Commission  de 
Surveillance  du  Secteur  Financier) 
set 
thresholds. As these limits will have distributional 
consequences, the Conseil d’Etat ordered to better 
define  the  accountability  framework  in  which  the 
Commission  de  surveillance  du  secteur  financier 
will  set  these  limits.  The  draft  bill  is  currently 
pending approval in the Parliament, but is expected 
to pass parliament in early 2019. 

to 

(44)  LTV:  loan  to  value,  i.e.  the  ratio  between  the  credit 
obligations  of  a  borrower  and  market  value  of  a  given 
property; LTI and DTI: loan (debt) to income, i.e. the ratio 
between  a  loan  (debt)  and  annual  net  income  DSTI:  debt 
service-to-income  ratio,  i.e.  the  ratio  between  the  total 
monthly  amount  of  a  borrower’s  repayment  obligations 
resulting  from  all  credit  agreements  and  the  borrower’s 
total  available  annual  net  income  divided  by  12;  maturity 
limits  are  upper  limits  expressed  in  years  concerning  the 
loans’ redemption. 

Source: European Commission 

3.2.3.  HOUSING MARKET DEVELOPMENTS 

Housing prices continue to rise amid increasing 
indications  of  overvaluation.  Real  residential 
property  prices  increased  by  4.5 %  on  the  year  in 
June 2018, compared with 5.1% in the same period 
of 2017. Prices appear markedly above their long-
term average  when compared to the level of rents 
and  income,  with  a  gap  of  39 %  and  37 % 
respectively  as  of  June  2018.  This  rather  large 
overvaluation  estimate  contrasts  with  a  more 
into 
measured  model-based  estimate 
account other fundamental variables (Graph 3.2.2). 
The  overall  house  price  gap  calculated  by  the 
Commission,  an  average  of  the  above  indicators, 
shows signs of an overvaluation of prices close to 
estimated 
30 %.  Other 
overvaluation  of  6.9%  (Banque  Centrale  du 
Luxembourg,  2018)  and  between  4%  and  52% 
(European  Systemic  Risk  Board,  2018).  Although 
their  range  is  very  wide,  there  seems  to  be  a 
consensus 
a  moderate 
overvaluation  of  housing  prices,  which  might,  if 
continued,  lead  to  a  potential  correction  in  the 
future.  

institutions 

pointing 

towards 

taking 

have 

28 

020406080100120140160180200010203040506070800102030405060708091011121314151617% GDI% of GDP and assetsDebt / GDP, HouseholdsDebt / fin. assets, HouseholdsDebt / gross disposable income, Households (right axis) 
                                                           
 
 
3.2. Financial sector 

Graph 3.2.2:  Housing prices overvaluation gap with respect 

to income, rents and fundamentals 

(1) Overvaluation gap estimated as an average of the 
price/income, price/rent and fundamental model valuation 
gaps. Long-term values are computed over 1995-2016. 
Source: European Commission 

benign 

growth, 

Strong  housing  demand  remains  driven  by 
demographic 
financing 
conditions  and  a  large  cross-border  workforce. 
The population of Luxembourg increased by 2.2% 
on the year in 2017, bringing overall growth from 
2010  to  17.6%.  82%  of  the  demographic  growth 
since  2010  is  due  to  migration,  as  Luxembourg's 
dynamic 
from 
neighbouring  countries.  The  low  interest  rate 
environment  eased 
financing  conditions  and 
supported  housing  price  increases  (BCL,  2018). 
The  large  share  of  cross-border  workers  (40 %  of 
employment), 
traffic 
combined  with 
congestion  and 
insufficient  supply  of  public 
transport  (see  section  3),  also  contribute  to  a 
sustained housing demand. 

economy 

attracts 

labour 

high 

the 

recent 

increase 

is  despite 

dwellings  remains  insufficient,  constrained  by 
insufficient  land  availability  and  low  housing 
density, and largely due to lack of incentives to 
landowners  to  build  new  housing.  The  pace  of 
construction  of  new  dwelling  has  increased  by 
50%  between  2011  and  2015  but  remains  only 
slightly  above  the  annual  average  observed  since 
2000  (2,700  new  housing  units  per  year).  As  a 
result  the  built-up  areas  in  Luxembourg  increased 
marginally in the past two decades (Luxembourg’s 
built  up  area  only  moved  from  8.1%  of  the 
territory in 2000 to 9.8% in 2016), which contrasts 
heavily with a very dynamic demographic growth. 
the  apparent  efficiency  of 
This 
Luxembourg's  procedures 
regarding  building 
permits  and  property  registration  (World  Bank, 
in  building 
2018)  and 
permits (45). As analysed in past reports (European 
Commission,  2018),  there  currently  seem  to  be 
insufficient incentives for private landowners, who 
own more than 90 % of available land, to sell their 
assets 
projects. 
Luxembourg is one of few EU countries where the 
investment  in  dwellings  as  a  percentage  of  GDP 
does  not  increase.  Indeed,  as  real  estate  values 
increase  steadily  and  property  taxes  remain  very 
low,  land  and  property  ownership  provide  high 
potential  returns  for  a  very  low  risk.  The  low 
density  of  housing  built  in  Luxembourg  also 
contributes  to  the  scarcity  of  supply,  as  80 %  of 
dwellings  are  one-family  houses  and  half  of 
collective  housing  units  contain  less  than  four 
apartments.  Therefore,  part  of  the  constraints 
weighing on housing supply appears to stem from 
insufficient 
regulatory 
incentives  to  extend  built-up  areas  and  achieve 
higher-density housing.  

financial  and 

construction 

undertake 

fiscal, 

or 

Significant  investment  is  needed  to  increase 
housing  supply.  At  this  point  investment  in 

(45)  5203  housing  building  permits  were  granted  on  average 
each  year  between  2014  and  2017,  from  4070  per  year 
from 2010 to 2013. 

29 

-50-40-30-20-10010203040506096979899000102030405060708091011121314151617% deviation of current priceModel-based valuations gapPrice to income vs. hist. avg.Price to rent vs. hist. avg.Overall valuation gap 
 
                                                           
3.2. Financial sector 

Box 3.2.1: The rental market in Luxembourg 

Mostly  concentrated  around  Luxembourg  city,  rented  housing  is  becoming  increasingly  expensive, 
notably for lower income households. In 2017, about 30% of Luxembourg residents rented a dwelling in 
the private market, and almost half of rental housing units were located in the Luxembourg canton (45.5%). 
One of the reason driving this concentration of the rental market in Luxembourg is linked to the presence of 
international  and  European  public  institutions,  and  international  firms,  whose  employees  tend  to  favour 
renting instead of buying, for flexibility reasons. Rental is more prevalent for lower income households, as 
about  50%  of  households  at  risk  of  poverty  are  homeowners.  The  rental  burden  has  increased  for  lower 
income households over the last decade, with 26% of tenants dedicating more than 40% of their income to 
rental  costs  in  2016  (in  line  with  the  EU  and  euro  area  averages).  The  introduction of  a  rental  subsidy  in 
2016 intends to alleviate the housing cost burden for the most vulnerable. The limited supply of housing in 
the main cities, particularly in the capital city of Luxembourg, is the main driver of the rise in rental costs. 
The  comparatively  lower  housing  costs  and  better  housing  supply  in  neighbouring  countries  therefore 
contribute to explaining the large number of cross-border workers and the high level of traffic congestion in 
Luxembourg.  

Social housing remains largely underdeveloped compared to neighbouring countries, pointing to some 
investment  needs  so  as  to  increase  the  supply  of  affordable  housing  units.  In  2017,  there  were  2,000 
publicly-owned social housing units, accounting for 0.9% of the total housing stock (compared to close to 
20%  in  France).  The  new  Government’s  coalition  agreement  highlights  plans  to  develop  the  supply  of 
affordable  housing  through  the  Housing  Fund  (Fonds  du  Logement)  and  the  Société  nationale  des 
habitations  à  bon  marché  (SNHBM).  The  medium-term  objective  is  to  multiply  by  three  the  supply  of 
affordable  housing  units  for  rent.  Delegated  social  housing  is  also  promoted,  whereby  privately-owned 
dwellings are rented, through a public entity, at lower rents to people who are not eligible to social housing 
or  who  are  on  the  waiting  list.  This  service  is  provided  by  the  Agence  Immobilière  Sociale,  which  rents 
about  300  housing  units.  The  State  also  grants  subsidies  to  social  associations  (non-profit  organizations, 
foundations)  acting  as  intermediaries  between  private  homeowners  and  low-income  households.  These 
associations  rented  about  500  housing  units  in  2017.  Given  the  very  low  starting  point,  the  government's 
objective regarding the supply of social housing might not be sufficient to significantly alleviate the existing 
tensions in the rental market. This might point to more important public investment needs in this particular 
area.  

increase 

the  areas  dedicated 

Luxembourg  intends  to  introduce  measures  to 
stimulate  housing  supply  and  investment.  A 
consultation  process  was  initiated  in  May  2018 
towards  adapting  urban  planning  laws.  Proposed 
legislative  changes  would 
the  area 
dedicated  to  housing  by  13%  and  would  raise  the 
share of this area set aside for social housing from 
10% 
to  30%.  This  would  also  allow  State 
authorities  to  supersede  municipal  authorities  in 
to  housing.  In 
defining 
addition, a series of measures are envisaged in the 
new government’s coalition agreement to increase 
housing  supply.  The  authorities  intend  to  make 
more  land  available  for  real  estate  development, 
either through public purchase of private land, the 
introduction  of 
increased 
technical  assistance  to  municipalities.  Stronger 
incentives  are  envisaged  to  encourage  owners  of 
vacant  land  or  properties  in  urban  areas  to  make 
their  properties  available  on  the  market.  Public 
authorities also intend to strengthen their powers to 

incentives  or 

tax 

expropriate  or 
development projects. 

exchange 

land 

to  unblock 

negative 

consequences 

Rising  rents  and  property  prices  could  be 
having 
on 
competitiveness  and  social  inclusion.  Relatively 
high  compensation  levels  in  some  key  sectors 
(finance, business services,  and technology) allow 
Luxembourg  to  remain  an  attractive  workplace 
internationally. However, the  comparatively  faster 
growth  of  property  prices  compared  to  income 
might  eventually  weigh  negatively  on 
the 
attractiveness of  working  in  Luxembourg, notably 
in  sectors  where  wages  are  less  dynamic.  This 
could 
salary 
expectations.  Rising  housing  costs  might  increase 
the  currently  low  share  (10%  in  2017,  STATEC, 
2018) of households dedicating more than 40% of 
income  to  housing  (see  Box  3.2.1),  notably  for 
more  vulnerable  low  income  and  single-parent 
households. In addition, lower income households 

upwards 

pressure 

exert 

on 

30 

 
3.2. Financial sector 

to  more 

might  be  pushed  further  away  from  urban  and 
economic  centres, 
traffic 
leading 
congestion,  longer  commuting  time  and  higher 
is  uncertain 
transport-related  expenditure. 
whether  the  expected  increase  in  the  supply  of 
affordable housing and in the availability of rental 
subsidies  will  prove  sufficient 
the 
consequences of rising housing costs. 

to  offset 

It 

31 

 
3.3.  LABOUR MARKET, EDUCATION AND SOCIAL POLICIES 

rate  (20-64)  over  the  last  years  is  mainly  due  to 
longer studies of young people, parental leave and 
an  ageing  population.  In  this  context,  substantial 
untapped  potential  stems  from  the  low  labour 
market  participation  of  some  groups,  in  particular 
older people, underlining further investment needs. 

Graph 3.3.2:  Employment rate by age group in Luxembourg 

3.3.1.  LABOUR MARKET 

a 

by 

favourable 

Supported 
economic 
environment,  the  labour  market  is  showing 
strong  and  continued  job  creation  with  a  low 
and declining unemployment rate. In 2017, total 
employment  grew  by  3.3%,  up  from  3%  in  2016, 
still  benefitting  more  cross-border  workers 
(+4.2%).  This  trend  is  expected  to  continue  in 
2018  and  progressively  stabilise  towards  2019. 
The  most  dynamic  sector 
remains  business 
services,  while  industrial  employment  has  also 
been  growing  since  2015.  After  a  continuous 
increase  between  2011  and  2015,  unemployment 
fell in 2016 and again in 2017 (5.6% against 6.3% 
in 2016) and even declined to  4.9% by the end of 
2018. Youth unemployment decreased from 19.1% 
in  2016  to  15.4%  in  2017,  and  reached  12.3%  in 
the  last  quarter  of  2018.  However,  the  rate  of 
young  people  not  in  employment,  education  or 
training,  though still low, increased from 5.4 % in 
2016 to 5.9% in 2017. 

Graph 3.3.1:  Activity, unemployment, long-term 

unemployment, youth unemployment and not 
in employment and education or training rates 

Source: Eurostat, LFS 

Old-age employment 

early 

The  employment  rate  of  older  workers  (55-64) 
has  stagnated  since  2010  and  remains  the 
second  lowest  in  the  EU  (39.8%  in  the  first 
three  quarters  of  2018,  against  57.1%  on  EU 
average).  Limited  progress  has  been  made  on 
reducing 
(see  European 
retirement 
Commission  2018,  3.1.2  and  3.3.1)  and  targeted 
activation  policies  did  not  improve  substantially 
the  older  workers'  participation  in  the  labour 
market.  Age  management  strategies  which  should 
also  help  to  keep  senior  workers  in  employment 
are  not  a  legislative  priority,  neither  for  the 
government nor for the social partners, as the draft 
bill  introduced  in  2014  seems  definitely  stalled  in 
parliament  (see  European  Commission,  2018, 
section  3.3.1,  page  29).  In  the  same  vein,  the 
transposition  of  the  European-level  framework 
agreement  on  active  ageing  between  social 
partners is yet to be negotiated in Luxembourg. 

Source: Eurostat, LFS 

the  overall  good 

Despite 
labour  market 
performance, the employment rate is stagnating 
and specific groups still face challenges. With an 
employment  rate  of  72%  in  the  third  quarter  of 
2018, Luxembourg has not yet reached its Europe 
2020  target  of  73%.  According  to  the  National 
Statistics  Institute,  the  decline  in  the  employment 

32 

6466687072747678051015202520012002200320042005200620072008200920102011201220132014201520162017%%Activity rate 20-64 (rhs)Unemployment rate 15-74 (lhs)Long-term unemployment rate 15-74 (lhs)Youth unemployment rate 15-24 (lhs)NEET rate 15-24 (lhs)010203040506070809020012002200320042005200620072008200920102011201220132014201520162017% population15-2425-5455-64 
 
 
 
 
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  is  designed  as  a  compass  for  a  renewed  process  of  upward 
convergence  towards  better  working  and  living  conditions  in  the  European  Union (1).  It  sets  out  twenty 
essential principles and rights in the areas of equal opportunities and access to the labour market; fair working 
conditions; and social protection and inclusion (2). 

results  with 

Luxembourg  performs  overall  well  on 
most  indicators  of  the  Social  Scoreboard 
supporting  the  European  Pillar  of  Social 
Rights.  The  labour  market  in  Luxembourg 
shows  very  good 
low 
unemployment and gender employment gap, 
accompanied by good childcare provision for 
very  young  children.  Although  there  are 
signs of weakening with regard to the overall 
risk  of  poverty  or  social  exclusion  rate  and 
the  impact  of  social  transfers  on  poverty 
reduction, the social situation in Luxembourg 
remain  close  or  better  than  in  the  EU. 
Income inequality is currently at a level close 
to the EU average, and remained stable since 
2016.  Despite  good  overall  performance 
some challenges related to the labour market 
and  education  still  remain.  In  particular, 
important  skills  shortages  have  recently 
emerged  in  certain  sectors.  Furthermore,  the 
education  system  still  faces  inequalities  in 
opportunity among pupils in relation to their 
and  migrant 
status 
socioeconomic 
background. 
The  employment  rate  of  older  workers 
has  not 
fundamental 
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  senior  workers  longer 
in employment.  

improved.  The 

The  Luxembourg  government  took  steps 
towards  a  better  work-life  balance  for 
fathers  and  more  equal  sharing  of  care  responsibilities  between  women  and  men.  The  government 
explicitly referred to the Social Pillar and to the Commission proposal for a Directive on work-life balance for 
parents  and  carers  to  amend  its  bill  on  paternity  leave.  The  law  (passed  in  December  2017 (3))  extends 
paternity leave from 2 to 10 days starting in January 2018, among other changes related to family leave.  

(1)  The European Pillar of Social Rights was proclaimed on 17 November 2017 by the European Parliament, the Council 

and the European Commission. 

(2)  The  European  Pillar  of  Social  Rights  in  20  principles:  https://ec.europa.eu/commission/priorities/deeper-and-fairer-

economic-and-monetary-union/european-pillar-social-rights/european-pillar-social-rights-20-principles_en  

(3)  Loi  du  15  décembre  2017  portant  modification  du  Code  du  travail,  de  la  loi  modifiée  du  31  juillet  2006  portant 
introduction d'un Code du travail et abrogeant la loi modifiée du 12 février 1999 portant création d'un congé parental 
et d'un congé pour raisons familiales. 

33 

Early leavers from education and training (% of population aged 18-24)Good but to monitorGender employment gapBetter than averageIncome quintile ratio (S80/S20)On averageAt risk of poverty or social exclusion (in %)To watchYouth NEET (% of total population aged 15-24)Good but to monitorEmployment rate (% population aged 20-64)On averageUnemployment rate (% population aged 15-74)Better than averageLong-term unemployment  (% population aged 15-74)On averageGDHI per capita growth On averageNet earnings of a full-time single worker earning AWBest performers  Impact 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  Social protection and inclusionEqual opportunities and access to the labour marketMembersStatesareclassifiedaccordingtoastatisticalmethodologyagreedwiththeEMCOandSPCCommittees.Themethodologylooksjointlyatlevelsandchangesoftheindicators in comparison with the respective EU averages and classifies Member States insevencategories(from"bestperformers"to"criticalsituation").Forinstance,acountrycanbeflaggedas"betterthanaverage"iftheleveloftheindicatorisclosetoEU average, but it is improving fast. For methodological details, please consult the draft Joint Employment Report 2019, COM (2018)761 final. Data update of 29 January 2019.NEET:neitherinemploymentnorineducationandtraining;GDHI:grossdisposablehousehold income.                      Dynamic labour markets and fair working conditionsSOCIAL SCOREBOARD FOR LUXEMBOURG 
 
3.3. Labour market, education and social policies 

deliver  respectively  a  job  placement  rate  of  68% 
and  94%.  Other  measures  (known  as  "social 
initiatives")  support  vulnerable  people  furthest 
from  the  labour  market  for  up  to  two  years.  The 
law  reforming  the  professional  reclassification 
scheme  for  persons  with  working  disabilities 
confirmed  its  impact  with  only  45%  of  people 
affected  by  external  reclassification  in  2018  (i.e. 
registered  in  the  public  employment  service) 
instead  of  70%  before  the  adoption  of  the  law.  In 
March 2018, the Government presented a draft law 
establishing  assistance  to  help  employees  with 
disabilities  or  in  external  reclassification  to  better 
integrate  themselves  in  their  job  (for  the  private 
sector),  a  step  towards  the  transposition  of  the 
rights  of  persons  with 
Convention  on 
legislative  process 
disabilities.  The  ongoing 
involves social partners, as usual in Luxembourg. 

the 

Labour market participation of women  

Despite  increasing  participation  in  the  labour 
market,  there  is  still  untapped  potential  of 
female  workers.  The  female  employment  rate 
continued to increase, reaching 68.0% in the third 
quarter  of  2018  (against  65.1%  in  2016)  whereas 
the  male  employment  rate  further  declined  in  the 
third  quarter  of  2018  to  75.0%  (against  76.1%  in 
2016),  resulting  in  a  significant  reduction  in  the 
gender  employment  gap  (7.0  pp).  The  labour 
market  performance  of  non-EU  born  women 
remains weak with an employment rate (age group 
20-64) of 54.4% in 2017 (same as the EU average) 
against  72.5%  for  their  male  counterparts  and 
66.7%  for  native-born  women,  resulting  in  a  gap 
slightly below the EU average.  

impact  of 

in  part-time  employment 
The  gender  gap 
remains very high. It stood at 25.2 pp. in the third 
quarter  of  2018  with  31.0%  of  women  working 
part-time  against  5.8%  of  men.  Part-time  work  is 
than  foreign 
more  widespread  among  native 
workers.  The 
family  and  care 
responsibilities  decreases  with  age.  This  suggests 
that 
the 
household  is  a  contributing  factor  to  inactivity 
despite  the  high  number  of  available  places  in 
childcare and good affordability with free vouchers 
or  at  a  very  low  fee  for  low-income  groups, 
Luxembourg  being  one  of  the  best  performers  in 
this field. 

the  presence  of  small  children 

in 

(respectively  20.5%  of 

The  financial  disincentives  to  work  stemming 
from  the  tax-benefit  system  are  a  persistent 
problem,  especially  for  older  people.  The  issue 
of high disincentives to work embedded in the tax 
and  benefit  system,  in  particular  for  older  people, 
has  been  addressed  in  previous  country  reports 
(see  European  Commission  2017,  page  29,  and 
2018,  page  29).  In  2017,  24.5%  of  the  total 
working age population (20-64 years) was inactive 
in  Luxembourg 
the 
working  age  men  and  28.8%  of  women).  59%  of 
those  aged  55-64  were  inactive  and  Luxembourg 
has one of the highest rates of inactive people aged 
60-64 (82.3%) in the EU. In 2016, for people aged 
55-64  and  inactive,  58%  of  men  and  37%  of 
women  were  inactive  due  to  retirement  or  early 
retirement, 1% of men and 12% of women because 
of family/care responsibilities, 6% of men and 7% 
of  women  were 
of 
illness/disability.  At 
least  for  men,  financial 
disincentives  to  work  were  the  main  reasons  for 
low  old  age  activity  rates  in  2016.  However,  this 
situation might evolve due to recent changes in the 
income tax between 2016 and 2018. 

because 

inactive 

large  share  of  the 

People  aged  above  50,  people  with  disabilities 
and  workers  with  reduced  working  capacity 
make  up  a 
long-term 
unemployed. Long-term  unemployment,  although 
well  below  the  EU  average,  reached  its  highest 
level in 2016 (2.2%) but slightly decreased in 2017 
(2.1%  against  3.4%  on  EU  average),  a  downward 
trend  further  confirmed  with  1.6%  in  the  third 
quarter  of  2018.  The 
long-term 
unemployment  in  total  unemployment  increased 
from  30.7%  in  2015  to 37.2%  in  2017  (Eurostat), 
highlighting  the  difficulty  in  integrating  some 
unemployed people in the labour market. 

share  of 

to 

Many  employment  measures  target  the  most 
vulnerable job seekers, in particular those aged 
45 or 50 and more, to help them re-integrate the 
labour  market.  According 
the  Public 
Employment Service, many new measures already 
show  positive  results.  The  creation  of  subsidised 
permanent  jobs  in  the  public  sector  and  social 
enterprises  to  give  long-term  job  seekers  better 
prospects  and  avoid  job  insecurity  (see  European 
Commission  2018,  page  29)  already  covered 
workers  whose  83%  are  50  years  old  or  more 
(October 2018). The professionalisation placement 
programme  (six-week  work  placement)  and  re-
integration  employment  contracts  (12  months) 

34 

 
3.3. Labour market, education and social policies 

of Labour and the public employment service also 
signed a  one-year cooperation agreement  with the 
Federation  for  Recruitment,  Search  &  Selection, 
industrial 
the  auspices  of 
created  under 
association  to  improve  the  prospects  of  highly 
qualified 
job  seekers  whose  share  has  been 
growing  among  those  registered  with  the  public 
employment service. 

the 

3.3.2.  SOCIAL POLICIES 

Luxembourg  shows  relatively  good  social 
outcomes,  but  with  some  negative  trends.    The 
overall risk of poverty or  social exclusion (21.5% 
in  2017)  remains  below  the  EU  average  (22.5%) 
but  shows  negative  developments.  From  2016  to 
2017,  the  risk  of  poverty  or  social  exclusion 
increased for young people (16-24) from 29.2% to 
31%,  working  age  adults  (25-54),  from  18.5%  to 
20.4%, and even the elderly (>  65), from 9.1% to 
11.8%.  Single-parent  families  showed  the  highest 
rate  regarding  the  risk  of  poverty  or  social 
exclusion in 2017 (48.5%). Though social transfers 
still have a favourable impact on poverty reduction 
(35.52% in 2017), there  was  a decrease compared 
to 2016 (39.11%). 

of  minimum 
the 

Luxembourg  performs  well  with  regard  to 
income  benefits 
adequacy 
overall (46).Although 
at-risk-of-poverty 
threshold still remains above the minimum income 
level  in  Luxembourg,  other  benefits  are  available 
to  low  income  groups  such  as  childcare  vouchers 
and  housing  benefits.  According  to  the  National 
Statistics  Institute,  childcare  vouchers  reduce  the 
at-risk-of poverty rate by 1.6 pp (even by 5 to 6 pp 
for  children).  Moreover,  people  with  modest 
incomes no longer have to pay healthcare expenses 
up-front.  However, 
reference 
the 
budget (47) is above the poverty threshold for most 

“national 

(46)  According  to  the  Benchmarking  Framework  on  Minimum 
Incomes conducted within the SPC Committee. Looking at 
the  case  of  single-person  households,  in  2016,  adequacy 
was  the  highest  in  the  Netherlands,  Ireland,  Denmark  and 
Luxembourg.  In  Luxembourg,  the  level  of  the  benefit 
represented  85.7%  of  the  poverty  threshold  and  78.2%  of 
the  income  of  a  low-wage  earner  (against  respectively 
57.5% and 46.1% on EU average). For details, see the draft 
Joint Employment Report 2019, COM(2018) 761 final. 
(47)  The  National  Statistics  Institute  calculated  the  cost  of 
living decently (meeting needs and actively participating in 
society) in Luxembourg for different family types, setting a 
“reference  budget”:    this  reference  budget  is  a  set  of 
baskets  of  goods  and  services  that  represent  a  certain 

Training and upskilling  

Adapting  skills  and  training  to  labour  market 
needs  remains  an  important  venue  to  improve 
labour  market  participation.  The  analysis  on 
macroeconomic  skills  mismatch  shows  that  skills 
mismatches  in  Luxembourg  have  remained  low 
throughout  the  last  decade.  Luxembourg  has  the 
second  lowest  shortage  in  the  EU  after  Ireland 
according  to  the  labour  shortage  index  in  the 
period  2013  to  2017.  However,  Luxembourg  is 
among  the  member  states  where  the  low-skilled 
comprise  the  majority  of  the  inactive  population, 
justifying  particular  attention  to  low-skilled  in 
activation  measures.  In  2017  45.84%  of  the 
inactive  were low-skilled (ISCED 0-2)  while only 
12.02%  of  the  inactive  were  high-skilled  (ISCED 
5-8). 

At  the  same  time,  sizeable  labour  shortages 
have  recently  emerged  in  certain  sectors.  For 
example,  the  public  employment  service  reports 
that  around  70%  of  vacancies  registered  by  the 
Information  and  Communication  Technology  and 
financial  sectors  remain  unoccupied  while  the 
average  overall  vacancy  rate  is  28%  (see  also 
sections  3.3.3  and  3.4.1  below).  Vacancies  also 
concern  some  low  and  medium-skilled  jobs  such 
as  butchers,  electricians  or  in  the  Horeca  sector. 
Though high-skilled workers are less vulnerable to 
changes 
public 
employment  service  also  intends  to  adapt  its 
services to this  specific group,  which  represents a 
non-negligible  share  of  the  job  seekers  (around 
20% in October 2018). Prioritising investments to 
both  upskill  and  reskill  the  labour  force  could 
strengthen its employability. 

economic 

trends, 

the 

in 

public 

service 

The 
has 
employment 
strengthened  its  cooperation  with  employers  to 
better  match 
labour  market  needs.  The 
development  of  training  courses  for  job  seekers 
remains a priority, notably for those aged 30-45, in 
particular at the request of a company or a specific 
sector.  Comparing  to  2016,  the  number  of  job 
seekers  participating  in  training  has  increased  by 
17% in 2017 and training measures represent about 
29% of total measures undertaken. The partnership 
between  the  public  employment  service  and  the 
business 
entreprises 
luxembourgeoises)  was  renewed  in  2018  for  a 
further three years, including, among others, tailor 
made training sessions. In June 2018, the Ministry 

(Union  des 

federation 

35 

 
                                                           
3.3. Labour market, education and social policies 

types  of  households.  In  other  words,  households 
with  incomes  between  the  poverty  threshold  and 
the reference budget are not registered as at risk of 
poverty  or  social  exclusion  though  they  cannot 
lead a decent life according to the reference budget 
criterion. 

at  14%  in  2016  (among  the  highest  in  the  EU) 
suggesting that the share of employees potentially 
affected  by  the  minimum  wage  is  significant. 
Among  minimum  wage  earners  51%  were  below 
the  age  of  25  and  29%  were  unskilled,  pointing 
also to the need for upskilling. 

Graph 3.3.3:  At-risk-of-poverty or social exclusion rate and 
its components in Luxembourg 

Source: Eurostat, EU-SILC 

In-work  poverty 
is  becoming  a  growing 
challenge.  In-work  poverty  is  increasing  since 
2011 and remains above the EU average. In 2017, 
it was 13.7% against 9.6% in the EU. Since 2011, 
it  has  increased  by  3.8  pp. Those  most  at  risk  are 
self-employed  workers  (22%),  employees  on 
temporary  contracts  (31.4%  against  16.3%  in 
EU28)  and  single-parent  households  (34%).  As  a 
result  of  a  further  indexation  in  August  2018  the 
to 
monthly  minimum  wage  has 
€2,048.54  and  €2,458.25  for  unqualified  and 
qualified  workers 
respectively,, 
reinforcing  Luxembourg’s  position  as  the  country 
with the highest (nominal and real) minimum wage 
in  the  EU.  However,  when  considering  minimum 
wages as a percentage of median wages, this ratio 
has  fallen  over  the  last  4  years  and  is  moderate 
compared  to  the  rest  of  the  EU.  Furthermore, 
according  to  the  latest  available  data  the  share  of 
minimum wage earners among all employees stood 

above  18, 

increased 

standard of living in a given society. The amounts allocated 
to the different baskets cover primary or secondary needs. 
(https://statistiques.public.lu/fr/publications/series/cahiers-
economiques/2016/122-budget-de-reference/index.html 
and 
publications/regards/2018/PDF-12-2018.pdf). 

https://statistiques.public.lu/catalogue-

People  born  outside  the  EU  tend  to  face 
particularly  poor  labour  market  and  social 
outcomes. Non-EU born residents, which are over-
represented in low-skilled occupations (75%), face 
high unemployment rates of 12.8% in 2017, below 
average incomes and a very high risk of poverty or 
social  exclusion  of  42.7%  in  2017.  On  the  other 
hand,  the  employment  rate  of  second-generation 
people  (aged  15-34)  moved  closer  to  that  of  the 
natives  with  a  very  low  gap  of  3.7  pp.  A 
particularly  alarming  trend  is  the  in-work  poverty 
for  non-EU  born  employees,  which  at  32.1%  in 
2017 is one of the highest in the EU (23.4% for the 
EU). In-work poverty gap between the non-EU and 
natives is also one of the highest in the EU. 

‘not 

Children with a migrant background are facing 
linguistic  and  integration  issues  that  have  an 
impact  on  their  educational  performance.  Non 
EU-born are 2.7 times more likely to fall under the 
category 
in  education,  employment  or 
training’  than  native-born  children.  Luxembourg 
raised  its  public  financing  for  day  care,  opened 
more places and made the service more affordable, 
which  could  help  foster  a  better  integration  of 
children  with  a  migrant  background  by  giving 
them  earlier  access  to  the  three  official  languages 
of the country.  

The  reform  of  the  minimum  income  intends  to 
better  tackle  social  exclusion,  in  particular  for 
households  with  children, 
labour  market 
inactivity and unemployment traps. The Revenu 
d’inclusion  sociale  scheme  has  replaced 
the 
previous guaranteed minimum income  in January 
2019 and aims at tackling poverty with a particular 
focus  on  children  and  single-parent  families.  In 
addition to the low lump sum component (benefit) 
this  scheme  also  has  an  activation  component 
(registration  as  unemployed  with 
the  public 
employment  service  and  participation  in  active 
labour  market  policies  is  required).  Furthermore, 
the Revenu d’inclusion sociale scheme allows two 
adults in a household to accept a job as part of the 
active  labour  market  policies,  whereas  only  one 
person  per  household  was  allowed  to  do  so  under 

36 

05101520252005200620072008200920102011201220132014201520162017% of populationAt-risk-of-poverty-or-social-exclusion rateAt-risk-of-poverty rateSevere material deprivationPeople living in low work intensity households 
 
                                                                                   
3.3. Labour market, education and social policies 

complete  their  studies.  The  school  population  is 
growing  and  getting  more  mixed,  with  46.7  %  of 
the  pupils  being  foreign-born,  which  may  require 
and 
investments 
qualifications  of  teachers  and  other  education 
professionals. 

the  number 

adapting 

in 

is  below 

the  EU 
Education  performance 
average  and  strongly  linked  to  socioeconomic 
status.  Luxembourg’s  average  performance,  as 
measured  in  the  Programme  for  International 
Student  Assessment,  worsened  between  2012  and 
2015,  especially  in  reading  and  science.  The 
impact of socio-economic status on performance is 
one  of 
the  strongest  among  EU  countries 
(European  Commission,  2018x).  It  outweighs  (by 
2.7  times)  the  impact  of  the  language  spoken  at 
home  (Ministère  de  l’Éducation  Nationale,  de 
l’Enfance  et  de  la  Jeunesse  –  MENJE  –  and  the 
University  of  Luxembourg  2016)  and  even  a 
socio-
migrant  background.  Controlling 
economic  status,  the  performance  gap  of  the 
children  of  migrants  is  reduced  by  two-thirds 
(OECD,  2017a).  Students  with 
lower  socio-
economic  status  are  the  most  likely  to  fall  behind 
in  all  subjects  and  to  be  oriented  towards  the 
technical tracks of secondary school.  

for 

tracking 

is  particularly  rigid. 
Educational 
Changing  tracks  is  extremely  rare  (Klapproth  and 
al., 2013). The difference in the language regimes 
of the general and the technical tracks of secondary 
education  —  the  first  being  French-based  and  the 
second German — also plays a role in orientation 
decisions  and  narrows  the  scope  for  switching. 
Pupils  of  foreign  nationality  are  less  frequently 
oriented  towards  the  higher  tracks  of  secondary 
education. 

leaving  rate 

Luxembourg's  early  school 
is 
significantly below the EU average but national 
surveys  indicate  a  steady  increase.  The  early 
school  leaving  rate,  as  measured  by  the  Labour 
Force  Survey,  stood  at  7.3%  in  2017.  However, 
this  data  should  be  interpreted  with  caution 
because of the limited sample size in Luxembourg. 
National  estimates  based  on  the  actual  number  of 
young  people  not  completing  upper  secondary 
education  indicate  that  dropouts  have  been  on  the 
rise  since  2009  and  stood  at  13.5  %  in  2015 
(MENJE, 2017a).  

for 

the 

reference 

budget (48) 

the previous guaranteed minimum income system. 
The  National  Statistics  Institute  made  simulations 
for  five  family  types  (including  single  persons, 
couples  without  children  and  with  children,  lone 
parents).  The  comparison  of  the  monthly  net 
revenues to the reference budget shows that under 
the  Revenu  d’inclusion  sociale  scheme,  provided 
the  recipients  are  activated,  their  income  will  be 
above 
all 
configurations,  except  the  case  of  the  single  adult 
activated at 75%. The European Commission Joint 
Research  Centre  and 
the  OECD  also  made 
simulations  on  the  effect  of  this  scheme  which 
largely  corroborate  the  findings  of  the  national 
statistics  office.  According  to  the  OECD  model, 
the  reform  improves  the  adequacy  of  the  social 
safety  net  for  those  with  children  who  are  not 
entitled to unemployment insurance  while there is 
no  significant  impact  on  those  without  children. 
The Joint Research Centre’s analysis, based on the 
EUROMOD micro-simulation model demonstrates 
that, assuming full take-up of the social assistance, 
9.1%  of  the  households  would  benefit  from  the 
reform,  while  3.6%  would  lose  some  of  their 
disposable  income.  Nevertheless,  the  reform  is 
expected to have a positive impact on poverty and 
inequality, as 70.7% of the households in the first 
(lowest)  decile  of  the  income  distribution  will 
benefit,  while  only  11%  of  the  losers  are  in  the 
first (lowest) decile. The impact of the new scheme 
on  poverty  will  actually  depend  largely  on  the 
success  of  activation  measures  and  prioritising 
investments to promote active inclusion and ensure 
transitions towards employment. 

3.3.3.  EDUCATION AND SKILLS 

and 

care, 

education 

Luxembourg  ranks  at  the  top  of  European 
countries  with  regard  to  enrolment  in  early 
childhood 
tertiary 
education  attainment  and  the  employability  of 
recent  graduates  but  shows  declining  basic 
skills  attainment  combined  with  an  increasing 
level  of  inequality.  The  increasingly  diverse 
school  population  struggles  with  the  trilingual 
education  system:  performance  is  strongly  linked 
to  students'  linguistic  background  and  socio-
economic 
remains 
frequent,  with high costs for the education system 
and  strongly  impacting  students'  motivation  to 

status.  Grade 

repetition 

(48)  See footnote 40 

37 

 
                                                           
3.3. Labour market, education and social policies 

Palatinate  signed  an  agreement  on  a  cross-border 
cooperation to boost the attractiveness of the dual 
system of apprenticeships and allow apprentices to 
complete  the  practical  part  of  the  training  in  one 
country  and  the  theoretical  part  in  the  other.  In 
March  2018,  the  Chamber  of  Employees  and  the 
Chamber  of  Professions  launched  Basic-check,  a 
tool  to  assess  skills  of  fifth-graders  and  thus  help 
orient them towards the right profession.  

in 

lifelong 

Adult  participation  in  lifelong  learning  is  high 
but is lower among low-skilled people and older 
workers.  At  17.2%,  participation  by  adults  in 
lifelong  learning  is  considerably  higher  than  the 
EU  average  (10.9%)  but  much  lower  among  low-
skilled  workers  (at  6%) (49)  and  older  workers 
(6.5%  in  2017),  increasing  the  risk  of  their  skills 
becoming  outdated  and  of  them  ending  up  in 
inactivity or early retirement. The employment rate 
of older workers remains particularly low at 39.8% 
in 2017, making it especially important to improve 
their  participation 
(see 
European  Commission  2018,  3.3.1,  page  30). 
According  to  the  last  European  survey,  77.1%  of 
Luxembourg  companies  provided  vocational 
training to their employees (above the EU average 
of 72.6%) and 61.8% of employees participated in 
this  training  (well  above  the  EU  average  of 
40.8%),  with  a  majority  of  women.  The  decrease 
in  the  state’s  co-financing  provisions  for  training 
provided 
European 
companies 
Commission  2018,  3.3.1,  page  30)  does  not  seem 
to have resulted in a decrease in training offers by 
businesses. Moreover, public co-financing remains 
higher  for  vulnerable  target  groups  (low-skilled 
and  older  workers),  indicating  that  this  challenge 
represents an investment priority. 

learning 

(see 

by 

Luxembourg  records  very  good  results 
in 
connectivity and digital skills but lags behind in 
the  business  integration  of  digital  technologies. 
Though it belongs to the high-performance cluster 
of  countries  in  the  Digital  Economy  and  Society 
Index (50),  its  overall  good  performance  levels 
mask  a  need  for  improvement  in  some  areas,  in 
particular in the integration of digital technologies 
by  companies,  for  e-business,  e-commerce  and  in 
public services. 

(49)  See the draft Joint Employment Report 2019, COM(2018) 
761  final  on  the  significant  discrepancies  across  Member 
States  (Figure  28)  with  an  EU  average  of  4.3%  of  low-
qualified adults participating in learning.   

(50)  See https://ec.europa.eu/digital-single-market/en/desi 

Grade repetition is frequent and strongly linked 
with  early  school  leaving.  About  20%  of  pupils 
have already repeated a grade by the third grade of 
primary  school  (MENJE,  2017b);  by  the  end  of 
secondary  education,  this  is  true  for  half  of  all 
pupils.  Grade  repetition  is  particularly  high  in 
technical  secondary  education:  by  the  final  grade, 
71%  of  technical  education  pupils  will  have 
repeated  a  year  at  least  once  (MENJE,  2017b) 
against  30%  in  general,  secondary  education, 
which  is  still  significant.  Failing  two  years  in  the 
course of one’s studies is the strongest predictor of 
early school leaving (MENJE, 2017a). 

to  close 

New  policy 
the 
initiatives  aim 
achievement  gaps  among  pupils  of  different 
backgrounds and to reduce early school leaving. 
A  2017  amendment  of 
the  Act  on  Youth 
established  national  quality  standards  in  early 
childhood  education  which  all  providers  had  to 
comply  with  by  September  2017.  The  Law  on 
secondary  education  of  July  2017  introduced 
several  measures  to  improve  school  quality  and 
better  adapt  the  school  offer  to  the  needs  of  an 
increasingly diverse school population. 

in  vocational  education  and 
Participation 
the  vocational 
training  remains  high  but 
is  marked  by  school  continuity 
pathway 
challenges.  The  proportion  of  upper  secondary 
students  (ISCED  3)  in  vocational  education  and 
training  was  61%  in  2016,  well  above  the  EU 
average  (49.3%).  However,  vocational  education 
and training is characterised by high levels of year 
repetition and dropout. The insufficient number of 
apprenticeship  positions,  in  particular  for  the 
students in the lowest levels of vocational training 
is  one  of  the  causes  of  dropout  as  businesses  are 
reluctant  to  hire  apprentices  whose  initial  training 
is deemed inadequate.  

to 

implement 

Reforms  are  underway  to  improve  vocational 
training.  Luxembourg  has 
education  and 
continued 
its  2016  vocational 
education  and  training  reform,  aiming  to  improve 
completion  rates  but  a  new  reform  originally 
foreseen  for  the  2018-2019  school  year  has  been 
delayed  by  one  year  due  to  reservations  by  the 
Conseil d’Etat. Guidance and counselling services 
for  young  people  were  restructured  with  more 
emphasis on social and psychological support and 
self-guidance education (Cedefop ReferNet, 2018). 
In March 2018, Luxembourg and Land Rhineland-

38 

 
                                                           
3.3. Labour market, education and social policies 

the 

federations, 

Information 

shortage  of 

professional 
non-governmental 
organisations  and  the  private  sector  to  effectively 
address 
and 
Communication  Technology  specialists.  Another 
promising  initiative  is  the  Digital  Skills  Bridge 
programme  launched  by  the  Ministry  of  Labour 
together with the Ministry of Economy. It aims to 
support  companies  needing  to  up-skill  or  re-skill 
their  workforce  in  response  to  the  disruptive 
changes  brought  by  digitisation  and  automation. 
Participating  companies  can  stem  from  a  wide 
range  of  sectors,  such  as  banking,  insurance, 
industry and logistics.  

3.3.4.  INVESTMENT NEEDS 

for 

and 

Increased  investment  in  skills,  employability, 
education  and  training  are 
important  for 
improving  Luxembourg’s  productivity  and 
equal 
employment, 
opportunities. While skills shortages are growing, 
some population groups continue to face particular 
difficulties  on  the  labour  market  pointing  at  the 
need  to  invest  more  in  education  and  training, 
while better aligning education curricula to labour 
market needs. 

fostering 

Providing digital skills training that respond to 
businesses’  needs  remains  a  key  challenge  due 
to the large digital skills gaps. While the country 
ranks 1st in percentage  of individuals  who have at 
least  basic  Digital  Skills  (85%),  the  share  of 
companies  reporting 
their  vacancies  for 
that 
Information  and  Communication  Technology 
specialists  are  hard  to  fill  remains  well  above  the 
EU average (see section 3.4.1 below). Over the last 
decade, Luxembourg has undertaken an ambitious 
economic  diversification 
identifying 
digital as a core pillar and requiring investments to 
meet the demands of the labour market in terms of 
digital skills. In May 2018, the Ministry of Labour 
presented  the  study  Working  4.0  –  Opportunities 
and Challenges for Luxembourg commissioned by 
the  Ministry  and  social  partners  to  show  the 
potential  impact  of  digitisation  on  labour.  On 
average,  90%  of  employees  need  basic  (71%)  or 
advanced (20%) IT knowledge for their job and the 
direct  impact  of  digitisation  is  high  or  very  high 
for 55% of them. 

strategy 

Several  programmes  have  been  put  in  place 
since  2015  as  part  of  the  government’s  wider 
digital  education  strategy. 
In  May  2017, 
Luxembourg  launched  the  national  coalition  for 
digital skills and jobs, with the purpose of bringing 
sector, 
together  government, 

the  education 

39 

 
 
 
3.4.   COMPETITIVENESS REFORMS AND INVESTMENT 

3.4.1.  PRODUCTIVITY AND INVESTMENT 

CHALLENGES 

to 

on 

and 

investments (51) 

investment 

sustainable 

stimulate  private 

stimulating 
improve 
the 

fostering 
Focussing 
digitisation  and  innovation,  improving  housing 
transport 
supply 
skills 
infrastructure, 
and 
economic 
development  would 
resilience,  and 
long-term 
strengthen 
potential  growth  of  Luxembourg.  Strategic 
public  investment  remains  high  and  focussed  on 
knowledge-intensive  sectors,  including  a  strong 
Information  and  Communication  Technology 
sector.  However,  this  has  not  spilled  over,  nor 
helped 
in 
innovation and digitisation, which remains low and 
appears  insufficient  to  support  the  transition  to  a 
data-driven economy, and to improve significantly 
the low levels of economic digital  integration and 
sluggish  productivity  growth.  Despite 
their 
relatively high wages in international comparisons, 
shortages  of  qualified  workers  are  increasingly 
seen  as  an  obstacle  to  investment,  but  rising 
housing costs and heavy traffic congestion may be 
lowering  the  country’s  attractiveness,  and  could 
affect  competitiveness  (see  Section  3.2),  which 
calls  for  significant  investments  in  construction 
and 
(see 
Section  3.4).  Effective  investments  in  education 
and  training  are  needed  to  make  the  most  of 
people’s potential and  thus  improve inclusion  and 
employability, and foster technological and digital 
improve  productivity  and 
transformations 
long-term growth potential (see Section 3.3). 

infrastructure 

sustainable 

transport 

to 

Luxembourg  exhibits  one  of  the  highest  GDP 
per  hour  worked  among  the  Organisation  for 
Economic  Co-operation  and  Development 
economies,  but  labour  productivity  growth  has 
been among the lowest in the period 2010-2016. 
Luxembourg  did  not  record  productivity  gains  in 
to 
sectors 
productivity  growth  in  other  EU  economies.  A 
publication  from  the  National  Statistical  Institute 
STATEC (Note de Conjoncture 1-2018) points out 
the  absence  of  enduring  productivity  gains  in 
industry  and  wholesale  and  retail  sectors,  unlike 
other 
significantly 
contributed to labour productivity growth between 

countries  where 

significantly 

contributed 

these 

that 

2000  and  2016.  By  contrast,  in  the  business 
services  sector,  information  and  communication 
showed  consistent  labour  productivity  growth 
(+6% in the period 2010-2016, cf. Organisation for 
Economic  Co-operation  and  Development  2018). 
Over  the  same  timeframe,  professional,  scientific 
and  technical  activities  and  administrative  and 
support  service  activities  showed  productivity 
gains  compared  to  the  previous  decade  and  being 
above the Organisation for Economic Co-operation 
and Development average.  

further 

is  expected 

The  recently  established  National  Productivity 
Board 
investigate 
to 
productivity  drivers  and  potential  productivity 
measurement pitfalls (i.e. weight of the financial 
sector, statistical sensitivity, significant increase in 
working  population).  Among  the  drivers,  limited 
take-up  of  digitisation  among  small  and  medium-
sized  enterprises  and  perceived  lack  of  qualified 
workforce  across  sectors  are  among  the  key 
priorities,  along  with  other  sustainable  quality-
growth  enhancing  policies  (including  through  the 
“Third 
“Rifkin” 
Industrial  Revolution”  or 
strategy). 

to 

the 

that 

suggest 

According 

the  attractiveness  of 

Indicators 
Luxembourg 
competitiveness  ranks  above  EU  average,  but 
private  investment  is  low  and  some  challenges 
the 
may  undermine 
country. 
National 
Competitiveness  Scoreboard,  Luxembourg  ranks 
as the ninth more competitive economy in the EU 
in  2017.  According  to  the  World  Economic 
Forum’s  Global  Competitiveness  Index  2017-
2018,  Luxembourg  ranks  19th  worldwide,  among 
the  best  performers  in  most  of  the  sub-indicators. 
However,  the  investment  to  GDP  ratio  is  among 
the  lowest  in  the  EU  and  below  pre-crisis  level 
(although  the  services  structure  of  the  economy 
has  to  be  taken  into  account).      Competitiveness 
limitations would in part stem from its market size, 
but  emerging  challenges,  such  as  the  perceived 
shortage  of  qualified  workforce  crosscut  sectors 
(issue  exacerbated  by  the  actual  limited  supply  of 
skills in the bordering regions),  mobility concerns 
and expensive and rising housing prices may drag 
down the country’s attractiveness. 

(51)  Both private and public investment. 

40 

 
 
                                                           
 
3.4. Competitiveness reforms and investment 

Box 3.4.1: Investment challenges and reforms in Luxembourg 

Section 1. Macroeconomic perspective 

Productivity is at high level, largely reflecting past efficiency gains in the financial sector, obtained from participation in global 
markets. While economic expansion has been remarkable, it has also become more dependent on a narrow base of goods and 
services and sensitive to external shocks. Productivity gains from off-shoring have been significant but also highly conditional 
on  access  to  global  markets,  which  may  lead  to  widening  productivity  gaps  vis-à-vis  some  domestic  more  lagging  sectors. 
Productivity gains have been limited since 2015, while extensive off shoring might have contributed to a lesser investment in 
the country. 

The business investment to GDP ratio is among the lowest in the EU and remains below pre-crisis levels. While this may be 
partly  owed  to  external  factors,  domestic  challenges  are  also  emerging.  Specifically,  the  perceived  shortage  of  qualified 
workforce across sectors (issue exacerbated by the shrinking supply of skills in the bordering regions), mobility concerns and 
expensive  and  rising  housing  prices  might  be  also  negatively  affecting  the  country’s  attractiveness.  Meanwhile,  compliance 
requirements in a changing regulatory and technological environment may also reduce the country’s attractiveness for investors 
and international firms.  

Section 2. Assessment of barriers to investment and ongoing reforms  

Infrastructure bottlenecks and the lack of skilled labour remain the main barriers holding back investment in Luxembourg. Around 71 % of firms 
surveyed by the  European  Investment  Bank encountered difficulties to  invest due  to the  unavailability of skilled  labour  in  Luxembourg. This 
compares with 77% in the EU as whole, which gives a measure of the size of the challenge at the EU level. 

Main barriers to investment and priority actions underway: 

1.  The  availability  of  housing  and  transport  infrastructure  remains  the  major  barrier  to  investment.  Investment  in  dwellings 
remains constrained by insufficient land availability and low housing density, largely due to lack of incentives to landowners. 
Although the recent adoption of an ambitious set of reforms has somewhat improved the outlook for the provision of housing, it 
will take time to reduce the current deficits in dwellings investment, also  in view to the expected increase in population (see 
Section  3.2).  Prices  should  therefore  continue  to  grow,  contributing  further  to  rising  inequalities  and  urban  sprawl.  Higher 
prices, compared to income, might also weigh negatively on the attractiveness of working in Luxembourg, and exert upwards 
pressure on wages and the commercial the real state, with an impact on competitiveness.  

2. Public investment is high, with the government pursuing its strategy for developing five knowledge-intensive sectors, which 
now contribute around 10 pps to GDP growth. By contrast,  private investment in research and innovation remains low in the 
broad business sector and appears insufficient to improve significantly the current low levels of digital economic integration and 
sluggish  productivity  growth,  which  has  quasi  stagnated  since  2015.  While  shortage  of  qualified  workforce  is  increasingly 
perceived as an obstacle for investment, the public investment strategy has developed technologies with the potential to support 
a broader digital integration of the economy.  Focussing investments in digital diffusion and digital human capital may foster 
business innovative investment conducive to higher productivity growth. 

In Luxembourg, the SNCI (Société Nationale de Crédit et d'Investissement) is a public banking institution, providing financial 
support  to  domestic  firms  for  development  investments,  including  fixed  assets,  innovations  or  commercial  projects,  either  in 
Luxembourg or abroad. SNCI also grants transfer loans to start-ups and SME’s and may take equity positions, either directly or 
in association with financial partners or its subsidiary, CD-PME S.A.  

41 

Regulatory/ administrative burdenTaxationPublic administrationAccess to financePublic procurement /PPPsCooperation btw academia, research and businessJudicial systemFinancing of R&D&IInsolvency frameworkBusiness services / Regulated professionsCSRCompetition and regulatory frameworkRetailEPL & framework for labour contracts ConstructionWages & wage settingDigital Economy / TelecomEducation EnergyTransportLegend:No barrier to investment identifiedSome progressCSRInvestment barriers that are also subject to a CSRSubstantial progressNo progressFully addressedLimited progressNot assessed yetPublic administration/ Business environmentFinancial Sector / TaxationR&D&ISector specific regulationLabour market/ Education 
 
 
 
 
 
3.4. Competitiveness reforms and investment 

launched  its  national  5G  Strategy  which  sets  out 
the  deployment  of  several  5G  pilots  and  the 
ambition of the country to lead in the development 
and roll-out of 5G.  

the 

and 

Information 

in  high-demand,  and 

Information  and  Communication  Technology 
specialists  are 
the 
difficulty to recruit them may affect the success 
of  the  diversification  strategy,  reducing  the 
and 
growth  potential  of 
Information 
Communication  Technology  sector  and 
those 
where 
Communication 
Technology specialists are needed (see also section 
3.3).  Yet,  despite  the  share  of  Information  and 
Communication  Technology  specialists  is  among 
the  highest  in  the  EU,  amounting  to  5%  of  total 
employment  in  2017,  up  from  4.1%  in  2016  (and 
well  above  the  EA  average  of  3.5%)  skills  labour 
shortages 
and 
Communication  Technology 
specialists  may 
constitute an obstacle  for the  future  growth of  the 
key diversification sectors. In fact, in 2017, 65% of 
the  enterprises  who  recruited  or  tried  to  recruit 
Information  and  Communication  Technology 
to  have  had  hard-to-fill 
specialists 
vacancies  (61%  in  2016,  47%  the  EA  Average).  
This  rate  is  up  to  78%  for  companies  in  the 
Information  and  Communication  Technology 
sector  (Eurostat).  The  capacity  to  continuously 
attract  and  train  skilled  workers  in  this  sector 
remains  a  relevant  short-medium  term  challenge 
for the transition towards a data driven economy.  

Information 

reported 

terms 

of 

in 

Luxembourg  continues 
its  engagement  and 
investment  in  the  commercial  space  industry, 
where  the  country  is  attempting  to  develop  a 
unique  ecosystem  in  the  domain  of  space 
resources. According to the Bilan de Compétitivité 
2018,  the  space  industry  in  2016  accounted  for 
1.8%  of  value  added  and  0.2%  of  employment, 
with  several  active  players  spread  over  the  space 
value chain. In September 2018, the commercially 
oriented  Luxembourg  Space  Agency  started  its 
operations,  primarily  with  the  goal  of  promoting 
the  further  economic  development  of  the  Grand 
Duchy’s  space  industry  notably  by  attracting 
businesses. Several challenges are associated to the 
development  in  the  medium-term  of  a  market  of 
space  resources  and  the  attraction  of  private 
regulatory  uncertainty, 
investments,  such  as 
financial  constraints  and  technical  capabilities 
needed.  

Diversification of the economy 

see  also 

section  3.2), 

The  multi-specialisation  strategy  to  diversify 
the  economy  exhibits  a  strong  potential  to 
stimulate  high  value  added  investment  and  to 
boost  productivity  growth.  To  boost  investment 
and  productivity  growth  and  to  reduce  the  risks 
related  to  the  economic  dependency  on  one 
economic sector (nowadays a diversified financial 
sector, 
since  2000 
Luxembourg  committed 
to  an  ambitious  and 
forward  looking  strategy  to  diversify  its  economy 
sectors 
in 
(Information  and  Communication  Technology, 
logistics,  space  industry,  health-technologies  and 
eco-technologies). These sectors,  whose  weight in 
the economy is overall increasing since 2008, now 
represent  approximately  9.6%  of  the  Gross  Value 
Added  and  almost  31.000  jobs  (cf.  Bilan  de 
Compétitivité, 2018) and are characterised by high-
value  added  potential  and  a  need  for  high-skilled 
workers,  in  accordance  with  the  country’s  salary 
levels and comparative advantages.  

knowledge-intensive 

five 

key 

of 

far 

and 

shares 

is  by 

highest 

Information 

Information 

Information 

Communication 
The 
Technology  sector  exhibits  strong  performance 
and  it  is  expected  to  be  the  driver  for  the 
transition  towards  a  data  driven  economy.  The 
Information  and  Communication  Technology 
sector 
the  most  successful  key 
diversification sector, representing 5.2% of GDP in 
2016  (6.8%  including  space  technologies),  down 
from  6.2%  in  2014  (cf.  Observatoire  de  la 
Compétitivité  2018),   remaining  however  one  of 
the 
and 
Communication  Technology  sector  to  GDP  in  the 
EU.  Additionally, 
and 
the 
Communication  Technology  sector  accounted  for 
17,319  salaried  jobs  in  total  in  2017  and  2,266 
operating  companies  in  2016.  Over  the  past  20 
years,  the  Government  has  heavily  invested  in 
Information  and  Communication  Technology  
infrastructure,  including  data  centres,  ultrafast 
broadband  and  other  key  advanced  digital 
infrastructures.  Luxembourg  is  clearly  committed 
to  the  advancement  of  new  technologies  and  is  a 
signatory 
initiatives 
orchestrated by the Commission. These include the 
declaration setting up a joint undertaking for High-
Performing  Computing  (Euro  HPC),  but  also  the 
European  Blockchain  Partnership 
the 
European 
intelligence. 
Additionally,  in  September  2018  Luxembourg 

several  cross-border 

approach  Artificial 

and 

to 

42 

 
3.4. Competitiveness reforms and investment 

platform  Creativecluster.lu  aimed  at  increasing 
synergies in the creative industry. 

remains  weak, 

New and past initiatives aim at fostering a take 
up in entrepreneurship, but the entrepreneurial 
culture 
especially  among 
Luxembourg  nationals.  Despite  a  rise  in  newly 
created  businesses  in  recent  years  and  a  host  of 
new  policy  support  measures,  there  is  a  dearth  of 
entrepreneurial  activity  as  compared  to  other  EU 
countries.  Only  43%  of  the  population  consider 
entrepreneurship  as  a  desirable  career  choice, 
which  is  one  of  the  lowest  scores  in  the  EU.  The 
rate  of  established  business  ownership  slightly 
increased to 3.3% but this also remains well below 
the  EU  average  which  overall  reflects  the  limited 
entrepreneurial  culture  in  the  country,  where  the 
majority  of  entrepreneurs  comes  from  abroad. 
Additionally,  the  costs  for  resolving  insolvencies 
in  Luxembourg  are  almost  50%  higher 
in 
Luxembourg  than  in  the  EU.  The  result  is  an 
increased 'fear of failure’, which may contribute to 
the hesitating attitude towards entrepreneurship. In 
2018,  Luxembourg  introduced  new  initiatives  to 
such  as  Creative 
support  entrepreneurship, 
Clusters, the House of Start-ups, which operates in 
synergy  with 
the  House  of  Entrepreneurship 
initiatives  and  Fit4Services.  Moreover,  initiatives 
introduced in the past have shown to be successful, 
such as Entrepreneurial Schools.  

Investment in Research and Innovation 

The  further  development  of  other  high-added 
value activities is required to boost productivity 
growth.  Knowledge-intense  sectors  –  such  as 
Information  and  Communication  Technology  or 
space  –  request  the  provision  of  knowledge  from 
the  public  research  system  and  large  investments 
in  research  and  development  from  the  business 
sector,  which  are  two  of  the  key  challenges  for 
Luxembourg.  With  a  rapid  development  of  its 
public  science  base  over 
last  decade, 
Luxembourg  had  the  highest  compound  annual 
growth  rate  of  public  research  and  development 
intensity    among  EU  Member  States,  rising  from 
0.26%  of  the  GDP  in  2007  to  0.58%  in  2017.  In 
addition,  Luxembourg’s  public  science  base  has 
become  one  of  the  top  performers  in  the  EU  in 
and 
terms  of  quality  outputs, 
internationalisation of the system. 

efficiency, 

the 

firms.  Luxembourg’s 

The  logistics  sector  showed  an  increase  in 
generation  of  value  added  in  absolute  terms 
over 
the  past  decade,  while  other  key 
diversification  sectors,  such  as  Eco-tech  and 
Health-tech, did  not yet achieve a critical  mass 
of  operating 
logistics 
sector,  characterised  by  a  few  big  players,  is  the 
second  key  sector  of  diversification  in  terms  of 
generation of value added (2.4% in 2016 according 
to  the  Bilan  de  Compétitivité  2018).  Since  2011, 
the  logistics  sector  is  growing  along  with  the 
logistics surface. According to the Observatoire de 
logistics  sector,  while 
la  Compétitivité, 
exhibiting a growing gross value added in absolute 
terms over the past years, maintained a stable share 
as  part  of  total  gross  value  added  (2.5%  in  2008 
and  2.4%  in  2016).  Despite  some  excellences 
active in Eco and Health technologies domains and 
strong public investment, both remain small so far 
in  the  private  sector  (cumulatively  representing 
less than 0.5% of the gross value added) and failed 
to  attract  a  consistent  number  of  companies  and 
related investments to achieve a critical mass. 

the 

Digital integration and Entrepreneurship   

of 

The integration of digital technologies by firms 
is  a  challenge  for  Luxembourg,  and  several 
initiatives have been taken in this respect. Small 
and  medium-sized  enterprises  are  lagging  behind 
and the digitisation of industry remains well below 
the EU average. Luxembourg has one of the lowest 
and  medium-sized 
small 
performances 
enterprises selling online with only 7.8% doing so 
at  either  national  or  cross-border  level.  This 
remains  well  below  the  EU  average  (17.2%  and 
8.4%),  despite  the  small  size  of  the  Luxembourg 
home  market.    Programmes  for  the  digitisation  of 
small and medium-sized enterprises have been put 
in place, through the initiatives E-Handwierk  and 
Go-Digital. These programmes operate in synergy 
run  by 
the  programme  Fit4Digital 
within 
Luxinnovation,  providing  financial  assistance  in 
the  form  of  vouchers  to  diagnose  the  digitisation 
opportunities  for  companies.  With  a  similar 
voucher  system,  the  programme  Fit4Service  has 
been  launched  in  October  2018  aiming  at  helping 
small  and  medium-sized  enterprises  to  improve 
their 
regards 
initiative  Letzshop.lu  has  been 
services.  The 
launched  in  2018  to  digitise  the  retail  sector  (see 
section  4.4.2  on  retail).  In  addition,  sectorial 
programmes  have  been  launched,  such  as  the 

interaction  with  consumers  as 

43 

 
Nevertheless, 
the  valorisation  of  research 
results remains a challenge requiring additional 
investment 
transfer. 
to  boost  knowledge 
Although there are several initiatives to strengthen 
science-business  collaboration 
(i.e.  BRIDGES 
programme),  the  declining  levels  of  collaboration 
between  the  public  research  system  and  the 
business sector calls for adequate funding schemes 
to boost knowledge transfer in the country.   

of 

in 

small 

research 

research 

investment 

the  authorities.  Private 

in  2017.  Small 
investments 

Business 
and 
development  continued  to  decline,  and,  while 
above the EU average, research and innovation 
capacities 
and  medium-sized 
enterprises  have  decreased  from  2010  to  2017 
(52), although several initiatives have been taken 
and 
by 
development  intensity  in  Luxembourg  has  been 
declining over the last 15 years, reaching 0.68% of 
and  medium-sized 
GDP 
and 
research 
in 
enterprises’ 
development  have  decreased  dramatically  (from 
0.41% of the GDP in 2007 to 0.12% in 2015) and 
are  well  below  the  EU  average  of  0.30%  of  the 
GDP.  The  stagnation  of  public  direct  support  to 
business research and development activities since 
2007 (at only 0.05 of GDP, one of the lowest in the 
EU)  might be one of the reasons behind this drop 
and  shows  that  further  investments  are  needed  to 
boost  research  in  firms.  The  RDI  promotion  law 
adopted in June 2017 provides the legal framework 
for  several  aid  schemes  for  enhancing  research, 
in 
development 
businesses, notably supporting innovation capacity 
in Small and medium-sized enterprises and shared 
research  infrastructures  between  the  public  and 
private  sectors.  Luxinnovation  keeps  providing 
support  to  Small  and  medium-sized  enterprises  in 
several  areas  –such  as  improving  their  innovation 
performance  or  increasing  digitisation  activities. 
Nevertheless,  additional  financial  resources  in  the 
areas  highlighted  in  the  law,  will  not  only  help 
reversing  the  declining  trend  in  business  research 
and development investments but will also support 
the diversification strategy of the country.  

innovation 

activities 

and 

(52)  Even  if  above  the  average,  the  innovation  performance  of 
small  and  medium-sized  enterprises  measured  by  the  2018 
European Innovation Scoreboard decreased from 2010 to 2017. 

3.4. Competitiveness reforms and investment 

to 

innovation 

linked 
and 

lacks  a  national  strategy  for 
Luxembourg 
its 
innovation 
research  and 
technological, 
socio-
environmental 
economic  challenges  and  opportunities.  The 
country  did  not  yet  develop  a  common  single 
policy approach for research and development with 
a  prioritisation  based  on  a  robust  assessment  of 
expected economic impacts. In addition, the public 
support  to  public  research  and  business  research 
and 
is  fragmented  among  several 
governmental  structures.  The  national  authorities 
are  currently  working  in  several  long-term  plans, 
such as in the design of a new strategy on a data-
driven  economy  (see  also  diversification  of  the 
economy). The reformulation of these research and 
development  priorities, 
the 
National Research Fund, under the mandate of the 
Luxembourg  Government,  aims  at  providing  an 
input  for  the  future  national  R&I  strategy  and  at 
better  supporting  the  connection  between  the 
the  economy  by  concentrating 
research  and 
in 
financial 
sectors. 
resources 
Luxembourg  adopted 
its  smart  specialisation 
strategy  in  December  2017,  aiming  at  addressing 
while 
key 
concentrating  on  a  limited  number  of  specific 
sectors, 
4.0,  Cleantech, 
Industry 
Healthtech  and  Information  and  Communication 
Technology.  

implemented  by 

socio-economic 

challenges, 

strategic 

namely 

Energy, Environment and climate change 

and 

jobs 

through 

Showing  ambition  on  issues  such  as  climate 
change, renewables, energy efficiency and clean 
energy  innovation  provides  opportunities  for 
growth 
increased 
productivity,  exports  and  business  creation.  In 
this  regard,  Luxembourg  is  in  line  with  its 
indicative  trajectory  to  achieve  its  binding  target 
for  renewable  energy  of  11%  of  final  energy 
consumption  by  2020  with  a  provisional  share  of 
renewable energy of  6.38% in 2017. Luxembourg 
must  achieve  an  average  rate  of  7.47%  for  2018. 
Luxembourg  is  also  on  track  to  meet  its  energy 
efficiency  targets  for  2020,  as  published  in  the 
fourth  national  action  plan  for  energy  efficiency 
(dated  June  2017).  In  addition,  Luxembourg  has 
also set an energy savings target of 5,993 GWh to 
be  achieved  by  December  31st,  2020  through  a 
mechanism of energy efficiency obligations set up 
in 2015. However the energy savings achieved up 
to 2017 are below 60% of what is needed, putting 
at  risk  the  achievement  of  the  target.  In  addition, 

44 

 
                                                           
 
3.4. Competitiveness reforms and investment 

Luxembourg is also expected to miss its 2020 and 
2030 greenhouse gas emission reduction targets in 
the  sectors  not  covered  by  the  emissions  trading 
system.  The  gap  in  2020  would  be  3  percentage 
points,  and  unless  additional  measures  are  taken, 
this will rise to 20% by 2030 (see graph 3.4.1).  

Graph 3.4.1:  Targets and emissions under the effort-sharing 
legislation - Luxembourg (percentage change 
from 2005) 

including 

provide  an  overview  of  its  investment  needs  until 
2030  for  the  different  dimensions  of  the  Energy 
Union, 
renewable  energy,  energy 
efficiency,  security  of  supply,  and  climate 
mitigation  and  adaptation.  The 
information 
provided,  including  in  the  draft  plan,  will  further 
contribute  to  the  identification  and  assessment  of 
energy  and  climate-related  investment  needs  for 
Luxembourg. 

in 

and 

some  aspects 

Luxembourg is advanced in the field of circular 
economy,  but 
exhibits 
insufficient  results.  Luxembourg  is  a  top  player 
within  Europe  in  eco-innovation.  It  is  performing 
well  above  the  EU  average  in  terms  of  resource 
productivity, 
and  medium-sized 
small 
enterprises'  score  in  the  environmental  dimension 
of  the  small  business  act.  A  new  national  waste 
management  plan  was  adopted  in  June  2018  (54), 
which  aims  to  promote  transition  towards  a 
circular  economy  and  sees  waste  as  a  resource. 
Investments  for  projects  higher  in  the  waste 
hierarchy  and  recycling,  such  as  re-use  projects 
and 
extended  producer 
responsibility  or  improving  waste  data  reporting, 
may  help  to  meet  the  more  ambitious  future 
environmental  targets.  

awareness 

raising, 

3.4.2.  SINGLE MARKET INTEGRATION   

to  unhindered 

Companies  in  Luxembourg  have  to  deal  with 
four different regulatory and fiscal frameworks 
for  the  provision  of  their  services  in  neighbour 
countries.  In  some  aspects  obstacles  for  the 
smooth  functioning of the internal  market remain, 
such  as  obstacles 
temporary 
provision  of  services  cross-border.  Formalities 
prior  to  the  commencement  of  service  provision 
imposed  on  foreign  providers  are  growing  in 
themselves,  more  and  more 
number  and, 
and 
information 
demanding 
documentation 
submitted  and  even 
administrative  charges  to  be  paid.  Many  of  these 
formalities  apply  to  posting  of  workers,  although 
controls  of  service  providers  outside  of  posting 
situations  are  also  becoming  widespread.  A 
uniform,  interconnected  and  multilingual  platform 
has  been  suggested  by  stakeholders  to  simplify 

terms  of 

to  be 

in 

2009/119/EC and (EU) 2015/652 and repealing Regulation 
(EU)  No  525/2013  of  the  European Parliament and  of  the 
Council (Text with EEA relevance.); 
(54)  Plan national de gestion des déchets 

Source: European Commission 

Attracting  investment  and  unlocking  private 
financing 
into  energy  efficiency,  renewable 
energy  deployment  on  the  necessary  scale  and 
other  low  carbon  technologies  is  crucial  to 
secure  the  Union's  energy  transition.  The 
the  new  government 
coalition  agreement  for 
underlines the vision of Luxembourg becoming an 
international  leader  in  energy  efficiency  and  to 
pursue  an  ambitious  policy  of  tackling  climate 
change  and  promoting  renewable  energy  sources. 
In  addition,  Luxembourg  recently  approved  its 
National Climate Change  Adaptation Strategy and 
Action Plan for 2018-2023. 

In  its  National  Energy  and  Climate  Plan  to  be 
adopted  by  31  December  2019  in  line  with  the 
Regulation  on  the  Governance  of  the  Energy 
Union and Climate Action (53), Luxembourg will 

(53)  Regulation  (EU)  2018/1999  of  the  European  Parliament 
and  of  the  Council  of  11  December  2018  on  the 
Governance  of  the  Energy  Union  and  Climate  Action, 
amending  Regulations  (EC)  No  663/2009  and  (EC)  No 
715/2009  of  the  European  Parliament  and  of  the  Council, 
Directives  94/22/EC,  98/70/EC,  2009/31/EC,  2009/73/EC, 
2010/31/EU, 2012/27/EU and 2013/30/EU of the European 
the  Council,  Council  Directives 
Parliament  and  of 

45 

-14%-20%-40%-15%-17%-20% -50% -40% -30% -20% -10%+0%201720202030Targets and emissions under the effort-sharing legislation -Luxembourg (percentage change from 2005)TargetEmissions (preliminary data)Projected emissions 
 
                                                           
                                                                                   
3.4. Competitiveness reforms and investment 

The 

stores. 

Commission’s 

repealing  the  special  authorisation  procedure  for 
large 
retail 
restrictiveness  indicator  published  in  April  2018 
(cf.  European  Commission,  2018c),  where 
Luxembourg  ranks  as  one  of  the  most  restrictive 
Member States in retail establishment, does not yet 
reflect  this  reform.  The  government  has  also 
undertaken  a  review  of  the  opening  hours  regime 
with a view to reduce restrictions. In this respect, a 
study  was  commissioned  by  the  Luxembourg 
Institute  of  Socio-Economic  Research  (LISER)  to 
carry  out  a  comprehensive  review  of  the  issue  of 
opening hours and its implications. 

the 

Territorial  supply  constraints  are  a  concern  to 
businesses 
in  Luxembourg.  The  national 
authorities have been investigating into the issue of 
territorial  supply  constraints,  which  could  help 
explain  at  least  part  of  a  difference  in  consumer 
prices between the Benelux countries and other EU 
countries. Food prices in Luxembourg were among 
the highest in the EU in 2017. A study carried out 
by the Benelux countries showed that the supply of 
level  of  prices  vary  greatly 
goods  and 
location.  This  could  be 
the 
depending  on 
explained, at least in part, by practices of suppliers 
who fragment the  market  not allowing retailers to 
source  products  from  the  country  of  their  choice. 
Such  practices  may  have  negative  consequences 
for  both  consumers  and  retailers.  89%  of  firms 
indicated  they  were  affected  by  territorial  supply 
constraints. Between 67 and 77% of respondents to 
territorial  supply 
the  survey 
constraints  had  a  negative  impact,  leading  to 
increases  on  consumer  prices,  restrictions 
in 
product  range,  and  decreases  in  their  businesses’ 
profit margins. In addition, between 44 and 50% of 
that  such  practices 
the  companies 
adversely affected the quality of products, delivery 
times and product characteristics. Data collected in 
Luxembourg  suggested 
territorial  supply 
constraints also affect businesses outside the retail 
trade.  

indicated 

indicated 

that 

that 

Other  challenges  affect  retail,  such  as  market 
size  and  limited  digitisation.  The  small  size  of 
Luxembourg’s market offers limited economies of 
scale  opportunities  and  retailers  would  benefit 
from  stronger  internationalisation.  Luxembourg  is 
one  of  the  leading  countries  for  connectivity, 
the 
digital  skills  and 

Internet  usage  while 

compliance.  This  is  particularly  relevant  for  the 
construction  sector,  but  also  other  sectors  such  as 
food  delivery.  Teleworking  for  commuters  from 
other  Member  States,  pushed  by  the  Government 
to  reduce  mobility-related  issues,  also  faces  fiscal 
difficulties.  Other  aspects  undermining  the  free 
movements  of  goods  and  services  stem  from 
territorial  supply  constraints  (impeding  to  source 
goods  from  where  they  are  cheaper)  and  geo-
blocking  (making  some  services  unavailable  in 
Luxembourg). 

Professional business services  

including 

Restrictions in the business services sector could 
hamper  competition  for  some  economically 
relevant  regulated professions.  According to the 
European  Commission  restrictiveness  indicator  as 
regards  regulated  professions  (see  COM  (2016) 
820  final  and  SWD  (2016) 436  final)  the  level  of 
restrictiveness would result higher in Luxembourg 
compared  to  the  EU  weighted  average  for  several 
economically  important  professions.  In  particular, 
the  wide  scope  of  reserved  activities  for  several 
lawyers,  may  create 
professions, 
obstacles to  market competition. According to the 
new  OECD 
Trade 
Restrictiveness  Index,  the  level  of  regulatory 
restrictiveness  in  Luxembourg  vis-à-vis  other  EU 
Member  States  is  higher  than  the  Single  Market 
average  in  sectors  such  as  accounting,  legal, 
architecture,  engineering,  computer  services  as 
well  as  construction  services  and  distribution 
services  (including  wholesale  and  retail  services). 
A reassessment in view of the proportionality and 
necessity  of  the  wide  scope  of  reserved  activities 
for  regulated  professions  may  help  to  identity 
obstacles  hampering  competition  and  growth  in 
those sectors. 

intra-EEA 

Services 

Retail sector  

Over  the  last  year,  Luxembourg  continued  to 
reform the retail sector. The law of 18 July 2018 
(55)  simplified 
rules  by 

retail  establishment 

(55)  Loi du 18 juillet 2018 portant modification 
1° de la loi modifiée du 29 juin 1989 portant réforme du régime 

des cabarets ; 

2° de la loi modifiée du 2 septembre 2011 réglementant l’accès 
aux professions d’artisan, de commerçant, d’industriel ainsi 
qu’à certaines professions libérales ; et 

3° de la loi du 23 décembre 2016 sur les ventes en soldes et sur 

trottoir et la publicité trompeuse et comparative. 
http://legilux.public.lu/eli/etat/leg/loi/2018/07/18/a616/jo 

46 

 
                                                           
                                                                                   
 
3.4. Competitiveness reforms and investment 

a  favourable  location  at  the  heart  of  Europe. 
Cooperation across borders as well as transnational 
cooperation  constitutes  a  prerequisite  for  the 
sustainable  development  of  the  country,  which 
experiences  border  obstacles,  border  effects  and 
cross-border  interdependencies.  While  an  analysis 
of  regional  differences  within  Luxembourg  may 
prove  to  be  of  limited  pertinence  due  to  its  small 
size,  the  integration  of  the  country  within  the 
"Grande  Région"  and  the  cross-border  dimension 
provides 
analysing 
Luxembourg’s economy.  

essential 

insights 

in 

to 

the  cross-border 

Luxembourg is a major partner of the "Grande 
Région".  This  political  organisation  focuses  on 
facilitating  access 
labour 
market through different labour mobility initiatives 
(including those linked to transport, education and 
training). It also endeavours on promoting an eco-
friendly 
(eco-technologies,  waste 
treatment,  cultural  heritage,  etc.),  on  developing 
health  and  social  care  services  as  well  as 
supporting 
innovation.  While 
Luxembourg greatly benefits  from  free  movement 
of  workers,  with  regard  to  employment  and 
economic  growth,  differences  in  national  social 
security legislations remain.  

research  and 

lifestyle 

and 

specific 

strategy 

innovation 

the  diversification 

limited  number  of 

In  terms  of  innovation  and  competitiveness, 
Luxembourg  needs  to  continue  developing 
partnerships  in  the  context  of  the  Grande 
Région,  building  on  its  Smart  specialisation 
strategy.  The  Luxembourg  smart  specialisation 
strategy  is  firmly  anchored  within  the  larger 
national 
economic 
perspective.  The  strategy  aims  at  addressing  key 
challenges,  namely 
and 
digitisation  of  the  economy,  while  concentrating 
on  a 
sectors. 
Collaboration and co-operation at interregional and 
national level is of the essence  in order to build a 
critical  mass,  to  access  global  value  chains  and 
accelerate the uptake of new ideas. In a context of 
rising  worldwide  competition  in  research  and 
innovation, where no Member State can succeed in 
isolation,  it  is  thus  crucial  for  Luxembourg  to 
continue  developing  partnerships  in  this  sector,  in 
particular  by  strengthening  collaboration  between 
stakeholders 
community, 
businesses and higher education. In this aspect, the 
Grande  Région  is  rather  competitive  and  has 
relatively  high  levels  of  innovation  potential.  The 
conditions  for  supporting  effective  growth  in 

research 

the 

in 

sales). 

integration  of  digital  technologies  by  companies 
remains  its  relative  weakness  (in  the  DESI  2018, 
Luxembourg  ranked  26th  in  terms  of  small  and 
In 
medium-sized  enterprises’  online 
Luxembourg,  the  e-commerce  supply  is  limited 
compared to the high demand from consumers. In 
the framework of the Pakt PRO Commerce, which 
aims in particular to support the  development and 
digitisation  of  the  urban  retail  trade,  the  platform 
“LetzShop.lu"  has  been  launched  recently  to  help 
retailers embrace the digital transition and to raise 
awareness among consumers on the local shopping 
opportunities. The rationale is to provide an online 
platform  to  shops  that,  due  to  small  size  and  low 
digital  awareness,  normally  would  not  have  gone 
online  and  to  increase  their  stock  management 
capacities. Finally, there is a perception of lack of 
qualified workforce in retail, including managerial 
skills.  According  to  the  sector,  most  of  retailers 
would  have  insufficient  financial  literacy  and 
limited planning capacity. 

Energy  

for  gas  and  electricity 

Consumer  engagement  in  the  energy  market  is 
currently  limited  in  Luxembourg.  The  rates  of 
change of supplier remain  very low  for electricity 
and gas. A possible explanation could be the retail 
in 
market  prices 
Luxembourg which are lower than the EU average, 
while  consumer  satisfaction  is  above  the  EU 
average.  The  roll  out  of  smart  meters  –  a 
precondition for engaging consumers in the market 
– has started in Luxembourg and it is legally due to 
reach  the  80  %  threshold  in  2020  (56),  although 
current penetration of smart meters is much lower. 
Around  3  %  of  households  have 
installed 
residential  solar  photovoltaic,  while  the  technical 
potential for such activities is at 8% (57). 

3.4.3.  THE GRANDE RÉGION  

Luxembourg  is  the  second-smallest  country  in 
the EU, characterised by an open economy with 

(56) As per Directive 2009/72/EC of the European Parliament 
and of the Council of 13 July 2009 concerning common rules 
for the internal market in electricity and repealing Directive 
2003/54/EC. 
(57) https://ec.europa.eu/commission/sites/beta-
political/files/study-residential-prosumers-energy-union_en.pdf 

47 

 
                                                           
3.4. Competitiveness reforms and investment 

investments 

infrastructure 
including  additional 
P+R  stations,  mainly  at  the  borders,  but  also  in 
France and Belgium with a financial support from 
Luxembourg,  will  be  made  in  the  next  couple  of 
years.   

traffic 

cross-border 

the  central 

Rail  passenger  transport  met  an  extraordinary 
increase  since  2005  (+  70%  over  the  last  15 
years).  A  capital-centric  mixed  rail  system  and 
very 
required 
dense 
remove  bottlenecks. 
to 
appropriate  solutions 
Infrastructure 
significantly 
investments  were 
increased since 2013. Ongoing projects include the 
extension  of 
the 
development  of  a  new  track  connecting  the  city 
with  Bettembourg  (South).  Improvements  include 
investments beyond the Luxembourg border based 
on  the  basis  of  bilateral  agreements  with  the 
neighbouring countries. Some rail projects are also 
supported  by  Connected  Europe  Facility  (CEF). 
Luxembourg remains a strong supporter of EU rail 
interoperability  and  since  2015  the  whole  rail 
network  has  been  equipped  with  the  European 
signalling system ERTMS. 

station  and 

in 

regional 

initiatives 

Luxembourg's 
the  EU 
involvement 
integration of electricity and gas markets relies 
on  its  participation  on  regional  initiatives. 
to  which 
Important 
Luxembourg  participates  are  the  intraday  market 
coupling  projects  within  the  North  West  Europe 
market  and  the  flow  based  day-ahead  capacity 
calculation  project  in  Central  West  Europe.  As 
regards  gas,  since  1  October  2015  with  the 
integrated  "BeLux"  gas  market  between  Belgium 
and  Luxembourg,  suppliers  who  wish  to  deliver 
gas  in  Luxembourg  can  purchase  gas  at  the 
Zeebrugge  purchase  point  in  Belgium  or  through 
interconnection  points  between  the  new  BeLux 
zone  and  neighbouring  countries.  The  BeLux 
market  constitutes  a  bigger  and  more  competitive 
consumers 
environment  giving  Luxembourg 
access to a bigger market.    

3.4.4.  GOVERNANCE AND QUALITY OF THE 

INSTITUTIONS 

competitiveness 
innovation-based 
and 
development,  and  the  critical  mass  to  support 
innovation  and  cooperation,  are  present.  The 
region  as  a  whole  features  strong  institutional 
capacities, stable macroeconomic conditions, good 
regional 
infrastructures,  healthy  populations, 
relatively  high shares of employment in high-tech 
larger-scale 
sectors, 
markets  (many  urban/  metropolitan  centres)  and 
high levels of technological readiness. 

the  presence  of  regional 

Cross-border  workers  currently  represent 
about  45  %  of  Luxembourg's  labour  force, 
contributing  to  road  traffic  congestion  in  the 
greater  region  at  peak  hours,  resulting  in  time 
losses, 
impacting  productivity  and  affecting, 
among  others,  quality  of  life  and  air  quality.  In 
2016, the transport sector has been responsible for 
47%  of  gas  emissions  (down  from  55%  in  2015 
but  still  more  than  double  of  the  EU  average  of 
21%).  

significant 

investment 

encouraged 

Recent  measures  have 
the 
development  of  a  more  sustainable  mobility, 
notably  through  the  2017  tax  reform,  but  also 
through 
in  public 
transport. In May 2018, the Government adopted 
the new Sustainable Mobility Strategy (MoDu 2.0) 
which  foresees  to  reduce  by  2025  the  peak-hour 
congestion  while  transporting  20%  more  people 
than  in  2017.  Projects  are  ongoing  to,  inter  alia, 
research  collaborations  in  developing  smart  and 
sustainable multimodal mobility-on-demand transit 
solutions.  The 
platform, 
"CoPilote"  was  thought  to  reduce  congestion 
during rush hours. The website and the application 
for  mobile  devices  connect  people  with  similar 
journeys so that they share their journey in a single 
car  and  cover  the  whole  territory  of  the  Grande 
Région. The objective of carpooling is to achieve a 
car occupancy rate of 1.5 persons on journeys from 
home  to  work  by  2025,  to  reduce  the  number  of 
vehicles on Luxembourg's roads by 50,000 per day 
and  to  cut  CO2  emissions  by  130,000  tonnes  per 
year.  The 
recent  coalition  agreement  also 
envisages  the  elimination  of  all  fares  for  trains, 
trams and buses by the first quarter of 2020. 

carpooling 

new 

Larger  offer  of  public  transport,  low  emission 
mobility  and  connected  mobility  complete  the 
tools  to  reach  the  2025  target.  Soft  mobility  is 
expected  to  alleviate  the  current  pressure  on 
mobility  of  employees.  In  parallel,  significant 

The, availability and accuracy of statistical data 
in  Luxembourg  may  represent  a  challenge.  For 
small  economies,  data  are  often  challenging  as 
reflecting  fast  changes  in  the  economy  with 
important  variations.  At  the  same  time,  the  often-

48 

 
3.4. Competitiveness reforms and investment 

to 

law 

the  costs 

contribute to persisting bottlenecks in the business 
environment.  According 
the  World  Bank, 
Luxembourg is ranked 66th in doing business (cf. 
World Bank 2018), lagging behind the majority of 
EU  countries.  Opening  a  business 
is  still 
burdensome,  requiring  on  average  16.5  days  and 
five  procedures  (cf.  World  Bank  2018)  while  in 
faster. 
most  EU  countries  procedures  are 
Nonetheless,  following  the  entry  into  force  of  the 
SARL-S 
to  start  a  business, 
especially  for  non-capital  intensive  businesses,  do 
not  seem  to  represent  a  major  challenge  (since 
January 2018, around 1.300 new companies opted 
for  this  legal  form).    The  approval  of  the  bill  on 
bankruptcies  presented  in  2013,  encompassing 
among others the regulatory framework on second 
chance  for  honest  entrepreneurs,  has  been  further 
delayed  to  2019.  The  bill  shall  also  include  an 
early  warning  mechanism  for  enterprises 
in 
difficulty.  Additionally,  an  important  challenge 
transfer,  since  estimations 
concerns  business 
foresee  approximately  3.000  firms’  transmissions 
within 
the 
internationalisation  of  small  and  medium-sized 
enterprises  may  suffer  regulatory  inconsistencies 
in  labour  and  social  laws  with  neighbouring 
countries  when  providing  services  across  the 
border (see section 3.4.2). 

Finally, 

decade. 

next 

the 

in 

national 

surrounding 

international 

limited  size  of  the  samples  may  lead  to  missing 
observations 
statistical 
classifications. Additionally, the frequent revisions 
of  national  accounts-data  are  witness  of  the 
uncertainty 
accounts 
statistics, which need to be taken with caution, and 
may  raise  questions  on  the  actual  standing  of 
Luxembourg  compared  to  its  EU  counterparts. 
Another 
correct 
stems 
interpretation  of  data  of  the  sizeable  commuting 
population  which  bias  upwards  or  downwards 
indicators). This issue is particularly important for 
Luxembourg,  since  its  ambition  to  become  a  data 
driven  economy.  An  increased  accuracy,  quality 
and 
the 
identification  of  challenges  for  policy-makers  and 
increasing the confidence in data. 

availability  of  data 

could  help 

challenge 

from 

a 

portal 

three  principles 

implementation  of 

Digital public services show limited usage. Only 
49%  of  internet  users  are  using  eGovernment 
services  (compared  to  59%  at  EU  level).  In  2015 
the  Government  adopted 
to 
underpin  government  policy  on  digital  public 
services:  ‘digital  by  default’,  ‘once  only’  and 
these 
transparency.  The 
principles  aims  to  support  three  objective:  The 
Einfach  Lëtzebuerg  program  aimed  at  simplifying 
administrative procedures, the development of the 
online 
Myguichet.lu 
greater 
administrative 
transparency, 
the 
development  of  an  Open  Data  strategy.  With 
respect  to  Open  Data,  Luxembourg  has  made 
remarkable progress over the last few years thanks 
to  the  launch  of  its  Open  Data  Portal,  and  Open 
Data  is  now  Luxembourg’s  best  performance  of 
this  dimension  of  the  DESI  with  a  score  of  85% 
compared to an EU average of 73%. Luxembourg 
also  remains  slightly  below  average 
the 
provision of digital public services for businesses, 
both  domestic  and  cross-border  (82  out  of  100 
compared to an EU average of 83).  

centralising 
and 
through 

procedures, 

particular 

in 

in 

Despite  good  performance  of  the  small  and 
medium-sized enterprises sector in recent years, 
challenges remain in the business environment.  
In the  period 2013-2017,  small and  medium-sized 
enterprises  value added rose by 18.4 % and  small 
and  medium-sized 
employment 
increased by 10.5 %.  Although good comparative 
performance in some areas (for example access to 
finance  for  relatively  small  amounts),  legislative 
vacuums  in  certain  areas  and  delayed  action 

enterprises 

49 

 
 
 
ANNEX A: OVERVIEW TABLE 

Commitments  

Summary assessment  (1)  

2018 country-specific recommendations (CSRs)  

Luxembourg has made Limited Progress in addressing CSR 1 

CSR  1:  Increase  the  employment 
rate  of  older  people  by  enhancing 
their employment opportunities and 
further 
employability 
limiting  early  retirement,  with  a 
view  to  also  improving  the  long-
term  sustainability  of  the  pension 
system.  

while 

Increase  the  employment  rate  of 
older  people  by  enhancing  their 
and 
employment 
employability 

opportunities 

Limited  Progress  Limited  Progress  The  employment  rate  of  older 
workers  has  stagnated  since  2010  and  remains  one  of  the  second 
lowest  in  the  EU  (39.8%  in  2017).  Some  labour  demand  oriented 
policies  have  been  implemented  so  far,  which  are  having  positive 
results  on  other  population  groups,  but  have  failed  to  improve 
substantially older workers' participation in the labour market.  

while 
retirement, 

further 

limiting 

early 

Limited Progress Limited Progress The average effective retirement 
age stood at 60.2 in 2016, well below the statutory age of 65. 59.2 % 
were  early  old-age  pensions  (average  effective  age:  59.8).  but  its 
impact on the average effective retirement age and on expenditure is 
still difficult to assess due to an easing of restrictions on other kinds 
of  early  retirement  schemes.    No  further  measures  intending  to 
provide  incentives  for  senior  workers  to  stay  longer  at  work  have 
been announced so far.  

with  a  view  to  also  improving  the 
long-term  sustainability  of 
the 
pension system. 

Limited  Progress  Limited  Progress  No  evolution  since  2017.  The 
2016  reform  of  the  professional  reclassification  scheme  for  persons 
with working disabilities is expected to reduce the share of disability 
pensions and the ‘pré-retraite de solidarité, a special scheme allowing 
people  to  retire  from  the  age  of  57,  was  abrogated  in  2018  but  its 
impact on the average effective retirement age and on expenditure is 
still difficult to assess due to an easing of  restrictions on other kinds 
of  early  retirement  schemes.  No  further  measures  intending  to 
provide  incentives  for  senior  workers  to  stay  longer  at  work  have 
been  announced  so  far.  In  2018,  the  working  group  on  pensions 
mandated  by  the  Government  concluded  that  the  pension  system 
appears  to  be  not  sustainable,  amid  high  uncertainty  levels,  in  the 
long term projections at unchanged policies.  

CSR  2:  Further  reduce  regulatory 
restrictions in the business services 
sector.  

professions 

Luxembourg  has  made  Limited  Progress  in  addressing  CSR  2: 
Regulatory restrictions remain above EU weighted average in several 
indicators). 
regulated 
Luxembourg engaged in further reforming the profession of architects 
(a new draft law is envisaged in the first half of 2019). With the law 
of  18  July  2018,  Luxembourg  removed 
the  requirement  for 
professional qualifications to obtain a standard business license.  

(according 

available 

to 

50 

 
 
 
A. Overview Table 

Europe 2020 (national targets and progress) 

Employment  rate  target  set  in  the 
National Reform Programme: 73%  

The  overall  employment  rate  of  the  resident  population  slightly 
increased from 70.7% in 2016 to 71.5% in 2017 but remains below 
both its Europe 2020 target and the EU average of  72.2%. 

Research and development target set 
in the National Reform Programme: 
2.3  %-2.6  %  of  GDP,  of  which  0.7 
%  to  0.9  %  for  public  spending 
(1.6%-1.7% for private sector)  

In  2017,  research  and  development  investment  in  Luxembourg 
decreased slightly to 1.26% of GDP, down from 1.30% in  2016. It 
remains below the EU average of 2.07 % of GDP and far from the 
National research and development target. 

Business  enterprise  expenditure  in  research  and  development  also 
decreased  slightly  from  0.70  in  2016  to  0.68%  in  2017.  Private 
research and development intensity  has been declining over the last 
15  years  and  continues  to  be  far  from  the  EU  average  (1.36%  of 
GDP in 2017). On the contrary, Luxembourg is on track to reach the 
target of public expenditure on research and development. 

National  greenhouse  gas  emissions 
target:  20%  in  2020  compared  with 
2005  (in  sectors  not  included  in  the 
EU emissions trading system) 

Preliminary  data  for  2017  show  that  Luxembourg  has  reduced  its 
greenhouse gas emissions by 15% relative to 2005 in the sectors not 
included  in  the  EU  emissions  trading  system.  This  is  1  percentage 
point  below  the  annual  emission  allocation  for  that  year  (-14%). 
According  to  the  latest  national  projections  submitted  to  the 
Commission  and  taking  into  account  existing  measures,  it  is 
expected  that  Luxembourg  will  have  reduced  by  17%  in  2020 
compared  with  2005  –  the  target  would  be  missed  by  a  projected 
shortfall of 3 percentage points.  

2020 renewable energy target: 11 %  Preliminary  data  for  2017  put  Luxembourg’s  share  of  renewable 
energy  in  gross  final  energy  consumption  at  6.38%.  In  2017  and 
2018,  Luxembourg  has  introduced  additional  measures,  including 
cooperation  mechanisms  with  other  Member  States,  to  ensure  the 
achievement of its 11% renewable energy target set for 2020. 

Energy  efficiency,  2020  energy 
consumption  targets:  Luxembourg’s 
2020  energy  efficiency  target  is  4 
481,6  Mtoe  expressed  in  primary 
energy  consumption  (4  239,2  Mtoe 
expressed 
energy 
consumption) 

final 

in 

Luxembourg  is  currently  on  track  to  meet  its  energy  efficiency 
targets for 2020. In 2017, energy consumption in Luxembourg was 
at 4.3 Mtoe expressed in primary energy consumption in  2016 and 
4.2 Mtoe expressed in final energy consumption.  

Early  school/training  leaving  target: 
7.3 % 

Luxembourg’s early school leaving rate, as measured by the Labour 
Force Survey, stood at 7.3 % in 2017. While significantly below the 
EU average, this data should be interpreted with caution because of 
the limited sample size in Luxembourg. National estimates based on 
the actual number of young people not completing upper secondary 
education  indicate  that  dropouts  have  been  on  the  rise  since  2009 
and stood at 13.5 % in 2015. 

Tertiary education target: 52.7 % of Luxembourg  has  set  the  national  target  of  increasing  its  tertiary 
attainment rate to 66 % by 2020. At 52.7 %, the country has already 

51 

 
A. Overview Table 

population aged 30-34 

one of the EU’s highest tertiary attainment rates. This is partly due 
to  the  high  proportion  of  the  migrant  population  with  a  tertiary 
degree (55.6 %), compared to 49.1 % among the native-born. 

1 The following categories are used to assess progress in implementing the 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, 

• 
o 
o 

o  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 ad 
dress 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 address the CSR, but a fair amount of work is still needed to fully 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. 

that partly address the CSR; and/or 

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. 

52 

 
 
 
ANNEX B: COMMISSION DEBT SUSTAINABILITY ANALYSIS AND 

FISCAL RISKS 

53 

General Government debt projections under baseline, alternative scenarios and sensitivity tests2017201820192020202120222023202420252026202720282029Gross debt ratio23.021.420.820.618.817.115.514.012.711.410.49.58.9Changes in the ratio (-1+2+3)2.3-1.6-0.6-0.2-1.8-1.7-1.6-1.5-1.4-1.2-1.1-0.9-0.6of which(1) Primary balance (1.1+1.2+1.3)1.71.71.61.21.31.21.21.11.01.00.80.70.4(1.1) Structural primary balance (1.1.1-1.1.2+1.1.3)1.91.71.41.11.21.21.21.11.01.00.80.70.4(1.1.1) Structural primary balance (bef. CoA)1.91.71.41.11.11.11.11.11.11.11.11.11.1(1.1.2) Cost of ageing0.00.00.10.20.40.50.71.01.2(1.1.3) Others (taxes and property incomes)0.10.10.20.20.30.40.40.50.5(1.2) Cyclical component-0.20.00.10.10.10.00.00.00.00.00.00.00.0(1.3) One-off and other temporary measures0.00.00.00.00.00.00.00.00.00.00.00.00.0(2) Snowball effect (2.1+2.2+2.3)-0.4-0.8-0.7-0.5-0.5-0.5-0.4-0.4-0.3-0.3-0.2-0.2-0.2(2.1) Interest expenditure0.30.30.30.30.30.30.30.30.20.20.20.20.2(2.2) Growth effect-0.3-0.7-0.6-0.5-0.5-0.4-0.4-0.3-0.3-0.2-0.2-0.2-0.2(2.3) Inflation effect-0.4-0.4-0.4-0.3-0.4-0.3-0.3-0.3-0.3-0.2-0.2-0.2-0.2(3) Stock-flow adjustments4.40.91.61.60.00.00.00.00.00.00.00.00.0Note: For further information, see the European Commission Fiscal Sustainability Report (FSR) 2018. b. For the medium-term, the risk category (low/medium/high) is based on the joint use of the S1 indicator and of the DSA results. The S1 indicator measures the fiscal adjustment required (cumulated over the 5 years following the forecast horizon and sustained thereafter) to bring the debt-to-GDP ratio to 60 % by 2033. The critical values used are 0 and 2.5 pps. of GDP. The DSA classification is based on the results of 5 deterministic scenarios (baseline, historical SPB, higher interest rate, lower GDP growth and negative shock on the SPB scenarios) and the stochastic projections. Different criteria are used such as the projected debt level, the debt path, the realism of fiscal assumptions, the probability of debt stabilisation, and the size of uncertainties. c. For the long-term, the risk category (low/medium/high) is based on the joint use of the S2 indicator and the DSA results. The S2 indicator measures the upfront and permanent fiscal adjustment required to stabilise the debt-to-GDP ratio over the infinite horizon, including the costs of ageing. The critical values used are 2 and 6 pps. of GDP. The DSA results are used to further qualify the long-term risk classification, in particular in cases when debt vulnerabilities are identified (a medium / high DSA risk category). [2]Thechartspresentaseriesofsensitivitytestsaroundthebaselinescenario,aswellasalternativepolicyscenarios,inparticular:thehistoricalstructuralprimarybalance(SPB)scenario(wheretheSPBissetatitshistoricalaverage),theStabilityandGrowthPact(SGP)scenario(wherefiscalpolicyisassumedtoevolveinlinewiththemainprovisionsoftheSGP),ahigherinterestratescenario(+1pp.comparedtothebaseline),alowerGDPgrowthscenario(-0.5pp.comparedtothebaseline)andanegativeshockontheSPB(calibratedonthebasisoftheforecastedchange).Anadversecombinedscenarioandenhancedsensitivitytests(ontheinterestrateandgrowth)arealsoincluded,aswellasstochasticprojections. Detailed information on the design of these projections can be found in the FSR 2018.LU - Debt projections baseline scenario[1]Thefirsttablepresentsthebaselineno-fiscalpolicychangescenarioprojections.Itshowstheprojectedgovernmentdebtdynamicsanditsdecompositionbetweentheprimarybalance,snowballeffectsandstock-flowadjustments.Snowballeffectsmeasurethenetimpactofthecounteractingeffectsofinterestrates,inflation,realGDPgrowth(andexchangerates in some countries). Stock-flow adjustments include differences in cash and accrual accounting, net accumulation of assets, as well as valuation and other residual effects.[3] The second table presents the overall fiscal risk classification over the short, medium and long-term. a. For the short-term, the risk category (low/high) is based on the S0 indicator. S0 is an early-detection indicator of fiscal stress in the upcoming year, based on 25 fiscal and financial-competitiveness variables that have proven in the past to be leading indicators of fiscal stress. The critical threshold beyond which fiscal distress is signalled is 0.46. 05101520253020162017201820192020202120222023202420252026202720282029Debt as % of GDP -LUBaselineEnhanced lower GDP growth scenarioAdverse combined scenarioEnhanced higher interest rate scenario010203020162017201820192020202120222023(% of GDP)Stochastic debt projections 2019-2023 -LUp10_p20p20_p40p40_p60p60_p80p80_p90p50Baseline05101520253020162017201820192020202120222023202420252026202720282029Debt as % of GDP -LUBaselineHistorical SPB scenarioSGP scenario05101520253020162017201820192020202120222023202420252026202720282029Debt as % of GDP -LUBaselineHigher interest rate scenarioNegative shock on the SPBLower GDP growth scenarioBaselineHistorical SPBLower GDP growthHigher interest rateNegative shock on SPBStochastic projectionsRisk categoryLOWLOWLOWLOWLOWLOWDebt level (2029)8.93.59.68.911.6Debt peak year20182018201820182018Percentile rank37.0%29.0%Probability debt higher17.3%Dif. between percentiles19.3HIGHLong termDSALOWDebt sustainability analysis (detail)Medium termLOWLOWShort termLOW(S0 = 0.1)(S1 = -4.8)S2HIGH(S2 = 8.1)S1 
 
ANNEX C: STANDARD TABLES 

Table C.1: 

Financial market indicators 

(1) Latest data Q3 2018. Includes not only banks but all monetary financial institutions excluding central banks. 
(2) Latest data Q2 2018. 
(3) Quarterly values are annualised. 
* Measured in basis points. 

Source: European Commission (long-term interest rates); World Bank (gross external debt); Eurostat (private debt); ECB (all 
other indicators). 

54 

201320142015201620172018Total assets of the banking sector (% of GDP)1)1967.41932.51944.11982.41876.11821.3Share of assets of the five largest banks (% of total assets)33.732.031.327.626.2-Foreign ownership of banking system (% of total assets)2)87.588.487.987.886.886.7Financial soundness indicators:2)              - non-performing loans (% of total loans)-1.41.10.80.70.6              - capital adequacy ratio (%)24.419.620.924.322.522.4              - return on equity (%)3)6.47.27.27.55.75.7Bank loans to the private sector (year-on-year % change)1)-4.83.25.48.06.65.4Lending for house purchase (year-on-year % change)1)6.77.06.26.58.38.0Loan to deposit ratio2)-91.588.083.376.675.4Central Bank liquidity as % of liabilities1)-0.50.60.70.90.8Private debt (% of GDP)313.3356.6379.4353.4322.9-Gross external debt (% of GDP)2) - public10.010.29.18.410.69.8    - private4592.15074.35700.66086.35613.75455.6Long-term interest rate spread versus Bund (basis points)*28.217.3-12.716.522.616.4Credit default swap spreads for sovereign securities (5-year)*------ 
 
 
 
 
 
 
 
C. Standard Tables 

Table C.2: 

Headline Social Scoreboard indicators 

(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) Long-term unemployed are people who have been unemployed for at least 12 months.       
(4) Gross disposable household income is defined in unadjusted terms, according to the draft Joint Employment Report 2019.       
(5) 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).       
(6) Average of first three quarters of 2018 for the employment rate, long-term unemployment rate and gender employment 
gap. Data for unemployment rate is annual.       

Source: Eurostat. 

55 

201320142015201620172018 6Equal opportunities and access to the labour marketEarly leavers from education and training (% of population aged 18-24)6.16.19.35.57.3:Gender employment gap (pps)14.112.911.711.07.97.6Income inequality, measured as quintile share ratio (S80/S20)4.64.44.35.05.0:At-risk-of-poverty or social exclusion rate1 (AROPE)19.019.018.519.821.5:Young people neither in employment nor in education and training (% of population aged 15-24)5.06.36.25.45.9:Dynamic labour markets and fair working conditions†Employment rate (20-64 years)71.172.170.970.771.571.8Unemployment rate2 (15-74 years)5.96.06.56.35.65.3Long-term unemployment rate3 (as % of active population)1.81.61.92.22.11.4Gross disposable income of households in real terms per capita4 (Index 2008=100) 100.0103.1102.5101.5105.6:Annual net earnings of a full-time single worker without children earning an average wage (levels in PPS, three-year average)30763313673192232320::Annual net earnings of a full-time single worker without children earning an average wage (percentage change, real terms, three-year average)-1.20.20.40.7::Public support / Social protection and inclusionImpact of social transfers (excluding pensions) on poverty reduction545.940.643.839.135.5:Children aged less than 3 years in formal childcare46.049.051.950.960.9:Self-reported unmet need for medical care0.90.80.90.40.3: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) 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.       
(2) PISA (OECD) results for low achievement in mathematics for 15 year-olds.       
(3) Impact of socio-economic and cultural status on PISA (OECD) scores. Values for 2012 and 2015 refer respectively to 
mathematics and science.       
(4) Average of first three quarters of 2018 for the activity rate, employment growth, employment rate, part-time employment, 
fixed-term employment. Data for youth unemployment rate is annual.       
Source: Eurostat, OECD. 

56 

Labour market indicators201320142015201620172018 4Activity rate (15-64)69.870.870.970.070.270.8Employment in current job by durationFrom 0 to 11 months11.012.213.311.312.4:From 12 to 23 months8.88.69.010.110.6:From 24 to 59 months18.017.218.317.617.6:60 months or over61.160.656.958.056.6:Employment growth* (% change from previous year)1.82.62.63.03.43.8Employment rate of women(% of female population aged 20-64)63.965.565.065.167.567.9Employment rate of men (% of male population aged 20-64)78.078.476.776.175.475.5Employment rate of older workers* (% of population aged 55-64)40.542.538.439.639.839.8Part-time employment* (% of total employment, aged 15-64)18.718.418.419.219.517.8Fixed-term employment* (% of employees with a fixed term contract, aged 15-64)7.08.110.29.09.110.1Participation in activation labour market policies(per 100 persons wanting to work)55.561.040.051.3::Transition rate from temporary to permanent employment(3-year average)32.434.534.234.233.1:Youth unemployment rate (% active population aged 15-24)16.922.316.619.115.513.5Gender gap in part-time employment (aged 20-64)31.030.928.128.729.426.4Gender pay gap1 (in undadjusted form)6.25.45.55.55.0:Education and training indicators201320142015201620172018Adult participation in learning(% of people aged 25-64 participating in education and  training)14.614.518.016.817.2:Underachievement in education2::25.8:::Tertiary educational attainment (% of population aged 30-34 having successfully completed tertiary education)52.552.752.354.652.7:Variation in performance explained by students' socio-economic status3::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. 

57 

201220132014201520162017Expenditure on social protection benefits* (% of GDP)Sickness/healthcare5.75.85.65.45.3:Disability2.52.52.52.42.3:Old age and survivors8.58.58.38.48.5:Family/children3.63.63.43.43.3:Unemployment1.31.51.41.41.3:Housing0.30.30.30.30.4:Social exclusion n.e.c.0.50.50.50.50.5:Total22.322.722.121.721.6:of which: means-tested benefits0.80.80.80.80.8:General government expenditure by function (% of GDP, COFOG)Social protection18.718.618.118.218.118.4Health4.95.24.94.74.84.9Education5.85.14.94.94.95.0Out-of-pocket expenditure on healthcare (% of total health expenditure)10.410.310.811.011.2:Children at risk of poverty or social exclusion (% of people aged 0-17)*24.626.026.423.022.723.6At-risk-of-poverty  rate1 (% of total population)15.115.916.415.316.518.7In-work at-risk-of-poverty rate (% of persons employed)10.211.211.111.612.013.7Severe material deprivation rate2  (% of total population)1.31.81.42.01.61.2Severe housing deprivation rate3, by tenure statusOwner, with mortgage or loan0.90.60.60.40.91.8Tenant, rent at market price6.05.95.76.06.65.8Proportion of people living in low work intensity households4 (% of people aged 0-59)6.16.66.15.76.66.9Poverty thresholds, expressed in national currency at constant prices*172611704317270176261689018010Healthy life years (at the age of 65)Females11.910.610.88.78.0:Males11.610.911.310.79.5:Aggregate replacement ratio for pensions5 (at the age of 65)0.80.80.90.80.90.9Connectivity dimension of the Digital Economy and Society Inedex (DESI)6::62.671.074.478.8GINI coefficient before taxes and transfers*48.650.348.548.147.349.2GINI coefficient after taxes and transfers*28.030.428.728.531.030.9 
 
 
 
 
 
 
 
C. Standard Tables 

Table C.5: 

Product market performance and policy indicators 

(1) Value added in constant prices divided by the number of persons employed.       
(2) Compensation of employees in current prices divided by value added in constant prices.       
(3) The methodologies, including the assumptions, for this indicator are shown in detail here: 
http://www.doingbusiness.org/methodology.        
(4) 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 75% and above, two if received below 75%, three if refused or rejected and treated as missing values if the 
application is still pending or don't know.       
(5) Percentage population aged 15-64 having completed tertiary education.       
(6) Percentage population aged 20-24 having attained at least upper secondary education.       
(7) 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       
(8) 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 small and medium-sized enterprises' applications for bank 
loans). 

58 

Performance indicators201220132014201520162017Labour productivity per person1 growth (t/t-1) in %Labour productivity growth in industry3.9016.34-5.6816.287.73-3.51Labour productivity growth in construction-9.720.7110.59-1.86-2.17-5.19Labour productivity growth in market services-4.140.492.061.04-1.65-2.58Unit Labour Cost (ULC) index2 growth (t/t-1) in %ULC growth in industry-2.33-11.497.13-12.36-6.855.77ULC growth in construction12.060.65-3.052.342.639.34ULC growth in market services6.192.111.840.822.896.17Business environment201220132014201520162017Time needed to enforce contracts3 (days)321321321321321321Time needed to start a business3 (days)16.516.516.516.516.516.5Outcome of applications by SMEs for bank loans4:0.290.000.320.560.36Research and innovation201220132014201520162017R&D intensity1.271.301.261.281.301.26General government expenditure on education as % of GDP5.805.104.904.904.905.00Employed people with tertiary education and/or people employed in science and technology as % of total employment363840373736Population having completed tertiary education5333540353634Young people with upper secondary education6727774697775Trade balance of high technology products as % of GDP-0.72-1.32-1.40-3.25-2.01-2.40Product and service markets and competition200320082013OECD product market regulation (PMR)7, overall1.601.441.46OECD PMR7, retail4.174.474.54OECD PMR7, professional services3.523.553.47OECD PMR7, network industries82.962.722.73 
 
 
 
 
 
 
 
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 (Europe 2020-2030) (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 use in industry (in kgoe) divided by gross value added of industry, including construction 
(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  research and development 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 use in transport sector including international aviation, (in kgoe) divided by transport 
industry gross value added (in 2010 EUR)  
Transport carbon intensity: GHG emissions in transport sector divided by gross value added of the transport activities 
Energy import dependency: net energy imports divided by gross inland energy consumption plus consumption of 
international maritime bunkers   
Aggregated supplier concentration index:  Herfindahl-Hirschman index for net imports of crude oil and NGL, natural gas and 
hard coal. Smaller values indicate larger diversification and hence lower risk.  
Diversification of the energy mix: Herfindahl-Hirschman index of the main energy products in the gross inland consumption of 
energy 
* 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). 

59 

Green growth performance201220132014201520162017MacroeconomicEnergy intensity kgoe / €0.110.100.100.090.090.09Carbon intensity kg / €0.290.260.240.220.21-Resource intensity (reciprocal of resource productivity)kg / €0.260.270.270.290.320.31Waste intensity kg / €0.20-0.16-0.21-Energy balance of trade % GDP-6.3-5.4-4.4-3.1-2.5-2.8Weighting of energy in HICP%11.614.914.512.310.911.7Difference between energy price change and inflation %3.9-3.5-6.3-8.0-8.20.6Real unit of energy cost% of value added11.511.210.110.711.5-Ratio of environmental taxes to labour taxesratio0.140.130.120.110.10-Environmental taxes% GDP2.42.22.01.81.71.7Sectoral Industry energy intensity kgoe / € 0.150.140.140.120.120.12Real unit energy cost for manufacturing industry excl. refining% of value added45.346.339.641.844.2-Share of energy-intensive industries in the economy% GDP2.63.23.83.83.53.1Electricity prices for medium-sized industrial users€ / kWh0.100.100.100.090.090.08Gas prices for medium-sized industrial users€ / kWh0.050.050.040.040.030.03Public R&D for energy % GDP0.000.000.000.000.000.00Public R&D for environmental protection% GDP0.020.020.020.020.020.02Municipal waste recycling rate%47.446.647.747.448.248.3Share of GHG emissions covered by ETS*%19.316.517.815.915.0-Transport energy intensitykgoe / €1.651.501.321.121.031.04Transport carbon intensitykg / €4.183.773.222.632.33-Security of energy supplyEnergy import dependency%97.597.196.595.996.195.4Aggregated supplier concentration indexHHI2.82.72.92.72.7-Diversification of energy mixHHI0.460.460.450.430.430.43 
 
 
 
 
ANNEX D: INVESTMENT GUIDANCE ON COHESION POLICY 

FUNDING 2021-2027 FOR LUXEMBOURG 

Investment Guidance on Cohesion Policy Funding 2021-2027 for Luxembourg(58) 

Building  on  the  Commission  proposal  for  the  next  Multi-Annual  Financial  Framework  for  the  period 
2021-2027 of 2 May 2018 (COM (2018) 321), this Annex presents the  preliminary Commission services 
views  on  priority  investment  areas  and  framework  conditions  for  effective  delivery  for  the  2021-2027 
Cohesion  Policy.  These  priority  investment  areas  are  derived  from  the  broader  context  of  investment 
bottlenecks,  investment  needs  and  regional  disparities  assessed  in  the  report.  This  Annex  provides the 
basis for a dialogue between Luxembourg and the Commission services in view of the programming of 
the cohesion policy funds (European Regional Development Fund and European Social Fund Plus). 

Policy Objective 1: A Smarter Europe – Innovative and smart industrial transformation 

Luxembourg  appears  too  dependent  on  the  financial  sector  and  lags  behind  in  diversification  of  its 
economic  structure.  Strengthen  innovation  performance  and  foster  productivity  growth  by  identifying 
smart specialisation areas on the basis of national and regional needs and potential. 

Investment  needs(59)  have  been  identified  to  enhance  research  and  innovation  capacities  and  the 
uptake of advanced technologies, and in particular to: 

support  technology  transfer  and  diffusion  of  innovation  through  networks  between  businesses  and 
research centres and through networks of digital innovation hubs and incubators; 

enhance  cooperation  in  key  digital  technologies,  eco-innovation,  support  cluster  development  through 
the implementation of interregional projects across EU national borders; 

stimulate integrated cooperation in new value chains across programmes and across borders. 

Even though companies perform above the EU average in business digitisation, electronic information 
sharing,  radio  frequency  identification  and  the  use  of  social  networks,  small  and  medium-sized 
enterprises  lag  behind  in  e-commerce.  Investment  needs  have  been  identified  to  reap  the  benefits  of 
digitisation for citizens, companies and governments and in particular to: 

facilitate the integration of digital technologies by companies; 

develop sustainable and circular district and cities; 

invest in common smart mobility systems through cooperation with neighbouring countries. 

Most  of  the  Scoreboard's  indicators  on  innovation  in  small  and  medium-sized  enterprises  are  on  a 
declining trend, including commercialisation of innovation. The percentage of small and medium-sized 
enterprises introducing product or process innovations also declined as did the percentage of small and 
medium-sized  enterprises  innovating  in-house.  Investment  needs  have  been  identified  to  enhance 
growth and competitiveness of small and medium-sized enterprises and in particular to: 

encourage  industrial  cluster  development  and  enhanced  cooperation  between  small  and  medium-sized 
enterprises and universities/research centres, and the sustained engagement of small and medium-sized 

(58)  This Annex is to be considered in conjunction with the Proposal for a Regulation of the European Parliament and of the Council 
on the European Regional Development Fund and on the Cohesion Fund COM(2018) 372 and the EC Proposal for a Regulation 
of the European Parliament and of the Council on the European Social Fund Plus COM(2018) 382, in particular as regards the 
requirements for thematic concentration and urban earmarking outlined in these proposals. 

(59)  The intensity of needs is classified in three categories in a descending order – high priority needs, priority needs, needs. 

60 

 
 
                                                           
C. Standard Tables 

enterprises in the Entrepreneurial Discovery Process; 

develop small and medium-sized enterprises skills and capacities in the exportation of their products and 
services and the commercialisation of innovation, especially online. 

A  large  share  of  companies  report  difficulties  in  filling  Information  and  Communications  Technology 
vacancies,  which  suggests  a  skills  mismatch.  Investment  needs  have  been  identified  to  develop  skills 
for smart specialisation, industrial transition and entrepreneurship, and in particular to: 

provide  small  and  medium-sized  enterprises  with  training  and  reskilling  possibilities  for  smart 
specialisation  areas  with  a  particular  attention  to  digital  skills  and  encourage  them  to  mutualise  their 
training  needs  by  supporting  and  co-financing  clusters,  and  joint  national,  regional,  transnational  and 
international cooperation in innovation sectors. 

Policy Objective 4: A more social Europe – Implementing the European Pillar of Social Rights 

Some groups face particular difficulties on the  labour market, in particular those born outside the EU, 
while  skills  shortages  are  growing,  in  particular  with  regard  to  digital  skills.  The  employment  rate  of 
older  workers  is  one  of  the  lowest  in  the  EU.  Investment  needs  have  therefore  been  identified  to 
improve  access  to  employment  and  to  promote  lifelong  learning,  notably  flexible  upskilling  and 
reskilling,  taking  into  account  digital  skills,  better  anticipating  change  and  new  skills 
requirements, facilitating career transitions and promoting professional mobility, and in particular 
to: 

enhance  active  labour  market  policies  for  jobseekers  furthest  from  the  labour  market  (especially  low-
skilled  and  long-term  unemployed  senior  workers,  young  people  not  in  employment  education  or 
training; people with a migrant background, in particular women);  

upskill and reskill the labour force, in particular older workers and people with a migrant background. 

The  overall  risk  of  poverty  or  social  exclusion  (though  below  the  EU  average)  shows  negative 
developments  and  in-work  poverty  is  high.  Investment  needs  have  therefore  been  identified  to  foster 
active inclusion, and improve employability, and in particular to: 

support integrated active inclusion measures, through enhancing cooperation between employment and 
social  services  aimed  at  increasing  outreach  to  disadvantaged  people  and  implementing  personalised, 
needs-based services and training; 

develop social entrepreneurship as a way to enhance the variety of routes to employment. 

Factors for effective delivery of Cohesion policy 

Building  on  what  has  been  developed  so  far  in  the  smart  specialisation  strategy  and  strengthened 
cooperation  between  stakeholders  and  in  particular  between  the  research  community,  businesses  and 
higher education; 

Broader  use  of  financial  instruments  and/or  contributions  to  Luxembourg’s  compartment  under 
InvestEU for all revenue-generating and cost-saving activities; 

Strong  support  and  involvement  of  social  partners,  local  authorities  and  other  public  bodies  and 
stakeholders are essential for effective implementation; 

61 

 
C. Standard Tables 

to 

increase  effectiveness  of  measure 

Support 
implementation. 

for 

innovative  actions  and  experimentation 

62 

 
 
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