Recommendation for a COUNCIL RECOMMENDATION on the 2019 National Reform Programme of Luxembourg and delivering a Council opinion on the 2019 Stability Programme of Luxembourg
Date: 2019-06-05
Institutions: European Commission, Secretariat-General
Subjects: Luxembourg, competition policy, economic policy, economic reform, employment policy, fiscal policy, investment, pension scheme, stability pact, stability programme

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 5.6.2019  COM(2019) 516 final  Recommendation for a COUNCIL RECOMMENDATION on the 2019 National Reform Programme of Luxembourg and delivering a Council opinion on the 2019 Stability Programme of Luxembourg    
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2019 National Reform Programme of Luxembourg and delivering a Council 
opinion on the 2019 Stability Programme of Luxembourg 

THE COUNCIL OF THE EUROPEAN UNION, 

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

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

Having regard to the recommendation of the European Commission, 

Having regard to the resolutions of the European Parliament, 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

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

Having regard to the opinion of the Social Protection Committee, 

Having regard to the opinion of the Economic Policy Committee, 

Whereas: 

(1) 

On 21 November 2018, the Commission adopted the Annual Growth Survey, marking 
the start of the 2019 European Semester for economic policy coordination. It took due 
account  of  the  European  Pillar  of  Social  Rights,  proclaimed  by  the  European 
Parliament, the Council and the Commission on 17 November 2017. The priorities of 
the  Annual  Growth  Survey  were  endorsed  by  the  European  Council  on  21  March 
2019.  On  21  November  2018,  on  the  basis  of  Regulation  (EU)  No  1176/2011,  the 
Commission  also  adopted  the  Alert  Mechanism  Report,  in  which  it  did  not  identify 
Luxembourg  as  one  of  the  Member  States  for  which  an  in-depth  review  would  be 
carried out. On the same date, the Commission also adopted a recommendation for a 
Council recommendation on the economic policy of the euro area, which was endorsed 
by the European Council on 21 March 2019. On 9 April 2019, the Council adopted the 
recommendation  on  the  economic  policy  of  the  euro  area  (‘Recommendation  for  the 
euro area’).  

(2) 

As a Member State whose currency is the euro and in view of the close interlinkages 
between  the  economies  in  the  economic  and  monetary  union,  Luxembourg  should 

1 

OJ L 209, 2.8.1997, p. 1. 

EN 

1 

  EN 

 
 
 
 
 
                                                 
(3) 

(4) 

(5) 

(6) 

ensure the full and timely implementation of the Recommendation for the euro area, as 
reflected in recommendations (1) to (4) below.  
The  2019  country  report  for  Luxembourg2  was  published  on  27  February  2019.  It 
assessed Luxembourg’s progress in addressing the country-specific recommendations 
adopted by the Council on 13 July 2018, the follow-up given to the recommendations 
adopted  in  previous  years  and  Luxembourg's  progress  towards  its  national  Europe 
2020 targets.  

On 30 April 2019, Luxembourg submitted its 2019 National Reform Programme and 
its 2019 Stability Programme. In order to take account of their interlinkages, the two 
programmes have been assessed at the same time. 

Relevant country-specific recommendations have been addressed in the programming 
of  the  European  Structural  and  Investment  Funds  ('ESI  Funds')  for  the  2014-2020 
period.  As  provided  for  in  Article  23  of  Regulation  (EU)  No  1303/2013  of  the 
European  Parliament  and  of  the  Council3,  where  it  is  necessary  to  support  the 
implementation of relevant Council recommendations, the Commission may request a 
Member  State  to  review  and  propose  amendments  to  its  Partnership  Agreement  and 
relevant programmes. The Commission has provided further details on how it would 
make use of that provision in guidelines on the application of the measures linking the 
effectiveness of the ESI Funds to sound economic governance4.  

Luxembourg is currently in the preventive arm of the Stability and Growth Pact. In its 
2019  Stability  Programme,  the  government  plans  a  decrease  in  the  headline  surplus 
from  2.4%  of  GDP  in  2018  to  1.0%  of  GDP  in  2019,  followed  by  an  almost  steady 
increase  thereafter,  reaching  a  surplus  of  2.2%  of  GDP  in  2023.  Based  on  the 
recalculated  structural  balance5,  the  medium-term  budgetary  objective  –  which  has 
been  changed  from  a  structural  deficit  of  0.5%  of  GDP  in  2019  to  a  surplus,  in 
structural  terms,  of  0.5%  of  GDP  as  of  2020  –  is  overachieved  throughout  the 
programme period. According to the 2019 Stability Programme, the government debt-
to-GDP  ratio  is  expected  to  remain  well  below  the  60%  of  GDP  Treaty  reference 
value.  The  macroeconomic  scenario  underpinning  those  budgetary  projections  is 
favourable throughout the period covered by the programme, except for 2023 when it 
is plausible. Based on the Commission 2019 spring forecast, the structural balance is 
forecast  to  register  a  surplus  of  0.9%  of  GDP  in  2019  and  0.5%  of  GDP  in  2020, 
lower, in particular for 2020, than in the 2019 Stability Programme, but still above or 
in  line  with  the  medium-term  budgetary  objective.  At  the  same  time,  expenditure 
developments  should  be  monitored  carefully  in  the  short  and  the  medium  term, 
especially in  light  of possible future risks to  the robustness  of revenues.  Overall, the 
Council is of the opinion that Luxembourg is projected to comply with the provisions 
of the Stability and Growth Pact in 2019 and 2020. 

2 
3 

4 
5 

SWD(2019) 1015 final. 
Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December  2013 
laying  down  common  provisions  on  the  European  Regional  Development  Fund,  the  European  Social 
Fund,  the  Cohesion  Fund,  the  European  Agricultural  Fund  for  Rural  Development  and  the  European 
Maritime  and  Fisheries  Fund  and  laying  down  general  provisions  on  the  European  Regional 
Development  Fund,  the  European  Social  Fund,  the  Cohesion  Fund  and  the  European  Maritime  and 
Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320). 
COM(2014) 494 final. 
Cyclically-adjusted  balance  net  of  one-off  and  temporary  measures,  recalculated  by  the  Commission 
using the commonly agreed methodology. 

EN 

2 

  EN 

 
                                                 
(7) 

(8) 

In  spite  of  recent  reforms,  Luxembourg’s  age-related  spending  (pension-related, 
healthcare and long-term care costs) is expected to increase markedly in the long term. 
Assuming no policy changes are made to the current system, this could put at risk the 
sustainability of public finances in the long term. This is despite the current low level 
of public debt  and the  accumulated reserves of the social  security system,  which are 
expected  to  ensure  the  system’s  viability  until  2041.  Recommendations  on  this 
challenge  have  been  addressed  to  Luxembourg  since  2011  but  limited  progress  has 
been  made  to  date.  In  its  2018  report,  the  government’s  pensions  working  group 
discussed various ways to improve the long-term sustainability of the pensions system, 
including gradually increasing the contribution rate, raising the pensionable age to take 
account  of  longer  life  expectancy  and  encouraging  phased  retirement.  The  report 
suggests  a  multi-pronged  strategy  of  calibrated  reforms  to  guarantee  the  long-term 
sustainability  of  the  system  while  minimising  the  impacts  on  both  the  economy  and 
pensioners. Projected increases in age-related expenditure also threaten the long-term 
sustainability of the healthcare and long-term care systems.  More than three quarters 
of  long-term  care  expenditure  comes  from  public  sources.  The  2018  reform  is 
expected  to  ensure  financial  viability  until  2030,  by  allowing  to  gradually  increase 
workers’ contributions to the healthcare system from 1.4% of the wage base to 1.7%, 
in order to keep costs in line with the proportion of dependent people. However, the 
impacts in terms of long-term fiscal sustainability are not  yet clear. To sustain social 
cohesion  and  public  finances  in  the  long  term,  demographic  policies  would  need  to 
concur with education and training policies, taking a holistic approach to considering 
both  the  challenges  and  opportunities  of  changes  in  demography  as  well  as  in  the 
digital economy, given the expected impact of population ageing on labour supply in 
the  near  future.  Labour  shortages  have  recently  emerged  in  certain  sectors,  which 
could hinder productivity growth and reduce the long-term growth potential. 

Despite an overall good labour market performance, the employment rate is stagnating 
and specific groups still face particular difficulties on the labour market. In particular, 
the  employment  rate  of  older  people  remains  particularly  low,  and  further  measures 
are  needed  to  improve  their  participation  to  the  labour  market.  Early  retirement 
schemes encouraging workers to leave employment remain widespread, with 57.5% of 
newly  attributed  pensions  being  early  old-age  pensions  in  2017.  In  2018,  the 
government  abrogated  one  of  the  pre-retirement  schemes  allowing  people  to  retire 
from the age of 57, but the effect of this reform was weakened by relieving restrictions 
on  other  pre-retirement  schemes.  Low  old-age  activity  rates  also  largely  result  from 
financial  disincentives  to  work  stemming  from  the  tax-benefit  system  which  are 
comparatively high for this age group. Encouraging the employment of older workers 
requires  a  comprehensive  strategy  including  measures  to  help  them  remain  in  active 
employment for longer. The ‘Age Pact’, a draft law submitted to Parliament in April 
2014, which aims to encourage firms with more than 150 employees to hire and retain 
older workers through age management measures, is still pending in Parliament.  

(9)  While  Luxembourg  remains  committed  to  improving  the  regulatory  environment  for 
the business services sector, regulatory barriers are still high in several sectors, such as 
legal,  accounting,  architecture  and  engineering  services,  according  to  the  European 
Commission’s  restrictiveness  indicator6.  The  OECD’s  intra-EEA  Services  Trade 
Restrictiveness Index published in December 2018 also confirmed that Luxembourg’s 
level of regulatory restrictiveness vis-à-vis other EU Member States is higher than the 
Single Market average for these sectors.  

6 

SWD(2016) 436 final 

EN 

3 

  EN 

 
                                                 
(10)  Luxembourg’s  economic  model  features  strong  performances  consistent  with  robust 
and sustained creation of qualified employment. This is supported by high productivity 
levels,  largely  reflecting  efficiency  gains  from  participation  in  global  markets,  in 
particular in the financial sector. However, productivity growth has stagnated in recent 
years,  hampered  by  low  levels  of  business  investment  in  innovation  and  digital 
integration.  Luxembourg’s  strategy  to  diversify  its  economy,  by  developing  key 
knowledge-intensive sectors in a transition to a data-driven economy, exhibits strong 
potential to stimulate high value-added investment and boost productivity growth. In 
that context, public investment remains high and focused on those sectors, including a 
strong Information and Communication Technology sector. However, this significant 
public  investment  has  not  spilled  over,  nor  has  it  helped  to  stimulate  private 
investment  in  innovation  and  digitalisation.  Increased  investment  in  research  and 
innovation,  as  well  as  in  digital  integration,  especially  in  firms  and  specifically  in 
small  and  medium-sized  enterprises,  is  important  for  improving  productivity  growth 
and  further  diversifying  Luxembourg’s  economy.  Developing  a  coherent  and 
integrated  national  framework  for  research  and  innovation  policies  and  support 
instruments, including prioritisation based on robust assessment of expected economic 
impacts,  is  essential  to  enabling  Luxembourg  to  exploit  the  full  potential  of  its 
innovation eco-system.  

(11) 

Increased  investment  in  skills,  in  particular  information  and  communications 
technology skills, employability, education and training, including a better alignment 
of education curricula to  labour market  needs and fostering technological  and digital 
transformations, is important for improving  Luxembourg’s productivity, employment 
and long‑term growth potential, and for fostering equal opportunities. 

(12)  Air  pollution  and  traffic  congestion  at  peak  times  still  constitute  major  problems  for 
Luxembourg,  from  both  a  competitiveness  and  environmental  point  of  view.  In 
addition,  the  CO2  emissions  from  road  transport  contribute  to  climate  change. 
According  to  the  2017  national  projections  submitted  to  the  Commission,  it  is 
expected  that  in  the  absence  of  additional  measures,  Luxembourg  will  miss  its  2020 
greenhouse gas emission reduction target by 3 percentage points and its 2030 target by 
20  percentage  points.  The  number  of  cross-border  workers,  who  currently  represent 
about 45% of Luxembourg’s labour force, the low taxation of transport fuel and high 
house prices stimulate increased car use and are an obstacle to improving air quality 
and traffic  conditions.  Meanwhile, the use of  alternative fuels  in  new passenger cars 
sold in Luxembourg has increased over the past few years.  

(13) 

Insufficient  housing  supply  may  negatively  affect  Luxembourg’s  attractiveness.  Its 
strong  housing  demand  remains  driven  by  population  growth,  favourable  financing 
conditions and a large 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 or to sell. The 
supply of social housing also appears insufficient and points to a need for significant 
investment to alleviate rising tensions in the housing market. 

(14)  The  fight  against  aggressive  tax  planning  is  essential  to  make  tax  systems  more 
efficient  and  fair  as  acknowledged  in  the  2019  euro  area  recommendation.  Spillover 
effects of taxpayers’ aggressive tax planning strategies between Member States call for 
a coordinated action of national policies to  complement EU legislation. Luxembourg 
has  taken  measures  against  aggressive  tax  planning,  but  the  high  level  of  dividend, 
interest and royalty payments as a percentage of GDP suggests that the country’s tax 
rules are used by  companies that engage in  aggressive tax planning. The majority of 

EN 

4 

  EN 

 
foreign  direct  investment  is  held  by  'special  purpose  entities'.  The  absence  of 
withholding  taxes  on  outbound  (i.e.  from  EU  residents  to  third  country  residents) 
interest and royalty payments and the exemption from withholding taxes on dividend 
payments  under  certain  circumstances  may  lead  to  those  payments  escaping  tax 
altogether, if they are also not subject to tax in the recipient jurisdiction. 

(15)  The programming of EU funds for the period 2021-2027 could help address some of 
the  gaps  identified  in  the  recommendations,  in  particular  in  the  areas  covered  by 
Annex D to the country report7. This would allow Luxembourg to make the best use of 
those funds in respect of the identified sectors. 

(16) 

In  the  context  of  the  2019  European  Semester,  the  Commission  has  carried  out  a 
comprehensive  analysis  of  Luxembourg’s  economic  policy  and  published  it  in  the 
2019 country report. It has also assessed the 2019 Stability Programme and the 2019 
National  Reform  Programme  and  the  follow-up  given  to  the  recommendations 
addressed  to  Luxembourg  in  previous  years.  It  has  taken  into  account  not  only  their 
relevance  for  sustainable  fiscal  and  socioeconomic  policy  in  Luxembourg,  but  also 
their  compliance  with  Union  rules  and  guidance,  given  the  need  to  strengthen  the 
Union’s  overall  economic  governance  by  providing  Union-level  input  into  future 
national decisions.  

(17) 

In  the  light  of  this  assessment,  the  Council  has  examined  the  2019  Stability 
Programme  and  is  of  the  opinion  that  Luxembourg  is  expected  to  comply  with  the 
Stability and Growth Pact. 

HEREBY RECOMMENDS that Luxembourg take action in 2019 and 2020 to: 

1. 

2. 

3. 

4. 

Increase  the  employment  rate  of  older  workers  by  enhancing  their  employment 
opportunities and employability. Improve the long-term sustainability of the pension 
system, including by further limiting early retirement.  

Reduce barriers to competition in regulated professional business services. 

Focus  economic  policy  related  to  investment  on  fostering  digitalisation  and 
innovation,  stimulating  skills  development,  improving  sustainable  transport,  and 
increasing housing supply, including by increasing incentives and lifting barriers to 
build. 

Address  features  of  the  tax  system  that  may  facilitate  aggressive  tax  planning,  in 
particular by means of outbound payments. 

Done at Brussels, 

For the Council 
The President 

7 

SWD(2019) 1015 final. 

EN 

5 

  EN