REPORT FROM THE COMMISSION Luxembourg Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the European Union
Date: 2020-05-20
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Luxembourg, budget deficit, budget policy, budgetary control, epidemic, gross domestic product, infectious disease, macroeconomics, public debt, stability pact

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   EUROPEAN COMMISSION  Brussels, 20.5.2020  COM(2020) 531 final  REPORT FROM THE COMMISSION Luxembourg  Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the European Union  
 
 
REPORT FROM THE COMMISSION 

Luxembourg 

Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of 
the European Union 

1. 

INTRODUCTION  

On  20  March  2020,  the  Commission  adopted  a  Communication  on  the  activation  of  the 
general escape clause of the Stability and Growth Pact. The clause, as set out in Articles 5(1), 
6(3),  9(1)  and  10(3)  of  Regulation  (EC)  1466/97  and  Articles  3(5)  and  5(2)  of  Regulation 
(EC) 1467/97, facilitates the coordination of budgetary policies in times of severe economic 
downturn.  In  its  Communication,  the  Commission  shared  with  the  Council  its  view  that, 
given  the  expected  severe  economic  downturn  resulting  from  the  COVID-19  outbreak,  the 
current  conditions  permit  activation  of  the  clause.  On  23  March  2020,  the  Ministers  of 
Finance of the Member States agreed with the assessment of the Commission. The activation 
of  the  general  escape  clause  allows  for  a  temporary  departure  from  the  adjustment  path 
towards  the  medium-term  budgetary  objective,  provided  that  this  does  not  endanger  fiscal 
sustainability in the medium term. For the corrective arm, the Council may also decide, on a 
recommendation  from  the  Commission,  to  adopt  a  revised  fiscal  trajectory.  The  general 
escape  clause  does  not  suspend  the  procedures  of  the  Stability  and  Growth  Pact.  It  allows 
Member States to depart from the budgetary requirements that would normally apply while 
enabling  the  Commission  and  the  Council  to  undertake  the  necessary  policy  coordination 
measures within the framework of the Pact. 

Data notified by the Luxembourg authorities on 31 March 2020 and subsequently validated 
by Eurostat1 show that the general government balance in Luxembourg reached a surplus of  
2.2%  of  GDP  in  2019,  while  general  government  gross  debt  stood  at  22.1%  of  GDP. 
According to the 2020 Stability Programme, Luxembourg plans a deficit of 8.5% of GDP in 
2020, while debt would reach 28.7% of GDP. 

The planned deficit for 2020 provides prima facie evidence of the existence of an excessive 
deficit as defined by the Stability and Growth Pact. 

Against this background, the Commission has therefore prepared this report, which analyses 
Luxembourg’s compliance with the deficit criterion of the Treaty. The debt criterion can be 
considered to be met as the debt ratio in 2019 is below the Treaty reference value of 60% of 
GDP.  It  takes  into  account  all  relevant  factors  and  gives  due  consideration  to  the  major 
economic shock linked to the COVID-19 pandemic.   

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https://ec.europa.eu/eurostat/documents/2995521/10294648/2-22042020-AP-EN.pdf/6c8f0ef4-6221-1094-

fef7-a07764b0369f 

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Table 1. General government deficit and debt (% of GDP)  

2016 

2017 

2018 

2019 

1.8 

1.3 

3.1 

2.2 

2020 
COM 

-4.8 

2021 
COM 

0.1 

20.1 

22.3 

21.0 

22.1 

26.4 

25.7 

General 
government 
balance 
General 
government 
gross debt 

Source: Eurostat, European Commission 2020 spring forecast 

2. 

DEFICIT CRITERION  

Based on the 2020 Stability Programme, Luxembourg’s general government deficit in 2020 is 
planned to reach 8.5% of GDP, above and not close to the Treaty reference value of 3% of 
GDP. 

The planned excess over the Treaty reference value in 2020 is exceptional, as it results from a 
severe economic downturn. Taking into account the impact of the COVID-19 pandemic, the 
Commission 2020 spring forecast projects a contraction of real GDP in 2020 by 5.4%. 

The  planned  excess  over  the  Treaty  reference  value  would  be  temporary  based  on  the 
Commission 2020 spring forecast, which projects the general government deficit to fall under 
3%  of  GDP  in  2021.  However,  those  projections  are  surrounded  by  an  exceptionally  high 
degree of uncertainty. 

In  sum,  the  planned  deficit  for  2020  is  above  and  not  close  to  the  3%-of-GDP  Treaty 
reference value. The planned excess is considered to be exceptional as defined by the Treaty 
and  the  Stability  and  Growth  Pact,  while  the  nature  of  the  excess  is  currently  considered 
temporary. Hence, the analysis suggests that prima facie the deficit criterion for the purpose 
of the Treaty and Regulation (EC) No 1467/97 is not fulfilled. 

3. 

RELEVANT FACTORS  

Article 126(3) of the Treaty provides that, if a Member State does not fulfil the requirements 
under one or both of those criteria, the Commission has to prepare a report. That report must 
also  “take  into  account  whether  the  government  deficit  exceeds  government  investment 
expenditure  and  take  into  account  all  other  relevant  factors,  including  the  medium-term 
economic and budgetary position of the Member State”.  

Those factors are further clarified in Article 2(3) of Regulation (EC) No 1467/97, which also 
provides  that  “any  other  factors  which,  in  the  opinion  of  the  Member  State  concerned,  are 
relevant in order to comprehensively assess compliance with the deficit and debt criteria and 
which the Member State has put forward to the Council and to the Commission” need to be 
given due consideration. 

In the current  situation,  a key  additional factor to  take into consideration regarding 2020 is 
the economic impact of the COVID-19 pandemic, which has a very substantial impact on the 
budgetary situation and  results  in  a highly  uncertain outlook. The pandemic has  also  led to 
the activation of the general escape clause.  

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3.1. 

 COVID-19 pandemic  

The  COVID-19  pandemic  has  led  to  a  major  economic  shock  that  is  having  a  significant 
negative  impact  throughout  the  European  Union.  The  consequences  for  GDP  growth  will 
depend  on  the  duration  of  both  the  pandemic  and  of  the  measures  taken  by  national 
authorities and at European and global level to slow its spread, protect production capacities 
and  support  aggregate  demand.  Member  States  have  already  adopted  or  are  adopting 
budgetary  measures  to  increase  the  capacity  of  health  systems  and  provide  relief  to  those 
individuals  and  sectors  that  are  particularly  affected.  Significant  liquidity  support  measures 
and  other  guarantees  have  also  been  adopted.  Subject  to  more  detailed  information,  the 
competent statistical authorities are to examine whether those measures entail an immediate 
impact on the general government balance or not. Together with the fall in economic activity, 
those measures will contribute to substantially higher government deficit and debt positions. 

3.2  Medium-term economic position  

Economic activity  grew by 2.3% in  2019, which was lower than in  the  year before.  Before 
the  outbreak  of  the  pandemic  GDP  was  still  expected  to  grow  by  2.7%  in  2020.  However, 
following the outbreak of the pandemic and the health measures adopted to contain the spread 
of the virus, whole parts of the economy have come to a stop, while others operate at much 
lower capacity. Economic activity is projected to contract sharply in 2020. This a mitigating 
factor in the assessment of Luxembourg’s compliance with the deficit criterion in 2020. 

Moreover,  the  uncertainty  related  to  the  duration  of  the  COVID-19  pandemic  and  its 
economic impact puts an exceptional degree of uncertainty on the near-term macroeconomic 
outlook. As a small open economy, the evolution  of economic activity in  Luxembourg will 
depend largely on the economic performance of its  main trading  partners. Furthermore, the 
strong dependence of the economy on the financial sector, which represents a large share of 
GDP, will heigthen the uncertainty about the size of the contraction, uncertainty that is also 
the result of the high volatility on financial markets.  

3.3 

 Medium-term budgetary position 

Based  on  outturn  data  and  the  Commission  2020  spring  forecast,  in  2019  Luxembourg 
overachieved its medium-term budgetary objective.  

The  2020  Stability  Programme  for  Luxembourg  projects  a  major  worsening  of  public 
finances from a surplus of 2.2% of GDP in 2019 to a deficit of 8.5% of GDP in 2020 amid 
the  COVID-19  pandemic.  The  government  has  adopted  a  comprehensive  support  package 
amounting  to  5.5%  of  GDP,  made  up  of  measures  to  preserve  employment,  support  for 
distressed  undetakings  and  additional  healthcare  spending.  The  amount  of  5.5%  of  GDP 
includes as well refundable loans and a part of the tax deferrals on direct taxes, which would 
have  a  direct  budgetary  impact  according  to  the  authorities.  The  deficit  also  reflects  an 
expected plunge on the revenue side reflecting mainly a drop in both indirect and direct taxes. 
The medium-term fiscal outlook remains subject to high uncertainty.  

3.4 

Other factors put forward by the Member State  

On  11  May  2020,  the  Luxembourg  authorities  transmitted  a  letter  with  relevant  factors  in 
accordance with Article 2(3) of Regulation (EC) No 1467/97. The analysis presented in the 
previous  sections  already  broadly  covers  the  key  factors  put  forward  by  the  authorities.  In 

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their letter the Luxembourg authorities highlighted that their budgetary projections are based 
on  very  prudent  assumptions  for  both  revenues  and  expenditures.  Lower  than  usual 
elasticities  have  been  used  to  project  revenues  in  order  to  cater  for  the  high  degree  of 
uncertainty. 

4. 

CONCLUSIONS 

According to the Stability Programme, Luxembourg’s general government deficit in 2020 is 
planned to reach 8.5% of GDP, above and not close to the 3% of GDP Treaty reference value. 
The  planned  excess  over  the  reference  value  is  considered  to  be  exceptional  and  currently 
considered to be temporary. 

In line with the Treaty and the Stability and Growth Pact, this report also examined relevant 
factors.  

Overall,  since  the  planned  deficit  is  well  above  3%  of  GDP  and  taking  into  account  all 
relevant factors, the analysis suggests that the deficit criterion as defined in the Treaty and in 
Regulation (EC) No 1467/1997 is not fulfilled. 

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