Recommendation for a COUNCIL RECOMMENDATION on the economic, social, employment, structural and budgetary policies of Luxembourg
Date: 2025-06-04
Institutions: European Commission, Reform and Investment Task Force
Subjects: Luxembourg, budget policy, economic policy, economic recovery, economic reform, employment policy, investment, social policy, stability pact, transport policy

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   EUROPEAN COMMISSION  Brussels, 4.6.2025  COM(2025) 216 final  Recommendation for a COUNCIL RECOMMENDATION on the economic, social, employment, structural and budgetary policies of Luxembourg {SWD(2025) 216 final}  
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the economic, social, employment, structural and budgetary policies of Luxembourg 

THE COUNCIL OF THE EUROPEAN UNION, 

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

Having regard to Regulation (EU) 2024/1263 of the European Parliament and of the Council 
of  29  April  2024  on  the  effective  coordination  of  economic  policies  and  on  multilateral 
budgetary surveillance and repealing Council Regulation (EC) No 1466/971, and in particular 
Article 3(3) 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: 

General considerations 

(1) 

Regulation (EU) 2024/1263, which entered into force on 30 April 2024, specifies the 
objectives  of  the  economic  governance  framework,  which  aims  at  promoting  sound 
and  sustainable  public  finances  and  sustainable  and  inclusive  growth  and  resilience 
through reforms and investments, and preventing excessive government deficits. The 
Regulation  stipulates  that  the  Council  and  the  Commission  conduct  multilateral 
surveillance in the context of the European Semester in accordance with the objectives 
and requirements set out in the TFEU. The European Semester includes, in particular, 
the  formulation,  and  the  surveillance  of  the  implementation  of  country-specific 
recommendations.  The  Regulation  also  promotes  national  ownership  of  fiscal  policy 
and  emphasises  its  medium-term  focus,  combined  with  more  effective  and  coherent 
enforcement. Each Member State must submit to  the Council and the Commission  a 
national  medium-term  fiscal-structural  plan,  containing  its  fiscal,  reform  and 
investment  commitments,  over  4  or  5  years,  depending  on  the  length  of the  national 
legislative  term.  The  net  expenditure2  path  in  these  plans  has  to  comply  with  the 

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OJ L, 2024/1263, 30.4.2024, ELI: http://data.europa.eu/eli/reg/2024/1263/oj. 
Net  expenditure  as  defined  in  Article  2,  point  (2),  of  Regulation  (EU)  2024/1263:  ‘net  expenditure’ 
means government expenditure net of (i) interest expenditure; (ii) discretionary revenue measures; (iii) 
expenditure  on  programmes  of  the  Union  fully  matched  by  revenue  from  Union  funds;  (iv)  national 
expenditure  on  co-financing  of  programmes  funded  by  the  Union;  (v)  cyclical  elements  of 
unemployment benefit expenditure; and (vi) one-offs and other temporary measures. 

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Regulation’s  requirements,  including  the  requirements  to  put  or  keep  general 
government debt on a plausibly downward path by the end of the adjustment period, or 
for it to remain at prudent levels below 60% of gross domestic product (GDP), and to 
bring  and/or  maintain  the  general  government  deficit  below  the  3%-of-GDP  Treaty 
reference value over the medium term. Where a Member State commits to a relevant 
set  of  reforms  and  investments  in  accordance  with  the  criteria  set  out  in  the 
Regulation, the adjustment period may be extended by up to three years. 
Regulation  (EU)  2021/241  of  the  European  Parliament  and  of  the  Council3,  which 
established  the  Recovery  and  Resilience  Facility  (the  ‘RRF’),  entered  into  force  on 
19 February 2021.  The  RRF  provides  financial  support  to  Member  States  for 
implementing  reforms  and  investments,  delivering  a  fiscal  impulse  financed  by  the 
Union.  In  line  with  the  priorities  of  the  European  Semester  for  economic  policy 
coordination, the RRF fosters economic and social recovery while driving sustainable 
reforms and investments, in particular promoting the green and digital transitions and 
making  Member  States’  economies  more  resilient.  It  also  helps  strengthen  public 
finances  and  boost  growth  and  job  creation  in  the  medium  and  long  term,  improve 
territorial cohesion within the Union and support the continued implementation of the 
European Pillar of Social Rights. 
Regulation  (EU)  2023/435  of  the  European  Parliament  and  of  the  Council4  (the 
‘REPowerEU  Regulation’),  which  was  adopted  on  27 February 2023,  aims  to  phase 
out the Union’s dependence on Russian fossil-fuel imports. This helps achieve energy 
security  and  diversify  the  Union’s  energy  supply,  while  increasing  the  uptake  of 
renewables,  energy  storage  capacities  and  energy  efficiency.  Luxembourg  added  a 
new  REPowerEU  chapter  to  its  national  recovery  and  resilience  plan  in  order  to 
finance  key  reforms  and  investments  that  will  help  achieve  the  REPowerEU 
objectives. 

On 30 April 2021, Luxembourg submitted its national recovery and resilience plan to 
the  Commission,  in  accordance  with  Article  18(1)  of  Regulation  (EU)  2021/241. 
Pursuant  to  Article  19  of  that  Regulation,  the  Commission  assessed  the  relevance, 
effectiveness,  efficiency  and  coherence  of  the  recovery  and  resilience  plan,  in 
accordance  with  the  assessment  guidelines  set  out  in  Annex  V.  On  6  July  2021,  the 
Council adopted its Implementing Decision approving the assessment of the recovery 
and resilience plan for Luxembourg5, which was  amended under Article 18(2) on  13 
September  2024  to  update  the  maximum  financial  contribution  for  non-repayable 
financial  support,  as  well  as  to  include  the  REPowerEU  chapter6.  The  release  of 
instalments  is  conditional  on  the  adoption  of  a  decision  by  the  Commission,  in 
accordance with Article 24(5), stating that Luxembourg has satisfactorily achieved the 

the  Recovery  and  Resilience  Facility 

Regulation  (EU)  2021/241  of  the  European  Parliament  and  of  the  Council  of  12 February 2021 
(OJ  L  57,  18.2.2021,  p.  17,  ELI: 
establishing 
http://data.europa.eu/eli/reg/2021/241/oj). 
Regulation  (EU)  2023/435  of  the  European  Parliament  and  of  the  Council  of  27 February 2023 
amending Regulation (EU) 2021/241 as regards REPowerEU chapters in recovery and resilience plans 
and  amending  Regulations  (EU)  No  1303/2013,  (EU)  2021/1060  and  (EU)  2021/1755,  and  Directive 
2003/87/EC (OJ L 63, 28.2.2023, p. 1, ELI: http://data.europa.eu/eli/reg/2023/435/oj). 
Council Implementing Decision of 6 July 2021 on the approval of the assessment of the recovery and 
resilience plan for Luxembourg (10155/2021). 
Council Implementing Decision of 13 September 2024 amending the Implementing Decision of 6 July 
2021  on  the  approval  of  the  assessment  of  the  recovery  and  resilience  plan  for  Luxembourg 
(10155/2021). 

(2) 

(3) 

(4) 

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(5) 

(6) 

(7) 

relevant  milestones  and  targets  set  out  in  the  Council  Implementing  Decision. 
Satisfactory  achievement  requires  that  the  achievement  of  preceding  milestones  and 
targets for the same reform or investment has not been reversed. 

On  21  January  2025,  the  Council,  upon  the  recommendation  of  the  Commission, 
adopted a recommendation endorsing the national medium-term fiscal-structural plan 
of  Luxembourg7.  The  plan  was  submitted  in  accordance  with  Article 11  and 
Article 36(1),  point (a),  of  Regulation (EU)  2024/1263,  covers  the  period  from  2025 
until 2029 and sets a budgetary constraint in the form of a maximum net expenditure 
growth rate over four years. 

On  26 November 2024,  the  Commission  adopted  an  opinion  on  the  2025  draft 
budgetary plan of Luxembourg. On the same date, on the basis of Regulation (EU) No 
1176/2011,  the  Commission  adopted  the  2025  Alert  Mechanism  Report,  in  which  it 
did  not  identify  Luxembourg as  one  of  the  Member  States  for  which  an  in-depth 
review  would  be  needed.  The  Commission  also  adopted  a  recommendation  for  a 
Council recommendation on the economic policy of the euro area and a proposal for 
the  2025  Joint  Employment  Report,  which  analyses  the  implementation  of  the 
Employment  Guidelines  and  the  principles  of  the  European  Pillar  of  Social  Rights. 
The Council adopted the Recommendation on the economic policy of the euro area8 on 
13 May 2025 and the Joint Employment Report on 10 March 2025.  

On  29 January 2025,  the  Commission  published  the  Competitiveness  Compass,  a 
strategic framework that aims to boost the EU’s global competitiveness over the next 
five  years.  It  identifies  the  three  transformative  imperatives  of  sustainable  economic 
growth: (i) innovation; (ii) decarbonisation and competitiveness; and (iii) security. To 
close  the  innovation  gap,  the  EU  aims  to  foster  industrial  innovation,  support  the 
growth of start-ups through initiatives like the EU Start-up and Scale-up Strategy, and 
promote the adoption of advanced technologies like artificial intelligence and quantum 
computing.  In  pursuit  of  a  greener  economy,  the  Commission  has  outlined  a 
comprehensive Affordable Energy Action Plan and a Clean Industrial Deal, ensuring 
that  the  shift  to  clean  energy  remains  cost-effective,  competitiveness-friendly, 
particularly  for  energy-intensive  sectors,  and  is  a  driver  for  growth.  To  reduce 
excessive dependencies and increase security, the Union is committed to strengthening 
global  trade  partnerships,  diversifying  supply  chains  and  securing  access  to  critical 
raw materials and clean energy sources. These priorities are underpinned by horizontal 
enablers, namely regulatory simplification, deepening of the single market, financing 
competitiveness and a Savings and Investments Union, promotion of skills and quality 
jobs, and better coordination of EU policies. The Competitiveness Compass is aligned 
with  the  European  Semester,  ensuring  that  Member  States’  economic  policies  are 
consistent with the Commission’s strategic objectives, creating a unified approach to 
economic governance that fosters sustainable growth, innovation and resilience across 
the Union. 

(8) 

In  2025,  the  European  Semester  for  economic  policy  coordination  continues  to 
develop  alongside  the  implementation  of  the  RRF.  The  full  implementation  of  the 
recovery and resilience plans remains essential for delivering on the policy priorities 

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8 

Council  Recommendation  of  21  January  2025  endorsing  the  medium-term  fiscal-structural  plan  of 
Luxembourg, OJ C/2025/650, 10.2.2025. 
Council  Recommendation  of  13  May  2025  on  the  economic  policy  of  the  euro  area  (OJ  C, 
C/2025/2782, 22.5.2025, ELI: http:// data.europa.eu/eli/C/2025/2782/oj). 

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under the European Semester, as the plans help effectively address all or a significant 
subset  of  challenges  identified  in  the  relevant  country-specific  recommendations 
issued  in  recent  years.  These  country-specific  recommendations  remain  equally 
relevant  for  the  assessment  of  amended  recovery  and  resilience  plans  in  accordance 
with Article 21 of Regulation (EU) 2021/241.   

(9) 

The  2025  country-specific  recommendations  cover 
the  key  economic  policy 
challenges that are not sufficiently addressed by measures included in the recovery and 
resilience  plans,  taking  into  account  the  relevant  challenges  identified  in  the  2019-
2024 country-specific recommendations. 

(10)  On 4 June 2025, the Commission published the 2025 country report for Luxembourg. 
It  assessed  Luxembourg’s  progress  in  addressing  the  relevant  country-specific 
recommendations  and  took  stock  of  Luxembourg’s  implementation  of  the  recovery 
and  resilience  plan.  Based  on  this  analysis,  the  country  report  identified  the  most 
pressing challenges Luxembourg is facing. It also assessed Luxembourg’s progress in 
implementing  the  European  Pillar  of  Social  Rights  and  in  achieving  the  Union 
headline  targets  on  employment,  skills  and  poverty  reduction,  as  well  as  progress  in 
achieving the United Nations Sustainable Development Goals.  

Assessment of the Annual Progress Report 

(11)  On 21 January 2025 the Council recommended the following maximum growth rates 
of net expenditure for Luxembourg: 5.8% in 2025, 4.7% in 2026, 3.8% in 2027, 5.4% 
in 2028 and 4.7% in 2029, which correspond to the maximum cumulative growth rates 
calculated  by  reference  to  2023  of  14.2%  in  2025,  19.6%  in  2026,  24.1%  in  2027, 
30.8%  in  2028  and  36.9%  in  2029.  On  25  April  2025  Luxembourg  submitted  its 
Annual Progress Report9, on adherence to the recommended maximum growth rates of 
net expenditure and the implementation of reforms and investments responding to the 
country-specific 
main 
recommendations.  The  Annual  Progress  Report  also  reflects  Luxembourg’s  biannual 
reporting  on  the  progress  made  in  achieving  its  recovery  and  resilience  plan  in 
accordance with Article 27 of Regulation (EU) 2021/241. 

the  European  Semester 

challenges 

identified 

in 

(12)  Russia’s  war  of  aggression  against  Ukraine  and  its  repercussions  constitute  an 
existential  challenge  for  the  European  Union.  The  Commission  recommended  to 
activate  the  national  escape  clause  (NEC)  of  the  Stability  and  Growth  Pact  in  a 
coordinated  manner  to  support  the  EU  efforts  to  achieve  a  rapid  and  significant 
increase  in  defence  spending  and  this  proposal  was  welcomed  by  the  European 
Council of 6 March 2025.  

(13)  Based  on  data  validated  by  Eurostat10,  Luxembourg’s  general  government  balance 
turned from a deficit of 0.8% of GDP in 2023 to a surplus of 1.0% in 2024, while the 
general government debt rose from 25.0% of GDP at the end of 2023 to 26.3% at the 
end  of  2024.  According  to  the  Commission’s  calculations,  these  developments 
correspond to a net expenditure growth rate of 6.2% in 2024. In the Annual Progress 
Report,  Luxembourg  estimates  the  net  expenditure  growth  in  2024  at  6.7%.  The 
Commission estimates that the net expenditure growth was lower than in the Annual 
Progress  Report.  The  difference  between  the  Commission's  calculations  of  the  net 

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10 

The  2025  Annual  Progress  Reports  are  available  on:  https://economy-finance.ec.europa.eu/economic-
and-fiscal-governance/stability-and-growth-pact/preventive-arm/annual-progress-reports_en 
Eurostat-Euro Indicators, 22.4.2025. 

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expenditure growth and the estimates of national authorities is due to assumptions of 
lower expenditure funded by transfers from the EU in the national projections. Based 
on the Commission’s estimates, the fiscal stance11, which includes both nationally and 
EU financed expenditure, was broadly neutral in 2024. 

(14)  According to the Annual Progress Report, the macroeconomic scenario underpinning 
the budgetary projections by Luxembourg expects real GDP growth at 2.5% in 2025, 
while  HICP  inflation  is  projected  at  2.0%  in  2025.  The  Commission  Spring  2025 
Forecast  projects  real  GDP  to  grow  by  1.7%  in  2025  and  2.0%  in  2026,  and  HICP 
inflation to stand at 2.1% in 2025 and 1.8% in 2026.  

(15) 

In the Annual Progress Report, the general government surplus is expected to turn to a 
deficit of 0.6% of GDP in 2025, while the general government debt-to-GDP ratio is set 
to  increase  to  26.4%  by  the  end  of  2025.  These  developments  correspond  to  net 
expenditure growth of 7.1% in 2025. The Commission Spring 2025 Forecast projects a 
general government  deficit of 0.4% of  GDP in  2025.  The  return to a deficit  in  2025 
mainly reflects lower windfall revenues from corporate income tax and the impact of 
the  expansionary  fiscal  stance.  According  to  the  Commission’s  calculations,  these 
developments  correspond  to  net  expenditure  growth  of  6.8%  in  2025.  Based  on  the 
Commission’s  estimates,  the  fiscal  stance,  which  includes  both  nationally  and  EU 
financed expenditure, is projected to be expansionary, by 1.2% of GDP, in 2025. The 
general government debt-to-GDP ratio is set to decrease to 25.7% by the end of 2025. 
The decrease of the debt-to-GDP ratio in 2025 is mainly due to the snow-ball effect as 
GDP growth has been higher than interest payment. 

(16)  General  government  expenditure  amounting  to  0.1%  of  GDP  is  expected  to  be 
financed  by  non-repayable  support  (“grants”)  from  the  Recovery  and  Resilience 
Facility  in  2025,  compared  to  0.1%  of  GDP  in  2024,  according  to  the  Commission 
Spring 2025 Forecast. Expenditure financed by Recovery and Resilience Facility non-
repayable support enables high-quality investment and productivity-enhancing reforms 
without a direct impact on the general government balance and debt of Luxembourg.  

(17)  General government defence expenditure in  Luxembourg  remained stable at 0.5% of 
GDP between 2021 and 2023 12. According to the Commission Spring 2025 Forecast, 
expenditure  on  defence  is  projected  at  0.6%  of  GDP  in  2024  and  0.7%  of  GDP  in 
2025. This  corresponds  to an increase of 0.3 percentage points  of GDP  compared to 
2021.  

(18)  According to the Commission Spring 2025 Forecast, net expenditure in  Luxembourg 
is  projected  to  grow  by  6.8%  in  2025  and  13.5%  cumulatively  in  2024  and  2025. 
Based  on  the  Commission  Spring  2025  Forecast,  the  net  expenditure  growth  of 
Luxembourg  in  2025  is  projected  to  be  above  the  recommended  maximum  growth 
rate,  corresponding  to  a  deviation13  of  0.5%  of  GDP  in  annual  terms.  The  projected 
deviation  exceeds  the  0.3%  of  GDP  threshold  for  the  annual  deviation.  Considering 

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The fiscal stance is defined as a measure of the annual change in the underlying budgetary position of 
the  general  government.  It  aims  to  assess  the  economic  impulse  stemming  from  fiscal  policies,  both 
those  that  are  nationally  financed  and  those  that  are  financed  by  the  EU  budget.  The  fiscal  stance  is 
measured as the difference between (i) the medium-term potential growth and (ii) the change in primary 
expenditure net of discretionary revenue measures and including expenditure financed by non-repayable 
support (grants) from the Recovery and Resilience Facility and other Union funds. 
Eurostat, government expenditure by classification of functions of government (COFOG).  
From  2026  these  figures  will  appear  in  the  control  account  that  is  established  in  Article  22  of  the 
Regulation (EU) 2024/1263. 

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2024 and 2025 together, the cumulative growth rate of net expenditure is projected to 
be below the recommended maximum growth rate. Overall, this means there is a risk 
of deviation from the recommended maximum net expenditure growth, when outturn 
data for 2025 will be available next spring. 

(19)  Moreover,  the  Council  recommended  that  Luxembourg  wind  down  the  emergency 
energy  support  measures  before  the  2024/2025  heating  season.  According  to  the 
Commission  Spring  2025  Forecast,  while  the  net  budgetary  cost14  of  emergency 
energy  support  measures  is  estimated  at  0.4%  of  GDP  in  2024,  it  is  projected  to 
decrease to 0.1% in 2025. The emergency energy support measures were only partly 
wound down before the 2024/2025 heating season. This is not fully in line with what 
was recommended by the Council. 

(20)  The  Annual  Progress  Report  does  not  include  budgetary  projections  beyond  2025. 
Based on policy measures known at the cut-off date of the forecast, the Commission 
Spring 2025 Forecast projects a general government deficit of 0.5% of GDP in 2026. 
These developments correspond to net expenditure growth of 5.3% in 2026. Based on 
the Commission’s estimates, the fiscal stance, which includes both nationally and EU 
financed expenditure, is projected to be expansionary, by 0.4% of GDP, in 2026. The 
general government debt-to-GDP ratio is projected by the Commission to increase to 
26.2%  by  the  end  of  2026.  The  increase  of  the  debt-to-GDP  ratio  in  2026  mainly 
reflects a debt-increasing stock flow adjustment. 

Key policy challenges 

(21)  Luxembourg’s  pension  system 

is 

facing  growing  medium-  and 

long-term 
sustainability  risks,  as  expenditures  are  projected  to  outpace  contributions  in  the 
coming  years.  According  to  the  2024  Ageing  Report15,  pension-related  spending  is 
expected  to  rise  steadily,  reaching  17.5%  of  GDP  by  2070  –  an  increase  of  8.1 
percentage  points  compared  to  2024.  This  is  related  to  an  increasing  number  of 
pensioners per worker, a consequence of an ageing population, coupled with a decline 
in net migration, which leads to a higher old-age dependency ratio. While the system 
currently  holds  the  EU’s  largest  pension  reserve,  without  policy  adjustments,  this 
reserve is projected to fall below the threshold envisaged by national legislation by the 
early 2040s16. Projections suggest that once this threshold is reached, the reserve will 
be  depleted  within  five  or  six  years.  Furthermore,  Luxembourg  has  the  lowest 
employment rate for older workers in the EU (51% for ages 55-64), despite a statutory 
retirement  age  of  65.  Early  retirement  is  allowed  from  age  57,  and  generous 
entitlements provide strong financial incentives to exit the workforce early and not to 
participate in  adult learning. In 2024, the government  launched a public consultation 
on  the  perspectives  of  the  pension  system.  In  a  first  phase,  it  gathered  input  from  a 
broad  range  of  stakeholders  and  the  general  public  reflecting  the  main  concerns: 
adaptability,  sustainability  and  equity  of  the  system.  A  second  phase  of  the 
consultation  is  ongoing.  Active  labour  market  policy  measures  to  encourage  longer 
working lives and higher participation rates among older workers would help address 
this issue and support economic growth. 

14 

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16 

The figure represents the level of the annual budgetary cost of those measures, including revenue and 
expenditure and, where applicable, net of the revenue from taxes on windfall profits of energy suppliers. 
European  Commission,  2024,  2024  Ageing  Report.  Economic  and  Budgetary  Projections  for  the  EU 
Member States (2022-2070). 
Cahier statistique no 18 – IGSS, 2024. 

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(22) 

Luxembourg  is  confronted  with  a  severe  housing  challenge,  as  affordability  has 
markedly declined over the past decade due to soaring property prices. Housing prices, 
which had been increasing steadily by above 5% annually, surged by nearly 60% from 
2018  to  2022,  making  Luxembourg  one  of  the  EU’s  most  expensive  housing 
markets17.  The  persistent  supply-demand  imbalance,  fuelled  by  tax  structures 
favouring  land  and  property  hoarding,  was  further  exacerbated  by  institutional 
investors  entering  the  presales  housing  sector18.  Reforms,  such  as  a  comprehensive 
land-use policy and tax measures to increase the supply of buildable land, could help 
increase housing supply, including through the supply of affordable housing. Priorities 
also  include  implementing  the  Housing  Pact  and  adopting  the  housing  tax  reform  as 
well as strengthening the macroprudential framework and phasing out fiscal incentives 
to borrow, which support high house prices19.  

(23)  Luxembourg  faces  significant  transportation  challenges  due  to  high  cross-border 
commuter traffic and high dependency on cars, including company cars, exacerbated 
by housing costs that push workers to reside further away from their workplace20. This 
situation has resulted in traffic congestion, impacting productivity and environmental 
sustainability.  Moreover,  despite  recent  notable  reductions  in  greenhouse  gas 
emissions from road transport, through policies like the National Mobility Plan 203521 
and  free  public  transport,  the  sector  remains  the  primary  greenhouse  gas  emissions 
source, accounting for 60% of total emissions in Luxembourg’s effort-sharing sectors 
in  202322.  While  Luxembourg  has  made  progress  in  promoting  electric  vehicles  and 
improving  public  transport,  a  coordinated,  cross-border  strategy  would  be  needed  to 
address the needs of its commuting workforce. This includes improving connectivity, 
integrating  rail  transport  infrastructure  with  neighbouring  countries,  integrating 
ticketing  systems  and  improving  last-mile  connections.  Further  decarbonising 
transport and investing in public transport infrastructure would help reduce emissions 
in line with the national 2030 emission reduction target. 

(24)  Luxembourg’s  financial  hub  hosts  a  number  of  multinational  groups,  where  a 
significant  share  of  international  financial  flows  takes  place  between  these  entities 
within  multinational  groups.  They  may  be  in  a  position  to  exploit  loopholes  in 
Luxembourg’s  tax  system  that  reduce  taxable  income.  While  the  entry  into  force  of 
Council Directive (EU) 2022/252323 (the ‘Pillar 2 Directive’) on 1 January 2024 aims 
to  address  the  issue  of  low  taxation  of  large  multinational  corporations,  its  scope  is 
limited  to  those  with  an  annual  revenue  of  at  least  EUR 750 million,  leaving  many 
companies  outside 
the  conditional  measure  of  non-
deductibility of interest and royalty payments, initially introduced in 2021, is narrowly 
focused on  those in  the  agreed EU list  of  non-cooperative jurisdictions  and does not 
effectively address the issue of low- or zero-tax jurisdictions. 

its  scope.  Furthermore, 

17 

18 

19 
20 
21 
22 

23 

Eurostat, prc_hpi_q, and Estimations du taux de rendement d’un investissement locatif au Luxembourg, 
Rapport d’analyse 13, Observatoire de l’habitat (2025). 
Coût du logement: Une comparaison du Luxembourg avec la France, la Belgique et l’Allemagne, Note 
40, Observatoire de l’habitat (2024). 
European Commission, 2023, In-Depth Review 2023 - Luxembourg. 
Statec, 2025, P2021 N°18 - La dépendance automobile persiste pour les déplacements domicile-travail. 
Plan national de mobilité, Ministère de la Mobilité et des Travaux publics. 
The effort-sharing emissions for 2023 are based on approximated inventory data. The final data will be 
confirmed in 2027 after a comprehensive review. 
Council  Directive  (EU)  2022/2523  of  14  December  2022  on  ensuring  a  global  minimum  level  of 
taxation  for  multinational  enterprise  groups  and  large-scale  domestic  groups  in  the  Union  (OJ  L  328, 
22.12.2022, p. 1, ELI: http://data.europa. eu/eli/dir/2022/2523/oj). 

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(25) 

In accordance with Article 19(3), point (b), of Regulation (EU) 2021/241 and criterion 
2.2  of  Annex  V  to  that  Regulation,  the  recovery  and  resilience  plan  includes  an 
extensive set  of mutually reinforcing  reforms and investments  to  be implemented by 
2026.  These  are  expected  to  help  effectively  address  all  or  a  significant  subset  of 
challenges  identified  in  the  relevant  country-specific  recommendations.  Within  this 
tight timeframe, finalising the effective implementation of the recovery and resilience 
plan including the REPowerEU chapter, is essential to boost Luxembourg’s long-term 
competitiveness  through  the  green  and  digital  transitions,  while  ensuring  social 
fairness. The systematic involvement of local and regional authorities, social partners, 
civil society and other relevant stakeholders remains essential in order to ensure broad 
ownership for the successful implementation of the recovery and resilience plan. 

(26)  The implementation  of  cohesion  policy programmes, which encompass support from 
the  European  Regional  Development  Fund  (ERDF),  the  Just  Transition  Fund  (JTF) 
and  the  European  Social  Fund  Plus  (ESF+),  has  accelerated  in  Luxembourg.  It  is 
important to continue efforts to ensure the swift implementation of these programmes, 
while  maximising  their  impact  on  the  ground.  Luxembourg  is  already  taking  action 
under  its  cohesion  policy  programmes  to  boost  competitiveness  and  growth.  At  the 
same  time,  Luxembourg  continues  to  face  challenges,  including  those  relating  to  the 
supply and affordability of housing, skills mismatches in the context of the green and 
digital  transitions,  the  labour  market  integration  of  older  workers  and  vulnerable 
groups,  and  decarbonisation.  In  accordance  with  Article  18  of  Regulation  (EU) 
2021/1060, Luxembourg is required – as part of the mid-term review of the cohesion 
policy funds – to review each programme taking into account, among other things, the 
challenges identified in the 2024 country-specific recommendations. The Commission 
proposals adopted on 1 April 202524 extend the deadline for submitting an assessment 
–  for  each  programme  –  of  the  outcome  of  the  mid-term  review  beyond  31  March 
2025.  It  also  provides  flexibilities  to  help  speed  up  programme  implementation  and 
incentives  for  Member  States  to  allocate  cohesion  policy  resources  to  five  strategic 
priority areas of the Union, namely competitiveness in strategic technologies, defence, 
housing, water resilience and energy transition.  

(27)  The  Strategic  Technologies  for  Europe  Platform  (STEP)  provides  the  opportunity  to 
invest in a key EU strategic priority by strengthening the EU’s competitiveness. STEP 
is channelled through 11 existing EU funds. Member States can also contribute to the 
InvestEU programme supporting investments in priority areas. Luxembourg could use 
these initiatives to support the development or manufacturing of critical technologies, 
including clean and resource-efficient technologies. 

(28)  Beyond the economic and social challenges addressed by the recovery and resilience 
plan  and  other  EU  funds,  Luxembourg  faces  several  additional  challenges  related  to 
weak  regional  coordination  and  inefficient  deployment  of  cross-border  transport 
networks;  under-exploited  potential  for  the  adoption  of  new  technologies  and 
digitalisation  of  SMEs;  significant  regulatory  barriers  remaining;  high  economic 
reliance on foreign investment stocks which are declining from 2017 (in percentage of 
GDP);  current  energy  mix  still  dominated  by  fossil  fuels  and  gas  for  transport  and 
buildings;  worsened  performance  and  increased  disparities  leading  to  unequal 

24 

Proposal  for  a  regulation of  the  European  Parliament  and of  the  Council  amending  Regulations  (EU) 
2021/1058  and  (EU)  2021/1056  as  regards  specific  measures  to  address  strategic  challenges  in  the 
context of the mid-term review (EUR-Lex - 52025PC0123 - EN - EUR-Lex). 

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opportunities  in  schools;  persistent  skills  mismatches  and  shortages  of  high  skilled 
workers  in key sectors linked to the green and digital transitions. 

(29)  Despite its  strong scientific base and internationally well-connected research system, 
business innovation and the scale-up opportunities of innovative start-ups and small to 
medium-sized  enterprises  (SMEs)  remain  limited,  hampering  the  diversification  and 
competitiveness  of  the  economy.  Luxembourg’s  potential  for  adoption  of  new 
technologies and digitalisation remains under-exploited, with Luxembourg performing 
below the EU average in terms of basic digital intensity of SMEs25. Additionally, the 
country’s  business  R&D  intensity  has  been  on  a  downward  trend  over  the  last  two 
decades,  falling  to  0.47%  of  GDP  in  2023,  far  below  the  EU  average  of  1.49%26. 
Moreover, the quality of research outputs is not fully leveraged, with science-business 
linkages  remaining  weak.  While  partly  explained  by  Luxembourg’s  services-based 
economy,  business  R&D  spending  is  substantially  lower  than  in  top-performing 
countries across a broad range of sectors, suggesting that low business R&D spending 
does not solely reflect the large size of the financial sector27.  

(30)  To address the challenge of boosting competitiveness in Luxembourg, it is essential to 
consider promoting inclusive and innovative diversification in the financial sector2829, 
which  could  help  address  the  sector’s  structural  weaknesses,  provide  support  for 
innovative  and  high  R&D  intensive  activities,  and  create  a  more  robust  and 
competitive economy aligned with EU policies. Strategic promotion and integration of 
innovative and high-growth sectors – such as sustainable finance, fintech, digital and 
emerging  technologies  – could  lead to  a more  robust and competitive economy.  The 
strong  relationship  between  real  GDP  growth  and  the  growth  of  Luxembourg’s 
international  investment  position  relative  to  its  GDP  (IIP/GDP)30  suggests  that  the 
country’s  economic  performance  is  closely  tied  to  its  ability  to  attract  and  retain 
foreign investment. Promoting innovative and high-growth sectors could help reverse 
the  decline  in  the  IIP/GDP  ratio  and  support  economic  growth.  To  achieve  this, 
Luxembourg could leverage the potential of its financial centre to finance productive 
and innovative activities, such as those supporting the green and digital transitions, by 
promoting collaborative ventures and innovative financing models, and supporting the 
development  of  new  financial  instruments  and  products.  In  particular,  further 
supporting  innovative  structuring  of  blended  finance  and  cooperative  ventures  could 
help  enable  greenfield  investment  in  sustainable  and  high  R&D  intensive  activities. 
Ensuring  transparency  and  accountability  in  the  financial  sector  is  also  crucial,  as  it 
could  help  build  trust  and  confidence  among  investors,  consumers  and  other 
stakeholders.  

(31)  While  Luxembourg  is  committed  to  improving  the  regulatory  environment  for  the 
business  services  sector,  significant  regulatory  barriers  remain.  According  to  the 
OECD31 and  the  European  Commission32,  regulatory  restrictions  are  still  particularly 

25 

26 
27 
28 
29 
30 
31 
32 

Eurostat  (isoc_e_dii,  2024)  and  Luxembourg  Startup  Ecosystem  Assessment  and  Benchmarking, 
Ministère de l’Economie, 2023. 
Conseil national de la productivité, 2023. 
OECD Economic Surveys: Luxembourg 2025. 
OPC LUX: Climate Policy Observatory, Luxembourg, Annual Report 2023. 
Z/Yen Group 2024, Smart Centres Index 10. 
Eurostat, (bop_iip6_q), (namq_10_gdp). 
OECD, Product Market Regulation indicators, 2024. 
European  Commission,  Communication  on  updating  the  reform  recommendations  for  regulation  in 
professional services, COM(2021) 385, 9.7.2021. 

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high for lawyers, notaries, architects, civil engineers, and accountants. For notaries, the 
restrictions are among the strictest in the EU. The regulation imposing the legal form 
of  their  business,  and  the  regulation  of  entry  into  the  profession  were  highlighted  as 
very strict. Entry regulations for lawyers are also particularly restrictive33. Barriers to 
competition  can  be  due  to  limited  pathways  to  access  some  professions,  various 
administrative  obligations,  the  existence  of  binding  tariffs,  or  the  prohibition  of  any 
form  of  advertising  and  marketing34.  Reducing  the  requirements  or  increasing 
flexibility would boost competition in the sector of regulated professions, which would 
benefit  the  businesses  that  buy  these  services.  In  the  retail  sector,  regulatory 
restrictions  are  still  slightly  higher  than  in  peer  countries,  although  they  have 
significantly  decreased  since  201835  36.  Examples  of  such  restrictions  are  the 
requirement to obtain specific authorisations for opening clothing, food and beverage 
outlets and the permission to do sales promotions only during specific periods of the 
year37.  

(32)  Luxembourg’s current  energy mix  is  still dominated by fossil fuels, with fossil fuels 
making up 61.1% of gross domestic consumption in 2023. While the country has made 
efforts  to  increase  the  share  of  renewable  energy  sources,  they  accounted  for  only 
11.9% of the energy mix in 202338, highlighting the need for further action to diversify 
the  energy  mix  and  reduce  reliance  on  fossil  fuels.  In  addition,  Luxembourg  largely 
depends  on  its  neighbours  to  meet  its  energy  needs.  While  electricity  grids  are 
sufficient  for  its  current  needs,  the  transmission  system  operator  sees  a  need  to  both 
increase  and  modernise  the  high-voltage  grid  and  improve  interconnections,  in 
particular with Germany, between now and 2040. Municipalities will also play a key 
role in developing detailed local plans for deploying renewable energy, including wind 
power and photovoltaics, and for district heating and cooling systems. Decarbonising 
buildings  is  crucial,  as  they  accounted  for  20%  of  total  emissions  in  Luxembourg’s 
effort-sharing  sectors  in  202339.  The  recent  slight  increase  in  energy  consumption  in 
the  residential  sector  highlights  the  need  for  further  progress  in  building  renovations 
and energy efficiency to meet the 2030 reduction target of 50% emissions compared to 
2005  levels.  Improving  energy  efficiency  in  both  residential  and  non-residential 
buildings  is  essential  to  reduce  energy  consumption  by  34%  by  2030,  as  outlined  in 
the national renovation strategy.  

(33)  Low  basic  skills  levels  pose  a  threat  to  labour  productivity  and  competitiveness  in 
Luxembourg.  The  proportion  of  low  achievers  in  the  country  is  higher  than  the  EU 
average, with a significant score gap between advantaged and disadvantaged students, 
making it the widest in the EU40. This performance deficit develops early, particularly 
among pupils from disadvantaged backgrounds and those who do not speak German or 
Luxembourgish at home, highlighting the need for targeted support. The absence of a 

33 
34 
35 
36 
37 
38 
39 

40 

OECD, Product Market Regulation indicators, 2024. 
OECD, OECD Economic Surveys: Luxembourg | OECD, p. 106, April 2025. 
OECD, Product Market Regulation indicators, 2024. 
European Commission, 2022 update of the Retail Restrictiveness Indicator. 
OECD, OECD Economic Surveys: Luxembourg | OECD, p.107, April 2025. 
Gross inland consumption 2023 (Eurostat). 
The effort-sharing emissions for 2023 are based on approximated inventory data. The final data will be 
confirmed in 2027 after a comprehensive review. 
https://www.oecd.org/content/dam/oecd/en/publications/reports/2019/12/pisa-2018-results-volume-
i_947e3529/5f07c754-en.pdf. 

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unified school quality framework at national level41 prevents effective monitoring and 
may  accentuate  segmentation  and  inequalities.  Current  policies  fail  to  address 
disparities  across  school  system,  underscoring  the  need  for  a  more  comprehensive 
approach42.  Adopting  a  national  school  quality  framework  and  an  external  school 
evaluation system, as well as adapting teaching to the needs of disadvantaged students 
and those from various linguistic backgrounds, could help reduce the performance gap 
and  improve  overall  skills  levels.  Ultimately,  this  would  also  support  the  country’s 
long-term  economic  growth  and  social  cohesion.  Addressing  these  challenges  would 
also contribute to supporting upward social convergence, in line with the Commission 
services’ second-stage country analysis of the Social Convergence Framework43. 

the  right  skills 

(34)  Despite  its  strong  economic  performance,  Luxembourg  is  facing  persistent  skills 
mismatches and significant shortages of skilled workers4445 in key sectors linked to the 
green  and digital transitions. Some 80% of  SMEs  encounter difficulties in recruiting 
in  certain  professions46,  which  may  hinder 
workers  with 
competitiveness.  Meanwhile,  shortages  are  reported  in  several  occupations  requiring 
specific  skills  related  to  the  digital  and  green  sectors.  Several  challenges  persist  in 
promoting  skills  development  in  Luxembourg.  Participation  of  older  workers  in 
learning programmes remains low. Moreover, there is  still a significant  gap between 
the current adult training rate and Luxembourg’s national 2030 skills target of 62.5% 
(17.3  percentage  points)47,  highlighting  the  need  for  targeted  initiatives  to  promote 
reskilling and upskilling. 

(35)  Luxembourg’s  health  system  faces  challenges  with  shortages  of  health  workers, 
mainly  due  to  the  high  reliance  on  foreign-trained  health  professionals,  unequal 
distribution of staff, and a significant proportion of doctors expected to retire by 2034. 
Ageing  of  the  population  will  exacerbate  challenges.  More  efficient  use  of  limited 
resources  and  better  governance  is  a  precondition  to  strengthen  the  resilience  of  the 
health  system.  Addressing  the  fragmentation  of  health  services  through  more 
prevention  and  community-driven  models  of  care,  provided  in  teams  rather  than  in 
solo practices, is a key factor of efficiency gains in the future. Better use of data and 
information  in  governance  and  planning  and  stepping  up  digitalisation  are  key  to 
supporting the transformation of the health system. 

(36) 

In view of the close interlinkages between the economies of euro-area Member States 
and  their  collective  contribution  to  the  functioning  of  the  economic  and  monetary 
union,  in  2025,  the  Council  recommended  that  the  euro-area  Member  States  take 
action,  including  through  their  recovery  and  resilience  plans,  to  implement  the  2025 
Recommendation  on  the  economic  policy  of  the  euro  area.  For  Luxembourg, 
the  first  euro-area 
recommendations  (2),  (3),  (4)  and  (5)  help 
recommendation  on  competitiveness,  while  recommendations  (1),  (4)  and  (5)  help 
and 
implement 

recommendation 

implement 

resilience, 

euro-area 

second 

the 

on 

41 

42 
43 

44 
45 
46 
47 

See Observatoire national de l’enfance, de la jeunesse et de la qualité scolaire (OEJQS), 2024,  Topical 
report: Evidenzorientierte Qualitätsentwicklung im Gesamtsystem Schule (German). 
Épreuves Standardisées (ÉpStan). 
SWD(2025)95  –  Second-stage  country  analysis  on  social  convergence  in  line  with  the  Social 
Convergence Framework (SCF), 2025. 
Eurostat, (lfsq_urgan). 
Eurostat, (jvs_q_nace2). 
Education and Training Monitor 2024. 
2022 Adult Education Survey. 

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recommendation (1)  helps 
macro-economic and financial stability set out in the 2025 Recommendation. 

third  euro-area  recommendation  on 

implement 

the 

HEREBY RECOMMENDS that Luxembourg take action in 2025 and 2026 to:  

1. 

2. 

3. 

4. 

Reinforce overall defence spending and readiness in line with the European Council 
conclusions  of  6  March  2025.  Ensure  that  net  expenditure  respects  the  path 
recommended  by  the  Council  on  21  January  2025.  Address  the  long-term 
sustainability of the pension system, in particular by limiting early-retirement options 
and increasing the participation and employment rate of older workers by enhancing 
their  employment  opportunities  and  employability.  Increase  housing  supply,  in 
particular  by  adopting  a  comprehensive  land-use  policy  and  a  property  tax  reform, 
developing 
land,  and  strengthening 
coordination  with  urban  planning  and  cross-border  public  transport.  Mitigate  risks 
related  to  the  housing  market  by  phasing  out  fiscal  incentives  to  borrow  and  by 
strengthening  the  macroprudential  framework.  Take  further  action  to  effectively 
tackle  aggressive  tax  planning,  in  particular  by  ensuring  sufficient  taxation  of 
outbound payments of interest and royalties to zero-/low-tax jurisdictions, other than 
those included in the agreed EU list of non-cooperative jurisdictions for tax purposes. 

large-scale  district  projects  on  public 

In  view  of  the  applicable  deadlines  for  the  timely  completion  of  reforms  and 
investments under Regulation (EU) 2021/241, ensure the effective implementation of 
the recovery and resilience plan, including the REPowerEU chapter.  Accelerate the 
implementation of cohesion policy programmes (ERDF, JTF, ESF+), building, where 
appropriate, on the opportunities offered by the mid-term review. Make optimal use 
of EU instruments, including the scope provided by  the InvestEU and the Strategic 
Technologies for Europe Platform, to improve competitiveness. 

Focus economic policy related to investment on fostering innovation and supporting 
high  R&D  intensive  activities.  Boost  competitiveness,  including  by  promoting 
diversification,  in  particular  in  the  financial  sector,  accelerating  digitalisation,  in 
particular  in  the  uptake  of  advanced  digital  technologies  by  SMEs,  and  enabling 
business  scale-up  and  productivity  growth.  Reduce  barriers  to  competition  in 
regulated professional business services. 

Improve sustainable and efficient transport by further promoting the decarbonisation 
of  transport  and  investing  in  public  transport  infrastructure  and  cross-border 
networks. Reduce overall reliance on fossil fuels by investing in energy efficiency in 
both the residential and non-residential sectors. Modernise the high-voltage grid and 
increase  its  capacity,  improve  cross-border  interconnections,  and  ease  permitting 
procedures  for  renewable  energy  deployment.  Support  municipalities  in  deploying 
renewable energy. 

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5. 

Improve  performance  and  ensure  equal  opportunities  in  schools,  including  by 
adopting  a  national  school  quality  framework  and  an  external  school  evaluation 
system,  and  by  adapting  teaching  to  the  needs  of  disadvantaged  students  and  those 
from various linguistic backgrounds. Address skills mismatches, in particular for the 
green  and  digital  transitions,  by  stimulating  skills  development.  Improve  the 
resilience of the health system by ensuring appropriate availability of health workers. 
Accelerate reforms to improve the governance of the health system and e-health. 

Done at Brussels, 

For the Council 
The President 

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