CELEX: 52011SC0811
Language: en
Date: 2011-06-07 00:00:00
Title: Recommendation for a COUNCIL RECOMMENDATION on the National Reform Programme 2011 of Luxembourgand delivering a Council opinionon the updated Stability Programme of Luxembourg, 2011-2014

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		52011SC0811
		
			Recommendation for a COUNCIL RECOMMENDATION on the National Reform Programme 2011 of Luxembourgand delivering a Council opinionon the updated Stability Programme of Luxembourg, 2011-2014 /* SEC/2011/0811 final */
			
				
		
		
			
			   	Recommendation for a
COUNCIL RECOMMENDATION
on the National Reform Programme 2011 of
Luxembourg
and delivering a Council opinion
on the updated Stability Programme of Luxembourg, 2011-2014
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 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 policies[1],
and in particular Article 5(3) thereof,
Having regard to the recommendation of the
European Commission[2],
Having regard to the conclusions of the
European Council,
Having regard to the opinion of the
Employment Committee,
After consulting the Economic and Financial
Committee,
Whereas:
(1)              
On 26 March 2010, the European Council agreed to
the European Commission's proposal to launch a new strategy for jobs and
growth, Europe 2020, based on enhanced coordination of economic policies, which
will focus on the key areas where action is needed to boost Europe’s potential
for sustainable growth and competitiveness.
(2)              
On 13 July 2010, the Council adopted a
recommendation on the broad guidelines for the economic policies of the Member
States and the Union (2010 to 2014) and on 21 October 2010, adopted a decision
on guidelines for the employment policies of the Member States,[3]
which together form the “Integrated guidelines”. Member States were invited to
take the integrated guidelines into account in their national economic and
employment policies.
(3)              
On 12 January 2011, the Commission adopted the
first Annual Growth Survey, marking the start of a new cycle of economic
governance in the EU and the first European semester of ex-ante and integrated
policy coordination, which is anchored in the Europe 2020 strategy. 
(4)              
On 25 March 2011, the European Council endorsed
the priorities for fiscal consolidation and structural reform (in line with the
Council’s conclusions of 15 February and 7 March 2011 and further to the
Commission’s Annual Growth Survey). It underscored the need to give priority to
restoring sound budgets and fiscal sustainability, reducing unemployment
through labour market reforms and making new efforts to enhance growth. It
requested Member States to translate these priorities into concrete measures to
be included in their Stability or Convergence Programmes and National Reform
Programmes.
(5)              
On 25 March 2011, the European Council also
invited the Member States participating in the Euro Plus Pact to present their
commitments in time to be included in their Stability or Convergence Programmes
and their National Reform Programmes.
(6)              
On 29 April 2011, Luxembourg submitted its
update 2011 Stability Programmecovering the period 2011-2014 and its 2011 National
Reform Programme. In order to take account of the interlinkages, the two programmes have been assessed at the same time. 
(7)              
Considering the
exceptional weight of the financial sector in the economy, Luxembourg has
withstood the financial and economic crisis relatively well. After real GDP
fell by 3.6% in 2009 the economy recovered quickly in 2010. GDP expanded by
about 3.5%, boosted by an increase in public spending decided by the Government
as part of the European Economic Recovery Programme,
and by a strong increase in net exports. Employment remained resilient, partly
due to a sizable recourse to short-time working arrangements, encouraged by the
authorities. Unemployment began to rise from the beginning of 2008 on and
broadly stabilised at about 6%, a level which is historically high in
Luxembourg. Despite the recession, public finances in Luxembourg are relatively
sound (a deficit of 1.7% and gross debt of 18.4% in 2010), thanks to a very
favourable starting position.
(8)              
Based on the assessment of the updated Stability
Programme pursuant to Council Regulation (EC) No 1466/97, the Council is of the
opinion that the macroeconomic scenario underpinning
the budgetary projections is slightly cautious when compared with the
Commission services 2011 Spring forecast. According to the programme, the
target for 2011 is a deficit of 1.0%, which is in line with the Commission
services' spring forecast. The programme, under an unchanged policy scenario,
projects a deterioration of the headline deficit in 2012 to 1.5% of GDP before
it improves gradually again to 0.8% of GDP by 2014. The Commission services'
forecast is slightly more optimistic projecting a deficit of 1.1% of GDP in
2012, based on a more favourable macro-economic scenario and a slower increase
in expenditure. The programme does not foresee the achievement of the Medium
Term Objective (hereinafter MTO), which is defined as a structural surplus of
0.5% of GDP, within the 2011-2014 programming period. On the contrary, the
structural balance (recalculated by Commission services based on the
information in the programme, following the commonly agreed methodology) is
expected to deteriorate gradually from a 0.3% surplus in 2011 to a 0.8% deficit
in 2014. 
(9)              
With GDP growth projected to remain robust,
Luxembourg's public finances could benefit from a further improvement of the
structural balance with a view to achieving the MTO already in 2012. This would
provide the country a safety margin against a possible future economic downturn
and help improve long-term sustainability of public finances. Additionally, in
the light of the estimated impact of the implicit liabilities related to
population ageing, the country would benefit from having a more ambitious MTO. 
(10)          
The increase in age-related public expenditure
in Luxembourg in coming decades is projected to be the strongest in the EU. The
short-term financing of the pension system is currently supported by a low
old-age dependency ratio and depends in part on the contributions paid by the
relatively young population of cross-border workers. In future, both factors
will reverse and pension costs are anticipated to increase substantially.
Although the government has accumulated sizeable assets and pension reserves
are still growing, these will not be sufficient to ensure the sustainability of
the system. In addition, the
employment rate of older workers (age 55-64) at 38.2% (2009) is one of the
lowest in the EU-27 (EU average: 46%). While the statutory retirement age is in
principle 65 years, the Luxembourg pension system often allows retiring earlier
with virtually no reduction in the pension level, which is, moreover,
comparatively high. As a result, the average age of withdrawal from the labour
market is 59.4 years, which weighs on the costs of the pension system. The government's
plans for a pension reform foresee a new model aimed at keeping jobholders in
work longer on a voluntary basis. This would improve the dependency ratio of
the pension system. However, this mechanism would only concern new pensioners
and only apply to the part of the career situated after the entry into force of
the reform, so it would only produce its full effect in 40 years.
(11)          
The price and cost competitiveness of Luxembourg
has deteriorated substantially since the beginning of the last decade. This is
due to developments both in wages and productivity. Over the period 2000-2010,
unit labour costs rose about one and a half times faster in Luxembourg than on
average in the EU-15, and more than five times faster than in Germany. Given
the agreement between the government and the trade unions to postpone, from
Spring to October 2011, the application of the automatic wage indexation
mechanism, there will be a substantial moderation of real wage growth in 2011.
A decision has yet to be taken concerning the subsequent threshold. Given the
current inflation outlook the next automatic indexation could fall already in
spring 2012, thus wiping out the earlier gains in cost competitiveness.
(12)          
Despite historically strong employment growth,
the employment rate of the resident population is lower than the EU average,
especially at both ends of the age spectrum. Job creation in recent years has
mainly benefitted non-residents. Even though the rise in unemployment since
2008 is related to the recession, it has an increasingly structural character,
illustrated by the fact that during the growth years prior to the crisis,
employment needed to grow at around 4% a year in order to produce a marginal
decline in unemployment. Youth unemployment is relatively high at 16.1% in 2010
compared to 6% of total active population. The unemployment rate depends
heavily on the educational level. Young residents face an acute competition for
available jobs from non-residents, who are often as much or even more skilled. 
(13)          
The Luxembourg government outlined a series of
commitments in the context of the Euro Plus Pact.[4]
These commitments refer to the four areas of the Pact. On the fiscal side, the
government approved the features of a pension reform and commits itself to
finalising the reform by the end of 2011. To reinforce financial stability,
measures focus on boosting the resistance of the financial sector through
regulation and supervision at the European and international level and pursuing
the efforts to diversify the structure of the Luxembourg economy. Employment
measures focus on increasing the efficiency of active employment policies
(reform of the "Administration de l'Emploi") and encouraging life
long learning in the private sector by a higher co-financing rate by the state.
The competitiveness measures include a postponement of
the indexation of wages from spring 2011 (implied by the automatic indexation
system) to October 2011, and a commitment to negotiate with social partners a
similar postponement for 2012. Moreover, the government
committed to improve the business environment through administrative
simplification and better infrastructure. They are in line with the broader
reform agenda outlined in the Stability and National Reform Programmes and address
challenges in the areas of pensions, competitiveness, employment (particularly
of young and older workers) and the financial sector. However, some of the
proposed reforms lack detail. The Euro Plus Pact commitments have been assessed
and taken into account in the recommendations.
(14)          
The Commission has assessed the Stability
Programme and National Reform Programme including the Euro Plus Pact
commitments for Luxembourg[5]. It has taken into
account not only their relevance for sustainable fiscal and socio-economic
policy in Luxembourg but also their conformity with EU rules and guidance,
given the need to reinforce the overall economic governance of the European
Union by providing EU level input into future national decisions. In this
light, the Commission considers that a more ambitious reduction of the deficit
in 2011 should be possible in view of the favourable macro-economic outlook,
and that a stronger fiscal effort would allow to reach the MTO in 2012. Further
steps should also be taken to reform the pension system and promote active
ageing, to strengthen competitiveness, and to help young people into jobs. 
(15)          
In light of this assessment, the Council has
examined the 2011 update of the Stability Programme of Luxembourg and its
opinion[6] is reflected in
particular in its recommendation under (1) and (2) below. Taking into account
the European Council conclusions of 25 March 2011, the Council has examined the
National Reform Programme of Luxembourg,
HEREBY RECOMMENDS that Luxembourg
should take action within the period 2011-2012 to:
(1)                   
Take advantage of the improving cyclical
conditions to strengthen the fiscal effort in order to further reduce the
headline deficit and reach the medium-term objective in 2012.
(2)                   
Propose and implement a broad pension reform to
ensure the long-term sustainability of the pension system, starting with
measures that will increase the participation rate of older workers, in
particular by discouraging early retirement and including measures that link
the statutory retirement age to life expectancy.
(3)                   
Reform, in consultation with social partners and
in accordance with national practices, the system of wage setting to ensure
that wage growth better reflects developments in labour productivity and
competitiveness. 
(4)                   
Take steps to reduce youth unemployment by
reinforcing training and education measures aimed at better matching young
people's skills to labour demand.
Done at Brussels,
                                                                       For
the Council
                                                                       The
President
[1]               OJ L 209, 2.8.1997, p. 1.
[2]               OJ C , p. .
[3]               Maintained for 2011 by Council Decision 2011/308/EU
of 19 May 2011.
[4]               More details on the commitments made under the Euro
Plus Pact can be found SEC(2011) 724.
[5]               SEC(2011) 724.
[6]               Foreseen in Article 5(3) of Council Regulation (EC)
No 1466/97.