Executive Summary

Key European capital
Luxembourg is a founding member of the United Nations (1945), the European Coal and Steel Community (1950) and the European Economic Community (1957). It is also one of the Europe Union’s three capitals, along with Brussels and Strasbourg. It hosts several EU institutions, including the Secretariat of the European Parliament, the European Court of Justice, EUROSTAT, the European Investment Bank and the European Stability Mechanism, as well as several European Commission services. Approximately 11,000 EU officials work in Luxembourg, while key EU ministerial meetings are regularly hosted in the Grand Duchy.
Young, swiftly changing resident population
The demographic development of Luxembourg differs from most other EU member states due to persistently high migration rates. Since 2012, Luxembourg has had an exceptionally high annual population growth rate by EU standards, currently 2.29% (2016). Another key driver of dynamic population development is the average age of 39.2, which is low by EU standards though higher than in Ireland and Cyprus. Overall, the general population is increasing, aging and becoming more heterogeneous.
Healthy, fast-growing economy
The economy is strengthening, domestic demand is increasing and the workforce is expanding. In the second quarter of 2016, GDP grew by an impressive 4.4%. In 2015, the real GDP growth rate was 4.8%, higher than the average euro zone growth rate. This is an increase of 0.8% compared to 2012 (4%). In 2015, a 2% increase in general VAT rates was implemented to compensate for a decline in e-commerce tax revenues. Since 2012, the return of economic growth has been accompanied by a sustained expansion of the workforce at a rate of approximately 2.5% per year.
Generous welfare
Luxembourg has experienced strong economic growth and fiscal stability. This has provided the means for public authorities to develop an outstanding welfare system over the last two decades, even while other neighboring countries have reduced public welfare provision in recent years. Luxembourg’s welfare system includes generous insurance cover, benefit schemes and public services. For example, health care provision has recently been expanded and levels of replacement revenues exceed Scandinavian standards. Luxembourg’s traditional corporatist philosophy has become increasingly universal and Luxembourg has not had to enact severe austerity policies. Though minor changes to the pension system and general employment rules will have to be adopted.
Fiscal restraint becoming more important
Luxembourg has generous, but cost-intensive social and health care systems, which exceed the level of cover provided in Scandinavian countries. The welfare state has gradually expanded. However, despite strong economic growth and low public debt, maintaining fiscal sustainability is increasingly important. Luxembourg is particularly vulnerable to geopolitical instabilities due to the economy’s small size and openness to global markets. A fiscal consolidation program was launched in 2013, which introduced some austerity measures and a reform of the pension scheme. Though the government aslo increased public investment in the economy to stimulate domestic markets, attract additional private investment and drive innovation.
Favorable tax deals for firms under fire
The LuxLeaks tax scandal, a dominant topic during the period under review, gained widespread international news coverage. The scandal focused on how multinational corporations had negotiated low tax rates, often less than 2% compared to an international average of 29.22%, in return for relocating to Luxembourg.
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