Luxembourg

   
 

Key Challenges

Economic diversification crucial
Economic diversification is the key challenge confronting Luxembourg. Addressing this challenge will necessitate exploiting innovative niche markets, promoting the digitization of the financial sector and adopting a new approach to publicizing Luxembourg as an international economic hub. With respect to the financial sector, the government should focus on developing ICT synergies and exploring new financial technology products and services.
Tarnished reputation
as tax haven
The Luxembourg Leaks and Panama Papers scandals demonstrated the vulnerabilities of focusing economic activity excessively on the financial sector. It will take time for recent efforts in tax transparency to restore Luxembourg’s tarnished reputation as a tax haven.
Future growth will
depend on R&D
In 2016, Luxembourg invested 1.24% of its GDP in R&D, less than the EU average and less than the government’s own target of more than 2.03% of GDP. The Luxembourg Cluster Initiative, led by the national research agency Luxinnovation, has identified seven economic sectors that will be essential for sustainable economic development. These sectors include health care and biotechnology, ICT, material technology, space technology, logistics, maritime activities, and emerging alternative investment funds (e.g., private-equity funds). There is broad consensus that to further drive economic growth, public investment in R&D must significantly increase and economic competitiveness must be improved.
Debt growing as investment rises
Public investments and, in turn, the national debt are on the rise. The latter increased from 22% of GDP in 2015 to 23.5% in 2017 and is projected to reach an all-time high €1 billion in deficit in 2018. Despite the country’s strong GDP growth, general government debt will significantly increase. Even though the current level of national debt is far below the EU average, further government expenditure must be monitored closely and rising interest rates taken into account.
Generous welfare system likely unsustainable
Luxembourg’s welfare system is one of the most substantial and comprehensive systems in the EU. While neighboring countries have reduced welfare provisions in recent years, Luxembourg has expanded its system over the past 30 years. Both the OECD and European Commission have warned that Luxembourg will need to reduce its generous welfare provision if the system is to remain sustainable, particularly its extensive support for early retirement, disability benefits and the health care sector.
Population growth creating new tensions
Recent population growth has been driven by a modest decrease in the birth rate, a falling death rate and increasing life expectancy. Luxembourg has also experienced a high rate of migration, with around 80% of its population growth resulting from migration. Since October 2017, more than 600,000 people are living in the Grand Duchy. After an all-time high of more than 11,000 new citizens in 2015, migration decreased slightly since 2016.
 
Forecasts indicate that Luxembourg’s population will increase to 1 million by 2060. Strong population growth will stabilize the social security system, especially the public pension system, but will also increase intergenerational and intercultural tensions. Luxembourg’s traditional corporatist philosophy has become increasingly universal and the country has been able to avoid enacting severe austerity policies. Nonetheless, minor changes to the pension system and general employment rules need to be adopted.
 
Population growth is a challenge particularly for the booming centers of Nordstadt, Luxembourg City and Esch/Beval. These cities will have to solve issues related to traffic congestion and the densification of living space, while ensuring a continued high standard of living for residents. The densification of living space is increasing the pressure on the limited number of rental properties and high real-estate prices. Major public investments are expected in the coming years, particularly in the areas of infrastructure, environment and housing.
Water a key environ-
mental challenge
The country’s most pressing environmental-policy challenges include improving water quality, avoiding water pollution through pesticide and fertilizer use and constructing wastewater treatment plants. Eutrophication is a serious problem and many water sources are at risk.
Education system a persistent concern
The education system poses another persistent challenge for Luxembourg. Its official trilingual nature presents difficulties to both nationals and foreigners. Moreover, the country’s PISA scores are lower than the OECD average. Over the past 15 years, several school reforms have sought to facilitate the integration of migrant children within this trilingual system by reducing the emphasis on language competency in the determination of school grades. Reforming the education system will be a key determinant in ensuring long-term economic competitiveness. As a result, the government is currently implementing secondary school reforms. To speed up business creation processes and facilitate business innovation, formal education and vocational training, combined with lifelong learning, must encourage entrepreneurship (especially in technical fields) by improving key competencies through non-formal and informal learning processes.
 
There remains room for improvement. The 4G cellular network still fails to cover 20% of the country. In addition, untapped potential in digital technology must be mainstreamed in all business sectors and startups need more venture capital.
Stable political system
with good prospects
Overall, Luxembourg enjoys a comparatively stable political system, high trade logistics performance, excellent broadband coverage, a very competitive tax system, reasonable living costs (excluding housing costs), new financial technologies, innovative communication technologies and tremendous job growth. Alongside continuing policy weaknesses (e.g., education), these capacities must be mainstreamed towards technology-driven sustainable development.
Citations:
Annuaire de la compétitivité 2016. Union des Entreprises Luxembourgeoises, 2016. www.statistiques.public.lu/catalogue-publications/perspectives-economiques/2016/PDF-31-2016.pdf. Accessed 7 Dec. 2017.

Country Report Luxembourg 2017. The European Commission, 2017. www.ec.europa.eu/info/sites/info/files/2017-european-semester-country-report-luxembourg-en.pdf. Accessed 28 Dec. 2017.

“ Fakten und Fragen: Eine Überdosis an Wachstum? ” CGFP, www.cgfp.lu/archive-details.html?ref=814. Accessed 4 Dec. 2017.

Luxembourg Cluster Portal, www.clusters.lu/. Accessed 4 Dec. 2017.

“Luxembourg.” OECD Data, data.oecd.org/luxembourg.htm. Accessed 4 Dec. 2017.

“Pierre Gramegna: Transparenz ist die Zukunft des Finanzplatzes.” Luxemburger Wort, 3 Apr. 2014, www.wort.lu/de/business/pierre-gramegna-transparenz-ist-die-zukunft-des-finanzplatzes-533c950ee4b0c117a0b359bb. Accessed 21 Feb. 2017.

“Observatoire de la compétitivité.” Le portail de l’actualité gouvernementale, 18 Apr. 2016, www.gouvernement.lu/odc. Accessed 21 Feb. 2017.

OECD Economic Surveys Luxembourg. OECD Publishing, 2017. www.oecd.org/eco/surveys/Luxembourg-2017-OECD-economic-survey-overview.pdfAccessed 4 Dec. 2017.

Rapport Social National 2016. Gouvernement du Grand-Duché de Luxembourg, 2015. www.mfi.public.lu/publications/Solidarite/RapportSocialNational2016.pdf. Accessed 4 Dec. 2017.

“Real GDP growth rate.” Eurostat, www.ec.europa.eu/eurostat/tgm/table.do?tab=table&init=1&plugin=1&language=en&pcode=tec00115. Accessed 14 Dec. 2017.

“R&D expenditure in the EU remained stable in 2016 at just over 2% of GDP.”
ec.europa.eu/eurostat/documents/2995521/8493770/9-01122017-AP-EN.pdf/94cc03d5-693b-4c1d-b5ca-8d32703591e7. Accessed 2 Dec. 2017.

The 3rd Industrial Revolution Strategy Study for the Grand Duchy of Luxembourg. The TIR Consulting Group LLC, 2016. www.troisiemerevolutionindustrielle.lu/wp-content/uploads/2016/11/TIR-CG_Luxembourg-Final-Report_Long-Version.pdf. Accessed 21 Feb. 2017.

“University of Luxembourg.” Institutional Evaluation Programme 2017.
2016. www.mesr.public.lu/publications/rapports-evaluations/IEP-Lux-report-16-17-final.pdf. Accessed 2 Dec. 2017.
Back to Top