Luxembourg

   
 

Key Challenges

Stable economic outlook
Luxembourg’s economic outlook is stable. Securities issued by the government have received an upper-medium A3 rating from Moody’s indicating a low credit risk and superior ability to repay short-term debt obligations. Luxembourg is geographically at the heart of Europe, while Luxembourg City is one of three EU capitals and a key international financial center. The country’s public administration is highly efficient.
Economic diversification needed
Economic diversification is the key challenge confronting Luxembourg, which will need to be addressed by exploiting innovative niche markets, promoting the digitization of the financial sector and adopting a new approach to promote 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, especially products related to emerging virtual currency markets and blockchain technologies. However, the LuxLeaks and Panama Papers scandals demonstrated the vulnerabilities of focusing excessively on the financial sector.
Welfare system becoming unsustainable
Luxembourg’s welfare system is one of the most substantial and comprehensive systems in the Europe Union. While neighboring countries in recent years have reduced welfare provision, Luxembourg has expanded its system over the past 30 years. However, both the OECD and European Commission have warned that Luxembourg will need to reduce its generous welfare provision if it is to remain sustainable, particularly its support for early retirement, work incapacity benefits and the health care sector.
R&D investment needs to be increased. Major public investments planned
In 2015, Luxembourg invested 1.3% of GDP in R&D, less than the EU average and less than the government’s target of more than 2.3% of GDP. The Luxembourg Cluster Initiative is led by the national research agency, Luxinnovation. The initiative has identified seven economic sectors that will be key for sustainable economic development. These sectors include health care and biotechnology, ICT, materials technology, space technology, logistics, maritime activities and emerging alternative investment funds (e.g. private-equity funds). There is broad consensus that public investment on R&D must increase significantly and economic competitiveness improved to drive further economic growth. Major public investments are expected in the coming years, particularly in the areas of infrastructure, environment and housing. An increase of 18% in public investment spending is planned for 2016.
Population growth bringing tensions
Forecasts indicate that Luxembourg’s population will increase to 1.1 million by 2060. Strong population growth will stabilize the social security system, especially the public pension system, but will also increase inter-generational and -cultural tensions.
 
Population growth is driven by a modest increase in the birth rate, a falling death rate and increasing life expectancy. Luxembourg also experiences high rates of migration. By the end of 2015, more than 576,000 people were living in the Grand Duchy.
 
Population growth is a particular challenge for the booming centers of Nordstadt, Luxembourg City and Esch/Beval. These centers will have to solve issues related to traffic congestion and densification of living space, while ensuring a high standard of living for residents. The densification of living space is increasing pressure on a limited stock of rental properties and high real-estate prices.
Effort to give migrants
a political voice
Employers’ association and non-governmental organizations have lobbied for the right of resident migrants to vote in national elections. Including non-nationals in the democratic process would improve parliament’s representative mix and strengthen non-nationals’ identification with the Grand Duchy. However, in a June 2015 referendum, 78.02% of voters voted against giving resident migrants full voting rights. This has put at least a temporary end to the project. Though the government has announced a legislative initiative to facilitate easier access to Luxembourgish nationality. Yet, enabling non-nationals the opportunity to obtain nationality or dual citizenship is not the only policy tool for fostering inclusiveness.
Water quality an environmental focus
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 reform a key aspect of integration policy
The education system is a persistent challenge. Its official trilingual nature poses difficulties to 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 weighting on language competency in determining student grades. Reforming the education system will be a key determinant in promoting long-term economic competitiveness. The government is currently working on 85 school reform projects.
Citations:
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.

Annuaire de la compétitivité 2015. Union des Entreprises Luxembourgeoises, 2015. www.uel.lu/images/stories/Documents_public/Annuaire_de_la_competitivite_2015_-_UEL.PDF. Accessed 21 Feb. 2017.

Country Report Luxembourg 2016. The European Commission, 2016. ec.europa.eu/europe2020/pdf/csr2016/cr2016_luxembourg_en.pdf. Accessed 21 Feb. 2017.

Luxembourg Cluster Portal, www.clusters.lu/. Accessed 21 Feb. 2017.

“Luxembourg.” OECD Economic Outlook, Volume 2015 Issue 1, OECD Publishing, 2015, pp. 155 - 157, www.keepeek.com/Digital-Asset-Management/oecd/economics/oecd-economic-outlook-volume-2015-issue-1/luxembourg_eco_outlook-v2015-1-29-en#page2. Accessed 21 Feb. 2017.

“Luxembourg.” OECD Data, data.oecd.org/luxembourg.htm. Accessed 21 Feb. 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, 2015. www.oecd.org/eco/surveys/Luxembourg-2015-overview.pdf. Accessed 21 Feb. 2017.

Rapport Social National 2015. Gouvernement du Grand-Duché de Luxembourg, 2015. www.mfi.public.lu/publications/Solidarite/RSN-2015.pdf. Accessed 21 Feb. 2017.

“Welche Zukunftsstrategie Für Luxemburg?” CGFP, www.cgfp.lu/archive-details.html?ref=220. Accessed 21 Feb. 2017.
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