Executive Summary

A center for European politics and business
Luxembourg is a founding member of the United Nations (1945), NATO (1949), the European Coal and Steel Community (1950), the European Economic Community (1957) and OECD (1960). It is also one of the three capitals of the EU, 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 12,000 EU officials work in Luxembourg and key EU ministerial meetings are regularly hosted in the Grand Duchy. Luxembourg also hosts the new European Public Prosecutor’s Office (EPPO).
Booming international financial hub
Luxembourg’s economy is booming and profiting from an expanding EU and global economy. The attraction of new industries and businesses, public investments, and rising domestic demand are fueling economic growth. Luxembourg City is one of three EU capitals and a key international financial center. The country offers extraordinary business conditions with an attractive tax environment, high private and public investments, strong GDP growth, high living standard, an outstanding social security system, low unemployment, and consistently low central government debt. The country’s public administration is highly efficient and the overall economic outlook remains stable.
Strong growth, generous welfare system
Luxembourg has experienced strong economic growth and fiscal stability. This has provided public authorities the means to develop and maintain an outstanding welfare system over the last two decades, even as neighboring countries have reduced public welfare provision. Luxembourg’s welfare system includes generous insurance coverage, benefit schemes and public services. For example, health care provision has recently been expanded and the level of retirement benefits exceeds Scandinavian standards.
Rosy outlook for
coming years
After a 3.4% GDP increase in 2017, the economy is projected to further strengthen to almost 4.4% in 2018. Consumer confidence, higher wages (+4% in 2017), and high domestic consumption and investment contributed to this major growth. Furthermore, in 2017 the unemployment rate decreased to 6% and tax arrears are compensating for reduced VAT revenue from e-commerce. The economic growth of recent years has reduced the national debt to below the 2012 level. Luxembourg had the second lowest gross national debt in Europe (behind Estonia) at 20.8% in 2016, though it is projected to rise to 22.8% in 2020. In addition, public investments are presumed to increase by about 10% in 2018.
High migration rates, cross-border workforce
The demographic development of the country 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 (2.29% in 2016). Another key driver of this dynamic population development is the average age of 39.2, again low by EU standards, although higher than in Ireland and Cyprus. Overall, the population is increasing, aging and becoming more heterogeneous. In July 2017, about 27% of the workforce were Luxembourg nationals, while 42.6% were so-called cross-border commuters. This situation guarantees Luxembourg high flexibility and short-term fluctuations in the labor market. For the cross-border labor market, commuters from within the Greater Region are crucial. A shortage of highly qualified personnel (e.g., in ICT) has a fundamental impact on the further sustainable development of the financial, service, research and health sectors.
Financial secrecy no
longer tenable
In the last years, Luxembourg was forced to accept that some tax policies were untenable and that alternative sources of revenue need to be developed. Recent legislation, which came into force in 2017, requires financial institutions based in Luxembourg to provide information to U.S. authorities; this will likely have a dampening effect on the country’s financial sector. Notwithstanding, competitive individual and corporate tax rates and low indirect labor costs will continue to make Luxembourg an attractive base for international companies.
Strong but cost-intensive welfare, health sectors
Luxembourg has generous, but cost-intensive social and health care systems, which even exceed the level of coverage provided in Scandinavian countries. The welfare state has gradually expanded. Despite strong economic growth and low public debt, maintaining fiscal sustainability is increasingly important. Due to the economy’s small size and openness to global markets, Luxembourg is particularly vulnerable to geopolitical instabilities. To ameliorate these risks, the government has increased public investment in the economy to stimulate domestic markets, attract additional private investment and promote innovation.
Promoting innovation
a key goal
The government must identify framework conditions to promote innovations and synergies between public and private research, with more spin-offs and start-ups, including research and knowledge transfer. In this respect, Luxembourg must increase the number of researchers (2,647 in 2015) and undertake necessary expenditures on competitive research and development (R&D), including more public-private partnerships to foster innovation.
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