Luxembourg

   
 

Key Challenges

Economic diversification
a key goal
Economic diversification is the key challenge confronting Luxembourg. Addressing this challenge will require the exploitation of innovative niche markets, promoting the digitalization 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 and services.
Reputation as tax haven slow to dissipate
The Luxembourg Leaks and Panama Papers scandals demonstrated the vulnerabilities of focusing a country’s economic activity excessively on the financial sector. It will take time for recent efforts to improve tax transparency to tackle Luxembourg’s tarnished reputation as a tax haven.
Below-average R&D investment
Luxembourg invests less in R&D than the EU average and less than the government’s own target of more than 2.03% of GDP. Nevertheless, 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 are 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 drive further economic growth, public investment in R&D must significantly increase and economic competitiveness must be improved.
Public investment driving rise in debt levels
Public investments and, in turn, the national debt are on the rise. National debt increased from 22% of GDP in 2015 to 23.5% in 2017 and is projected to reach an all-time high of €1 billion 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.
Comprehensive
welfare system
Luxembourg’s welfare system is one of the most substantial and comprehensive systems in the European Union. 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.
Several factors behind rising population
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 immigration, with around 80% of its population growth resulting from immigration. Since October 2017, more than 600,000 people live in the Grand Duchy. After an all-time high of more than 11,000 new citizens in 2015, immigration has decreased slightly since 2016.
Population growth stabilizing pension system
Statistical forecasts indicate that Luxembourg’s population will increase to 1 million by 2050. 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.
Cities facing increasing challenges
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 issues a
pressing concern
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.
Trilingual country produces education hurdles
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.
Stable political system with strong prospects
Overall, Luxembourg enjoys a comparatively stable political system, high trade logistics performance, excellent broadband coverage, a very competitive tax system, new financial technologies, innovative communication technologies and tremendous job growth. Alongside continuing policy weaknesses (e.g., education), these capacities must be mainstreamed toward technology-driven sustainable development.
Citations:
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 25 Oct. 2018.

“Fakten und Fragen: Eine Überdosis an Wachstum? ” CGFP, www.cgfp.lu/archive-details.html?ref=814. Accessed 25 Oct. 2018.

Luxembourg Cluster Portal, www.clusters.lu/. Accessed 25 Oct. 2018.

“Luxembourg.” OECD Data, data.oecd.org/luxembourg.htm. Accessed 25 Oct. 2018.

„Wir haben es trotz Aufgabe des Bankgeheimnisses geschafft, attraktiv zu bleiben“, in: Forum.lu, 2018, no. 385, pp. 34 – 39. https://www.forum.lu/wp-content/uploads/2018/07/386_Gramegna.pdf. Accessed 17 Dec. 2018.
 

Party Polarization

Party relationships harmonious; major decisions preceded by consultation
In Luxembourg, politicians and political parties are in constant dialogue. There are no major frictions. Only in the days immediately after a national election do individual disturbances might occur due to negotiations between potential coalition partners. In general, however, political party relationships are harmonious and characterized by mutual respect. This is particularly evident in respect to votes that require a two-thirds majority in parliament, such as constitutional changes. Hence, major political decisions, such as constitutional changes by consensus, are usually preceded by regular consultation between the four major parties (i.e., the conservatives, socialists, liberals and greens) and are ultimately jointly decided. Thus, the new constitutional text, which was drafted before 2018, was created on the basis of dialogue and consensus.
 
Due to the small size of the country, many politicians know each other very well and maintain private contacts. Decision-making channels are short and the well-being of the country is a common goal. Respect among various political actors is omnipresent. (Score: 9)
Citations:
“Politische Kultur” in Luxembourg. https://www.forum.lu/issue/politische-kultur/ Accessed 23 Oct. 2018.
Bumb, Christoph: “Kommentar zur Politischen Kultur. Der Wahlkampf, der keiner ist.”
www.reporter.lu/kommentar-luxemburg-der-wahlkampf-der-keiner-ist/ Accessed 6 Nov. 2018.
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