Luxembourg

   
 

Key Challenges

Economic diversification necessary
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.
Reliance on financial sector carries risks
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.
R&D must increase significantly
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 healthcare 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,
debt on the rise
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.
Sustainability risks
in 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 healthcare sector.
Strong migration
swelling 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.
Stability paired with
rising tensions
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.
Urban areas under increasing pressure
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 weakness
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 in trilingual system poses difficulties
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.
Technological development a
key goal
Overall, Luxembourg enjoys a comparatively stable political system, high trade logistics performance, excellent broadband coverage, a 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:
“Fakten und Fragen: Eine Überdosis an Wachstum? ” CGFP, www.cgfp.lu/archive-details.html?ref=814. Accessed 19 Oct. 2019.

Luxembourg Cluster Portal, www.clusters.lu/. Accessed 19 Oct. 2019.

“Luxembourg.” OECD Data, data.oecd.org/luxembourg.htm. Accessed 19 Oct. 2019.

“Die wirtschaftliche Diversifizierung kommt voran.” Tageblatt, www.tageblatt.lu/wirtschaft/die-wirtschaftliche-diversifizierung-kommt-voran/. Accessed 18. Nov. 2019.
“Population.” http://luxembourg.public.lu/en/le-grand-duche-se-presente/population/index.html. Accessed 20 Nov. 2019.
 

Party Polarization

New frictions
between parties
The Luxembourg model of free exchange of views between the parties still exists. However, elections held in 2018 and 2019 (national elections and European elections) also created frictions between the parties. On the one hand, this was partly due to the unexpected defeat of the Christian Social People’s Party (CSV) in the national elections of 2018, and the subsequent leadership change (the new chairman is not a deputy); on the other hand, this was driven by various small and large scandals from within the governing parties in 2019. This affected the Green Party in particular.
Informal party
discussions
complicated
While political talks between politicians of different parties were generally kept confidential in the past, this has now changed somewhat. In 2019, sources from within the parties said that the Democratic Party (DP, a liberal party) and the Luxembourg Socialist Worker’s Party (LSAP, a socialist party) had been motivated by a CSV (conservative party) negotiator to change coalition partners, although the parties involved denied any such negotiations. The truth of this contention is difficult to assess. In any case, this incident will probably lead to a reduction in informal talks between political parties.
New constitution
work interrupted
Furthermore, in the summer of 2019, the new chairman of the CSV, Frank Engel, made the unexpected announcement that he wanted to interrupt the process of drafting a new constitution. This new constitution had been the subject of 10 years of work, with the process driven by the consensus of all four major political parties. Deputy Paul-Henri Meyers, a member of the CSV, had been president and later vice president of the reform commission. The announcement of this interruption was criticized in the media by the other parties. In the past, such an incident would have been clarified internally between the parties themselves, rather than being debated in the media. (Score: 8)
Citations:
“Regierungskoalition in Luxemburg kann fortgesetzt werden.” https://www.zeit.de/politik/ausland/parlamentswahlen-luxemburg-regierungsbuendnis-wahlergebnis. Accessed 10 Nov. 2019.
“CSV:ein harter Schlag.” https://ww.wort.lu/de/politik/csv-ein-harter-schlag-5ceb15b9da2cc1784e344e94. Accessed 10 Nov. 2019.
“Politische Kultur” in Luxembourg. https://www.forum.lu/issue/politische-kultur/ Accessed 20 Oct. 2019.
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