Luxembourg

Economic diversification is the key challenge confronting Luxembourg. Addressing this challenge will require the exploitation of innovative niche markets, promotion of digitalization within the financial sector and the adoption of a new approach to promoting 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.

The recent OpenLux investigation (2021), as well as LuxLeaks and Panama Papers, revealed the vulnerabilities associated with focusing a country’s economic activity excessively on the financial sector. Luxembourg has long been considered one of the most notable tax havens around the world, alongside Ireland, Netherlands and Singapore. In tackling this issue, the Grand Duchy has in recent years implemented all EU and OECD tax rules and standards on the issue of tax transparency and the fight against tax abuse. Luxembourg signed the so-called GAFA (Google, Apple, Facebook, Amazon) agreement on the taxation of multinational companies. The diversification of the economy – which is still heavily dependent on financial sector – remains a critical challenge for the future. New projects focusing the digital and circular economy, green finances, supercomputing activities, and space mining have already been launched.

Luxembourg has made research, development and higher education one of the cornerstones of the nation’s vision for the future. It plans to allot about 1% of GDP to R&D investments by 2023. The latest outstanding R&D achievements – driven mainly by the National Research Fund (FNR), the University of Luxembourg, and a wide range of interdisciplinary centers, including public-private partnerships – include the national High Performance Computing (HPC) facility associated with the European High Performance Computing Joint Undertaking (EuroHPC), the Integrated Biobank of Luxembourg (IBBL), the European Space Resources Innovation Center (ESRIC), the HealthTech Cluster (HTC), and a number of 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.

Luxembourg’s population grew by 31.45% between 2008 and 2022, and further growth of 21.3% is expected by 2028. Statistical forecasts indicate that Luxembourg’s population will increase to 800,000 by 2050. Strong population growth will stabilize the social security system, especially the public pension system, but also risks increasing intergenerational and intercultural tensions, and is likely to put more pressure on the housing market and on public infrastructures.

The recent coronavirus crisis highlighted the potential of long-term sustainability risks in the Luxembourg social security system, which is being placed under growing pressure by an aging population. Both the OECD and European Commission have warned that Luxembourg will need to reduce its generous welfare provision – particularly its extensive support for early retirement, and its high level of disability and healthcare benefits – if the system is to remain sustainable.

Luxembourg’s workforce has two peculiar features: It is highly qualified, and it mainly consist of cross-border workers coming from the broader region on which the country is highly dependent. Another phenomenon that the country should deal with is the risk of in-work poverty, as Luxembourg currently shows the EU’s third-highest level of such risk (single young people, persons with low levels of educational attainment, job seekers, single-parent families and foreigners are most affected).

The Grand Duchy’s education policy must deal with the challenges of a multilingual and multicultural society, with a high proportion of foreign students. The country’s PISA scores are lower than the OECD average. Over the past 15 years, several 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 a fundamental education reform (focusing on the first nine years of schooling), which is based on five key skills and high levels of digital literacy.

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 increasingly dense living space, while continuing to ensure a high standard of living for residents. These circumstances are increasing prices for the limited number of rental properties and for real estate more generally. Major public investments are expected in the coming years, particularly in the areas of infrastructure, environment and housing.

The country’s most pressing environmental policy challenges include reducing greenhouse gas emissions and improving water quality, in particular by avoiding water pollution through pesticide and fertilizer use.

Luxembourg enjoys a comparatively stable political system, a knowledge-driven economy based on strong trade logistics performance, outstanding broadband coverage, new financial infrastructures (FinTech), innovative communication technologies, a competitive tax system, and significant and constant job growth. Alongside continuing policy weaknesses (e.g., education), these capacities must be mainstreamed toward technology-driven sustainable development.

“Stability and Growth Programme of the Grand Duchy of Luxembourg 2021 > 2025”/De Stabilitéits-Programm.”
The Government of the Grand Duchy of Luxembourg. Ministry of Finance. https://ec.europa.eu/info/sites/default/files/2021-luxembourg-stability-programm e_en.pdf. Accessed 03 Jan.2021.

“National Plan for a Green, Digital and Inclusive Transition. National Reform Programme of the Grand Duchy of Luxembourg under the European semester 2021.” The Government of the Grand Duchy of Luxembourg. https://ec.europa.eu/info/sites/default/files/2021-european-semester-national-re form-programme-luxembourg_en.pdf. Accessed 03 Jan.2022.

“Creating value for society: The FNR’s strategy and action plan 2022-2025.” FNR (14 January 2022). https://www.fnr.lu/creating-value-for-society-the-fnrs-strategy-and-action-plan- 2022-2025/. Accessed 15 January 2022.

The state of global education – 18 months into the pandemic,” OECD (2021). https://doi.org/10.1787/1a23bb23-en. Accessed 3 January 2022.

“Luxembourg: National Reforms in School Education.” European Commission (1 April 2021). https://eacea.ec.europa.eu/national-policies/eurydice/content/national-reforms-s chool-education-40_en. Accessed 3 January 2022.

Luxembourg’s party system has become increasingly diversified as the control exerted by the two traditional key parties of government – the Christian Social People’s Party (CSV) and the Luxembourg Socialist Worker’s Party (LSAP) – has eroded. Out of the 10 registered political parties, seven are represented in the Chamber of Deputies: the Christian Social People’s Party (CSV), the Luxembourg Socialist Worker’s Party (LSAP), the Democratic Party (DP), the Green Party (déi gréng), the Alternative Democratic Reform Party (ADR), the Left (déi Lénk), and the Pirate Party (PPL). For the last three years, a DP-LSAP-Greens coalition has governed the country, while the CSV – the largest political party in Luxembourg – has remained in opposition, as it has been since 2013.

Luxembourg’s political culture is still characterized overall by a preference for consensus and compromises. While the state of crisis was declared from 18 March 2020 to 24 June 2020 because of the coronavirus pandemic, allowing the government to rule by decree without the assent of parliament (in accordance with Article 32(4) of the Luxembourg Constitution), the usual legislative procedures resumed afterwards.

Despite the historical orientation toward consensus in Luxembourg’s political life, political debates both within and between parties have grown increasingly contentious over the last years. The leader of the CSV, Frank Engel, was denounced on charges of fraud and forgery by other leading members of his own party and parliamentary group. While Engel was eventually acquitted of all charges by the court, he was replaced as party leader by Claude Wiseler. Engel has since announced his intention to form a new party. Debates between parties have also become more polarized. This has become especially visible over the long-planned revision of the constitution. Though representatives of all major parties had been jointly working on this project for 15 years, the CSV decided in 2019 to cease supporting the overall revision project and to turn various aspects of the revision project into political issues. Political debates over the revision of the constitution and the coronavirus pandemic have also featured increasingly strident positions taken by leading members of the ADR.

Debates over the measures to contain the coronavirus pandemic have also been characterized by increasing polarization. During the first wave of the pandemic, during the first semester of 2020, the measures taken by the government to contain the pandemic enjoyed a broad level of support among the parties represented in parliament. This support started eroding, however, over the course of the second semester of 2020 and later in 2021. During the second semester of 2020, Luxembourg also witnessed the emergence of a small but vocal anti-vaccination movement, whose members took to demonstrating in front of the private residences of government ministers, in an obvious breach with established customs.

In December 2021, three key members of the government stepped down: the vice prime minister in charge of the ministries of labor and sports, Dan Kersch; the minister in charge of social security and of agriculture, viticulture and rural development, Romain Schneider (both LSAP); and Minister of Finance Pierre Gramegna (DP). Kersch cited health reasons, whereas Schneider and Gramegna declared that they aspired to a better work-life balance. This nearly simultaneous resignation of three ministers in the middle of the fourth wave of the coronavirus pandemic was seen as offering further testimony to the difficulties of political life in the pandemic. (Score: 8)

“2021 Rule of Law Report. Country Chapter on the Rule of Law Situation in Luxembourg,” Brussels 20.07.2021. https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52021SC0718. Accessed 03 Jan. 2022.

« Proposition de loi portant modification de : 1) la loi modifiée du 21 décembre 2007 portant réglementation du financement des partis politiques; 2) la loi électorale modifiée du 18 février 2003. No 75095. Chambre des Députés. Session ordinaire 2020-2021 ». https://www.chd.lu/wps/PA_RoleDesAffaires/FTSByteServingServletImpl?path=A2CD6FAE26078CDB7CC81AFC4D365313A9F8849A693FD5565738BD107E25A15DEB3E849404E36FCA815010A0BD282B69$9B1AB37EEEF3EBE9EC114A2BB60AA78A. Accessed 03 Jan.2022.

“Luxembourg, act of 24 March 2020 extending the state of crisis declared by the Grand Ducal regulation of 18 March 2020 introducing a series of measures as part of the fight against Covid-19” (Loi du 24 mars 2020 portant prorogation de l’état de crise déclaré par le règlement grand-ducal du 18 mars 2020 portant introduction d’une série de mesures dans le cadre de la lutte contre le Covid-19). https://legilux.public.lu/eli/etat/leg/rgd/2020/03/18/a165/jo. Accessed 03 Jan.2022.

« TNS. Politmonitor, 15.11.2021 ». https://download.rtl.lu/2021/11/17/3c474b61b5800e0f8f3f4b837421e65f.pdf