The Country-specific Recommendations are documents prepared by the European Commission for each country, analysing its economic situation and providing recommendations on measures it should adopt over the coming 18 months. They are tailored to the particular issues the Member State is facing and cover a broad range of topics: the state of public finances, reforms of pension systems, measures to create jobs and to fight unemployment, education and innovation challenges, etc. The final adoption of Country-specific Recommendations prepared by the Commission is done at the highest level by national leaders in the European Council.
Luxembourg’s remarkable period of economic growth in the past 30 years was mostly based on the strong expansion of financial services. The country is heavily dependent on its financial sector, which accounts for about 30% of total value added and 25% of collected fiscal revenues.
Luxembourg has made some progress in addressing the 2012 CSRs, particularly on fiscal consolidation. The general government deficit is expected to decrease to 0.2% of GDP in 2013, mostly due to the consolidation measures adopted with the Budget for 2013. In December 2012 the Luxembourgish Parliament adopted the reform of the pension system. However, the reform is rather limited in scope and does not guarantee the long-term sustainability of public finances.
Luxembourg faces major challenges as regards the long-term sustainability of its public finances, the competitiveness and the diversification of its economy, the labour market and greenhouse gas emissions.
2013 European Commission's recommendations for Luxembourg in brief
The Commission has issued six country specific recommendations (CSRs) to Luxembourg to help it improve its economic performance. These are in the areas of:
- Sustainable public finances
Luxembourg is expected to improve its public finances in 2013 on the back of a sizeable consolidation package but the improvement is not yet sustainable. The public deficit is projected to worsen from 2015 onwards. To better address these risks, both the debt and expenditure constraints, should be established in law. Moreover, there should be an identified monitoring body and predefined action in case of non-compliance.
- Corporate taxation and standard VAT rate
Luxembourg should reform taxation in a way that improves the competitiveness of private enterprises and improves the long-term sustainability of its fiscal system. The corporate tax system in Luxembourg is characterised by a large tax bias towards indebtedness, which contributes to a high private debt to GDP ratio and weakens private enterprises. Moreover, the Commission considers that Luxembourg has scope to raise revenue by extending the standard VAT rate. This is because currently less than a third of tax revenues are raised from consumption taxes, partially owing to moderate standard and reduced VAT rates.
- Social security for the elderly
Luxembourg is confronted with the risk of further increases in age-related expenditure. To counter that tendency, it should make long-term care more cost effective. It should strengthen the recently adopted pension reform and take additional measures to curb early retirement and increase the effective retirement age. It should link the statutory retirement age to life expectancy.
- Competitiveness and wage-setting
Luxembourg is not sufficiently responsive to productivity and sectoral developments. It should take further structural measures to reform the wage setting system, including wage indexation. More efforts are needed to diversify the structure of the economy. This should be achieved by fostering private research and development investment, for example. by developing cooperation between public research and firms.
- Labour market
Youth unemployment in Luxembourg is over three times higher than the overall unemployment rate. This should be tackled by improving active labour market policies. General and vocational education to better match young people’s skills with labour demand should be strengthened, in particular for people from a migrant background. Moreover, the participation rate of older workers is not sufficient. Further measures are needed to improve their employability through lifelong learning.
- Greenhouse gas emissions
Luxembourg has committed itself to reducing the level of carbon emissions in sectors not covered by the EU's Emissions Trading System by 20% by 2020, but is not on track to achieve this target. The fuel-pump tourism induced by the low petrol and diesel taxes contributes largely to this shortfall and these should therefore be increased.
See how Luxembourg compares with other EU Member States in key areas
European Semester Documents