OECD Economic Surveys: Luxembourg

Every 18 months
1999-0782 (online)
1995-3720 (print)
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OECD’s periodic surveys of Luxembourg’s economy. Each edition surveys the major challenges faced by the country, evaluates the short-term outlook, and makes specific policy recommendations. Special chapters take a more detailed look at specific challenges. Extensive statistical information is included in charts and graphs.

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OECD Economic Surveys: Luxembourg 2006

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05 July 2006
9789264025226 (PDF) ;9789264025219(print)

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This 2006 OECD review of Luxembourg's economy examines the challenges Luxembourg is facing with regard to slowing economic growth, public finances, employment, education achievement and product market competition. It finds that Luxembourg has regained its footing after a slowdown at the start of the decade and that the financial servies sector, which accounts for one-third of economic activity, has renewed confidence. But there is deterioration in the fiscal position, weakening of the pension system, and growing unemployment all of which could be improved through enhanced human capital development and strengthened product market competition.
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  • Assessment and Recommendations
    The economy has regained its footing after the disruptive events at the start of the century, and is currently undergoing a sustained recovery. Output growth rose to around 4% in both 2004 and 2005, which is near the trend rate, and the short-term outlook is one of continued dynamic growth in 2006. The financial services sector (which represents around 30% of value-added) has recovered from the bursting of the stock market bubble, with investors regaining confidence in equity markets.
  • Insuring Against Lower Economic Growth in the Long Term
    Economic growth in Luxembourg has picked up to around the trend rate in the past two years, following weak activity in the wake of the bursting of the global equity market bubble. While the estimated trend growth rate remains high by international comparison, it has nevertheless slowed considerably from the 1980s- 90s, reflecting lower contributions from financial services. In the long term, such contributions may weaken further as adjustment to factors such as financial market liberalisation and regulatory and tax advantages that have underpinned rapid development of Luxembourg’s financial sector draws to a close, pulling trend growth closer to the European average. In a related development, output growth has become increasingly labour intensive.
  • Public Finances
    After having been a model of fiscal rectitude until 2001, Luxembourg has since then joined the group of countries experiencing budgetary difficulties. With expenditure growth remaining brisk, in spite of decelerating growth entailing a slowdown in revenue growth, the fiscal balance has rapidly deteriorated and the general government deficit has reached 1.9% of GDP in 2005, raising concerns with policymakers. The authorities are rightly determined to bring the budgetary position close to balance before the end of the current legislature, i.e., by 2009 at the latest. This will require dealing with the fast-growing trend of public spending, notably the strong momentum of social benefits and public salaries.
  • Improving Employment Prospects of Resident Workers
    Despite renewed employment growth in Luxembourg, the unemployment rate has continued to rise with new jobs going almost exclusively to cross-border workers. High unemployment benefit replacement rates, generous social assistance and attractive entry-level conditions in the civil service have encouraged residents to hold out for higher wage rates than cross-border workers are willing to accept. Moreover, the public employment service (ADEM) has had difficulties in matching job seekers with jobs owing to its bureaucratic structure and antiquated assignment system. Unemployment mostly affects youths and the unskilled, but not so much older workers, who benefit from generous exit routes from the labour market – such as pre-pension and early retirement systems.
  • Improving Education Achievement and Attainment to Compete in the Labour Market
    Student achievement in Luxembourg is below the OECD average according to the 2003 OECD PISA study, with the gap in achievement between immigrant- and native students being above average. Similarly, education attainment is below the OECD average. A factor that makes learning more difficult in Luxembourg than in other countries is that it has a trilingual education system (Lëtzebuergesch, German and French are used as languages of instruction). This contributes to social unity by educating students to speak all three languages fluently but is challenging for students from lower socio-economic and/or immigrant backgrounds.
  • Increasing Product Market Competition to Boost Productivity
    Being a small economy with open borders and small travelling distance to neighbouring countries, Luxembourg already enjoys many of the gains coming with competitive pressures on product markets. However, several segments of the economy remain sheltered from competitive pressures. The recent introduction of the Competition Law should be used as a vehicle to reduce these remaining regulatory barriers. This chapter identifies three sectors where the competition authorities could play their essential role of promoting competition in the economy. First, easing the regulation of professional services, a relatively important sector in terms of employment, could foster competition and hence create beneficial effects on, currently adverse, productivity developments.
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