2003 OECD Economic Surveys: Luxembourg 2003

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This 2003 edition of OECD's periodic review of Luxembourg's economy examines recent economic developments, prospects and policies and includes special features on policies to strengthen growth in national income and on migration.

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Economic Developments and Policy Challenges

Economic growth has crashed in Luxembourg in the past couple of years as its financial sector, along with the rest of the global financial industry, suffered the fall-out from the deflation of the international stock market bubble that developed during the late 1990s. While conditions in the financial sector, which directly accounts for about one third of GDP, are likely to improve, they are unlikely to return to those of the 1990s. Accordingly, Luxembourg must adjust to mediumterm growth that is likely to be lower than in the past, although still considerably higher than in other European countries. As in the past, most of the adjustment to changes in growth will entail variations in employment of foreign workers, notably cross-border workers. However, lower growth in the medium term also increases the likelihood that labour-market adjustment to adverse shocks will entail reductions in national employment because there will be less scope to absorb such indicators by reducing growth in cross-border employment. In these circumstances, adverse shocks could lead to higher structural unemployment given current labour-market institutions. This chapter discusses recent economic developments and prospects before turning to medium-term characteristics of the economy. Finally, the policy challenges that emerge from the medium-term outlook for the economy, bearing in mind its special features, are reviewed.

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