The grand duchy may have been resilient in the face of the covid-19 pandemic, and will likely only indirectly feel the impact of the war in Ukraine on the short run, , labour shortages, rising poverty, the surging price of housing and the high ratio of household debt to disposable income pose a risk to the country’s economic future.
“Luxembourg should tackle the main factors limiting labour supply for the longer term: (i) an ageing population, (ii) the need for reskilling and upskilling to enable a faster green and digital transition, (iii) growing issues with housing and transport and (iv) education,” the report says.
The country will also have to push its innovation and digital transition, as these--if pushed--have “the potential to trigger productivity growth.” Luxembourg’s productivity growth has stagnated in recent years, and will be a challenge for the country, the commission says.
Inclusive economic growth
If implemented in its entirety, Luxembourg’s recovery and resilience plan (RRP) will help tackle the issues identified by the European Commission. The Housing Pact 2.0, for instance, should increase the supply of available affordable housing and free up more space to build additional housing. The FutureSkills programme in turn should help create a more sustainable environment for job seekers, allowing Digitalising the healthcare sector, if implemented, will also address shortcomings in the that were made more evident during the covid-19 pandemic.
Luxembourg should also continue applying its digitalisation
Lastly, the report underlines Luxembourg’s focus on climate change, noting its climate contribution is much higher than the EU target, and underlining its efforts in creating more sustainable energy options for housing units as well as electrifying the public sector fleet. “However, the financial contribution under the RRF is limited. Therefore, only certain climate challenges are addressed (sustainable transport and renewable energy generation),” the report concludes.
Strategy misses several key problems
The grand duchy’s recovery and resilience plan may tackle some of the country’s current challenges, but appears to fail at foreseeing upcoming issues and providing solutions to them, the commission says.
As Luxembourg’s population its pension reserves , social security minister Claude Haagen (LSAP) confirmed at the end of April. The country should address this issue now rather than later, to assure intergenerational fairness. The report suggests that people should work for longer to support the economic growth of Luxembourg.
The government would also benefit from addressing issues of aggressive tax planning, inequalities in the education system, growing traffic congestion and Luxembourg’s reliance on fossil fuels, says the commission.
Some progress in most CSRs
Luxembourg may have a lot of issues to tackle, but the commission in its report also says that it made “some progress” in 64% of its country-specific recommendations (CSRs), as of May 2022. This includes for instance increasing the chances of older workers to be employed, and improving sustainable transport.
Luxembourg also made some substantial progress (18%) in areas such as the employment market during the pandemic and supporting the liquidity of businesses through support measures. On 18 May, the grand duchy issued another €2.5bn bond and pay for its energy package benefitting households and companies impacted by the energy crisis.
For 14% of its CRSs, there was only limited progress--this includes addressing the aggressive tax planning issue. For the longetivity of the pension system among others (4%) there was no progress at all.