Luxembourg: Staff Report for the 2014 Article IV Consultation
Author:
International Monetary Fund. European Dept.
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Publication Date:
09 May 2014
eISBN:
9781475518528
Language:
English
Keywords:
ISCR; CR; government; Luxemburg; wage indexation mechanism; staff; banking sector; indexation mechanism; IMF staff calculation; euro area; area inflation; Financial sector; Global
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This 2014 Article IV Consultation highlights that with a strong policy framework, Luxembourg has weathered the crisis well and the economy is rebounding. The fiscal position remains sound, and the large financial sector has been resilient. After a shallow recession in 2012, growth reached 2.1 percent in 2013. The improving economic and financial environment in Europe drove the recovery in services exports. The outlook is for growth to firm up but without returning to its pre-crisis trend. Output is forecast to grow broadly in line with potential (2 to 2½ percent) during 2014–2019.

Abstract

This 2014 Article IV Consultation highlights that with a strong policy framework, Luxembourg has weathered the crisis well and the economy is rebounding. The fiscal position remains sound, and the large financial sector has been resilient. After a shallow recession in 2012, growth reached 2.1 percent in 2013. The improving economic and financial environment in Europe drove the recovery in services exports. The outlook is for growth to firm up but without returning to its pre-crisis trend. Output is forecast to grow broadly in line with potential (2 to 2½ percent) during 2014–2019.

RESILIENT SO FAR, BUT CHALLENGES LOOMING

1. Thanks to sound policy management, Luxembourg has weathered the crisis well. After a shallow recession in 2012, growth reached 2.1 percent in 2013—the second best performance in the euro area. The gradual improvement in the euro area supported a rebound in exports (Figure 1). Meanwhile, a healthy fiscal position, accommodative credit conditions and continued employment growth shielded domestic demand from external headwinds. Credit has been particularly dynamic for mortgage purposes, but less so to non-financial corporates (Figure 2). A new government based on a three-party coalition took office following early elections in October 2013.

Figure 1.
Figure 1.

Luxembourg: Real Sector Developments

Citation: IMF Staff Country Reports 2014, 118; 10.5089/9781475518528.002.A001

Sources: Haver Analytics, Data Insight, and IMF Staff calculations.
Figure 2.
Figure 2.

Luxembourg: Credit and Housing Market Conditions

Citation: IMF Staff Country Reports 2014, 118; 10.5089/9781475518528.002.A001

Sources: Haver Analytics, Data Insight, ECB, Luxembourg Authorities, and IMF Staff calculations.
A01ufig01

Luxembourg and Euro Area Real GDP Recovery

(In index number, 2009Q1 = 100)

Citation: IMF Staff Country Reports 2014, 118; 10.5089/9781475518528.002.A001

Sources: Eurostat

2. But trend growth has slowed markedly from the pre-crisis period. The period of buoyant pre-crisis activity—with average growth of 4¾ percent over 2000–08, driven by rapidly expanding financial services—has come to an end. The ongoing changes in the EU financial landscape will call for adjustment. Meanwhile, labor costs have risen substantially more than in trade partners, and underlying productivity has been dented by the crisis (Figure 3). As a consequence, potential growth is estimated to have been cut to half the pre-crisis period, at about 2–2¼ percent.

Figure 3.
Figure 3.

Luxembourg: External Developments and Labor Market

Citation: IMF Staff Country Reports 2014, 118; 10.5089/9781475518528.002.A001

Sources: Haver Analytics, Luxembourg Authorities, and IMF Staff calculations.
A01ufig02

Average Contribution to Gross Value Added

(In qoq contribution to growth)

Citation: IMF Staff Country Reports 2014, 118; 10.5089/9781475518528.002.A001

Sources: Haver Analytics, IMF Staff calculations.

3. While the external position remains strong, the economy faces several challenges from an evolving external environment. The current account surplus reached 5.2 percent of GDP in 2013, and the exchange rate is estimated to be broadly in line with fundamentals (Appendix I). However, Luxembourg’s role as a hub for EMU financial activities ties its fortunes intrinsically to the euro area (Box 1 and Figure 4). Deleveraging trends, EU-driven regulatory changes, and the global move toward higher transparency of cross-border financial flows will weigh on the banking sector. Large and volatile capital flows are dominated by cross-border banking and investment fund activities with limited linkages to domestic activity, but their sheer size in comparison to the economy could still generate inward spillovers in case of systemic shocks.

Figure 4.
Figure 4.

Luxembourg: Financial Sector

Citation: IMF Staff Country Reports 2014, 118; 10.5089/9781475518528.002.A001

Sources: Luxembourg Authorities and IMF Staff calculations.

4. Luxembourg’s fiscal position is healthy, but there are looming challenges there too. The fiscal position is characterized by a structural surplus and very low general government debt (23 percent of GDP in 2013), and Luxembourg remains one of the few AAA-rated sovereigns in the region. However, the fiscal position will come under strain from upcoming losses in e-VAT revenue, and rapidly growing public expenditures. The G20-driven push to increase transparency in corporate taxation could also affect Luxembourg, as it hosts large multinational activities.

Luxembourg’s Financial Sector

Luxembourg hosts a large financial sector mostly focused on cross-border businesses. It hosts the second largest fund industry after the U.S., a large banking sector (15 times GDP) with diversified activities, and one of the largest primary markets for international bond issuance. A wide spectrum of specialized financial service providers gravitate around the industry, with support ranging from legal to accounting and IT activities. In 2012, the sector contributed 22 percent of GDP and 11 percent of employment.

A01ufig03

Size of Different Sectors of Luxembourg Financial Industry

(In multiples of GDP)

Citation: IMF Staff Country Reports 2014, 118; 10.5089/9781475518528.002.A001

The banking sector is dominated by subsidiaries and branches of foreign groups. These conduct mostly cross-border businesses, including wealth management, intragroup treasury and liquidity management, custody services to investment funds, and international wholesale lending. Unlike other countries with a large financial sector, the system is a net provider of liquidity, and overall non-resident deposits have remained stable, even after the move to automatic exchange of information for tax purposes was announced in April 2013. Only a handful of banks—less than 20 percent of total banking assets but about 250 percent of GDP—provide credit to the economy, with generally limited links with the internationally-oriented sector. Half of these domestically-oriented banks are stand-alone domestic banking groups, the rest are owned by European banking groups.

The investment fund industry manages assets amounting to 2.6 trillion euro. The industry benefits from the established trademark and passporting features of UCITS (Undertaking for Collective Investment on Transferable Securities) products, and caters to a diversified pool of non-resident investors. After a marginal decline in May 2013 in the context of global volatility, assets under management have resumed their increase. UCITS funds for retail distribution under EU regulation continue to dominate, with around 80 percent of assets. Money market fund activities have been curtailed in the wake of the crisis, and constant net asset value (CNAV) funds, which generated substantial liquidity pressures in 2009, account for only 5 percent of total fund assets. A large part of the investment funds’ products are sold outside of the euro area, but similarly, a substantial part of the funds are invested in assets from non-euro area countries.

In synergy with those activities, the financial sector is also involved in bond issuance, and custodian and settlement activities. Luxembourg is one of the biggest international bond issuance markets in the world. It hosts an important global clearing and settlement player focusing on euro-denominated bonds. It is also home to various other financial services. The insurance sector is relatively large and growing, with total assets over 5 times GDP.

The country’s business model benefits from several key comparative advantages:

  • Stable political and economic conditions, as exemplified by the AAA sovereign rating, a central location within the euro area and a multi-lingual society.

  • A first-mover advantage, as the country’s financial center status was originally built on European banks’ foreign exchange and euro loan businesses that were attracted by flexible regulations. The authorities have generally been proactive in implementing new European regulations.

  • EU and euro area financial integration, in particular the European passport for financial intermediaries and single rulebooks for financial regulation, such as UCITS.

  • A range of advisory and ancillary services that financial institutions and investors can access.

5. Despite an inclusive social model, the labor market is showing some signs of strain, and the housing market is posing multi-dimensional challenges. Unemployment has doubled since the early 2000s to reach 7 percent, even though employment has increased steadily, including during the crisis. Rapid pre-crisis growth allowed for a well-developed safety net and substantial income redistribution, but generous social benefits also tend to generate inactivity traps. The temporary adjustment to automatic wage indexation—limiting it to one tranche every twelve months—has mitigated the steady erosion in cost competitiveness, but the agreement expires at the end of 2014. Meanwhile, rapid income and population growth is feeding demand for residential real estate, while structural supply shortages persist (Box 2).

Housing Market Challenges1

House prices picked up strongly in 2013, by almost 9 percent, following a longer period of moderate but sustained growth between 2003 and 2011, and a slight decline in 2012.

Cyclical as well as structural factors are contributing to the imbalance between demand and supply.

  • Continuing population and employment growth, as well as a very large group of non-resident workers (around 40 percent of employment) are pushing up structural demand.

  • With mortgage interest rates at record lows, accommodative financial conditions provide further impetus to demand, while government policies (i.e. interest subsidies, tax deductibility of mortgage loan interest payments, and other assistance) strengthen incentives for home ownership.

  • Meanwhile, supply is held back by constraints on building, including through environmental and zoning rules. Low recurrent taxation on immovable property is keeping the opportunity cost of holding unused land or property low, especially in a context of expectations of continuous price increases, further reducing turnover.

Domestically-oriented banks’ exposure to Luxembourg’s real estate market has risen significantly. Mortgage credit never slowed during the crisis, even as credit to non-financial corporates fell sharply. As a consequence, mortgage credit has risen from 12 percent of domestically oriented banks’ assets in 2008 to 24 percent in 2012, or almost 50 percent of GDP.

Households’ financial position is strong, though with pockets of vulnerability. Household debt to GDP is around 55 percent, and households are among the wealthiest in the region. However, much of the wealth is held in real estate, and therefore sensitive to valuation changes. With most loans at floating interest rates, increases in interest rates, as well as higher unemployment, could pose risks for households with a more fragile financial position.

1 See also Selected Issues Paper: “The Residential Real Estate Market”.

OUTLOOK, RISKS, AND SPILLOVERS

6. The outlook is for growth to firm up, but falling well short of the pre-crisis trend. Growth is forecast to reach 2 to 2½ percent over 2014–19, broadly in line with potential (Table 1). A more conducive regional outlook will support trade and investment. The financial sector will continue to contribute to growth, but at a slower pace than pre-crisis, as banks retool and reorient their activities toward new businesses.

Table 1.

Luxembourg: Selected Economic Indicators

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Sources: Luxembourg authorities; IMF staff estimates and projections.

Contribution to GDP growth.

Overall economy.

7. Short to medium-term risks are tilted to the downside (see Table 2).

  • On the external side, a protracted period of low growth in the euro area could hold back the recovery in the Grand Duchy, given its strong trade and financial linkages with the region.

  • On the domestic side, failure to address forthcoming losses in revenue and strong spending growth would sharply worsen the fiscal position. As this would lead to a steady increase in public debt, investors could eventually come to doubt the stability of Luxembourg’s AAA rating, a critical requirement for the financial sector’s attractiveness.

Table 2.

Luxembourg: Risk Assessment Matrix

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8. Longer-term risks pertain to the capacity to secure Luxembourg’s business model in a changing environment and to the prevalence of a large financial sector.

  • The baseline scenario assumes that the banking sector successfully reorients its activities toward more dynamic regions—as the euro area banking sector continues to deleverage—and higher net-worth individuals—as the move to automatic exchange of information for tax purposes reduces private banking geared to less affluent non-resident clients. An overriding risk, however, is that these adjustments have a larger-than-expected impact, with knock-on effects on growth, employment, and public finances.

  • Rising residential real estate exposures could also pose a risk in the (still low-probability) event of a sharp correction in housing prices. The three largest mortgage lenders are sizeable relative to the economy and support to any of these banks would add significantly to public debt. A few of these banks also remain subsidiaries of large European banks, posing a risk of contagion as happened with Dexia.

9. Luxembourg is a recipient of inward spillovers and a conduit for outward spillovers, rather than a generator of spillovers in its own capacity. Internationally-oriented banks represent about 80 percent of assets. In the event of a systemic shock in one of the large euro area parent banks, the treatment of intragroup exposures in any bail-in decisions will be critical, given that such exposures account for half of the sector’s assets. The 2.6 trillion euros managed by the fund industry are almost entirely invested in foreign assets. Thus, both inward and outward potential spillovers from a surge in global financial market volatility could be large—for example arising from the unwinding of unconventional monetary policies in the United States. The unwinding could affect the portfolio allocation of investment funds, but with likely limited effect on the domestic economy. Yet, the reallocation, if sizeable, could affect a wide range of countries in which these funds are invested.

10. Authorities’ views. The authorities concurred that growth would not return to pre-crisis levels, but viewed short-term growth prospects slightly better than staff, on the basis of a more negative output gap. However, there was agreement that the measure of the output gap was surrounded with high uncertainty, given the small size of the economy and the ongoing adjustment in the financial sector (Box 3). They also saw risks more balanced, as they were optimistic that the financial sector would come out stronger from the regulatory changes implemented at the EU level and from the move toward greater transparency. Conversely, they viewed continued financial fragmentation within the euro area as a significant risk factor exacerbating the impact of regulatory changes in Europe and hence for financial activities in Luxembourg.

Luxembourg: Uncertainty in Potential Output Growth and Output Gap Estimates

Luxembourg’s output is highly volatile and difficult to predict. Furthermore, national accounts data can be revised significantly. In addition, a decomposition of growth shows that TFP growth turned negative during the crisis period and has yet to recover sustainably.

A01ufig04

Decomposition of GDP growth: K, L and TFP

(in percent change, contribution to real GDP growth)

Citation: IMF Staff Country Reports 2014, 118; 10.5089/9781475518528.002.A001

Sources: Staff estimates.

With such uncertainties, it is prudent to use various methodologies to estimate potential output. Staff estimates are based on three methodologies, with data going back to 1995:

  • Hodrick-Prescott (HP) filter. This commonly-used procedure applied to quarterly data gives annual potential output estimates that attribute more of the decline in growth to structural factors, and hence ascribes a more permanent impact of the crisis on growth. This technique results in an output gap of around 1 percent of GDP in 2013.

  • Production function using annual HP-filtered inputs. Labor is decomposed into working age population, participation rates, hours worked, and adjusted for cross-border workers. With this method, the output gap reaches around 3½ percent in 2013.

  • Production function using an estimated capital series based on the perpetual inventory method, and decomposing the labor components as in the previous method, while taking a view on structural unemployment and equilibrium participation rates and hours worked. This refinement results in an output gap measure of 2¼ percent in 2013.

    The authorities use various techniques, including well-elaborated macroeconomic models, and have adapted the European Commission’s methodology to account for the large pool of cross-border workers. The 2013 output gap used in the budgetary framework was 2¾ percent.

    The wide range of estimates illustrates the need for a conservative approach, as revisions to the data tend to reduce the size of the output gap over time. Going forward, staff’s medium term projections assume a very gradual recovery in potential growth, given headwinds to growth from the various challenges, and a slow pick-up in TFP reflecting diversification efforts. The output gap is projected to broadly close by 2016

A01ufig05

Uncertainty about the level of output gap

(In percent of potential output)

Citation: IMF Staff Country Reports 2014, 118; 10.5089/9781475518528.002.A001

Sources: STATEC, staff estimates.

POLICY PRIORITIES TO SECURE LUXEMBOURG’S ECONOMIC AND SOCIAL MODEL

Luxembourg’s success has been predicated on a model of strong public finances, dynamic financial services, and an attractive business environment. Together, these factors allowed for solid growth prior to the crisis and the financing of a generous social welfare system. Discussions focused on the priorities to preserve the main outlines of this model in a changing environment. Those revolved around actions to preserve the healthy fiscal position, manage the risks associated with the diversification of financial sector activities, and shore up competitiveness to ensure the economy can also diversify beyond the financial sector.

A. Adapting Fiscal Policy

11. Without corrective measures, the fiscal position would deteriorate substantially over the next five years. While the 2014 fiscal stance is projected to be broadly neutral, under unchanged policies the structural deficit is projected to worsen by as much as 3½ percent of GDP over 2015–2019. The deterioration would be driven broadly equally by the loss in e-VAT revenues and continued buoyant expenditure growth—which has outpaced that of revenue and GDP since 2009.1 Public debt could reach close to 40 percent of GDP by 2019, substantially higher than the new government’s target (Figure 5, Tables 3 and 4).

Figure 5.
Figure 5.

Luxembourg: Fiscal Developments

Citation: IMF Staff Country Reports 2014, 118; 10.5089/9781475518528.002.A001

Sources: Haver Analytics, Luxembourg Authorities, Eurostat, Etudes d’impact, and IMF Staff calculations.
Table 3.

Luxembourg: General Government Operations

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Sources: Luxembourg authorities, and staff projections.
Table 4.

Luxembourg: General Government Financial Balance Sheet

(In millions of Euros)

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Sources: Luxembourg Statistical Office and Eurostat.

12. Staff advocated a moderate but sustained consolidation effort for the next five years. An annual effort of around ½ percent of GDP in structural terms (excluding the effect of e-VAT losses) over 2015–2019 would stabilize debt below 30 percent of GDP—an explicit commitment of the coalition partners. It would also allow Luxembourg to return to its medium-term objective of ½ percent of GDP structural surplus by 2018—a European commitment—while mitigating the negative impact on growth (Figure 6, Table 5).

Figure 6.

Luxembourg: Public DSA: Composition of Public Debt and Alternative Scenarios

Citation: IMF Staff Country Reports 2014, 118; 10.5089/9781475518528.002.A001

Source: IMF staff.
Table 5.

Luxembourg: Public Sector Debt Sustainability Analysis (DSA) - Baseline Scenario

(In percent of GDP unless otherwise indicated)

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Source: IMF staff.

Public sector is defined as general government.

Based on available data.

Long-term bond spread over German bonds.

Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.

Derived as [(r - π(1+g) - g + ae(1 + r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the numerator in footnote 5 as r - π (1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 5 as ae(1+r).

Includes asset changes and interest revenues (if any). For projections, includes exchange rate changes during the projection period.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

13. The authorities have announced a VAT hike, as a first measure. The measure is expected to be adopted by Parliament in the second half of the year, with rate increases to take effect in January 2015, and an estimated yield of ¾ percent of GDP. Staff supported this move, noting that, given low current rates, the planned 2 percentage point hike would still allow Luxembourg to maintain the lowest VAT rate in the EU. The increase would apply to all rates but the lowest 3 percent rate on basic goods, helping to shield the poorest households.

Fiscal Adjustment Under Unchanged Policy and Consolidation Scenarios

(In percent of GDP)

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Excludes the effect of eVAT losses, as those do not represent a fiscal stimulus to the domestic economy, despite the fact that without correction, they would appear as a relaxation of the fiscal stance.

Under the assumptions of measures including (i) VAT adjustment totalling ¾ percent of GDP, spread over 2015-2016 (ii) increase in recurrent property taxes yielding ¾ percent of GDP spread over 2015-17, and (iii) moderation in expenditure growth in social benefits, purchases of goods and services, wages and salaries, current transfers, and subsidies of 2½ percent of GDP. Total current expenditures would be assumed to grow by 1¾ percent per year on average in real terms as opposed to 3½ percent, over 2015-19.

14. Property taxes would be another preferred source of revenue. Luxembourg’s income from such taxes is currently less than 0.1 percent of GDP, while it averages ¾ percent of GDP in the euro area. Increasing the tax yield could take the form of an update in property valuations—which date back to 1941 and are out of line with current market prices. Raising revenue through this channel would also increase the holding costs of unused properties, potentially relieving pressures in the housing market.

15. However, staff stressed that significant steps were also required to curtail rapid expenditure growth:

  • Staff welcomed the recently-initiated comprehensive expenditure review as a tool to prioritize savings to be included in the 2015 budget. As part of EU commitments, the planned introduction of multi-annual budgeting and expenditure ceilings for the central government could also help identify efficiency gains. A public sector reform bill which includes a wage agreement for 2014–16 is expected to generate short-term costs but will allow for a slowdown in the seniority system. Staff noted that, over the medium term, public sector staffing and compensation policies would need to be consistent with the new budgetary framework.

  • Staff stressed that a specific area of focus should be social benefits, as they absorb about half of public spending, are the highest per capita in the region, and some of them create disincentives to work (Box 4). Consideration could also be given to partially means-testing family benefits.

16. Pension reforms remain an unfinished agenda. Despite the steps taken in 2012, without deeper reforms, pension obligations are still expected to remain unsustainable in the long term. Staff encouraged the authorities to consider measures well ahead of the 2017 scheduled review, including by permanently limiting indexation of pensions to inflation only.

17. The fiscal framework is to be adjusted to fulfill EU commitments and prepare for potential changes in international corporate taxation. A fiscal council to monitor deviations from fiscal targets is to be constituted. With the main fiscal target now defined in structural terms, staff underlined the importance of estimating output gaps conservatively, to avoid overstating the structural balance. The extent to which the global push for transparency in corporate taxation would affect revenues in Luxembourg is difficult to determine, as data is patchy; staff encouraged the authorities to develop a better capacity to assess tax revenues stemming from multinational activities.

Authorities’ views

18. The authorities are keenly aware of the fiscal challenge, and plan to achieve consolidation mainly by slowing expenditure growth. They underscored that efforts had already started in 2014, with a limit on expenditure growth at the central government level, and that the VAT increase was also to come. They expressed a preference for front-loading measures in 2015, the year the revenue loss would materialize, stressed the role of the ongoing expenditure review, and took note of the recommendation on property taxes. They agreed that social benefits selectivity would need to increase—it is part of the coalition agreement—but noted, however, that reforms in that area might take longer to implement. While they recognized that more needed to be done to reform the pension system, they did not foresee any measures in the near term.

19. The authorities also planned a strategic review of both tax and expenditure policies to provide the basis for reforms. On the revenue side, a committee of experts will be established to conduct a comprehensive review of the tax system, in particular with a view to improving efficiency while maintaining tax competitiveness. Measures would be expected in 2017. On the expenditure side, the authorities noted that a move to a more flexible system, whereby public servants could be moved from one area to another more easily, would help respond to evolving needs. With respect to international corporate taxation, the authorities reiterated that, as long as a level playing field was established at a global level, they would favor those reforms.

Inactivity Traps in Luxembourg1

Incentives embedded in the social benefits system can give rise to “inactivity traps”. These operate when people taking up employment are financially worse off, because the additional net income from work is less than the social benefits foregone in the process, either from unemployment benefits and/or from other social assistance, deterring those affected from participating in economic activity. In those circumstances, the marginal effective tax rate (METR) exceeds 100 percent: more than 100 percent of the additional income is “taxed away”. These effects tend to be observed mostly at the low end of the wage scale.

The social benefit system in Luxembourg exhibits some of these features. Unemployment benefits are relatively generous, with an 80 percent replacement rate, for a maximum of 12 months. Those ineligible for unemployment benefits can access the minimum guaranteed income (RMG), with amounts received varying by family status and by income up to a certain level. The RMG also includes a small housing benefit portion. Other relevant benefits include family benefits, which are not means-tested, a cost-of-living type allowance (“allocation de vie chère”), and a minimal income tax credit for work.

This system results in very high METRs, particularly for those receiving unemployment benefits, for whom virtually all the additional income is taxed away when taking up employment. This effect is present up to relatively high wage income and across family status ranging from single persons to single earner couples and two-earner couples, with or without children. For example, the METR only declines below 100 percent levels at 90 percent of average wage for a single person, and at as high as 150 percent of average wage for the second earner of a two-earner couple.

In the case of the RMG, the inactivity trap effect operates at lower wage ranges than with unemployment benefits, but still applies to many types of family status. The METR is above 100 percent for singles earning below 50 percent of the average wage and for single earner couples up to 70 percent of the average wage, making it difficult to leave social assistance. The latter case is illustrated in the text chart: gross wage earnings cannot replace forgone benefits (including lower RMG, minus new taxes and social contributions to be paid), as seen in the grey shaded area. It is only when pay rises above 70 percent of the average wage that the earner is able to keep more than what is lost, and the METR drops to the “normal” tax, which would include income tax as well as social contributions.

A01ufig06

Couple with one earner and two children, 2011

(LHS in percent, RHS in euro; X axis in percent of average wage)

Citation: IMF Staff Country Reports 2014, 118; 10.5089/9781475518528.002.A001

Source: OECD tax and benefits database.

Policies should focus on incentives to participate in economic activity. While the social benefit system has helped support social cohesion, it is likely to have contributed to the high rate of unemployment for unskilled workers, and to a less dynamic economy through lower participation rates. The authorities have revamped the employment agency to more actively tackle this challenge. Experiences in neighboring countries such as Germany suggest indeed that more active labor market policies help, but they also highlight the need to combine them with a reform of social benefits to address the adverse incentives related to high METR. In that respect, a reduction in social transfers could be associated with the introduction of a well-targeted earned income tax credit system.

1 See also Selected Issues Paper: “The Fiscal Position: Sound for Now, but Significant Challenges Ahead”.

B. Navigating the Changing Financial Landscape

20. The European regulatory and supervisory environment is undergoing substantial changes. As the euro area moves toward a banking union, banks and supervisors will have to prepare for the switch to the Single Supervisory Mechanism (SSM). The single rulebook is being enhanced through the transposition of Basel III framework, and harmonization of banks’ recovery and resolution processes as well as of national deposit guarantee schemes. In parallel, the authorities announced that they will start the automatic exchange of information with other tax authorities under the EU Savings Taxation Directive on savings income from 2015.

21. The financial sector appears resilient and, faced with these new challenges, is moving toward diversification. 2 Despite a contraction of their balance sheets since the crisis—driven by deleveraging pressures in euro area parent banks—banks remain highly capitalized and liquid, and NPLs are low (Table 6). However, staff stressed that, with the euro area banking sector still ailing, activities geared toward the region were likely to grow only moderately. Progress toward banking union was seen as positive in the long run. But staff noted that strengthened capital requirements and the introduction of bail-in instruments might initially exacerbate euro area deleveraging pressures, and that more harmonized EU regulation and supervision might lessen Luxembourg’s competitive advantage for some businesses. In that context, it was recognized that diversification already underway would mitigate some of the short-term effects of EU-driven changes:

  • Luxembourg has been able to attract new institutions from emerging markets looking for a hub in the euro area, in part thanks to its extensive financial infrastructure.

  • Banks are retooling private banking activities toward high net-worth individuals to mitigate the effects of the switch to automatic exchange of information in 2015—which could be challenging for some institutions.

  • The investment fund industry has continued expanding, despite recent bouts of volatility in global financial markets. The rapid transposition of the Alternative Investment Fund Managers Directive was seen as an opportunity to develop new activities.

Table 6.

Luxembourg: Financial Soundness Indicators

(In percent)

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Sources: Financial Soundness Indicators Database, BCL, and CSSF.

Profit and loss data (end 2011) of one bank under restructuring excluded from profitability and efficiency indicators.

22. Financial sector oversight has been steadily improved. Since the 2011 FSAP, staffing at the Commission de Surveillance du Secteur Financier (CSSF) has been increased, techniques for stress testing banks have been enhanced, and investor protection has been stepped up (Appendix III). Cooperation between the Banque Centrale du Luxembourg (BCL) and the CSSF is being enhanced in the context of the preparations for the SSM. It will be further strengthened through the foreseen set-up of a national Systemic Risk Committee, involving the supervisors, the BCL, and the Finance Ministry. Preparation for the SSM, though taxing on resources, is proceeding according to schedule, with 80 percent of total assets expected to be supervised by the SSM, either directly or through parent banks.3 Staff noted that the operational independence of the CSSF could be further strengthened as part of the SSM-related revision of the legal framework.

23. The authorities are also taking steps to preserve the resilience of the banking sector. The implementation of Basel III capital requirements is being front-loaded, with banks having to meet the minimum 7 percent CET1 from 2014. Given the already high level of capital, banks were generally expected to meet this requirement without difficulty. Staff viewed the measure as appropriate but encouraged the supervisors to remain vigilant and carefully monitor systemic banks to determine, in collaboration with European authorities, whether specific additional measures might be warranted over time. In parallel, each bank will be required to provision at least 1 percent of their insured deposits by end-2016—the aggregate provisioning already exceeds 2 percent of insured deposits. Work to transpose EU’s Deposit Guarantee Schemes and Bank Recovery and Resolution Directives has started, and banks will be mandated to prepare resolution plans in this context. Coordination with all parties involved, in the context of the future Single Supervision and Resolution Mechanisms, would be critical in the event of a potential systemic shock in one of the large euro area parent banks.

24. Domestic residential real estate exposures require monitoring. Exposures have risen substantially since 2008. The authorities have taken several positive steps, including by raising risk weights for mortgage loans exceeding 80 percent of loan-to-value ratios and by requiring frequent stress testing. While early indications suggest these measures are gaining traction, staff argued that supervisors should stand ready to take additional macro-prudential measures if exposures continued to rise. Given their systemic importance for the domestic economy, consideration could also be given to maintaining higher capital requirements for domestically-oriented banks, in collaboration with European authorities.

25. Interconnections and emerging risks should be carefully scrutinized.

  • Staff underscored the need to closely monitor the entire financial sector. In particular, links between the various domestic financial actors—for example, from large deposits in the banking system from the fund industry, specialized financial service providers, financial holdings and via financial infrastructures—warrant close monitoring, including of potential inward and outward spillovers. The proposed Systemic Risk Committee would be well-placed to monitor these risks, possibly through system-wide stress testing covering both investment funds and banks.

  • Staff stressed that diversification comes with both benefits and risks. In that context, emerging risks should receive enhanced attention; for example, currency mismatch risks could increase as banks’ business in foreign currencies expands. Staff encouraged the authorities to publish their assessments regularly to show that they are closely following new developments in the sector.

  • Likewise, to maintain the confidence in the financial sector and ward off reputational risks, staff called for more communication on the authorities’ commitment to investor and depositor protection.

  • Staff pointed to remaining shortcomings in the AML/CFT and tax information exchange frameworks to be addressed. While the Financial Action Task Force recently recognized efforts in addressing some of the shortcomings under the 2003 AML/CFT standard, further progress is needed in relation to the treatment of tax offences, transparency of legal persons and arrangements, and exchange of information with foreign counterparts (Appendix IV).

Authorities’ views

26. The authorities and industry were optimistic about the financial center’s prospects under the changing environment. They saw the financial industry capable of adapting to more transparency and to upcoming EU-driven regulatory changes. They noted that these trends, which they called for, could even have upside risks as they could strengthen the financial center’s advantages. They pointed in particular to the “eco-system” developed over time in Luxembourg as a powerful selling point to attract new businesses—a unique concentration of diversified financial institutions and related services, providing services based on the EU rulebook and the civil law tradition, and supported by the multi-lingual workforce. They were also positive about the move toward a euro area banking union, as it would ensure a level playing field and contribute to the stability of the European banking system. The comprehensive assessment by the ECB was not seen as likely to raise any substantial issue as the authorities viewed banks as well capitalized and with limited exposures to risky assets. They emphasized that the national supervisors would continue to work closely with the SSM after its establishment, as envisaged in related regulations.

27. Supervisors stressed, though, the importance of moving in collaboration with European partners. They were open to consider additional capital buffers for systemic and domestically-oriented banks. They noted, however, that these measures would have to be carried out over time and in consultation with EU partners—once the full picture of CRD IV implementation became clearer in the euro area. The authorities explained their plan to move ahead expeditiously to set up an ex-ante deposit guarantee scheme and saw merit in maintaining the current overall level of protection even as they moved to this ex-ante system.

28. The authorities broadly shared staff’s views on possible sources of risks for the financial sector. They agreed on the need to closely monitor banks’ residential real estate exposure and to consider further measures if need be, but preferred for now to wait for the full effects of recent measures. They concurred on the need to continuously monitor risks arising from growing interconnections within the financial sector and from diversification efforts, but at this point, did not see those links posing a substantial risk to the sector’s stability. The authorities agreed with the need to communicate more proactively their focus on investor protection. Finally, the authorities indicated that they are waiting for the adoption of the 4th AML/CFT Directive to revise their legal framework in line with international and regional standards, but that they had already taken preparatory steps with regard to tax crimes and the transparency of legal persons and arrangements.

C. Supporting Economic Diversification beyond the Financial Sector

29. The authorities are implementing a diversification strategy beyond financial activities. They have been targeting specific sectors of growth (i.e. logistics, ICT, bio- and eco-technologies), and efforts are starting to bear fruit, in particular in the fledging but rapidly growing ICT sector.

30. However, despite a strong external position, underlying trends are less benign. Wages have continued to increase rapidly, even after the crisis, and this despite a decline in productivity and slower employment growth. As a result, the increase in unit labor costs has outpaced that in euro area neighbors by about 20 percent since 2007. The automatic wage indexation mechanism played a critical role, making it difficult for wages to adjust to declining productivity since the crisis; staff analysis suggests that it contributed to more than half of the persistent wedge between Luxembourg and euro area inflation (Box 5). Despite strong economic performance in pre-crisis years, and a solid external position, structural problems in the labor market, as exemplified by the continuous increase in long term unemployment and skills mismatch at the lower end of the wage scale, could eventually erode competitiveness, and hamper long-term growth potential.

31. Adjusting the wage indexation mechanism would help halt these trends. Under a temporary agreement expiring in December 2014, efforts to alleviate the negative side-effects of indexation—by limiting wage adjustments to once a year—have helped contain unit labor costs. But staff underscored the need for further actions to better link wage and productivity developments, and suggested some complementary options:

  • Making the limit of one indexation round per year a permanent feature after the current arrangement expires, but setting the annual cap closer to the ECB price stability objective (close but below 2 percent) than the current 2½ percent threshold, with additional wage increases left to negotiations between employers and employees to reflect productivity developments.

  • Supplementing the current mechanism with escape clauses when inflation among the main trade partners falls significantly below the annual cap on automatic indexation.

  • Modifying the reference index to exclude volatile prices (notably food and fuel prices).

Wage Adjustment and Inflation Persistence1

The automatic indexation of wages may be partially responsible for the strong dynamism of labor costs and inflation in recent years. Strong wage increases can trigger higher inflation than in euro area partners, as the rise in inflation automatically causes wages to increase, and as a second round response, the subsequent rise in wages increases inflation further—a process that can result in labor cost increases that diverge from productivity gains. As a first indication, the inflation differential between Luxembourg and the euro area has been relatively persistent, at close to 1 percentage point per annum. Furthermore, this wedge has almost always been positive since the inception of the euro, even during recessions. The bi-annual review of the official minimum wage can also contribute to wage dynamism; the minimum wage in Luxembourg is one of the highest among advanced economies.

A01ufig07

Core inflation: Luxembourg and Euro Area

(In percent, qoq annual moving average)

Citation: IMF Staff Country Reports 2014, 118; 10.5089/9781475518528.002.A001

Sources: Eurostat and IMF.

An econometric analysis suggests that at least half of the inflation differential with the euro area can be attributed to the automatic indexation mechanism. In a model linking Luxembourg inflation to the euro area inflation and idiosyncratic effects such as the automatic indexation and the review of minimum wages, the latter effects are found to contribute ½ to 1 percentage point to the annual inflation rate. Spikes in inflation are found to occur the quarter directly following an episode of automatic wage indexation. In this context, the temporary arrangements in place until end–2014 limiting the frequency of adjustment has helped, but a permanent system less conducive to high inflation persistence should be designed to preserve competitiveness. This is especially important in a context where the increase in labor compensation has been accompanied by a decline in labor productivity since the crisis.

article image

Differential with euro area inflation

“***” <1 percent, “**” < 5 percent, “*”< 10 percent.

Sources: IMF staff estimations.
A01ufig08

Compensation and real value added per worker

Citation: IMF Staff Country Reports 2014, 118; 10.5089/9781475518528.002.A001

1 See also Selected Issues Paper: “External Developments, Competitiveness, and Labor Market Policies”.

32. Steps to increase labor participation, strengthen labor skills and reinforce the business environment would further support diversification efforts. Staff pointed to the need to:

  • Review social benefits to strengthen work incentives. The 2012 pension reform increased the number of contribution years required for full pension, but did not touch existing early retirement schemes that result in a low effective retirement age. The recent reform of the employment agency (ADEM) improved job search assistance and training opportunities. But staff argued that a review of existing social transfers, including unemployment insurance benefits and minimum guaranteed revenue, would complement these efforts by increasing incentives to participate in the labor market.

  • Continue efforts to align skills to private sector needs. Growing skill mismatches at the low end of the wage scale suggest a need to review some features of the education system—where Luxembourg ranks low compared to OECD peers—with a view to reducing dropout rates and increasing efficiency. In addition, efforts should continue to be made to match workers’ skills with private sector needs, in collaboration with the private sector, including through support for training in the areas of targeted growth.

  • Reduce barriers to entry and competition. As noted by the OECD, Luxembourg has more stringent product market regulations than other EU members, notably for professional services and network industries (i.e. retail distribution). In addition, the emergence of new firms could be facilitated by improving administrative processes to start a business.

Summary of Recommendations for Luxembourg: 2014 OECD Going for Growth Interim Report

article image
Sources: OECD.

33. Authorities’ views. The authorities agreed that some social transfers created disincentives to work and that competitiveness had deteriorated due to rising labor costs in a context of declining productivity. However, they viewed the business environment as conducive to attracting skilled foreign workers, and stressed that their diversification strategy was based on improving overall productivity—through increased public investment in the areas of targeted growth and through training efforts—rather than narrowly focused on cost competitiveness. In that context, they took note of the recommendations regarding the automatic indexation mechanism, but indicated that consideration so far had only been given to making the current arrangement permanent and limiting full indexation to the lower end of the wage scale.

STAFF APPRAISAL

34. The Luxembourg economy is rebounding. The fiscal position remains sound, the large financial sector has been resilient, and the outlook is for growth to gradually firm up, yet without returning to pre-crisis trend. Protracted low euro area growth as well as a larger-than-expected impact on banks from euro area deleveraging trends and from the move to automatic exchange of information constitute the main downside risks. EU-driven regulatory changes may also curtail growth of the financial sector.

35. Yet securing Luxembourg’s economic and social model calls for a proactive approach to address the fiscal, financial, and structural challenges ahead. The fiscal position will soon come under strain from losses in e-VAT revenues, the financial sector will have to adjust to a changing external landscape, and Luxembourg’s cost competitiveness is being eroded. It will be essential to adapt fiscal policies, manage the risks associated with the diversification of financial sector activities, and preserve competitiveness to allow for alternative sources of growth.

36. A moderate but sustained consolidation is essential to preserve the current healthy fiscal position, underpinned by significant efforts on the expenditure side. A consolidation effort of ½ percent of GDP for the next five years would allow public debt to stabilize below 30 percent of GDP, and the authorities to meet their medium-term objective by 2018, while mitigating the impact on growth. Given current low rates, the planned VAT hike is appropriate, and consideration should also be given to increasing the yield of property taxes. Yet, even after revenue measures are implemented, it will remain critical to curb public spending growth; the expenditure review underway will be a useful tool to identify savings. Changes to the design of some social benefits should be a specific area of focus, as they would also help boost the economy’s growth potential through greater labor participation. In that context, a reduction in social transfers could be associated with the introduction of a well-targeted earned-income tax credit system.

37. Adjustments to the fiscal framework should improve transparency. The planned introduction of expenditure ceilings in the context of multi-annual budgeting, in line with EU commitments, should support efforts to moderate spending growth. Likewise, the future fiscal council should have the expertise and resources to monitor deviations from fiscal targets in full independence. With the main target now defined in structural terms, output gap estimates will need to be made conservatively—to avoid overstating the structural balance—and assessed independently—to prevent politicization. Better information on tax expenditures and revenues stemming from multinational activities would also help inform fiscal policy decisions.

38. The financial sector’s resilience should be preserved as diversification proceeds. The decision to front-load the implementation of Basel Ill’s capital requirements is welcome. Supervisors should remain vigilant and carefully monitor developments to determine, in collaboration with European authorities, whether specific additional measures may be warranted over time to reflect the systemic size of a number of banks. They should also stand ready to take additional actions if domestic real estate exposures continue to rise. Meanwhile, the authorities should move ahead expeditiously to set up the ex ante deposit guarantee scheme and resolution fund required by European legislation. The switch to the SSM also offers an opportunity to further strengthen financial sector oversight, but a smooth transition will require the continued involvement of the national competent authorities in the supervision of banks. In addition, the future Systemic Risk Committee should play a leading role in monitoring the interconnections between domestic financial sector actors and new emerging risks from financial diversification. To ward off reputational risks, a more proactive focus on investor protection in the authorities’ communication strategy would be beneficial.

39. Structural policies should support Luxembourg’s efforts to diversify beyond the financial sector. In particular, the expiration of the temporary agreement on wage indexation offers an opportunity to adjust the mechanism in a way that allows wage and productivity developments to be better aligned. At a minimum, annual indexation should be permanently capped at a level closer to the ECB price stability objective than the current 2% percent threshold, and escape clauses considered when inflation among the main trading partners drops significantly below 2 percent. As high real estate prices put pressures on wages, measures to support housing supply would complement these efforts, including through more flexible rules on land use and higher holding costs on unused properties. Meanwhile, the authorities should continue their efforts to match workers’ skills with private sector needs, and the emergence of new firms should be facilitated by improving administrative processes to start a business.

40. It is recommended that the next Article IV Consultation with Luxembourg be held on the standard 12-month cycle.

Appendix I. Exchange Rate Assessment

1. Luxembourg’s current account gap is expected to narrow over the medium term.

Rising income and transfers, including the loss of e-commerce VAT revenue from 2015 and beyond, will weigh on the current account. As a result, the external position is projected to move closer to its equilibrium level in the medium term. These medium-term projections, however, do not reflect any policy changes and are subject to large uncertainty from the intrinsic volatility in financial service exports.

Staff estimates show that the exchange rate is broadly in line with fundamentals. The Macroeconomic Balance (MB) and External Stability (ES) approaches indicate a slight undervaluation of the real effective exchange rate (REER) while the Equilibrium Real Exchange Rate (ERER) approach points to a mild overvaluation. Taking all together, the exchange rate is estimated to be close to the equilibrium value implied by fundamentals, with no evidence of substantial misalignment.1 Under the MB approach, the initial net foreign asset (NFA) position and relative income growth are the two main contributors to the current account balance norm for Luxembourg, with a prudent fiscal framework also playing a role, although to a lesser extent.

Exchange Rate Assessment for Luxembourg

(in percent)

article image
Sources: IMF WEO and staff estimates.
A01ufig09

Macroeconomic Balance Approach: Estimated Current

Account Norms and Its Components, 2009-2019

Citation: IMF Staff Country Reports 2014, 118; 10.5089/9781475518528.002.A001

Sources: IMF April WEO 2014 and staff estimates.

Appendix II. Implementation of Past Fund Advice

article image

Appendix III. Implementation of 2011 FSAP Recommendations

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Appendix IV. Financial Integrity and Transparency Issues

1. While highly attractive, Luxembourg’s financial center may also be vulnerable to misuse. Political stability and multilingual, qualified financial services advisors contribute to the attractiveness of Luxembourg’s financial center. The FATF recently decided that Luxembourg had made significant progress in addressing the deficiencies identified in its 2010 AML/CFT mutual evaluation report.1 However, the AML/CFT and tax information exchange frameworks still suffer from some shortcomings, such as an inadequate treatment of tax offenses, (notably in relation to the revised (2012) AML/CFT standard), limited transparency of ownership of legal persons and arrangements, and weaknesses in the detection of and exchange of financial intelligence and tax information on non-residents. Both the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes and the FATF have raised concerns in this regard. The authorities indicated that they were waiting for the adoption of the European Union’s 4th AML/CFT Directive to introduce the necessary amendments in their legal framework.

2. The authorities are encouraged to include tax crimes amongst the predicate offenses to money laundering. The scope of tax fraud2 has a number of limitations. Both the substance and the implementation of this offense have been criticized. It may hamper international judicial cooperation relating to tax offenses. For instance, non-residents who bring funds to Luxembourg in order to evade taxes in their own country are not deemed to commit the offense covered by this provision because using the Luxembourg legal framework does not amount per se to a “systematic use of fraudulent means”. In addition, tax crimes are not predicate offenses to money laundering. In these circumstances, the AML/CFT framework is not applicable in cases of tax crimes, which hampers detection of, and international cooperation on, tax evaders. The authorities have indicated that they are working towards including tax crimes as predicate offenses to money laundering as recommended by the 2012 FATF standards.

3. The authorities are taking steps to increase the transparency of legal persons that issue bearer shares but have not taken similar measures with respect to legal arrangements. The lack of transparency over legal persons is widely recognized as offering opportunities to facilitate the laundering of criminal proceeds. On October 4, 2013, a bill providing for the immobilization of bearer shares was submitted to Parliament. If adopted, this would play an important role in increasing the transparency of legal persons. Nevertheless, further measures are necessary to ensure that information relating to the beneficial ownership of legal entities is readily available. This includes ensuring that adequate and accurate information on the beneficial owners of legal persons is available in all cases, and may require changes in the Registry of Business and Corporations (RCS)’s framework. Beneficial ownership information relating to trusts is only accessible in the course of criminal proceedings and the identification of trusts and their beneficial owners is not carried out in a systematic manner. The Committee on Transferable Securities (within the CSSF) and the Committee on Company Law (within the Ministry of Justice) are currently conducting a joint analysis of the shortcomings in the area of transparency of legal persons, trusts and other legal arrangements.

The framework for exchanging financial intelligence on non-residents potentially misusing Luxembourg’s financial sector is in place but would benefit from further strengthening. An important number of AML/CFT inspection missions have taken place over the past years, the number of suspicious transactions reports have increased and the number of sanctions pronounced has increased. In addition, the authorities appear to request information from foreign counterparts as soon as a foreign person appears in a suspicious transaction report—a critical element given that the majority of predicate crimes may be committed outside the country. Almost 10,000 AML/CFT-related information requests have been sent in 2012, as opposed to less than 3,000 in 2010. However, the decreasing number of inspections of banks in 2013, the short length of the onsite inspection missions (3-5 days) and the relatively low amount of fines imposed in 2013 (less than EUR150,000) could impact the effectiveness of the supervisory process.3 It also appears that one single bank disclosed more than 85 percent of all the suspicious transactions in 2012, and explains the high number of information exchanged. A draft law concerning the harmonization and update of the general legal framework on sanctions and prudential powers of the CSSF is being discussed by the authorities. With regard to exchange of information for tax purposes, the November 2013 Phase 2 Global Forum report indicated significant delays in responses to foreign requests, based on the analysis of the response timeframe for years 2009–11. The authorities indicate that communications with requesting partners have significantly improved in the last years.
1

Based on the E-Business Directives, from 2015, VAT on digital content will be charged where the customer resides, not to the country of origin. 70 percent of the revenue (1% percent of GDP) will be lost starting in 2015, an additional 15 percent in 2017, and the full amount in 2019.

2

See also Selected Issues Paper: “The Financial Sector: Strengths and Challenges”.

3

Seven banks with head offices in Luxembourg, including two domestically-oriented banks, will be subject to the comprehensive assessment directly. 62 other banks, including all other major domestically-oriented banks, will also be subject to the exercise through their head offices in other euro area countries.

1

Economies that serve as hubs for international financial flows have tended to run substantial current account surpluses and net creditor positions. This effect is captured in the IMF exchange rate assessment framework by a financial center variable that represents the following economies: Belgium, Hong Kong SAR, Luxembourg, Netherlands, Singapore, and Switzerland.

1

Measures in italics denote those taken before the 2012 Article IV consultation.

1

See FATF, 2014, Mutual Evaluation of Luxembourg: 6th Follow-up report.

2

The main tax crime in Luxembourg is the “escroquerie fiscale” as defined in Articles 396, paragraph 5, and 397 of the Tax Code. Additional tax offenses include the “fraude fiscale” (Article 396, paragraph 1, of the Tax Code) and offenses relating to indirect taxes, and customs and excise duties.

3

Fund staff experience and indications from some FATF members with supervisory frameworks that are generally considered to be effective suggest that onsite inspections missions last 2-3 weeks on average, depending on the size of the financial institution. Similarly, much higher fines have been pronounced for non-compliance with AML/CFT equirements by some foreign supervisors, with several fines higher than US$10 million (e.g.: JP Morgan Chase, TD Bank, TCF National Bank, HSBC Holdings in the US.; Standard Bank PLC in the U.K.; UBS France in France).

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Cover IMF Staff Country Reports
Luxembourg: Staff Report for the 2014 Article IV Consultation
Author:
International Monetary Fund. European Dept.
Volume/Issue:
Volume 2014: Issue 118
Publisher:
International Monetary Fund
ISBN:
9781475518528
ISSN:
1934-7685
Pages:
55
DOI:
https://doi.org/10.5089/9781475518528.002
  • Figure 1.
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    Figure 1.

    Luxembourg: Real Sector Developments

  • Figure 2.
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    Figure 2.

    Luxembourg: Credit and Housing Market Conditions

  • View in gallery

    Luxembourg and Euro Area Real GDP Recovery

    (In index number, 2009Q1 = 100)

  • Figure 3.
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    Figure 3.

    Luxembourg: External Developments and Labor Market

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    Average Contribution to Gross Value Added

    (In qoq contribution to growth)

  • Figure 4.
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    Figure 4.

    Luxembourg: Financial Sector

  • View in gallery

    Size of Different Sectors of Luxembourg Financial Industry

    (In multiples of GDP)

  • View in gallery

    Decomposition of GDP growth: K, L and TFP

    (in percent change, contribution to real GDP growth)

  • View in gallery

    Uncertainty about the level of output gap

    (In percent of potential output)

  • Figure 5.
    View in gallery
    Figure 5.

    Luxembourg: Fiscal Developments

  • Figure 6.
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    Figure 6.

    Luxembourg: Public DSA: Composition of Public Debt and Alternative Scenarios

  • View in gallery

    Couple with one earner and two children, 2011

    (LHS in percent, RHS in euro; X axis in percent of average wage)

  • View in gallery

    Core inflation: Luxembourg and Euro Area

    (In percent, qoq annual moving average)

  • View in gallery

    Compensation and real value added per worker

  • View in gallery

    Macroeconomic Balance Approach: Estimated Current

    Account Norms and Its Components, 2009-2019

Figure 1.

Luxembourg: Real Sector Developments
Figure 2.

Luxembourg: Credit and Housing Market Conditions

Luxembourg and Euro Area Real GDP Recovery

(In index number, 2009Q1 = 100)
Figure 3.

Luxembourg: External Developments and Labor Market

Average Contribution to Gross Value Added

(In qoq contribution to growth)
Figure 4.

Luxembourg: Financial Sector

Size of Different Sectors of Luxembourg Financial Industry

(In multiples of GDP)

Decomposition of GDP growth: K, L and TFP

(in percent change, contribution to real GDP growth)

Uncertainty about the level of output gap

(In percent of potential output)
Figure 5.

Luxembourg: Fiscal Developments
Figure 6.

Luxembourg: Public DSA: Composition of Public Debt and Alternative Scenarios

Couple with one earner and two children, 2011

(LHS in percent, RHS in euro; X axis in percent of average wage)

Core inflation: Luxembourg and Euro Area

(In percent, qoq annual moving average)

Compensation and real value added per worker

Macroeconomic Balance Approach: Estimated Current

Account Norms and Its Components, 2009-2019