Being an economic analyst in these times is a challenge. And for good reason: in recent months, the global economic situation has been riddled with a series of significant shocks that have regularly changed forecasts.

 After, ‘everything depends on vaccination rates’, and ‘everything depends on price trends’, came, ‘everything depends on the situation in Ukraine’. Indeed, beyond the dramatic human consequences of this new crisis that has blindsided the entire world, the invasion of Ukraine has a much greater global impact than we could have imagined: increased shortages of electronic materials and raw materials in general, scarcity of basic food products, and more. Above all, this international crisis is right on the heels of a previous international crisis that already greatly weakened the economic fabric. 

Return to calm postponed for public finances 

It is in this shifting context that Luxembourg’s annual economic meetings as part of the European semester for coordinating economic, budgetary, social and employment policies within the European Union (EU), took place, with the ‘National Stability Programme 2022-2026’ and the ‘National Reform Programme 2022’ publications presented on 26, 27 and 28 April (both published in French). 

The ‘National Reform Programme : National Plan for a Green, Digital and Inclusive Transition’ (published in French as, ‘Programme Nationale de Réforme : Plan national pour une transition verte, numérique et inclusive’; English courtesy translation of the original document available), describing the strategy pursued by the Government ‘in order to lay the foundations for a transition combining economy, sustainability and ecology’, does not contain any major surprises, but raises the question of the speed of its implementation, at a time when the constraints weighing on companies are increasing. 

The ‘National Stability Programme’ (published in French as ‘Programme de Stabilité et de Croissance du Grand-Duché de Luxembourg 2022 > 2026’) is a much more binding exercise for the Government since it must set out the budgetary policy for the next four years, as well as the evaluation and actions in terms of public finances. The report recalls the uncertain macroeconomic future of Europe and Luxembourg in the short and medium term, which is highlighted by the latest revisions of the STATEC forecasts, which put Luxembourg’s inflation at 5.8% in 2022 and 2.8% in 2023. According to the very recent spring forecasts of the European Commission, published on 16 May, this rate would even reach 6.8% in 2022 and 2.3% in 2023. Inflation would therefore continue, whereas at the time of the conclusion of the tripartite agreement at the end of March, a sharp downturn in the general rise in prices, reaching 1.5% in 2023, was still forecast. 

If the central government balance reaches -326 million euros in 2021 – against a colossal deficit of about 3 billion euros in 2020 – reaching a positive general government balance – State, municipalities and social security – for that same year, both should deteriorate as of 2022, the general government balance only returning to positive in 2026. And if total public revenues have increased by 12.7% in 2021, while expenditures have progressed by ‘only’ 2.4%, this improvement could be short-lived due to the war in Ukraine, which adds a surge in the prices of raw materials, food and energy, in turn impacting the overall economic situation and growth forecasts. In addition, the health crisis in China has flared up, and the strict lock downs imposed could once again affect production and supply chains, as in the case of closed ports in China. 

The new measures introduced by the Luxembourg Tripartite Coordination Committee of 31 March 2022 will have a ‘mathematical’ negative impact on the general government balance in 2022, of around 1 percentage point. In addition, economic growth of ‘only’ 1.4% during this year is well below the previous estimates of STATEC (+3.5%) and the European Commission (+3.9%). And although the IMF in its recent projections is more optimistic in terms of growth than the National Stability Programme for 2022 (+1.8%), it is less so for 2023 (+2.1%). 

It is now important for Luxembourg to remain cautious and to ensure that it can retain its assets, its foundations and the room to manoeuvre that enabled it to create its economic success story. This is all the more true since some of the achievements of the Grand Duchy today, including components of its successful social model, were partly structurally designed against the backdrop of the exceptional success enjoyed by our country during the unprecedented period of the years known as the ‘Splendid Twenty’ (from the mid-1980s to 2007), which were marked by an average annual growth of 5.3%, i.e., more than double the figure for the European Union 15 (2.3%). In particular, the general pension insurance scheme, whose financial situation and financing will constitute, if there is no new economic golden age shortly, a real challenge for the future requiring courageous reforms. 

Urgent structural decisions to be made 

This outlook was also partly revealed at the end of April with the publication of the ‘Technical Assessment of the General Pension Insurance Scheme’ (published in French as, ‘Bilan technique du régime général d’assurance pension – 2022’). Although the scheme is still in a comfortable financial situation at this stage, all scenarios show the same trend: a more dynamic increase in expenditures than in revenue, which will put the balance under pressure in the medium term. A first ‘critical event’ is expected in 2027 when the overall contribution rate (the equivalent of what is deducted from the total income of employees) is exceeded by the pure distribution premium (the equivalent, still expressed in relation to the total income, of what is paid out to beneficiaries), i.e., deficits excluding income from assets in the general scheme. Under the impact of a load factor of at least 50% in 2030, which would be equivalent to a ratio of 50 pension beneficiaries to 100 affiliated employees contributing to the scheme, the reserve of the general scheme – which currently amounts to no less than 24 billion euros – would also decline sharply thereafter before being completely exhausted by 2045-2049. These outlooks should immediately call on all stakeholders in the Grand Duchy to conduct a fundamental debate on intergenerational equity, especially since the work of the Ageing Working Group – which establishes the reference demographic forecasts at European Union level – is based on a population of ‘only’ 785,000 residents in 2070 and employment that would increase by an average of 0.6% per year. In contrast, productivity would increase by some 1.2% per year over the same period, while apparent labour productivity stagnated from 2000 to 2019. The starting hypotheses therefore seem risky. 

The competitiveness of companies is at stake 

The margins of companies already greatly burdened by the health crisis, they are now burdened by inflation, the rise in the cost of raw materials and energy, and the rise in the cost of labour. Their profitability is therefore undermined and the means available to them to invest in the dual energy and digital transitions are shrinking. 

Furthermore, future European regulations are likely to have an impact on the competitiveness of companies, in particular Luxembourg companies that are largely integrated into world trade, but to date this impact is still uncertain. 

There are therefore many challenges ahead for Luxembourg’s companies and public finances: inflation, shortages, environmental and digital transitions, regulations, sustainability of the pension system, etc., against the backdrop of the competitiveness of Luxembourg companies and the attractiveness of Luxembourg for companies, investors, workers and consumers. However, one climatic, economic, health, financial and geopolitical crisis after another has exposed the vulnerabilities of our small economy, largely open to the outside world, exposed to the vagaries of international supply and demand, and dependent on the attractiveness of the factors of production and the legal and regulatory framework in which companies operate. These successive crises do not facilitate the necessary transitions (digital and environmental, but also in terms of tax attractiveness and the ability to attract and retain talent), nor the diversification of our economy, the markets where our goods and services are sold, and the supply of our resources. Courageous and innovative policy measures and deepened public-private collaborations can hopefully accelerate these transitions and the ongoing diversification required. We must quickly consolidate our strengths (employing the usual shortcuts) and avoid any measures that could harm the competitiveness of our economy (such as a general reduction in working hours).

Communicated by Carlo Thelen, from Luxembourg Chamber of Commerce


Publié le 18 mai 2022