Following the 2013 and 2018 elections, the Grand Duchy of Luxembourg is being ruled by a coalition government of three political parties: Democrat (Demokratesch Partei, with Prime Minister Xavier Bettel), Socialist (LSAP), and Green (déi gréng).
An important feature of the Luxembourgish political system is its commitment to social dialogue. The role of social partners is enshrined in legislation. What is sometimes called the 'Luxembourg model' is a search for ongoing and institutionalised consensus by means of a 'tripartite': a trilateral discussion board with representatives of government, employers and syndicates who agree on important economic and social issues.
Policy dialogue is made easier by the small size of the country and its resulting close proximity between policymakers and leaders of labour and management. This three-way negotiation system stimulates political change and economic diversification in Luxembourg. It thus contributes to the economic and social stability of the country.
Currently, the following institutions ensure an ongoing social dialogue:
- The Economic Committee (Comité de conjoncture) analyses the economic situation and the evolution of conjuncture. It issues monthly reports to the Government Council, advising on measures to prevent layoffs due to circumstantial factors
- The Economic and Social Council (Conseil économique et social), placed under the authority of the Prime Minister and financed by the budget of the Ministry of State, is an advisory body that studies economic, social and financial issues and advises the government on the matter. Established in 1966, it is made up of representatives of various sectors, employers and employees, and experts, with different ministries and stakeholders ensuring fairness and social inclusion
- Sectoral tripartites, shaped on the model of the Steel tripartite Conference (founded in the context of the steel crisis of the 1970s), bring together representatives of business, unions and government on an institutionalized and ongoing dialogue platform
- The tripartite Coordination Committee (Comité de coordination tripartite) issues advice notes and recommendations prior to the implementation of actions deemed necessary to tackle unemployment.
Historical background of economic development
Prior to the 19th century, Luxembourg economy was mainly based on agriculture, with an industrial activity strongly rooted in the rural community.
According to economist Gérard Trausch (2012, Les mutations économiques et sociales de la société luxembourgeoise depuis la révolution française, p.179 and, by the same author, 2009, La société luxembourgeoise depuis le milieu du 19e siècle dans une perspective économique et sociale), the development of industry in Luxembourg has evolved in three phases:
1- The pre-industrial period
Luxembourg's political independence in 1839 fostered the development of industry: as a matter of fact, tax revenue (an average of 1.8 million guilders per year) could now be invested in the country itself. On the other hand, the country’s membership of the German Zollverein (tariff union) – from 1842 to 1918 - allowed access to an important market.
In the first half of the 19th century, industrial activity in Luxembourg focused on the production of textiles, gloves, pottery, paper, and brewery and tobacco products.The discovery, around 1842, of iron ore in the south of the country started the development of the steel industry, which evolved from 1876 to become the most important industrial sector.
The advent of railways in 1859 made it possible to replace charcoal by coke, thus significantly increasing the productivity of cast iron. Furthermore, rail transport boosted exports not only of ironworks, but also of other industries established in Luxembourg.
2- The industrial era
From 1876 on, technological innovations in steel manufacture enabled the large-scale production of steel. With increasing demand, cast iron and steel were exported, first within the Zollverein, later to partners worldwide after the First World War.
In the 20th century, and particularly from the 1950s, steel industry grew significantly, reaching a peak production in 1974 with over 6 million tons.
On the other hand, Luxembourg’s economy became more diversified during the second half of the 20th century. Increasingly complex businesses emerged, such as major US firms like Goodyear (tire production), DuPont (polyester) or Monsanto (nylon yarn). Concurrently with this diversification, the financial sector developed.
From a societal perspective, it is noteworthy that workers’ mutual aid associations appeared from the middle of the 19th century, the first dating back to 1849. In these mutual aid societies grouped according to occupations, workers and craftsmen contributed to a common fund designed to provide support in case of illness or death. In 1891, legislation recognised the role of mutual aid associations. In 1901, a first law on social insurance was voted in Parliament, making sickness and accident insurance compulsory. Ten years later, in 1911, the law also instituted a compulsory pension insurance scheme. Luxembourg thus progressively implemented a robust social protection system.
Concerning trade unionism, the start of a labour movement was initially held back by the heterogeneity of the workforce in the steel industry, largely made up of immigrants. It was only towards 1916-1920, when living conditions sharply deteriorated, that the first structured union associations appeared. On 10 February 1958, Luxembourg ratified the Convention 98 of the International Labour Organization on the Right to Organise and Collective Bargaining.
3- Deindustrialisation, expansion of the tertiary sector and globalisation
From the end of the 1960s, Luxembourg was severely affected by the steel crisis related to worldwide overproduction. The cutback of production was abrupt: the utilisation rates of crude steel producing installations fell from 96% in 1974 to 55% in 1982.
Nevertheless, the Grand Duchy managed to overcome the crisis with financial support from public authorities and by establishing a Tripartite Coordination Committee in 1977. The tripartite sectoral Steel Conference managed to avoid mass unemployment by a number of measures, like investment aids, financial restructuring, social support, etc. Deindustrialisation in Luxembourg didn’t mean the total disappearance of industry: in fact, it only 'normalised' an over-speeding industry.
In parallel to these developments in the steel industry, Luxembourg continued to develop its tertiary sector: business services, computer services, transport, communication, and in particular the financial sector. The expansion of the latter was not originally motivated by a deliberate policy on the part of the Grand Duchy, but it was largely favoured by new and more restrictive regulations introduced in other countries.
Today, banking and financial services have taken over as driving forces of the national economy. The Luxembourg financial centre has a number of assets: its geographical location and the small size of the country, a favourable economic environment and responsiveness to changes in the international regulatory and legislative context, a flexible but effective supervision structure of the financial sector, etc.
The expansion of the service sector in Luxembourg’s economy has had a spillover effect on other sectors, in particular service providers and other enterprises, notably in the trade sector and in the catering and hotel industry.
With increasing economic internationalisation Luxembourg has experienced an unprecedented development. Between 1980 and 2000, the growth of GDP per capita was more important than in most other countries. The expanding labour market of the country has attracted a significant number of immigrants and cross-border workers.
From 2000 on, economic growth has slowed down, though the overall economic situation remains relatively positive. Still, the 2008 crisis has led to a rapid and significant deterioration in the labour market, with increased unemployment and a downward revision of public finances.
Distinctive economic characteristics of present-day Luxembourg
- A small but open economy: From the beginning of its political independence, Luxembourg is part of larger markets or economic unions (Zollverein, UEBL, ECSC, EEC - see Eurydice article 1.1. Historical Development)
- A highly specialised and flexible economy: The small size of the territory has allowed Luxembourg to adapt laws and institutions such as to foster economic development with a high degree of specialisation. The main areas of specialisation have been steel production in the past and currently are financial services
- Exposure to external developments: Due to the important role of foreign investment and external demand for products and services, the country is exposed to alterations in European and international environments, such as general economic conditions or financial or legislative provisions in other countries
- A transnational labour market: Luxembourg’s labour market is composed of Luxembourg nationals, foreign residents and cross-border workers (see Eurydice article 1.3 Population). Owing to the expansion of financial and IT services, foreign employees are strongly represented at both ends of the qualification spectrum: they mostly either do unqualified work or hold highly qualified positions. Luxembourg nationals are predominant in public administration and services
- Labour market regulation and social security: In the course of the 20th century, Luxembourg has established a strong system of social security and labour market regulation (i.e. minimum wages, automatic wage indexation).
Current situation and outlook
Today financial services (banking, financial auxiliaries) represent the most important sector in Luxembourg economy. Industry has gradually lost influence over the years, whereas the tertiary sector has developed: at first business services, then the financial sector, and in recent years the sectors of transport and communications with dynamic growth and a high potential for development.
The presence of other sectors has remained relatively stable. As for agriculture, its importance has been progressively decreasing.
The deterioration of the international economic environment has led to a remarkable slowdown of Luxembourg’s economy from 2008 on. GDP growth even became momentarily negative (in 2012), and unemployment rate has reached unprecedented levels in Luxembourg, though in the subsequent years a relative recovery has begun.
(Source: STATEC— Note: 2021 and 2022 figures are estimates, data extracted on 20/01/2022)
In international comparison, Luxembourg economy is performing rather well. Real GDP per capita remains at a high level with EUR 82 250 per inhabitant in 2020. This figure should however be put into perspective, given the importance of cross-border workers who by definition are not included as residents in the statistics.
To ensure more sustainable national competitiveness while meeting regulatory provisions agreed at international level, Luxembourg has been implementing a number of legislative and regulatory measures in order to reduce public debt and place public finances on a sustainable path. The 250 reform measures of the 2013 governmental programme involve taxation, social benefits, housing, employment, family, education, health and retirement.
The 2022 State budget is forward-looking and prepares the country for the challenges of tomorrow. In 2022, major policy priorities are:
- High levels of investment to continue to improve infrastructure and quality of life
- High investment in social benefits
- Climate protection
- A large budget to respond to the challenges of digitalisation
- Affordable housing
- An increased budget for education.
In 2021, economic results and previsions have been altered worldwide in the wake of the Covid-19 pandemic. STATEC publication Conjoncture Flash January 2021 analyses Luxembourg's economic outlook at the beginning of the year.
Effects on the development of the education system
The 2022 budget allocates 14.19% to Education, Children and Youth (corresponding to € 3 152 850 168), and 2.72% to Higher education and Research (i.e. € 605 217 876).
Reforms are being implemented in the field of education, as well as measures for young job seekers. The level of State co-funding of in-company continuous vocational training has also been redefined, and expenses on study grants and loans have been restructured.