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“A goal without a plan is just a wish” Antoine de Saint-Exupéry

“A goal without a plan is just a wish” Antoine de Saint-Exupéry

Although seemingly more resilient than other countries, the Grand Duchy is not immune to economic crises and recessions.
Olivier Coekelbergs, EY Luxembourg Country Managing Partner
Olivier Coekelbergs, EY Luxembourg Country Managing Partner
Photo credit: EY Luxembourg
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Its leaders must implement specific and sometimes temporary policies to address global economic and socio-political challenges, while ensuring a healthy economy and finances to guarantee the purchasing power of residents. In the current context, these policies must be more proactive, bold, and targeted than ever before. They cannot leave room for aspirations.

A complicated global context

While the global economy has been strong for the past 10 years, the pandemic and the war in Ukraine have reversed the positive trends that had perhaps become too customary. The IMF projects global growth of 2.9% in 2023, whereas growth was 6.0% in 2021 and 3.2% in 2022. Western economies seem to be the most affected, with GDP growth forecasts of 1.4% for the United States, 0.6% for the Eurozone, and -0.6% for the United Kingdom. With such prospects and in an inflationary environment, government policies are fundamental to preserving citizens' purchasing power.

To curb inflationary trends, central banks have carried out a synchronized increase in interest rates in an attempt to reduce consumption and combat against rising prices. Although academically correct, this strategy is associated with a slowdown in corporate investments and must be measured to avoid counterintuitively plunging the economy into an even stronger crisis. Such a policy must, therefore, be pursued with great caution and take into account potential indirect side effects.

 Thus, one may wonder whether measures taken by central banks tend to paralyze the economy and businesses. This at a time when agility is required to deal with the disruption of operating models and supply chains triggered by the pandemic and the war in Ukraine, as well as the increase in energy prices. To respond to the economic forecasts, some countries whose finances have been too battered by COVID might have no choice but to resort to strict budgetary discipline measures.

What about Luxembourg?

We can applaud Luxembourg for maintaining its excellent rating while simultaneously increasing its spending and investments. A large number of tangible measures aimed at improving the quality of life for citizens have been taken in recent years, yet have generated recurring expenses. Free public transport is a very good example.

Luxembourg will obviously not be spared from the economic slowdown and will have to take necessary steps to preserve its stability and the standard of living of its citizens. Budget discipline will be inevitable, but will it be a strict discipline that reduces the level of state spending to such an extent that social programs established in recent years will be called into question, or will we limit this discipline to pausing unnecessary spending until the economy returns to better times?

A stimulus plan for Luxembourg?

 With wage indexation, rising interest rates, and economic slowdown, we can expect a decrease in corporate profits and tax revenue, as the taxable base available to the state will inevitably decrease. With corporate and personal tax rates above the OECD average, increasing the tax burden on taxpayers is not feasible without jeopardizing the country's competitiveness internationally. Therefore, it seems imperative to increase the number of taxpayers in Luxembourg, whether they are companies or individuals, as well as their profits, in order to indirectly increase the tax base. Thus, an ambitious economic stimulus plan capitalizing on Luxembourg's strengths should attract foreign investors and groups to develop new businesses, create new jobs, and thereby increase the taxable base for the state. This plan should also provide measures to strengthen the competitive positioning of existing economic fabric and aid in both its transformation and development. Finally, to generate quick results and activate necessary economic recovery, these measures should be targeted at sectors that employ many employees, such as construction, trade, industry, and the financial sector.

Given the evolution of energy prices, we cannot help but draw parallels with the 1973 oil crisis. While it is true that some policies implemented at the time mainly increased deficits and public debt, we cannot deny that other policies based on a restoration of growth resulted in reduced public debt and increased tax revenues.

Luxembourg's economy has had major junctures in its history, and the signs of a new inflection point are becoming increasingly apparent, with existing economic dynamics to review and new dynamics to create. The events of recent years – the pandemic, the war in Ukraine and the general global economic context – have accelerated the need to act quickly and establish a strong, targeted, and bold economic recovery plan to build future sustainability and maintain the social peace.

Construction and the perpetual housing problem

Measures to promote the construction of more housing should be implemented to meet the ever-increasing demand and stabilize the soaring prices that the sector has experienced in recent years. In addition to better matching supply and demand, these measures would revitalize the sector, increase the workforce, and offer new career opportunities to workers of companies that have not survived the current crisis. It should be noted that our Belgian neighbors have taken measures on the VAT rate to promote construction. Such a path could perhaps be explored by the Grand Duchy.

The financial center – economic lung of the Grand Duchy

Envied by some and criticized by others, the financial center plays a leading role in the Luxembourgish economic landscape. Beyond stimulating economic activity, its development and competitiveness; and ultimately its material contribution to the state's finances and the social well-being of the entire population, it seems increasingly urgent to educate a substantial percentage of the population about the importance of Luxembourg’s financial center for the sustainability of the Grand Duchy. It is too often that criticisms emerge from a lack of knowledge and understanding of what the players of the financial center bring to society and the economy. A better understanding of its functioning and contribution should allow everyone to better comprehend its stakes, why the industry should be preserved, and the pressures it faces on an international level. Interesting initiatives in the fields of sustainable finance, investment funds, or private banking are underway in Luxembourg. It is important to capitalize on these and initiate other changes likely to attract new players to the financial center.

Is Industry 4.0 a myth or a reality in the Grand Duchy? 

The fourth industrial revolution is underway: "Industry 4.0". This refers to a new way of organizing production and will incorporate new technological elements such as artificial intelligence. Some countries have used Industry 4.0 as a tool for industrial revitalization and relocation. In Luxembourg, we are seeing a growing number of emerging Smart Factories. A plan to accelerate this trend and transform existing industries should help to strengthen the existing economic foundation and make it more attractive to international industrial groups looking to develop production sites in Europe. Luxembourg's geographical location is an additional strategic asset for the economy of the future.

The attractiveness of talent: a cross-cutting issue for the Luxembourgish economy

The common link throughout the Luxembourgish economy remains its international exposure. This constant is the foundation of the Grand Duchy's success. The sound management of public finances and socio-political stability that Luxembourg has enjoyed for decades are largely attributable to its commitment to constantly reinventing itself. Other crucial parameters include the international openness of its economy, notably thanks to the presence of foreign groups on its territory, and above all a foreign workforce that represents over 74% of the active population of Luxembourg (private and public sectors). It is evident that the sustainability of the Grand Duchy cannot be envisaged if this workforce were to be lacking. Too many business leaders have major concerns about this issue, which must be addressed at the highest level urgently. This issue risks weighing on the continuity of operation of too many companies in Luxembourg and cannot remain without response. Real measures aimed at attracting foreign labor must be put in place.

Economic recovery, a priority for the next government

It is certain that the next government, to be formed after the October legislative elections, will hold the key to unlocking the social and economic future of Luxembourg.

The goals and wishes of citizens as well as businesses are clear, and as the elections approach, expectations are high for economic revival proposals from political parties in their electoral programs. After all, as Antoine de Saint-Exupéry put it so well: "A goal without a plan is just a wish."