The Luxembourg economy ı An eventful history

The Luxembourg economy ı An eventful history
SIP_CHAPTER_5_EN.indd 108
14/12/07 15:48:00
5ı1
Luxembourg currently boasts one of the highest standards of living in the world. In 2006,
GDP (gross domestic product) per capita – expressed in Purchasing Power Standard (PPS) to
eliminate price differences – stood at around 63,000 euro, compared with 37,000 euro in the
United States and an average of 26,500 euro among the Europe of Fifteen. While GDP per
capita is not the only or the most reliable instrument for measuring standards of living and
welfare, these figures nevertheless reflect a very favourable economic situation. This has not
always been the case. Furthermore, the path followed by Luxembourg to attain this standard
of living was anything but straight.
SIP_CHAPTER_5_EN.indd 109
14/12/07 15:48:00
the luxembourg economy
Ettelbruck
LUXEMBOURG
Hesperange
Pétange
Differdange
Sanem
Schifflange
Bettembourg
Esch-sur-Alzette
Kayl
The discovery of iron ore in the south of the country marked
the beginning of industrialisation in Luxembourg
Dudelange
Eight of the country’s eleven most populated councils can be found in the mineral basin
110
An eventful history
A brief outline of the economic development from the early 20th century onwards is
shown in the table depicting the average annual growth rate of GDP and the growth
rate of the population. It illustrates the cycles witnessed by the Luxembourg economy
during this period.
The years preceding the First World War were marked by a sustained growth of the
steel industry. This sector, founded on iron ore deposits in the south of the country,
took root in the second half of the 19th century. It was nevertheless the construction of
large-scale integrated steelworks (such as Differdange and Belval) – during the two decades preceding the First World War – enabling on-site processing of cast iron into steel
and rolled-steel products, that was crucial to the subsequent development of this economic sector and of the country as a whole. Part of this investment was possible due to
German capital. From 145,313 tonnes in 1900, the production of rolled-steel products
rose to 1,115,004 tonnes in 1913, with the steel industry being responsible for approximately 60% of total industrial employment prior to the First World War.
The population grew rapidly, increasing from 211,088 inhabitants in 1890 to 235,954
in 1900 and 259,891 in 1910. Consequently, over the course of 20 years, it increased by
SIP_CHAPTER_5_EN.indd 110
almost 50,000, whereas the two previous decades (1870-1890) had seen an increase of
a mere 13,500.
The increase in population went hand in hand with a concentration of people in the
city of Luxembourg and the district of Esch-sur-Alzette (mining and steel industry
basin). While in 1880 some 11.4% of the total population lived in the Esch-sur-Alzette
district, this percentage increased to over 26% in 1910. On the eve of the First World
War, the city of Luxembourg and the district of Esch-sur-Alzette combined were home
to 45% of the total population, in contrast to less than 26% in 1880.
Demographic growth was due in particular to a wave of immigration (first from Germany,
then Italy) as a result of the high demand for labour in the steel industry and iron
mines. The proportion of foreign nationals among the total population virtually doubled
in 20 years, rising from 8.5% in 1890 to 15.3% in 1913. This immigration flow occurred
in parallel with an emigration trend: between 1840 and 1907 around 80,000 Luxembourg citizens left the country.
T exodus witnessed during the years 1840-1870 was a result of precarious living condiThe
tions. For the period subsequent to this, marked by a rapid growth of the steel industry,
emigration appeared to be more of a socio-cultural phenomenon, with Luxembourgers
being reluctant to join the sector.
14/12/07 15:48:02
An eventful history
WORKING POPULATION ACCORDING TO MAIN
ECONOMIC SECTORS (in %)
Average annual growth rate of GDP and
resident population (in %)
Duration GDP volumePopulation
70
1900-1913
…
1.0
60
1913-1951
1.6
0.3
1953-1975
3.9
0.8
1975-1985
2.3
0.2
1985-2006
5.1
1.2
50
40
30
20
10
N.B.: for the years prior to 1950, statistical sources are very scarce and the figure
for GDP growth from 1913 to 1951 is approximate only
0
1870
1907
Agriculture
Source: Statec
1935
Services
1947
1960
1966
1970
1981
1991
2001
Industry
Source: Statec (population censuses). NB: Industry = includes construction
111
Nevertheless, the 1907 population census revealed that almost 40% of the total working
population was employed in the industrial sector. According to the figures available for
the preceding period, in 1870 the Luxembourg industry employed barely 20% of the
working population.
Access to coal and coke supplies for the iron and steel industry was facilitated by
the Grand Duchy’s membership to the Zollverein, also the principal outlet for steel
products. At the same time, the sector underwent a process of financial and industrial
concentration and rationalisation. In 1911, ARBED was created by merging three medium-­
sized companies (Burbach, Eich, Dudelange steelworks) and became one of the largest
steel producers in Europe. By merging with Usinor and Aceralia in 2001, ARBED
helped create the largest steel group in the world, Arcelor. In 2006, Arcelor in turn
merged with Mittal Steel, creating world steel giant Arcelor Mittal.
The growth of the economy between 1900 and 1913 was reflected in the population
growth rate, which increased at an average of 1% per year. This period also saw legal
foundations being established for social security (employers’ liability, health and retirement insurance).
SIP_CHAPTER_5_EN.indd 111
The 1913-1951 period: troubled times
The years 1913-1951 were troubled times due to the two world wars and the crisis of the
late 1920s/early 1930s. Social unrest, linked to changing economic and social structures and arising from difficult living conditions, characterised the end of the First
World War and the immediate post-war period. The impact on labour legislation soon
made itself felt. Significant social progress was made between 1918 and 1926: an eighthour working day for the large-scale industry, workers’ representation within companies,
unemployment insurance, sliding pay-scales for wage earners (i.e. automatic adaptation
of wages to cost of living), the creation of professional chambers, workers’ health and
safety regulations, paid holidays for employees and workers.
The denunciation of the Zollverein at the end of the First World War led to an economic
reorientation, with the Belgo-Luxembourg Economic Union (BLEU) being created in
1921. Many traditional small- and medium-sized businesses, oriented towards the German
market prior to the war, experienced great difficulty adapting to this change.
When German capital was withdrawn, the iron and steelworks were taken over by
groups with French, Belgian and Luxembourg capital. Despite the increasing competition due to the emergence of new producer countries, the steel industry managed to
14/12/07 15:48:03
The Luxembourg economy
Rolled steel products (in t)
1900
145,313
1913
1,115,004
1919
312,271
1929
2,127,282
1939
1,470,190
Source: Federation of Luxembourg steel industries
112
diversify its outlets, increase productivity and raise output before the impact of the
world crisis was felt following 1930.
an average of 30% from 1970 to 1974. This was an indication of times to come, culminating in 1981 with the last iron ore mine being closed down.
The 1930s were marked by economic stagnation, despite a temporary upswing in 1937
bringing the volume of rolled steel products back up to its 1929 level. During the war
years, the production of steel exceeded the low 1939 level only once (in 1943).
As far as the labour market was concerned during the interwar period, immigrant
labour acted as a regulator. In 1922, the proportion of foreign nationals (around 33,400)
in the total population was no more than 12.8%, compared with 15.3% in 1910. As a
result of the relatively favourable situation of the steel industry during the second half
of the 1920s and a new wave of immigration, the foreign population reached 18.6% in
1930, prior to the impact of the worldwide slump. In 1935, foreign nationals made up
12.9% of the population, having regressed to the level of 1922.
The variations in iron ore production reflected the cycles of the steel industry. After
continuous growth up to 1913, the First World War brought about a significant fall in
ore production. The favourable climate of the steel industry during the second half of
the 1920s and the crisis in the 1930s had a direct impact on ore extraction volume. Further­
more, the overall level of production of Luxembourg iron ore mines on the eve of the
First World War was never again exceeded. Even the substantial growth in steel produc­
tion from 1945 to 1974 was not accompanied by a parallel increase in ore extraction.
In fact, Luxembourg ore (minette) had a ‘low’ iron content and, even before the First
World War, the steel industry started to use ‘richer’ ore from France and, after the
Second World War, from Brazil and Sweden. The proportion of domestic ore consumed
by the Luxembourg steel industry fell from an average of 56% in the 1920s to 44% in
the 1930s. Figures again dropped significantly from the early 1960s onwards, reaching
SIP_CHAPTER_5_EN.indd 112
As is often the case in a period of crisis, significant social innovations were introduced
during the 1930s: in 1936, a Conseil national du travail (National Labour Council) –
a conciliation body called upon to forestall and settle ‘social conflicts at work’ – was set
up and composed of an equal number of representatives of both employers and the
workforce. Many collective agreements were signed within this framework, particu­­­­lar­ly in the steel and mining industries.
Over the entire course of 1913-1951, GDP is estimated to have grown at an average
of 1.6% per year. Population growth barely averaged 0.3% per year, compared with 1%
14/12/07 15:48:04
An eventful history
In 1993, ARBED introduced electric furnaces, and factories were
equipped with electric steelworks and continuous casting facilities
Industrialisation drew thousands
of foreign workers to Luxembourg
113
during the 1900-1913 period. In addition, the role of the state became more prominent
between the two wars. While budget expenditure represented 7.8% of the national
revenue in 1913, it rose to 16.6% in 1935.
From the end of the 1950s, however, industrial diversification policies and efforts to
promote Luxembourg abroad, particularly in the United States, intensified. While the
establishment of Goodyear in Luxembourg in 1951 was still an isolated event, around
50 new companies were set up in the country between 1959 and 1972, including
DuPont de Nemours in 1963.
The ‘thirty glorious years’
The economic reconstruction following the Second World War generated an exceptional growth rate averaging 6.7% during the 1946-1951 period. From the early 1950s
until the mid-1970s – i.e. until the first oil crisis and the concurrent steel industry crisis –
average growth dropped to a more modest rate of 3.9%.
Despite these significant fluctuations in the added value of the steel industry, it was this
industrial sector that largely determined the growth rate of the Luxembourg economy
as a whole during the ‘thirty glorious years’ (1945-1975). The production of raw steel
rose from 2.45 million tonnes in 1950 to 6.45 million in 1974. During the early 1970s,
steel represented around 30% of the total added value of the Luxembourg economy and
more than half the total added value of the country’s industry (including construction).
The steelworks and iron ore mines employed around 25,000 people in 1974, equating
to 16% of the total workforce of the Luxembourg economy.
SIP_CHAPTER_5_EN.indd 113
The favourable development of the steel industry up to 1974 should not overshadow
the growth in the tertiary sector (trade, hotel and restaurant industry, public administration, etc.). In 1970, the proportion of the working population in the service industry
was 48.6%, compared with 34.5% in 1947. Conversely, employment in agriculture
dropped dramatically, falling from 27% of the working population in 1947 to 7.5%
in 1970.
The use of immigrant labour made it possible to respond to the general growth in demand for labour. The proportion of foreign nationals in the total working population,
which stood at 11.4% in 1947, had increased to 21% by 1970.
The social arena witnessed particular progress in the years immediately following
the Second World War (1944-1945), and again from 1965 to 1974. The 1944-1945 period
was marked by the founding of the Conférence nationale du travail (National Labour
14/12/07 15:48:06
The Luxembourg economy
Luxembourg is an attractive site for the establishment of
foreign businesses, such as DuPont de Nemours in Contern
Goodyear Luxembourg, with its factory in Colmar-Berg
in the centre of the country, is the tyre manufacturer’s
largest plant outside the United States
114
Conference), which replaced the 1936 Conseil national du travail, and the Office
national de conciliation (National Conciliation Service), which established a system of
arbitration and a general obligation to draw up wage agreements. The minimum social
wage was introduced in December 1944.
The second period of intense legislative activity in the social domain (1965-1975) was
marked in particular by the birth in 1965 of the law on collective agreements, requiring
the insertion of a clause indexing wages to the cost of living (‘sliding pay-scales’) and
introducing the principle of national representation. In 1975, the mechanism of automatic and integral indexation was extended to all wage earners. The working week for
workers was restricted to 44 hours by a law dated December 1970, which also introduced a 40-hour week with effect from 1 January 1975. The Conseil économique et social
(Economic and Social Council), an advisory body composed of representatives of the
workforce, employers and experts appointed by the public authorities, was created in
1966.
Finally, Luxembourg took an active part in the process of European integration, signing
the Treaty of Paris establishing the European Coal and Steel Community in 1951 and
the Treaty of Rome establishing the European Economic Community (EEC) in 1957.
SIP_CHAPTER_5_EN.indd 114
1975-1985 world economic crisis
The world economic crisis between 1975 and 1985, associated with the first and second
oil crises, had a major impact on the Luxembourg economy. At the same time, the steel
industry was facing serious problems resulting above all from global over-production,
which put significant pressure on prices. In 1983, production of raw steel amounted to
only 3.2 million tonnes (compared with 6.45 million in 1974), having dropped right
down to its 1955 level. In 1985, the steel industry workforce comprised around 13,400
people, the equivalent of only half the sector’s employment in 1974. Throughout the
1975-1985 period as a whole, the average annual GDP growth rate was 2.3%, compared
with nearly 4% recorded from 1953 to 1975.
Responses to the crisis were social, institutional and economic in nature. The response
in social terms was the creation of the travaux extraordinaires d’intérêt général (TEIG)
(extraordinary works of general interest) in 1975 and the introduction of the division
anti-crise (DAC) (anti-crisis division) in 1977. At the end of the same year, ‘early retirement’ legislation was passed, mirroring the reduction in jobs in the steel industry and
allowing steel workers to bring their retirement forward.
14/12/07 15:48:11
An eventful history
State budget expenditure under the ‘steel industry plan’ between
1975 and 1987 (cumulative expenditure) (in million euro)
Guardian Luxembourg is one of the world leaders in glass technology
for the automobile and building industries
1975-1982
1983-1987
1975-1987
A // Investment aid
Ordinary capital subsidies,
extraordinary capital subsidies,
special preferential interest rates
and other subsidies
70.6
63.4
134.0
B // Financial restructuring
Share and convertible bond subscriptions,
acquisition of SIDMAR shares,
special and temporary aid
-
393.0
393.0
C // Social aid Extraordinary works of general interest (TEIG),
vocational re-education, re-employment benefits,
early retirement, anti-crisis division (DAC),
special invalidity scheme
147.1
307.6
454.7
D // Tariff aids
9.6
1.7
11.3
Total
227.3
765.7
993.0
Statec, Cahiers économiques du Statec, no. 73, Luxembourg, 1987, page 191.
115
While the rise in unemployment could not be entirely contained – with the number of
registered unemployed rising from 23 in 1974 to 3,874 in 1984 – these measures did
prevent collective layoffs. Between 1975 and 1986, around 14,800 workers left the steel
industry, with almost 30% (4,300) being able to benefit from the early retirement
scheme, which was extended in 1987 to all commercial economic sectors.
Responses in the economic arena came primarily from the steel sector itself. From 1975
to 1979, steel company investments increased and in 1978, for the first time since the
1950s, they exceeded the average for the other European countries. In addition, the
financial and industrial rationalisation trend (acquisitions and mergers) that began in
the 1960s gathered momentum.
At an institutional level, these years were marked by the creation of the ‘tripartite’ system.
Pursuant to the law of 26 July 1975 authorising the government to implement measures
to prevent redundancies for economic reasons and to maintain employment, a Comité
de conjoncture (Economic Committee) with a tripartite structure (employers, workforce and public authorities) had already been created in 1975. This Committee was
respon­sible for monitoring the development of the economic situation and reporting to
the government on a regular basis. Faced with a worsening crisis, a Tripartite Steel
Conference met during the second quarter of 1977 and drew up an action plan to maintain
economic growth and full employment. This gave rise to the law of 24 December 1977
establishing a Comité de coordination tripartite (Tripartite Coordinating Committee).
In March 1979, the Tripartite Steel Conference reached an agreement on the restructuring and modernisation of the steel industry. The tripartite system continued to prevail
and is now at the heart of what is generally referred to as the ‘Luxembourg social model’,
a system in which the quest for consensual solutions to socio-economic problems has
become the norm.
At the end of the 1970s, ARBED was the only steel company in Luxembourg. The state’s
contribution to managing the crisis first involved implementing social measures (creation
of works of general interest and participation in the funding of the anti-crisis division),
but also providing investment aid (ordinary and extraordinary capital subsidies, etc.).
The particularly unfavourable economic climate of the early 1980s meant that investments provided for under the 1979 tripartite agreement had to be revised downwards
and the highly indebted sector had to be financially reorganised, accompanied by the
signing of cooperation agreements with the Belgian steel industry. The Luxembourg
state played a very active role in this restructuring, particularly through the Société
nationale de crédit et d’investissement (National Credit and Investment Society), and
ultimately held 42.9% of ARBED’s total capital (and 30.9% of the voting capital).
SIP_CHAPTER_5_EN.indd 115
An exceptional collective effort thus enabled the steel industry, which was (and continues
to be) a significant player in Luxembourg’s industry, to survive. Approximately 5% of
14/12/07 15:48:18
The Luxembourg economy
Share of different economic sectors of
total added value (in %)
1970
1985
2005
Agriculture
3.8
2.0
0.4
Industry*
including:Steel
Construction
Other industries
53.2
27.9
6.2
19.1
28.1
9.8
4.3
14.0
16.2
1.1
5.8
9.3
Services
including:Financial services Trade and repairs
Transport and communications
Other services
43.0
4.6
10.7
4.9
22.8
69.9
21.6
12.2
6.0
30.1
83.4
24.2
9.3
10.3
39.6
* industry, including energy and construction
Source: Statec
The rail motorway, called Lorry-Rail, was inaugurated in March 2007. It operates a shuttle
service between Luxembourg and Perpignan, covering a distance of 1,000 km.
116
the average budget expenditure for the 1975-1987 period was devoted to saving the
steel industry. Furthermore, the increase of the technical productivity of the steel­
workers shows that efforts to modernise and rationalise this sector have continued in
recent years.
in 1974 to almost 24% of GDP in 1981. The social measures accompanying the restructuring of the steel industry obviously contributed to this increase, but a general improvement in social welfare benefits and social assistance was also witnessed.
The ‘happy’ outcome of the 1975-1985 crisis period was also associated with three other
elements:
- the growth in financial services, virtually coinciding with the decline of the steel
industry;
- the intensification of the economic diversification policy;
- a wage moderation policy implemented during the early 1980s – reflected particularly
in the temporary suspension of the automatic wage indexation in 1982 – enabling the
cost competitiveness of the Luxembourg economy to be restored.
1985-2000: fifteen exceptional years
Finally, reference must be made to the increase in public administration expenditure
(central administration, local administration and social security) during the 1975-1985
period. This expenditure, which totalled an average of 35% of GDP in 1971-1975, reached
around 50% of GDP between 1981 and 1985. This development was, on the one hand, a
result of relatively low growth rates of GDP, but also and above all, a result of a growth
in social welfare transfers (household transfers), which rose from just over 14% of GDP
SIP_CHAPTER_5_EN.indd 116
From the mid-1980s to 2000, the average rate of growth of GDP reached levels unprecedented in Luxembourg over such a long period – over 5% – and far exceeded those of
other European countries, with the exception of Ireland. Between 1985 and 2000, total
employment rose from 161,000 to 264,800, at an average annual growth rate of 3.4%.
The acceleration in growth entailed an increased dependence on an immigrant and
cross-border workforce. In 1980, some 12,000 cross-border workers were employed in
Luxembourg. By 2006, this figure had risen to over 127,000. The proportion of foreign
nationals in Luxembourg’s total population, which the 1970 census stated at 18%, rose
to around 41% in 2006. Luxembourg nationals accounted for no more than 34% of the
domestic workforce in 2003, with cross-border commuters making up 41% and resident
foreign workers 27% of the workforce.
14/12/07 15:48:23
An eventful history
AVERAGE GROWTH RATE OF GDP VOLUME (1985-2000)
7
6
5
4
3
2
1
0
IRL
L
P
US
E
NL
UK
JP
A
EU-15
FIN
B
D
F
S
DK
I
EL
The company Elth, established in Steinsel, is an
important supplier of accessories for the automobile
and electric household appliances industries
117
The main factors that have been underlying this significant development since 1985 are
the following:
- the continued growth of the financial sector;
- the favourable development of other economic sectors such as business services, the
development of which has been partly fostered by the financial sector;
- IT services, transport and communications;
- a productive and competitive industrial sector, despite the fact that its relative share
in the total added value of the economy is dropping – mechanically speaking – as a
result of the exceptional growth in services;
- high levels and growth rates of investment;
- relatively low wage deductions (income tax, social security contributions), keeping
the cost of labour at a competitive level;
- a global compulsory tax and social security rate and decrease in public spending (in
relation to GDP) during the above period, particularly between 1995 and 2000. Total
public expenditure in Luxembourg – including social security – which stood at 45.6%
of GDP in 1996, fell to 38.5% in 2000, in comparison with a rate of around 46% of
GDP throughout the Europe of Fifteen in 2000.
Some of these factors are linked. Strong growth, for example, largely driven by the
financial sector, to some extent allows fiscal policy to be flexible, which in turn favours
the competitiveness of the Luxembourg economy and constitutes a growth factor.
SIP_CHAPTER_5_EN.indd 117
Economic downturn in 2001-2003:
a medium-term perspective
Most of the world’s economies experienced exceptionally high economic growth
during the second half of the 1990s. The growth rate in the United States, for example,
averaged around 4% per year between 1996 and 2000, while the corresponding rate in
Europe was 2.7%. This growth led to a reduction in unemployment, which decreased
from 10.5% in 1994 to 7.4% in 2001 in the Europe of Fifteen. In the United States,
unemployment started dropping from 1992 onwards. In 2000, it amounted to 4%, compared with 7.5% in 1992. This development occurred in a globally non-inflationary
climate: with the exception of 1995, the rate of growth of consumer prices in both the
United States and the Europe of Fifteen never exceeded 2.5% during the second half of
the 1990s.
Luxembourg followed this trend, nonetheless displaying a trait characteristic of the
openness of the country and its exposure to external crises, namely that of larger variations in added value. From 1997 to 2000, annual GDP growth rate averaged 7.3%. This
sudden rise was largely but not exclusively favoured by the strong expansion of the
financial sector. Three other service sectors experienced greater than average expansion during this period, those of trade and repairs, transport and communications and
14/12/07 15:48:28
The Luxembourg economy
The national airline Luxair was founded in 1948
Since June 2007, Paris can be reached from
Luxembourg by TGV in 2 hours and 5 minutes
118
the health services. Finally, attention should be drawn to the good industry perfor­
mance from 1995 to 2000 in terms of the volume increase in added value.
The growth peaks of the total added value of the Luxembourg economy correspond to
the combined exceptional growth rates of the added value in the financial services, as
well as in other services (trade, transport and communications, business services…) and
the industry. Attention must be drawn to the fact that in 1998, the significant drop in
growth in added value of the financial services (banking) was offset by very positive
growth rates of services other than financial in nature. The same phenomenon – albeit
not to the same extent – was witnessed in 2001 and 2003, years in which the growth in
added value of the financial services was negative.
From 2001, the Luxembourg economy mirrored the global slowdown in economic
activity. The economic downturn of 2001 involved a net fall in the growth of GDP
(volume), which went from 8.4% in 2000 to 2.5% in 2001. This trend was accentuated
by the weakness of the financial sector. A drop in added value of what constitutes the
driving force of the Luxembourg economy, i.e. the financial services (negative growth
rate), followed in 2001 (see graph above). The banking institutions and other financial
bodies reacted to the lower revenues by cutting expenditure (personnel, overhead and
investment expenditure) and as such acted like a braking mechanism on other domestic
SIP_CHAPTER_5_EN.indd 118
sectors, commercially dependent on the financial sector, such as business services
(cleaning and maintenance, security…). This brake effect was not felt until later, i.e.
2002. In 2001, the expansion of these non-financial services (wholesale trade, retail
trade, transport and communications, business services) remained strong enough to
cushion the fall of the gross added value of the financial sector. The fact remains that
the global decline of 2001 was spectacular.
In 2002, the growth of added value of the financial services once again became positive. The financial sector did, however, experience a relapse in 2003 before undergoing
subsequent increases in 2004, 2005 and 2006. The growth of the financial services did
not, however, appear to match the levels of 1999-2000, years that were characterised by
a true explosion in added value of the financial sector. The growth rhythm of the
industry and the non-financial services was positive in 2002, 2003 and 2004, without
nevertheless reaching the peaks of 1997 and 2000 (for the industry), or those of 1998
and 2001 (for the non-financial services). The industry underwent a decline in 2005,
resulting in a fairly ‘gentle’ growth, the economic sectors being unable to provide the
necessary simultaneous impulse, which could have led to a real sudden rise of growth
rates as witnessed by Luxembourg during the ‘good years’ of 1997 to 2000.
14/12/07 15:48:39
An eventful history
DEVELOPMENT OF GROSS ADDED VALUE VOLUME (in %)
GDP VOLUME GROWTH RATE (in %)
12
12
10
10
8
8
6
6
4
4
2
2
0
0
-2
-2
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
-4
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Luxembourg
Industry, including energy
Financial services
Other services
Euro area
Luxembourg average
To t a l b r a n c h e s
Source: Statec (2006 projection)
119
The 2001 downturn in activity was reflected in a delayed, yet significant, deterioration
in the labour market. The growth rate of total domestic employment, which was 5.7% in
2001, dropped to 2.8% in 2002 and 2.1% in 2003. Therefore, while the Luxembourg
economy was continuing to create employment, at the same time unemployment was
also strongly on the increase. The unemployment rate in the broad sense – taking into
account those benefiting from an employment allowance – averaged under 3% in 2002,
but exceeded 5% in 2003. From mid-2005 onwards, the unemployment rate in the
broad sense stabilised somewhat at a rate of approximately 6%. Luxembourg furthermore appeared unable to avoid the rising trend in structural unemployment: despite
unemployment falling during a period of strong economic growth, it no longer dropped
to the lowest previous level. Attention should nevertheless be drawn to the fact that
with an official unemployment rate (not taking into account those benefiting from an
employment allowance) of 4.8% in 2006, Luxembourg still remains less affected by
unemployment than the majority of other European countries. In 2006, the Europe of
Fifteen averaged an unemployment rate of 7.3%.
The economic downturn of 2001-2002 also had an impact on public finances. In 2000,
at the height of the economic cycle, the (surplus) funding capacity of the public administrations – local and central administrations, social security – amounted to more than
6% of GDP. Reserves were built up during prosperous years. In 2000, the cumulative
SIP_CHAPTER_5_EN.indd 119
special funds reserve and budgetary reserve exceeded 2.2 billion euro, corresponding
to more than 10% of the annual GDP. The retirement insurance reserve rose from
2.1 times the amount of annual benefits in 1985 to three times that amount in 2001. The
impact of the slowdown occurred with some delay and caused public administration
funding capacity to fall to 2.1% in 2002 and 0.4% in 2003. In 2004, a moderate deficit
(need for funding) corresponding to 1.2% of GDP was recorded. 2005 was also marked
by a deficit (-0.3% of GDP), but a positive balance was once again reached in 2006
(+0.1%). Forecasts for 2007 suggest a deficit of 0.1% of GDP.
Despite this deterioration in public administration finances, the situation remained
healthy compared with most other European countries. In 2006, the average funding
capacity in the Europe of Fifteen corresponded to -1.6% of GDP (+0.1% of GDP in
Luxembourg). While the average public debt exceeded 60% of GDP in the Europe of
Fifteen in 2006, in Luxembourg it amounted to only approximately 7%.
In the long run, consumer price or wage inflation in Luxembourg is no different to that
affecting its main trading partners (Belgium, France, Germany and The Netherlands).
This is hardly surprising, since inflation in Luxembourg is largely ‘imported’. The
reduced size and high degree of openness of the Luxembourg economy explains this
parallel trend.
14/12/07 15:48:40
The Luxembourg economy
1
2
3
4
1 // In a bid to improve the country’s economic structure, the Luxembourg government
has been launching a policy of economic diversification from the 1960s onwards
2 // Modern businesses using state-of-the-art technologies
have joined the classic heavy industry
3 // The Grand Duchy is home to the Société européenne des
satellites (SES), operator of ASTRA, the leading satellite system
for reception in Europe
4 // Cargolux, one of the world’s largest freight companies,
was created in 1970. Its inaugural flight went to Hong Kong.
120
SIP_CHAPTER_5_EN.indd 120
Overall, inflation in Luxembourg and its main trading partners has been determined
by the same phenomena, as shown in the graph depicting the development of inflation.
The very weak inflation witnessed from 1985 onwards followed a decade (1975-1985) of
very strong inflation, which even exceeded 10% at times.
In recent years, Luxembourg has nevertheless been marked by slightly higher consumer
price and wage inflation than that experienced by its main trading partners, a situation
giving rise to endless discussions regarding the competitiveness of the Luxembourg
economy.
Inflation in Europe and in Luxembourg over the past 30 years has been marked by the
following events:
- oil crises of 1974 and 1979;
- rise of the dollar during the 1980-1985 period;
- oil counter-crisis of 1986-1987;
- overheating economy in Germany in 1991-1992 due to reunification;
- tying of the Luxembourg franc/Belgian franc to the Deutschmark during the late
1980s;
- introduction of the single currency in 1999;
- surge in oil prices in 1999-2000 and in 2004-2006, leading to a rise in consumer
prices throughout all of the European countries.
Text: Paul Zahlen/Statec
14/12/07 15:48:46
An eventful history
SALARIED
SALARIED EMPLOYMENT
EMPLOYMENT ACCORDING
ACCORDING TO
TO NATIONALITY
NATIONALITY
AND
AND RESIDENCE
RESIDENCE (in
(in %)
%)
INFLATION RATE – CONSUMER PRICE (in %)
13
60
60
8
40
40
3
20
20
0
0
-2
1961
1966
Luxembourg
France
1971
Germany
1976
1981
European Union
1986
Belgium
1991
1996
2001
2006
1
19
97
70
0
1
19
97
74
4
L
Lu
u xx ee m
m bb oo u
u rr gg
1
19
97
78
8
FF oo rr ee ii gg n
n
1
19
98
82
2
1
19
98
86
6
1
19
99
90
0
1
19
99
94
4
1
19
99
98
8
2
20
00
02
2
2
20
00
06
6
C
C rr oo ss ss -- bb oo rr dd ee rr
121
SIP_CHAPTER_5_EN.indd 121
14/12/07 15:48:47