A bright spot in the heart of Europe: what can we learn from the Luxembourg success story?

When looking for bright growth performances in the EU, the focus is often put on Ireland. But another interesting case in this respect is Luxembourg, which experienced very strong growth in output and employment over the last 20 years.

The primary engine of growth in Luxembourg was the financial sector but other high value-added service activities have also flourished in the country. A favourable regulatory and fiscal environment as well as a tradition of social dialogue and consensus constituted the main factors behind this success story. Beside these factors, this paper stresses the role of a mild taxation of labour income (especially when compared with neighbouring countries). Low labour taxation contributed to containing the rise in labour costs while guaranteeing high net incomes to wage earners and thereby helped attract many high value-added activities as well as a massive inflow of foreign workers. The challenge Luxembourg faces in the coming years is to preserve the conditions of this performance - and especially the favourable taxation rates - in view of the tensions that demographic evolutions will impose on the pension system.