Laying the groundwork for recovery and the post-crisis period

In spite of an end to confinement almost everywhere in Europe (and not very well coordinated), following the waning of the epidemic, it is too early to claim victory! The risk of a second wave is still possible and a return to normal from a socio-economic point of view seems distant. Business leaders continue to navigate by sight despite poor visibility, as do political leaders. In the lack of certainty about the efficacy and availability of a vaccine, it is therefore extremely difficult to cast a verdict on the post-crisis period, even for a small country like Luxembourg.

How will the crisis shape the different sectors of our economy, consumer behaviour, producers’ business plans, the innovation potential of companies, investors’ strategies, the aversion to risk of young entrepreneurs, the propensity of households to save, the capacity of financiers and bankers to support them, public finances, the government coalition’s programme?

Despite the lack of clear answers to these questions, it would be irresponsible to wait for things to evolve by reacting on a day-to-day basis. Despite the uncertainties and questions regarding the final impact of this crisis, we must be proactive, anticipate the effects of the crisis on economic players by implementing effective and rapid aid measures, and prepare for the post-crisis period with an ambitious recovery plan.

Some say that the changes will be far reaching, that the world will no longer be the same after this unprecedented crisis and that society will live differently after the misguided extremes of the past. Others link the pandemic and global warming, advocating a welcome fundamental change in our civilisation after this harsh warning from a virus that is extremely dangerous both from a health and economic point of view.

Still others believe that the world has already seen other crises and that our country can hope for a return to normalcy after a more or less long and painful transitional phase. Its duration will depend in particular on the effectiveness of the health measures in place and the availability of a vaccine. Its strength will depend on the state measures implemented to compensate for the socio-economic losses suffered by businesses and households.

Luxembourg has so far managed the situation regarding the health crisis well compared to other European countries. This can serve as a positive example for the management of the unprecedented socio-economic crisis and the establishment of a bold recovery plan. The government’s business support programme is indeed impressive in its overall volume. However, in the eyes of the many entrepreneurs/managers/self-employed calling the Chamber of Commerce helpline [1], this support should be put into perspective from a micro-economic perspective. For some, the financial situation is desperate and despite this, they are not eligible for certain types of direct aid. For others, the aid allocated so far to cover their losses is largely insufficient. Still others are satisfied with government support, the aid they receive is more generous than in other European countries. Finally, some sectors, notably the financial sector, are only slightly affected at this stage and hope that there will not be further unexpected effects of the crisis on their activities.

The post-crisis period is unthinkable without healthy, innovative and profitable businesses, without a diversified economic fabric, without agile sectors capable of responding to new trends and consumer demand, without young and independent people who are open to taking risks. We must therefore ensure that all these men and women leaders and entrepreneurs can survive and get through the current socio-economic crisis, which is likely to last for several more months. We must save as much of the economic fabric created by these women and men as possible, so that we have a solid base from which they can make a powerful contribution to economic recovery.

Saving the fabric of business in this period of economic decline is a real challenge.

The end of confinement will be anything but a liberating experience for our businesses. Take the example of the construction sector, where health measures could, according to some indications from the sector, lower labour productivity by up to 10%, while at the same time increasing fixed costs, creating a dreaded margin squeeze that works against profit margins that were already barely above 3% before the crisis. We should also mention hotels, restaurants, tourism and events, where the activity remains closed for the time being and will remain in the background for the foreseeable future and problematic after reopening.

A business survey conducted by the Chamber of Commerce from 8 to 15 April 2020 indicates that 60% of non-food businesses and 72% of the hotel and catering sector will run out of cash as of 1 May. According to calculations by the Chamber of Commerce, if 40% of businesses in these two sectors were to disappear due to this prolonged period of inactivity (or at least ‘low-frequency’ activity), public administrations would lose almost 1 billion euros (in lower tax revenues and social security contributions and additional unemployment benefits).

In these and many other sectors, the expected decline in the GDP[2], which is already dramatic, therefore largely underestimates the scale of the challenges facing our businesses, particularly with regard to their profit margins and their ability to pay deferred taxes and contributions later and to repay aid granted by the government, or other charges that are subject to a short-term moratorium.

Much has been done, much remains to be done!

While much has been done by the authorities to ensure, in this difficult context, the smooth functioning of our economy and to avoid permanent damage such as bankruptcies, with a considerable stabilisation programme of some EUR 10.4 billion, or 17.5% of the GDP, the bulk of these sums are based on provisions consisting of repayable aid, guaranteeing bank loans and granting payment periods to businesses, especially regarding the tax burden. Although they are undeniably welcome, mere deferral of charges does not in itself make it possible to cope with the risks already mentioned of a collapse in business margins, including during the period of gradual recovery of activity.

The COVID-19 partial unemployment measures for cases of force majeure is particularly important in order to save jobs in businesses that had to cease operations. This measure, the budgetary cost of which is estimated at EUR 1 billion and which supports both households and businesses, is to be continued because of the partial and slow recovery of activities. It enables businesses to maintain a connection with their employees (especially the most qualified, who are the custodians of often irreplaceable human capital) while relieving their labour costs during the crisis period. Moreover, this support for household purchasing power indirectly benefits companies that remain in business.

The dashboard published by the Ministry of the Economy showing the evolution of the aid granted by the state shows that the number of grants for small businesses and the self-employed remains far below what was planned for and budgeted by the government. This is surprising at first sight, as these emergency allowances are welcome support and an indispensable breath of fresh air for cash-strapped SMEs.

There is therefore a significant difference between the number of grants applied for and granted by the Ministry as a result of the restrictive eligibility criteria, due in particular to the group-oriented criterion, which eliminates many small businesses from the benefit of a grant (such as small business structures belonging to a group of companies with more than 10 or 20 employees respectively, depending on the type of grant).

Despite the vast amount of direct and indirect aid, both repayable and not, credit with state guarantees, deferrals[3] and moratoriums, some businesses fall through the cracks. Likewise, for businesses that can resume their activities gradually (11 May, or only after 1 June), the future is uncertain. The situation is particularly serious for certain commercial activities, for the hotel and catering sector, tourism, and the event sector. Indeed, many larger companies seek the helpline of the House of Entrepreneurship of the Chamber of Commerce for information regarding the bankruptcy procedure. They plan to end their entrepreneurial adventure, rather than continue to go into debt personally without knowing if their business plan will eventually restore their profitability. Other companies have reorganised to keep in touch with their customers, but work with greatly reduced productivity, even at a loss.

Feedback from the field leads to a call for a global package for the most affected sectors.

Some companies that have a significant impact on the economy of Luxembourg, with between 50 and 250 employees, have so far received no aid, or at least very limited aid in relation to the volume of their fixed costs to be compensated. However, these companies that employ a significant number of employees will have to bear considerable fixed costs during the phase of the gradual resumption of activities.

A new global package should therefore include, alongside the extension of the flexible rules on partial unemployment, direct non-repayable aid for these companies that have between 20 and 250 employees. The bankruptcy of one of these companies would not only be dramatic in economic and social terms, but would also risk setting off a negative spiral thereafter. Such aid could take the form of a non-repayable direct subsidy, calculated according to the number of employees returning to their jobs, covering both employer contributions[4] as well as part of the fixed costs. The latter cannot in fact be covered by turnover which will be difficult to achieve when activities partially resume.

This incentive for companies to get workers back to work would significantly unburden the budget allocated to partial unemployment and allow a certain return to normal for the employees concerned.

Without such a direct subsidy, the businesses concerned – with no prospect of a return to profitability under current conditions – risk definitively stopping the activity, either totally or, in the case of a group, for at least several entities within the group, with negative consequences on employment and the socio-economic fabric of the country.

Setting ourselves up for recovery success and (re)positioning Luxembourg for the better.

Various economic players, including the Chamber of Commerce, are already working on recovery plans and are actively preparing for the post-crisis period. They are working together with businesses and the government in a real process of collective solidarity and national unity. Discussions and related work must accelerate to quickly lead to an ambitious recovery programme, positioning Luxembourg among the most honorable countries and stronger than before the crisis.

The fundamental rules of our economy will not change after this crisis: healthy and efficient businesses (self-entrepreneurs, self-employed, young companies, innovative startups, family businesses, hidden champions, global players,…), thanks to the risks, contributions and innovations of the leaders and creators and thanks to the work of the talent and workforce which they employ, will create lasting value and wealth which will be redistributed in the form of wages, dividends, taxes and contributions, in the community’s interest. To succeed, companies must evolve in a pro-business, attractive and competitive environment, especially since Luxembourg will in any event be characterised by its extreme openness to the rest of the world (which explains both the success and the vulnerability of its model) and by an international financial centre whose success in terms of development and diversification is intimately linked to that of the country’s socio-economic model.

The financial sector also seems to be somewhat cushioning the economic impact of the crisis on Luxembourg, which also benefits from healthier public finances than many other European nations.

Luxembourg must maintain its resilience in the face of other shocks which are bound to occur in the future. The present crisis perfectly illustrates the importance of this factor. Countries with healthy public finances have greater room to manoeuvre in coping with the crisis, from a health and economic point of view. We must certainly deal with the most urgent in the short term, but by strengthening in parallel and in the most systematic way our capacities to resist a new crisis.

A three-tiered recovery and resilience programme.

The future programme must result from a real national consensus reflecting the best of a Tripartite.

It is first and foremost about investing heavily in the future, with efficient infrastructure and cutting-edge research. We must welcome the government’s plan to continue its ambitious investment programme despite the marked deterioration in public finances. It will probably be difficult to maintain the level of public investment foreseen in the 2020 state budget at the planned level, faced with a sharp drop in the productivity of the national production apparatus. It is all the more important to postpone unfinished projects to 2021 and beyond, in order to consolidate recovery. At the same time, the government will be able to readjust and redirect investments according to the needs of the recovery programme and the new qualitative priorities set for the post-crisis period.

Firstly, in the area of ​​health and infrastructure for seniors, in order to proactively strengthen our resistance to future health and epidemiological shocks and in order to deal with any medical shortage in the future as the age pyramid is worrying in that sector. A ‘health ecosystem’ could also become a real centre of diversification for Luxembourg.

Changes in production and supply chains will reshape globalisation without question. If Europe manages to relocate industrial production, Luxembourg must be ready to welcome new industries with a strong research, development, and innovation (RDI) component and at the forefront of technological and environmental progress. The country’s industrial, energy, environmental and regional development policy must encourage such industrial relocation.

We must also envision a real pole of qualitative growth that integrates the circular economy, energy efficiency programmes and renewable energies. Without overlooking the usual suspects of mobility and housing. The latter cannot be overlooked, as, paradoxically, net immigration could increase following the crisis, fueling demand for real estate. Our country is an example in terms of managing the health crisis, which is a great marketing and nation branding asset for the Grand Duchy.

Mobility is also to be reassessed in the wake of COVID-19, which is likely to affect travel requirements, as is the impact of the increasing use of telework both on mobility and on the demand for offices. Other priorities are digital, telecommunications, training and RDI. A particular investment effort should also aim to ensure sufficient autonomy in Luxembourg in strategic areas such as health facilities, tourism, logistics, or the food sector.

Secondly, we need to set the course for public finances in order to recreate fiscal margins in a true spirit of anti-cyclical fiscal policy. A short-term bottom-up consolidation strategy would be economically and socially dangerous. But that does not mean that we should set aside budgetary rigor: on the contrary, we need to develop a coherent mid-term management framework for public finances as quickly as possible, including solid anchors. With first of all a mid-term debt (and wealth) objective that integrates the aforementioned investment needs as well as the costs of future aging.

This will result in annual budgetary balance targets, which will have to continue to be the subject of multiannual programming. It is only when the Grand Duchy has found a solid budgetary anchor that it will be able to effectively prepare for any possible future shock and to prepare for a next crisis, whatever its nature. Needless to say, the AAA rating further helped the government to appeal to the markets for loans on favourable terms. This optimal rating, which reflects market confidence in the ability to repay government debt, must be maintained at all costs.

Thirdly, we need to structurally strengthen the resilience of our businesses in the face of shocks that can affect our future. By ensuring their competitiveness in the broadest sense of the word, and a business environment favourable to innovation. Such an ecosystem is essential for a small, very open economy, capable of educating and motivating young people about entrepreneurship and of attracting the talent and investors it needs.

An efficient tax system is not the least of these aspects and is not at all contradictory to solid public finances in the mid term. For example, a transparent roadmap detailing the change in direct tax rates payable by businesses in the coming years and encouraging people with specific skills (in the health, digitalisation, IT security, logistics, etc. sectors) to come to Luxembourg should not be seen solely from the perspective of ‘budget waste’. It would indeed strengthen our economic base and trigger positive return effects. Payroll costs evolving more in line with productivity gains would also improve the resilience of our businesses. In addition, efforts should be made to simplify administrative matters and to continuously digitise public administrative services.

The impact of COVID-19 will now force us to dig deep into our imaginations, daring, and courage in order to make smart, ambitious, and unprecedented choices when the future is more uncertain than ever.


[1] The Chamber of Commerce is supporting businesses during this crisis with training and advice, granting of guarantees via its Mutualité de Cautionnement and targeted support for businesses, in particular through its ReAct initiative. It recently issued 11 proposals for partial unemployment measures to aid businesses. It proposes in particular to reduce the fixed costs of businesses and to support their liquidity; the repayment of repayable advances only when businesses return to better fortune; a reopening (in complete safety) of shops and restaurants; a targeted exemption from social security contributions for very small businesses; a review of the bankruptcy procedure or the creation of a stabilisation fund. Finally, targeted aid to households, for example ‘Corona checks’ to be used in shops or restaurants, would ensure the survival of these activities while strengthening the purchasing power of the most fragile households (for all measures proposed, see: https://www.cc.lu/en/relance/).

[2] The macro- and microeconomic impacts of the crisis are enormous, as are the implications for public finances. Various institutions confirm the fears of a sharp drop in the GDP in 2020, which would be followed by a probable (mechanical) rebound in 2021. Thus, STATEC, with a scenario having served as the basis for the development of the new Stability and Growth Programme for Luxembourg (Programme de Stabilité et de Croissance du Grand-Duché de Luxembourg, PSC), and the IMF and the European Commission recently announced a drop in the real GDP of 6%, 4.9% and 5.4% respectively in Luxembourg in 2020. They also underline strong risks for a downturn, for example a second wave of the epidemic or a more marked than expected decline in external demand. At best, the GDP would stagnate during the 2020-2021 period, while it would probably have increased by 5 to 6% if not for the virus. As for public finances, the PSC indicates that on the basis of the measures adopted before the end of April, in 2020 the general government deficit would amount to almost 5 billion euros, or 8.5% of the GDP. This would be the highest deficit since the figures have been recorded, due to the impact of the crisis on economic activity and the measures that had to be taken urgently, as well as those that would have been added over time. As a result, in 2020 and 2021, public debt would approach the 30% limit of the GDP set in the 2018 coalition agreement.

[3] In a recent study for France, Rexecode also considers that 14% of the deferrals of charges and taxes will be definitively lost by the state, notably due to bankruptcies. Transposed to Luxembourg, this would be around EUR 700 million.

[4] This is one of 11 measures that the Chamber of Commerce recently introduced.

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