Competitiveness: Tomorrow will be too late

Last year’s relegation of Luxembourg to 20th place in the IMD World Competitiveness Ranking was already a warning. The loss of a further three places in the recently published 2024 ranking is a real wake-up call. It underlines Luxembourg’s loss of competitiveness in recent years.

Luxembourg has long sat near the top of this global competitiveness ranking, which compares the performance of 67 countries across the globe. In the early 2000s, it even stood on the podium alongside the world’s most competitive economies. In the 2010s, Luxembourg consistently made it into the top 15, reaching sixth place in 2015. Since then, it has seen a slow decline, which accelerated to 20th place in 2023 and 23rd place in 2024. The Grand Duchy is lagging behind in this global benchmark, while the countries we often refer to as our main economic competitors are performing well:  Singapore (1st), Switzerland (2nd), Denmark (3rd) and Ireland (4th). This isn’t good enough.

The reasons for this loss of competitiveness should be carefully analysed. The causes are both cyclical and structural. Cyclical, because Luxembourg has seen growth slump in the last two years. In the preceding years, the Grand Duchy had already lost its positive growth differential relative to the eurozone, despite showing remarkable resilience during the health crisis. The inflationary crisis, particularly strong in Europe, has taken its toll.  The recession recorded in 2023 (-1.1% according to STATEC) played a large part in the downgrading of Luxembourg for the IMD ranking’s Economic Performance factor. Luxembourg came in first place for this factor in 2022, slipped to 38th place last year and has fallen even further to 57th this year. Only Colombia saw a greater decline than Luxembourg for this factor.

Structural problems must be overcome

However, it would be simplistic to say that the current poor economic performance alone is responsible for Luxembourg’s slide in the World Competitiveness Ranking. While it has accelerated over the last two years, this loss of competitiveness has been the trend for the past two decades. The reasons are primarily structural. First and foremost is the country’s clear loss of tax competitiveness. Tax competition has intensified across the globe in recent years. According to the OECD, between 2000 and 2022, the corporate tax rate fell in 97 jurisdictions worldwide, while it rose in only 6.

Then there’s the difficulty Luxembourg faces in attracting the talent it needs to meet the economic challenges of tomorrow: the ecological and digital transitions, and an ageing population. Luxembourg ranked 53rd worldwide for the “availability of skilled labour” indicator in the IMD rankings.

Administrative complexity is another major obstacle to achieving full entrepreneurial potential. Another indicator used by the IMD is the “number of days to start a business”. Luxembourg ranks 50th worldwide for this indicator, with an average of 16.5 days. By comparison, it takes just 1.5 days to launch a business in Singapore and 3.5 days in Denmark. Last but not least is the cost of labour and working hours.

Luxembourg has the highest hourly labour costs in the European Union, with this competitive disadvantage becoming even more pronounced in recent months due to successive index-linked wage reviews.

As regards working hours, Luxembourg ranks 60th out of the 67 countries in the ranking, with an average of 1,488 hours worked per employee per year. According to Eurostat, the average working week for employees in Luxembourg is 35.3 hours, compared to a European average of 36.1 hours [1]. This puts Luxembourg in 8th place in Europe in terms of where people work the least. The Grand Duchy’s competitive disadvantage in this area is growing rapidly. Over the twenty year period from 2003 to 2023, the average working week in Luxembourg fell by 2.6 hours. Over the same period, the European average fell by just 2.1 hours. According to OECD data, Luxembourg has lost 113 hours worked per employee per year over the last twenty years, whereas the OECD countries lost only 64 hours on average over this period.

Furthermore, there were no productivity gains during this period. As a result companies’ profitability – already severely undermined by rising production costs (automatic index-linked wage increases, energy prices, over-regulation, etc.) – continues to deteriorate.

Competitiveness is the ability of an economy to generate relatively high levels of income, employment and social cohesion on a sustainable basis, while being exposed to international competition. It’s worth remembering that our strong competitiveness, boosted by our productivity, was the basis for Luxembourg’s prosperity, with abundant tax revenues financing our generous social model. Any reversal in our competitiveness may well jeopardize this virtuous circle. Restoring Luxembourg’s competitiveness must therefore be the government’s top priority. There should be a strong commitment to this objective.

Simplicity, quality, modernity: companies have been waiting for these words

I want to believe this is the case. The announcements made by Prime Minister Luc Frieden’s in his State of the Nation address on 11 June suggest just so. His speech was structured around a triptych that reads like a motto: simplicity, quality, modernity. Luxembourg companies have been waiting for these words. An insistence on administrative simplicity, a concern for quality and the search for modernity will surely boost our competitiveness and enable our country to regain its position.

These cross-functional objectives cover a range of areas. Firstly, taxation. The government is committed to reducing the corporate income tax rate from 17% to 16% from 1 January 2025. The Prime Minister expressed his aim to ultimately “bring the corporate tax rate into line with the international average”. An extremely positive signal. Secondly, housing. The new measures announced are to be welcomed, since they respond to the vital need for construction in Luxembourg. This need has been highlighted by several surveys in recent months. In the latest edition of our Baromètre de l’Economie (Economic Barometer), 76% of respondents felt that the current housing crisis was having a negative impact on Luxembourg’s competitiveness and attractiveness. 63% of companies believe the housing crisis has affected their business. With this in mind, following the introduction of short-term, mainly fiscal, measures to revitalise the market last May, additional measures aimed in particular at cutting red tape are therefore welcome, in the hope that the structural problems facing the housing sector can be overcome. To speed up housing construction, general development plan (PAG) and special development plan (PAP) procedures will be streamlined, the principle of “silence means agreement” will be applied for building permits, and a national building regulation will be introduced. However, it should be made clear that many of these measures will take time to come into effect. Furthermore, we must ensure that the various financial aids put in place – which should be allocated selectively – do not jeopardise the government’s plan to restore public finances.

The talent issue – both training in our country and the attraction of foreign workers – is also a key element of our present and future competitiveness. The quality of the education and training system was also cited as a major challenge for Luxembourg by the European Commission in its recent assessment as part of the European Semester. While the government’s announcement about the creation of two new masters programmes at the University of Luxembourg (in actuarial science and private assets) is to be welcomed, the country cannot do without the contribution of skills from outside. For a country like Luxembourg, where nearly three quarters (74%) of the workforce are non-citizens, this is a strategic matter, one of economic survival. The Luxembourg financial centre in particular faces competition from financial centres in Paris, Frankfurt and Singapore. Competition is fierce, with candidates often spoilt for choice. As such, taxation is key to boosting Luxembourg’s attractiveness to these highly coveted profiles. The government’s aim to make the profit-sharing bonus and impatriate tax regime more attractive is thus a step in the right direction.  

Lastly, innovation. The government wants to accelerate the digitalisation of Luxembourg’s economy. Several specific announcements have been made to this effect: the autumn launch of the “Clarence” project, the upcoming introduction of Lyten and in Luxembourg, the installation of a new-generation supercomputer to replace Meluxina, and the bid to host one of Europe’s first quantum computers. The productivity gains required by businesses and public authorities must be driven by technological progress and innovation, and underpinned by substantial investment in research and development.

A window of opportunity

Businesses are applauding all these measures, but nonetheless await others which are more far-reaching. Here too, there are (at last) some positive signs. The government has shown its willingness to reform one of the country’s foremost sacred cows, the pension system, which is clearly unsustainable over the long term. “The system needs to be reassessed from top to bottom, taking into account the country’s demographic and economic trends”, says the Prime Minister. He therefore aims to launch a major consultation on the subject. Businesses will play their full part, putting forward concrete, responsible proposals. Other sacred cows should also be re-examined. I’m thinking of Luxembourg’s system of automatic, across the board index-linked wage increases, which has clearly shown its limits in recent months. I’m also thinking of other important issues such as abusive absenteeism. At a time when 22 countries across the world are more competitive than Luxembourg, we can no longer afford to avoid this subject.

The current government, in its focus (see coalition agreement) and ambitions (see state of the nation address), seems to understand the concerns of business. With the main electoral and social deadlines behind us, the government now has an unprecedented window of opportunity to implement the reforms needed to restore the country’s competitiveness. However, the timeframe is short. Let’s make sure not miss this opportunity, since tomorrow will be too late.

[1] How many hours per week do Europeans work?, Eurostat, May 2024

Leave a Reply

Your email address will not be published. Required fields are marked *