The war in Iran has very quickly produced tangible effects on our economy: rising energy prices, pressure on supply chains, and a downward revision of growth prospects. These effects are here to stay. A prolonged blockade of the Strait of Hormuz — a scenario that must now be taken seriously — would alone be enough to deprive the global economy of a significant share of its energy supplies, fertilisers, and industrial raw materials.
Admittedly, the shock we are facing is external. But the response is ours to shape.
Luxembourg Can No Longer Afford Its Old Habits
The Government has decided to convene a tripartite talks dedicated to the energy crisis. The first meeting, an exchange on the current situation, is scheduled for 12 May . The intention is sound. Preparing the ground with social partners before the storm hits in full force is the right approach. But we must clearly acknowledge what makes this tripartite fundamentally different from previous ones: it will take place in a country that can no longer afford its old habits.
The real issue is not this new inflationary shock in itself, but the moment at which it occurs. Luxembourg has been facing near-zero growth since 2022. This conflict does not create that fragility; it reveals and exacerbates it. Until now, residents have not felt this slowdown in growth in their daily lives, as their purchasing power has largely been preserved. But at what cost? Through massive support measures deployed crisis after crisis — first COVID, then Ukraine — which absorbed the shocks and shielded households from their full economic impact.
STATEC data confirms an increase in living standards in Luxembourg, including after the recent inflationary shock. Between 2018 and 2025, the average standard of living rose each year by between 2.05% and 10.35%. At the same time, income inequalities have remained broadly stable: the Gini coefficient stands at 30.5% in 2025, after fluctuating between 29.1% and 32.3% over the period. The State budget has therefore effectively played the role of a shock absorber. But today, that shock absorber is worn out.
Unemployment has already exceeded 6%, a high level for Luxembourg. A revealing paradox: at the same time, companies that are performing well struggle to recruit. This double signal — rising unemployment alongside labor shortages — reflects a structural mismatch that this shock will further aggravate. Demographic ageing — another major structural challenge — will not improve matters.
The state of public finances at the end of the first quarter of 2026 illustrates this economic slowdown. The central government balance shows a deterioration of nearly €280 million compared to the same period last year. We are far removed from the room for manoeuvre that existed during previous tripartites, when the State could open its wallet widely to finance compromises in the traditional “Luxembourg-style” , often through broad, untargeted spending measures.
Real Threats to Public Finances
And more clouds are gathering on the horizon. Several ongoing issues will weigh heavily on public finances in the years ahead. There is the reform introducing individual taxation of income. The rationale behind the reform is less controversial than its timing. It will result in a fiscal loss estimated at between €800 and €900 million per year for the State budget from 2028 onwards. Would it not be wise to revisit the proposal and better target measures toward lower-income taxpayers?
To this must be added exogenous risks that are too rarely discussed. The draft European directive on harmonizing tobacco excise duties could could significantly reduce a source of tax revenue that is often overlooked but currently exceeds €1.5 billion per year.c. Then there is the politically complex issue of unemployment benefits for cross-border workers. A provisional agreement has been reached in the Council and the European Parliament on this matter. It should lead to unemployment benefits being paid by the country where the individuals were employed. The Minister of Labour estimates the cost of this new rule at €200 million per year. These financial risks are not hypothetical. They are real, and they are cumulative.
On top of this comes the necessary increase in defence spending, which will require the country to invest ever greater financial resources annually in order to reach 3.5% of GNI by 2035. To meet the 2% target, Luxembourg’s military spending has already increased from €190 million in 2014 to €1.29 billion this year. By 2035, assuming annual nominal GNI growth of 4% i more than €3 billion per year will need to be invested in defence.
When combining these various pressures — tax reform, tobacco excise duties, cross-border workers, defense — the public deficit could reach €2.5 to €3 billion per year. Public debt would then quickly exceed 30% of GDP, a threshold closely monitored by international rating agencies.
A potentially significant deterioration in public finances, mounting stagflationary with stagnant growth while inflation rises again under the impact of the oil and gas shock linked to the Middle East conflict: this is the complex context in which the energy tripartite must take place.
Containing Inflation as a Priority
If support measures are needed, they must be targeted, temporary, and above all focused on what will enable us to emerge from this crisis in a stronger position : controlling inflation, notably through measures acting on energy costs. In a stagflationary environment, inflation control is crucial to preserving the competitiveness and attractiveness of our economy, which are the sources of value creation for Luxembourg society.
This means protecting companies’ profitability by controlling production costs, in particular labor and energy costs. Without profitability, there is no investment, no innovation, no growth, and no jobs. The key challenge is to support companies’ ability to weather this energy shock without resorting to layoffs.
A particular effort must also be made in favor of the most vulnerable households, rather than dispersing support indiscriminately . Above all, we must avoid adding recurring expenditure to recurring expenditure, when every euro spent today will reduce our capacity to face future challenges.
Beyond the tripartite discussions, other reforms must be accelerated. Progress on administrative simplification remains too limited. Administrative complexity, regulatory delays, and certain forms of overregulation — notably in the financial center — weaken our attractiveness in the face of increasingly aggressive international competition.
Housing is another major issue that is struggling to move forward and will, sooner or later, affect the country’s social cohesion — especially as the war in Iran may lead to higher interest rates.
Luxembourg has demonstrated in the past its ability to design attractive and competitive frameworks. We must return to this approach by developing instruments that support investment and attract new economic activities.
This tripartite is not like the others. To maximise its chances of success, the focus must be remain on the negative effects of the conflict in Iran, on household purchasing power, and on business competitiveness. Targeted measures aimed at reducing energy costs will be necessary in order to contain inflationary pressures and avoid triggering the harmful knock-on effects of automatic wage indexation on the wider economy.
The many other structural challenges facing our socio-economic model (housing crisis, administrative complexity, etc.) should be addressed separately through dedicated forums or existing high-level committees.
- The Gini coefficient is a statistical indicator used to measure the level of inequality in a distribution, most often of income or wealth, within a population. It can range from 0% (perfect equality) to 100% (maximum inequality).