Saturday 5 June 2010

EU: Stability programme Luxembourg

Stability programmes for eurozone countries on the one hand, convergence programmes for member states still without the euro; you can start by reading the background remarks on economic policy coordination in the European Union, in the blog post EU: Useful stability and convergence programmes? (3 June 2010).

You can then move on to the EU Council opinion on the stability programme of the euro area country Luxembourg, published in the Official Journal of the European Union (OJEU):

COUNCIL OPINION on the updated stability programme of Luxembourg, 2009-2014; OJEU 2.6.2010 C 143/12

Economic background

On 26 April 2010 the EU Council examined the updated stability programme of Luxembourg, which covers the period 2009 to 2014. The assessment began with a brief description of the economic situation:

The Luxembourgish economy was severely hit by the crisis: real GDP, after zero growth in 2008, dropped by 3.9 % in real terms in 2009, according to most recent estimates, as all demand components went down, with the exception of public expenditure. The contribution of net exports remained positive as imports dropped even more than exports, probably due to a collapse in equipment investment. The financial sector seems to have been less affected by the crisis than could have been expected, even if at the end of 2008 the Luxembourgish authorities had to organise a support operation for two of the country's largest banks which belong to international groups. Employment still rose by 1.2 % on average in 2009 but exclusively thanks to the carry-over resulting from the very strong growth recorded in 2008 (+ 4.7 %). It only slightly decreased in the financial sector but much more strongly in the industry. Unemployment increased from 4.9 % in 2008 to 5.7 % on average in 2009, despite the massive recourse to short-time working encouraged by the authorities. The main challenge for Luxembourg at the current juncture is to maintain and develop the favourable conditions that have made possible the remarkable growth experience of the latest 25 years based on the country's increasing specialisation in services activities, especially financial services. Moreover, as far as budgetary policy is concerned, the long-term perspective deserves full attention. First, the rise in expenditure has been rather strong in recent years and the recurrent surpluses have essentially been made possible by buoyant revenues, the continuation of which is not certain. Moreover, due for a large part to the generosity of the country's pension system, the rise in age-related expenditure is projected to be one of the strongest in the EU.

Council recommendation

After a detailed discussion the Council of the European Union invited Luxembourg to:

(i) start fiscal consolidation as from 2011 with a view to bringing the deficit below the 3 % of GDP threshold and effect the measures that will be needed to achieve this consolidation; and

(ii) in view of the significant projected increase in age-related expenditure, improve the long-term sustainability of public finances by reforming the pension system and set a MTO [medium-term objective] that takes sufficiently into account the implicit liabilities related to ageing.

Eurozone financial stability

On 31 May the European Central Bank (ECB) published its Financial Stability Review June 2010, which assesses the stability of the euro area financial system both with regard to the role it plays in facilitating economic processes and with respect to its ability to prevent adverse shocks from having inordinately disruptive impacts (page 7).

The Financial Stability Review (225 pages) offers a view of the inter-related financial markets and the consolidation measures of eurozone governments.

The Euro Group plays an important part in the efforts to restore fiscal stability in the euro area. Its president is Jean-Claude Juncker, the prime minister of Luxembourg.

Ralf Grahn

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