Luxembourg has come through the pandemic "relatively well", thanks to the measures taken by the government: This is one of the conclusions drawn by the International Monetary Fund (IMF) in its annual report.
Emil Stavrev, in charge of the report, stressed that Luxembourg's economy has developed "significantly better" compared to those of the other Eurozone countries.
If the government continues to support the economy with targeted measures, the IMF experts expect the Grand Duchy's GDP to increase by 4.5% in 2021. In the medium term, this upswing will remain slightly below the pre-pandemic level.
A potential risk to this perspective is the evolution of the coronavirus. A prolonged health crisis would have consequences for the country's economic recovery.
Regarding fiscal policy, the IMF recommends that it should act in a supportive way until the economy rebounds. It should also increasingly focus on low-income households and companies from industries that have been hit especially hard by the crisis.
Luxembourg should also continue to implement the national Energy and Climate Plan, according to the Fund. The CO2 tax, which has been introduced in 2021, is also part of this plan.
Holes in the country's infrastructure should be fixed, for instance regarding transport, and public investments should remain high.
However, the IMF's experts also see a number of fiscal risks for Luxembourg, which should not be neglected. Changes in US fiscal policy could, for instance, hit big multinational companies so hard that tax income in Luxembourg could also go down.
This is why the IMF recommends that the Grand Duchy should act responsibly and analyse its options to diversify and invest public funds more efficiently.
Housing prices have increased by 14% in 2020. While the IMF welcomes the introduction of a debt limit, it recommends that the limit should be reconsidered, if the debts of private households continue to increase.
In addition, Luxembourg should also consider introducing measures to prevent a debt overload.
Regarding the labour market, the IMF experts analysed the data provided by Eurostat and determined that the crisis has hit the most vulnerable demographics the hardest.
The unemployment rate for young people, less skilled workers, and foreigners has increased. All of these groups already experienced difficulties in Luxembourg's labour market prior to the crisis.
In the future, Luxembourg needs a change of policy, which should be focused on helping these groups of the population instead of merely saving jobs. The IMF calls for increased mobility between different industries, for instance by promoting re-education programmes.
