Economic and Social Portrait of Luxembourg NOTES

Economic and social portrait of Luxembourg NOTES

1. This publication is being released at a time 2. In this “economic and social” portrait, par- when great uncertainty regarding the global ticular emphasis has been placed on compara- situation is weighing heavily on Luxembourg’s tive aspects, which should make it possible to economic prospects. There has been a marked position Luxembourg’s economic development change in climate in Luxembourg. GDP growth in relation to other European countries. As (in volume) fell from 8.9 % in 2000 to 1 % in there is often a two-to-three year delay in pub- 2001. At the time of publication, STATEC fore- lication of the comparative and harmonised casts are banking on GDP growth of 0.5 % for statistics by EUROSTAT and the OECD, many 2002 and 2 % for 2003. In this document, it has comparative tables and charts relate to the not been possible to carry out a detailed analy- year 2000, and in some cases 1999. As regards sis of the impact of this current decline on the comparative statistics, the document Luxembourg’s economy, especially as the sta- deliberately confines itself to structural social tistical data for 2002 is still incomplete. In fact, and economic indicators relating to 2001 is the most recent year included in most Luxembourg’s economy and society which are of the charts and tables. The publication deals unlikely to be deeply affected by short-term mainly with the development of economic changes. structures since 1985. Recent economic events are referred to only where they represent changes likely to affect future developments.

NOTES 1 IMPRESSUM

Publishing manager : Robert WEIDES Chief editor and general coordination: Paul ZAHLEN Authors : Ferdy ADAM Zulmiro DA COSTA Jean LANGERS Guy SCHULLER Paul ZAHLEN Technical coordination: Guy ZACHARIAS Design and layout : Today’s Ink Translation : Euroscript Printing : Offset SCIE

This publication has been produced with the support of Luximage (Information and Press Service of the Luxembourg Government and Ministry of Foreign Affairs)

Central Service for Statistics and Economic Studies b.p. 304 L-2013 Luxembourg E-mail : [email protected] Internet : www.statec.lu ISBN : 2-87988-049-1

March 2003 Copies are authorised provided the source is mentioned.

2 IMPRESSUM SUMMARY

Notes 1 Impressum 2 Summary 3 Foreword 5 Introduction 6

CHAPTER 1 – RECENT ECONOMIC DEVELOPMENT 1.1. Growth of the Luxembourg economy 20 1.2. Factors of growth and competitiveness 34

CHAPTER 2 – ECONOMIC STRUCTURES 2.1 Residential population, working population and employment 62 2.2. Productive structure 78 2.2.1. From industrial economy to service economy: an overview 79 2.2.1.1. Radical and rapid changes 79 2.2.1.2. End result: an economy largely dominated by services 83 2.2.1.3. Dynamic sectors and sectors in relative decline 85 2.2.1.4. Imposed changes and intentional changes 95 2.2.1.5. A diversified economy, despite the financial sector’s dominance 100 2.2.2. Spotlights 105 2.2.2.1.The financial sector: the heart of the Luxembourg economy 105 2.2.2.2. Information technology, business services and leisure businesses: job creators 121 2.2.2.3.Transport and communications: emergence of telecommunications and air transport 127 2.2.2.4. A diversified, high-performance industrial sector 134 2.3. External economic relations 144

CHAPTER 3 – SOCIAL SYSTEM 3.1.Wages and salaries 154 3.2. Standard of living and living conditions 164 3.3 Social security 182

Bibliography 189 Abbreviations 191 Index 191

SUMMARY 3 S

GB PL

D B Grand Duchy of Luxembourg TCH

A F CH

4 FOREWORD

Over the past few years, scientific analysis of the economic and social development of Luxembourg has expanded, thanks to the setting up of appropriate (yet improvable) structures, whether at STATEC, the Central Bank of Luxembourg, the University (Applied Economics Research Unit - CREA and Statistics and Decisions Unit - STADE) or CEPS/INSTEAD.This has resulted in a pro- fusion of publications, aimed mostly at a specialist readership. This “economic and social portrait” of Luxembourg fulfils the need to provide the general public with a résumé, summarising structural developments over recent years. Whereas the “economic portrait” published in 1995 tended to juxtapose the fields or subjects dealt with, this new version aims to reveal links and interaction. The first chapter features an overview of recent economic development as well as factors of growth and competitiveness and explains how these factors fit together. The second part provides a more detailed description of changes in the fields of demography, employment, the productive structure and external economic relations, with “spotlights”on certain important or “buoyant”sectors such as financial services, transport and communications and business services. The recent emergence of the concept of “sustainable development” clearly shows that economic, social and environmental issues are closely linked. Also, “human development” cannot be understood very well purely from the aggregates of national accounts. Therefore, the chapter on social conditions has been filled out and expanded to take account of environmental data in particular. Generally speaking, a country’s peculiarities and specificities can be revealed only through a comparative approach. In a globalised world, an economy must constantly determine its position in relation to other countries and regions with a comparable level of development. This publication contains numerous indicators that should enable the reader to see where Luxembourg stands in this comparison, especially with regard to its competitiveness and attractiveness. At the start of the 21st century, Luxembourg’s economy and society are facing a new turn. The remarkable growth from 1985 to 2000 has given way to lower levels of economic progress, and it’s impossible to say, on publication of this document, whether this is simply a temporary swing or whether we are heading for a prolonged period of reduced growth. The “economic and social portrait” gives a general picture which will, we trust, be widely accessible. It shows the key elements of the strengths and weaknesses with which Luxembourg is facing the new challenges.

Robert Weides Director of STATEC

FOREWORD 5 Introduction

6 INTRODUCTION Luxembourg can currently claim one of the highest standards of living in the world. In 2001, the GDP (Gross Domestic Product) per inhabitant was approximately EUR 48 700, compared with EUR 39 400 in the United States and EUR 23 200 on average among the 15 EU countries. The GDP per inhabitant certainly isn’t the only or the most reliable instrument for measuring the standard of living and well-being. Nevertheless, these figures reflect a very favourable economic situation.The route taken by Luxembourg to reach this level has been far from straight.

An eventful history We will limit ourselves to a brief outline of economic development from the beginning of the 20th century. A glance at the table showing the average annual GDP growth rate and the population growth rate gives some idea of the cycles the Luxembourg economy has been through during this period.

Average annual real growth rate in GDP and in resident population (in %)

GDP Population

1900-1913 … 1.0 1913-1951 1.6 0.3 1953-1975 3.9 0.8 1975-1985 2.3 0.2 1985-2002 5.3 1.2

Source: STATEC. N.B. For the years prior to 1950, the statistical bases are very modest, so the GDP growth figure from 1913 to 1951 gives an approximate indication.

The years preceding the First World War Sustained growth in the steel industry marked the years preceding the First World War.This industrial sector, based on the iron ore deposits located in the south of the country, is rooted in the latter half of the 19th century. However, it was the construction - during the two decades preceding the First World War - of the large integrated steelworks (such as Differdange and Belval) that were able to convert cast iron into steel and then rolled steel on the same site, which was crucial to the subsequent development of this economic sector. Some of these investments were made possible thanks to German capital. The production of rolled steel rose from 145 313 t. in 1900 to 1 115 004 t. in 1913 and steel-making accounted for around 60 % of total industrial employment before the First World War. The population grew rapidly, rising from 211 088 in 1890 to 235 954 in 1900 and 259 891 in 1910. So over a twenty-year period, it increased by nearly 50 000, while during the previous two decades (1870-1890) there had only been a rise of some 13 500.The population increase went hand in hand with a concentration of the population in the City of Luxembourg and in the Canton of Esch (the mining and steel area).Whereas in 1880, 11.4 % of the total population lived in the Canton of Esch, the proportion reached more than 26 % in 1910. The City of Luxembourg and the Canton of Esch shared 45 % of the total population on the eve of the First World War, compared with under 26 % in 1880. The demographic growth was due in particular to a wave of immigration (first Germans and then Italians) associated with the strong demand for labour in the steel industry and iron mines. The proportion of foreigners in the total population practically doubled over 20 years, increasing from

INTRODUCTION 7 Residential population 1875 - 2001

450 000 400 000 350 000 300 000 250 000 200 000 150 000 100 000 50 000 0 1981 1875 1991 1935 1910 1922 1947 1970 1930 1880 2001 1990 1960 1900 Total Luxembourgers Foreigners Source: STATEC (population censuses)

8.5 % in 1890 to 15.3 % in 1913. This immigration trend overlapped with an emigration trend. Between 1840 and 1907 around 80 000 Luxembourgers left the country. Precarious living conditions may well explain the departures between 1840 and 1870. During the later period, which was marked by the boom in the steel industry, emigration seemed more of a socio-cultural phenomenon, with Luxembourgers reluctant to move into industry. Nevertheless, according to the 1907 population census, nearly 40 % of the total working population was already employed in the industrial sector. Judging from the incomplete figures available for the previous period, Luxembourg industry employed barely 20 % of the working population in 1870. Coal and coke supplies for the steel industry were facilitated by membership of the Zollverein (customs union), which was also the main outlet for steel products. At the same time, this economic sector underwent a phase of financial and industrial concentration and rationalisation. In 1911, ARBED (Aciéries de Burbach, Eich, Dudelange) resulted from the merger of three medium- sized firms.This company was to become one of Europe’s biggest steel-producers.When it merged with USINOR and ACERALIA in 2001, ARBED helped create the biggest steel group in the world, ARCELOR. Economic growth between 1900 and 1913 was reflected in the population growth rate, which was 1 % a year on average. During this period, the foundations of social security legislation (accident, sickness and pension benefits) were laid.

The 1913-1951 period The 1913-1951 period was affected by the great upheavals caused by two world wars and the Great Depression of the late 1920s and early 1930s. A certain amount of social unrest, which was associated with changing economic and social structures resulting from difficult living conditions, pre- vailed at the end of the First World War and during the immediate post-war period. This situation soon had repercussions in the field of employment legislation. Between 1918 and 1926, there were many social improvements: an eight-hour day in heavy industry, worker representation within firms, unemployment aid, sliding salary scale (i.e. automatic linking of salaries to the cost of living)

8 INTRODUCTION Working population by major economic sector (in %)

1870 1907 1935 1947 1960 1966 1970 1981 1991 2001 0 Agriculture 10 20 30 40 Services 50 60 70 80 Industry 90 100 Source: STATEC population censuses until 1991, Labour Force Survey (LFS) for 2001. N.B. Industry includes Construction for public employees, the creation of professional bodies, regulations relating to the health and safety of workers as well as paid holidays for staff and then labourers. The withdrawal of Luxembourg from the “Zollverein” agreement at the end of the First World War created a need for economic re-orientation. In 1921, the “Belgo-Luxembourg Economic Union” (BLEU) was formed. Many traditional small and medium-sized enterprises that had been geared towards the German market before the war found it very difficult to adapt. Following the withdrawal of German capital, the steelworks were taken over by groups with Franco-Belgian-Luxembourg capital. Despite fiercer competition due to the emergence of new producer countries, the Luxembourg steel industry managed to diversify its outlets, to raise its productivity and to increase its output before the world slump took its toll after 1930. The 1930s were a period of economic stagnation, although a brief upturn in 1937 brought the tonnage of rolled products back up to its 1929 level. During the war years, steel production only exceeded the low 1939 level in one single year (1943). The variations in iron ore production reflected the cycles in steel. After non-stop growth up to 1913, the First World War brought a big drop in mining output.The favourable climate in the steel industry during the latter half of the 1920s and the slump in the 1930s had a direct impact on the volume of ore extracted. Moreover, the general level of output achieved by Luxembourg’s iron mines

Rolled steel products

(in metric tonnes)

1900 145 313 1913 1 115 004 1919 312 271 1929 2 127 282 1939 1 470 190

Source: Federation of Luxembourg Steel Industries

INTRODUCTION 9 just before the First World War was never exceeded later on. Even the huge increase in steel production from 1945 to 1974 didn’t result in a parallel increase in mining output. The Luxembourg ore (minette) was in fact “low” in iron and, even before the First World War, the steel industry was moving over to the “richer” ore from France and - after the Second World War - from Brazil and Sweden as well.The amount of indigenous ore consumed by Luxembourg’s steel industry dropped from 56 % on average during the 1920s to 44 % during the 1930s. From the early 1960s, this percentage shrank significantly, reaching 30 % on average between 1970 and 1974. This situation her- alded a trend that was to lead to the closure of the last iron mine in 1981.

Production of iron ore (in metric tonnes)

8 000 000 7 000 000 6 000 000 5 000 000 4 000 000 3 000 000 2 000 000 1 000 000 0 1870 1875 1880 1885 1890 1895 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980

Sources: Chamber of Commerce, Inspectorate of Labour and Mines, STATEC

As regards the labour market during the interwar period, immigrant labour played a balancing role. In 1922, the proportion of foreigners (around 33 400) in the total population was only 12.8 %, compared with 15.3 % in 1910. As a result of the relatively favourable climate in steel during the latter half of the 1920s prompting a new wave of immigration, the size of the foreign population reached 18.6 % in 1930, before the worldwide depression began. By 1935, the foreign element had receded to its 1922 level, standing at 12.9 % of the total population. As often happens in times of crisis, major social innovations were introduced during the 1930s. For instance, 1936 brought the creation of a Conseil National du Travail (National Labour Council), a conciliatory body responsible for preventing and ironing out social conflicts at work, composed equally of employee and employer representatives. Many collective labour agreements were made within this framework, especially in the steel and mining industries. Over the 1913-1951 period as a whole, the GDP growth rate can be estimated at an annual average of around 1.6 %. Population growth barely reached 0.3 % on average per annum, compared with 1 % between 1900 and 1913. In addition, the State’s role tended to take on increasing importance during the inter-war period. Budgetary expenditure represented 7.8 % of the national revenue in 1913, compared with 16.6 % of this revenue in 1935.

“Les trente glorieuses” Economic reconstruction after the Second World War resulted in an exceptional growth rate of 6.7 % on average during the period 1946-1951. From the early 1950s until 1975 - i.e. until the first oil crisis and the simultaneous steel crisis, average growth returned to a more modest pace of 3.9 %.

10 INTRODUCTION Despite significant fluctuations in added value within the steel industry, this industrial sector largely determined the growth rate for the whole Luxembourg economy during the “trente glorieuses”- the “thirty glorious years”from 1945 to 1974. Raw steel production rose from 2.45 million tonnes in 1950 to 6.45 million tonnes in 1974. During the early 1970s, the steel industry represented some 30 % of the sum total of added values in the Luxembourg economy and more than half the total added value of industry (including construction). The steelworks and iron mines provided work for around 25 000 employees in 1974, i.e. 16 % of the total workforce of the Luxembourg economy. However, from the late 1950s, industrial diversification policies and efforts to promote Luxembourg abroad, especially in the United States, were stepped up. The arrival of Goodyear in 1951 was, as yet, an isolated event, but between 1959 and 1972 around 50 new companies set up factories in the country, including Dupont de Nemours in 1963. The steel industry’s favourable development up to 1974 should not overshadow the growth in the tertiary sector (commerce, hotels and restaurants, public administrations, etc). In 1970, the proportion of the population working in services was 48.6 %, compared with 34.5 % in 1947. Conversely, the proportion working in agriculture was tumbling rapidly, falling from 27 % of the working population in 1947 to 7.5 % in 1970. Reliance on immigrant workers made it possible to meet the general increase in the demand for labour. The foreign element of the total working population - a mere 11.4 % in 1947 - reached 21 % in 1970.

INTRODUCTION 11 Steel production 1890-2001

Millions of tonnes 7 6 5 4 3 2 1 0 1915 1975 1935 1955 1910 1925 1945 1895 1985 1965 1995 1970 1930 1905 1950 1920 1940 1890 1980 1960 1990 1900 2000

Cast iron Steel Rolled products

Source: Federation of Luxembourg Steel Industries

On the social front, progress was particularly pronounced during the years immediately after the Second World War, and from 1965 to 1975. For example, 1944-1945 brought the creation of the Conférence Nationale du Travail (National Labour Conference), replacing the 1936 Conseil National du Travail (National Labour Council) and the Office National de Conciliation (National Conciliation Service). The conference provided a system for arbitration and declaring wage agreements generally binding. In December 1944, the “salaire social minimum” (minimum wage) was introduced. As regards the second period of intense legislative activity in the social field (1965-1975), it is worth highlighting the 1965 law on collective labour agreements which imposed the inclusion of a clause index-linking salaries to the cost of living (sliding scale) and introduced the idea of national representativity. In 1975, the system of automatic and integral indexation was extended to all employees. The working week for labourers was restricted to 44 hours by a law dated December 1970, which also provided for the introduction of a 40-hour week on the 1 January 1975.We should also mention the foundation, in 1966, of the Conseil Économique et Social (Economic and Social Council), a consultative body composed of employee and employer representatives and experts designated by the public authorities.

Technical productivity per worker in the steel industry and iron mines (in t. per annum)

Blast furnaces Steelworks Rolling mills Iron mines

1913 487 … 171 1 263 1929 389 850 250 1 292 1937 713 1 130 307 1 691 1950 737 1 058 283 1 659 1974 1 866 2 221 575 3 409 1990 5 971 3 771 1 088 ** 2001 * 6 041 2 069

Source: Federation of Luxembourg Steel Industries *) During the 1990s, the blast furnaces were replaced by the electrical process **) The last iron mine was closed in 1981

12 INTRODUCTION Finally, attention should be drawn to Luxembourg’s active participation in the process of European integration. Luxembourg was a signatory of the Treaty of Paris founding the European Coal and Steel Community in 1951 and the Treaty of Rome creating the European Economic Community (EEC) in 1957.

The world economic crisis of the 1975-1985 period The world economic crisis of the 1975-1985 period, which was linked to the first and second oil crises, had a powerful impact on the Luxembourg economy. At the same time, the steel industry was facing grave problems resulting, in particular, from worldwide overproduction that put prices under serious pressure. In 1983, raw steel production stood at only 3.2 million tonnes (compared with 6.45 in 1974). So it had slumped back to its 1955 level. In 1985, the steel industry employed around 13 400 workers, i.e. half the number employed in this sector in 1974. Over the 1975-1985 period as a whole, the average annual GDP growth rate was 2.3 %, whereas between 1953 and 1975 the corresponding figure was nearly 4 %. There were social, institutional and economic responses to the crisis. The social response consisted notably of the creation of Travaux Extraordinaires d’Intérêt Général/TEIG (Extraordinary Works of General Interest) in 1975 and the setting up of the Division Anti-Crise/DAC (Anti-Crisis Division)

INTRODUCTION 13 Budgetary expenditure made by the State under the “steel plan” between 1975 and 1987 (cumulative expenditure)

Unit: million euros 1975-1982 1983-1987 1975-1987

A. Investment aid 70.6 63.4 134.0 (Ordinary capital subsidies, extraordinary capital subsidies, special interest rate reductions and other subsidies) B. Financial restructuring - 393.0 393.0 Convertible bond and share subscriptions, acquisition of SIDMAR company shares, special and temporary aid C. Social aid 147.1 307.6 454.7 Extraordinary Works of General Interest (EWGI), professional re-training, re-employment benefits, early retirement, Anti-Crisis Division (ACD), special disability scheme D. Tariff aid 9,6 1.7 11.3

Total 227.3 765.7 993.0

STATEC - STATEC Economic Reports, No. 73, Luxembourg, 1987, page 191

in 1977. At the end of this same year, legislation relating to early retirement, accompanying the reduction of the steel workforce, was passed. It enabled steelworkers to bring forward their retirement date. However, it wasn’t possible to completely stem the rise in unemployment - the number of registered unemployed rose from 23 in 1974 to 3 874 in 1984 - but these measures helped avoid mass lay-offs without compensation. Between 1975 and 1986, around 14 800 workers left the steel industry, and nearly 30 % of them (4 300) benefited from the early retirement scheme. This scheme was extended to all commercial sectors of the economy in 1987. On the institutional front, the creation of the “tripartite” marked these years. Under the law of 26 July 1975, authorising the government to take steps to prevent redundancies for economic reasons and maintain employment, a Comité de Conjoncture (Economic Committee) with a tripartite structure (employers, employees and public authorities) had already been created in 1975. The Committee’s task was to monitor the development of the economic situation and report to the government on a regular basis. As the crisis worsened, a tripartite “steel” conference, which met during the second quarter of 1977, drew up an action plan to maintain economic growth and full employment, resulting in the law of 24 December 1977 that instituted a Comité de Coordination Tripartite (Tripartite Coordination Committee). In March 1979, the Conférence Tripartite Sidérurgie (Tripartite Steel Conference) reached an agreement relating to the restructuring and modernisation of the steel industry. The “tripartite” has become a permanent feature, and currently lies at the heart of what is known as the “Luxembourg social model”,i.e. a system where finding consensual solutions to socio-economic problems has become the norm. On the economic side, the responses came firstly from the steel sector itself. Between 1975 and 1979, investments from steel companies increased and in 1978, for the first time since the 1950s, they exceeded the average for the other European countries. Furthermore, the industrial and financial rationalisation trend (stake acquisitions and mergers), which began in the 1960s, accelerated. By the end of the 1970s, ARBED was the only remaining steel company in Luxembourg.The State’s contribution to handling the crisis involved, firstly, the implementation of social support measures (creation of works of general interest and help with funding the Anti-Crisis Division) but

14 INTRODUCTION Share of the various economic sectors in total added value (in %)

1970 1985 2001

Agriculture 3.8 2.0 0.6

Industry* 53.2 28.1 17.9 Steel 27.9 9.8 1.9 Construction 6.2 4.3 5.9 Other industries 19.1 14.0 10.1

Services 43.0 69.9 81.5 Financial services 4.6 21.6 24.9 Commerce and repairs 10.7 12.2 9.5 Transport and communications 4.9 6.0 10.8 Other services 22.8 30.1 36.3

Source: STATEC * Industry, including energy and construction

also investment aid (ordinary and extraordinary capital subsidies, etc.). The particularly bad climate in the early 1980s led to a cut-back in the investments planned under the tripartite agreement of 1979, and a financial restructuring of this debt-laden sector, coupled with synergy agreements with the Belgian steel industry. The Luxembourg State played a major role in this restructuring, notably through the Société Nationale de Crédit et d’Investissement (National Credit and Investment Company). By the end of the operation, it held 42.9 % of ARBED’s total capital (and 30.9 % of the voting capital). Therefore, it was a remarkable joint effort that ensured the survival of the steel industry, which constituted (and still constitutes) an important strand of Luxembourg’s industrial fabric. Approximately 5 % of average budgetary expenditure for the period 1975-1987 was devoted to saving steel. In addition, the increase in technical productivity of steelworkers (see earlier table) shows that modernisation and rationalisation efforts in this industrial sector have continued in recent years. The “happy” outcome of the 1975-1985 crisis period is also linked to three other factors: - the boom in financial services, which practically coincided with the decline in steel; - the stepping-up of the economic diversification policy; - a pay moderation policy in the early 1980s - resulting in particular in the suspension of the automatic index-linking of salaries in 1982 - which helped to restore the cost-competitiveness of the Luxembourg economy. Finally, it’s worth mentioning the increase in the general government expenditure (central administration, local administrations and social security) that occurred during the 1975-1985 decade. In relation to GDP, this expenditure rose by some 15 points between the early 1970s and the early 1980s.This increase resulted, from rather weak GDP growth rates and, mainly, from the increase in welfare transfers (to households) which rose from just under 14 % of GDP in 1974 to nearly 24 % of GDP in 1981. The social measures accompanying the restructuring of the steel industry obviously contributed to this rise, however, there was a more general improvement in welfare payments and social security benefits.

INTRODUCTION 15 General government expenditure (in % of GDP)

60 % 50 % 40 % 30 % 20 % 10 % 0 % 1971 - 1975 1976 - 1980 1981 - 1985 1986 - 1990 1991 - 1995 1996 - 2000 Source: European Commission, STATEC N.B. Break in the series in 1990. The approximations remain valid.

Recent economic development From the mid-1980s until 2000, the average GDP real growth rate reached a level hitherto unknown in Luxembourg over such a long period (more than 5 %) and far exceeded that of the other European countries, apart from Ireland. This accelerated growth meant an increased reliance on immigrant and cross-border workers. The foreign element of the population, which had been 18 % according to the 1970 census, rose to nearly 37 % in 2001. Luxembourgers accounted for only a 35.5 % share of domestic salaried employment in 2001, while cross-border and resident foreign workers accounted for a 37.5 % and 27 % share respectively. Let’s briefly cite the main factors behind this remarkable development since 1985, namely: - non-stop growth in the financial sector; - the favourable development of different economic sectors, such as business services (whose development has been led partly by financial services), IT services and also transport and communications; - a productive and competitive industrial sector, although its relative share of the sum total of the economy’s added values is decreasing - mechanically - following the remarkable growth in services; - high-level and growth rates of investments; - relatively low salary deductions (income tax, social security contributions) helping keep labour costs at a competitive level; - a global rate of tax and social security deductions and falling public expenditure (in relation to GNP) during the period. Some of these factors are linked. For example, the strong growth, led to a large extent by the financial sector, allows a certain amount of flexibility in fiscal policy which, in turn, enhances the competitiveness of the Luxembourg economy and constitutes a growth factor. The economic swing in 2001 meant a clear decline in GDP growth (by volume) which has dropped from 8.9 % in 2000 to 1 % in 2001, and won’t exceed 1 % in 2002. However, we shouldn’t prejudge the future trend, which depends firstly on a worldwide economic upturn and secondly on the results in the financial sector.

16 INTRODUCTION Average GDP real growth rate 1985-2001 (in %)

7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 IRL L P E US NL UK FIN JP AEU-15 B D F EL I DK S

Source: STATEC, European Commission

INTRODUCTION 17 Luxembourg and neighbouring countries in international indexes

GDP per inhabitant GDP per inhabitant GDP per person in PPS* in PPS * employed in PPS*

Year 2001 2002 2002

Table OCDE EUROSTAT EUROSTAT

Luxembourg 1 1 1 Belgium 11 9 4 Netherlands 6 8 13 Germany 14 12 12 France 17 16 7

No. of countries covered 30 **32 **32

* PPS = Purchasing Power Standard. Calculation of the PPSs makes it possible to eliminate the impact of price level differences between countries. **EU countries + the ten countries in the process of joining + United States, Japan, Norway, Iceland, Bulgaria, Romania,Turkey. N.B. Luxembourg has not been included in the WEF index since 2001.

Luxembourg’s place within international comparison Owing to the growing importance of aspects of national competitiveness within the context of globalisation, the practice of “ranking” or “benchmarking” has become very widespread over the past few years. Luxembourg is included in a certain number of international indexes. In the case of the pure “economic performance”indicators - GDP per inhabitant, apparent working productivity (GDP/job) - Luxembourg is among the leading industrialised countries. The high GDP growth rate between 1985 and 2001 enabled Luxembourg to occupy this place. In competitiveness tables, like those of the IMD and the WEF,account is taken - besides “objective” macroeconomic indicators - of the “subjective” perceptions of economic decision-makers about factors that are thought to determine competitiveness. For instance, the IMD calculates its overall index and establishes the “rankings” using more than 300 criteria, both objective and subjective, relating in particular to the efficiency of public action, the adjustment of infrastructures and policies to economic requirements, etc. In the IMD table for the year 2002, Luxembourg held third place, behind the United States and Finland and ahead of the Netherlands, Singapore, Denmark and Switzerland. There are also some more specific international tables in the economic and social field. The Index of Economic Freedom is a synthetic index compiled by the very liberal Heritage Foundation, based on criteria such as the level of tax and social security deductions, capital flows and foreign direct investment, government intervention in the economy (e.g. collective consumption of public administrations), regulation of the financial sector, government intervention in prices and wages, etc.The authors rely on statistical data but also the assessments of the Economist Intelligence Unit.

18 INTRODUCTION World Growth Index of Corruption Human Competitiveness Competitiveness Economic Perceptions Development Scoreboard Index Freedom Index Index (HDI)

2002 2000 2003 2002 2002

International Institute World Economic The Heritage Transparency UNDP for Management and Forum (WEF) Foundation International Development (IMD)

333716 18 17 19 20 4 441178 15 15 19 18 17 22 22 40 25 12

49 59 156 102 173

Together with New Zealand, Luxembourg occupies third place in the Index of Economic Freedom, behind Hong Kong and Singapore and ahead of the United States, the United Kingdom, etc. An index showing perception of corruption is published annually by the non-governmental organisation Transparency International, whose aim is to fight corruption. The organisation uses information from other publications instead of first-hand information to compile this synthetic index. For Luxembourg, it refers to the answers to questions put to economic decision-makers - under the enquiry led by the IMD - concerning the bribes and corruption existing in the economy. Luxembourg is placed seventh in this index, together with the Netherlands and Canada. Among the European countries, only Sweden, Denmark and Finland have achieved a better score. These synthetic indexes present some reliability problems in that the methodologies are often rather imprecise. Similarly, the selection of indicators and their weightings are frequently arbitrary, and ideological considerations sometimes introduce bias into the ratings. Nevertheless, comparative tables can help reveal certain economic or social weaknesses in a country. The Human Development Index (HDI) is a case in point. Luxembourg’s slide in the HDI, compared with the other indexes that all give it a very favourable position, makes it clear that the situation in the fields of education and public health (life expectancy at birth indicator) can be improved (see also chapter 3.2.). Most of the economic and social themes addressed in this document are treated in a comparative way, which may modify the image of Luxembourg portrayed in the abovementioned international tables.

INTRODUCTION 19 1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY

1.1 Growth

20 1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY 1.1 - Growth 1.1.1. DEVELOPMENT OF GROSS DOMESTIC PRODUCT (GDP)

Growth in GDP in the Luxembourg economy during the second half of the 20th century has been marked by several characteristics: - weaker average growth than in neighbouring countries until the end of the 1960s; - an acceleration in growth since the early 1970s - temporarily interrupted by the 1974/1975 economic crisis - making the annual average growth rate for the years 1985-2001 virtually twice that in neighbouring economies; - the persistence of a high average level of growth that stood at over 5 % for more than 15 years from the mid-1980s, despite the slight downturn in 1992-1996.

GDP real growth rate (five-year averages)

8.0 % 6.0 % 4.0 % 2.0 % 0.0 % -2.0 % -4.0 % 1972 1974 1978 1958 1982 1976 1956 1962 1992 1970 1984 1988 1964 1994 1968 1986 1998 1980 1966 1996 1960 1990 2000 Difference (L - BFD) Growth rate (L) Average rate Belgium, France, Germany (non-weighted average)

Sources : STATEC, European Commission

Lacklustre performance from 1950 to 1970 seemed to be related to the economic structure at the time, which was dominated by the iron and steel industry until the first oil crisis and the simultaneous world crisis in the market for steel. Iron and steel was without doubt the driving force of the Luxembourg economy: in the early 1970s it was responsible for 30 % of the total value added. Meanwhile, this industrial sector was subject to significant fluctuations in demand and prices. Its overall growth performance, bearing its cyclical nature in mind, does not seem to have been sufficient to enable the Luxembourg economy to keep pace with the rate of growth in neighbouring countries.This led to the implementation of an eminently successful industrial diversification policy from the end of the 1950s, as will be seen in section 2.2.2.4. However, the early 1970s was the first period during which the average growth of the Luxembourg economy exceeded that of neighbouring countries. This period was marked by the particularly favourable economic climate for steel.The first oil crisis, followed by the structural crisis in the iron and steel industry and coupled with excess capacity at global level, was to bring the curtain down suddenly on this favourable situation. Since the end of the 1970s, on the other hand, the rapid development of financial services began to stimulate growth in Luxembourg. Details on the development of this sector can be found in section 2.2.2.1. The economic cycle in Luxembourg tends to mirror what happens in other European countries. However, the extent of variations in GDP is more marked, which is characteristic of a small-scale economy that is very open to the exterior and, therefore, more vulnerable to external crises. Consideration of GDP aggregates makes it easier to understand the reasons underlying the exceptional growth of GDP in Luxembourg from the early 1980s.

1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY 21 1.1 - Growth Deviation of the Luxembourg cycle from the European cycle

10.0 % 8.0 % 6.0 % 4.0 % 2.0 % 0.0 % -2.0 % -4.0 % -6.0 % 1972 1974 1978 1982 1976 1962 1992 1970 1984 1988 1964 1994 1968 1986 1998 1980 1966 1996 1960 1990 2002 2000

GDP EU15, deviation from trend GDP Luxembourg, deviation from trend

Sources : STATEC, European Commission

Output In terms of output, GDP mainly consists of gross value added (GVA) and taxes on goods. GVA arises from the production of goods and services, less intermediate consumption, i.e. the value of goods and services used as inputs during production, but excluding fixed assets.Therefore, development of GDP depends on the gross value added produced by the various economic sectors.

Contribution of economic sectors to gross value added 1985-2000 (% of total growth)

1986-1992 1992-1996 1996-2000

Agriculture 1.3 0.4 0.0 Extractive products 0.5 -0.3 0.2 Manufactured products 9.7 11.2 6.2 Electricity, gas and water 1.5 2.3 0.7 Construction 3.2 5.5 4.4 Trade 10.8 -1.0 15.8 Hotel and catering services 1.0 1.3 0.4 Transport and communications 14.4 32.9 17.5 Financial services 26.5 15.6 26.1 Real estate services, rental and business services 11.0 14.4 15.5 General government services 4.3 3.0 3.0 Education 4.0 2.9 2.3 Health and social services 7.5 14.2 3.1 Other collective, social and personal services -0.1 -2.3 1.1 Domestic services 0.0 0.1 0.1

Source : STATEC

22 1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY 1.1 - Growth It is undeniable that since the end of the 1970s the Luxembourg economy has relied on the dynamic and buoyant financial services sector. Statistics on the contribution of the various economic sectors to GDP growth, however, suggest a less clear-cut situation. The impact on growth of at least six sectors during the years 1985-2000 should be noted, particularly financial services, transport and communications, real estate services, leasing and business services, health and social services and manufacturing industry. This impact is confirmed by data for 1992-1996, a period marked by an economic downturn in Luxembourg in line with trends in the world economy. The average rate of growth for 1992-1996 was 2.7 % in Luxembourg compared to 7.3 % for 1985-1991.The contribution of financial services to growth fell from an average of 26.5 % to 15.6 %, while transport and communications, real estate, rental and business services and health and social services increased considerably, driving growth upwards. In addition, throughout the period as a whole the contribution of industry was considerable. Besides financial services, other economic sectors participated in the strong growth of the Luxembourg economy.

Expenditure GDP aggregates in terms of expenditure are generally made up of final household consumption expenditure, final government consumption, gross fixed capital formation and the export-import balance. The degree of openness of the Luxembourg economy is reflected in the relationship between exports and imports and GDP. In 2001, exports from and imports to Luxembourg represented around 150 % and 130 % of GDP respectively. In the European Union, the value of exports and imports stands at 36 % and 35 % of GDP respectively on average. Meanwhile, the corresponding figures for Ireland, another very open country, are 94 % for exports and around 80 % for imports. The positive export-import balance was a result of favourable development in trade in goods and services. In 1985, this balance represented a 4.1 % share in GDP, compared to 1 % in the Fifteen. Since the end of the Second World War, Luxembourg has always had a surplus current account

GDP agregates in 1985 GDP agregates in 2001

100 % 100 % 90 % 90 % 80 % 80 % 70 % 70 % 60 % 60 % 50 % 50 % 40 % 40 % 30 % 30 % 20 % 20 % 10 % 10 % 0 % 0 % -10 % -10 % JP JP US US EU 15 EU 15 France France Belgium Belgium Germany Germany Netherlands Netherlands Luxembourg Luxembourg Final household consumption Final government consumption Gross fixed capital formation Export-import balance

Sources : STATEC, European Commission

1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY 23 1.1 - Growth balance. Until the 1970s,exports of goods,particularly iron and steel and other industrial products, accounted for this surplus.With the emergence of the services economy, the accompanying fall in the weight of industry in the economy and the rapid growth in financial activities, the structure of trade changed. The balance of trade in goods (commercial balance) went into the red, while services produced an increasing surplus. In 2001, the share in GDP of the export-import balance amounted to almost 18 %. Reflecting Luxembourg’s economic structure, financial services came at the forefront of total exports of goods and services. These services represented around 37 % of exports on average during the years 1995-2001. However, other products and services continue to contribute to this current account surplus, such as metal products, transport, communications services, etc. (see section 2.3). Meanwhile, the development of the balance of payments and the share of the export-import balance in GDP have shown signs of the economic slowdown since 2001. The export-import balance represented 23 % of GDP in 2000, but fell to 18 % in 2001.

24 1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY 1.1 - Growth Development of main GDP aggregates (in % of GDP)

60 % 50 % 40 % 30 % 20 % 10 % 0 % 1991 1987 1985 1997 1993 1995 1989 2001 1999 Final household consumption expenditure Final government consumption Gross capital formation Export-import balance

Source : STATEC

As far as the other GDP aggregates are concerned - in terms of expenditure - it should be noted that the share of gross fixed capital formation remained high and even increased from 1985 to 1990, a sign that investment increased at the same (high) rate as GDP.Similarly, the share of final consumption by general government remained virtually constant. On the other hand, even if final household consumption increased in absolute terms - the respective rate of growth amounting to an average of 3.6 % per annum during the period 1985-2001 - its contribution to GDP fell, because the other GDP aggregates grew at a higher rate.

Current balance of payments millions of EUR 6 000 4 000 2 000 0 -2 000 -4 000 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Balance of services and revenues Trade balance Current balance

Source : STATEC

1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY 25 1.1 - Growth 1.1.2. A MEDIUM-TERM PERSPECTIVE ON THE 2001/2002 ECONOMIC DOWNTURN

Most economies in the world experienced exceptionally high growth during the second half of the 1990s. The rate of growth of the United States, for example, averaged around 4 % per annum between 1996 and 2000, while the corresponding rate in Europe was 2.7 %. This growth produced a fall in unemployment, which went from 10.5 % in the Fifteen in 1994 to 7.4 % in 2001. In the United States, unemployment began to fall in 1992. In 2000, it stood at 4 %, compared to 7.5 % in 1992, a development that was set against a globally non-inflationary backdrop. Apart from 1995, the rate of growth of consumer prices never exceeded 2.5 % during the second half of the 1990s, either in the United States or in the Fifteen as a whole. Luxembourg accompanied this trend, though with a characteristic arising out of the country’s openness and exposure to external crises, i.e., greater variations in value added. The average rate of growth of GDP was 6.8 % per annum from 1995 to 2000. This rapid growth was largely but not exclusively favoured by strong expansion in the financial sector.Value added in this sector actually increased at virtually the same rate as in the economy as a whole (+6.6 %). Three other sectors enjoyed greater than average expansion during this period: “trade and repairs”, “transport and communications” and “health services”. From 2001, the Luxembourg economy followed the global slowdown in economic activity. There was nothing out of the ordinary in this development, which was similar during the slow growth phase during the early 1990s. This time, however, the Luxembourg economy was marked by rates of expansion that were at the lower end of the scale of European countries, while from 1992 to 1996 the rate of economic expansion in Luxembourg was still double that of Europe. During the period 2001-2005 - based on provisional figures - growth in Luxembourg will be virtually identical to that in the rest of Europe. At the beginning of the 1990s, the financial sector, but also transport and communications, business services and industry, continued to drive growth forward. In 2001, real value added in the financial sector fell and growth rates in the other economic sectors, which remained positive,

Development of the gross value added at constant prices (annual variation in %)

15.0 13.0 11.0 9.0 7.0 5.0 3.0 1.0 0 -1.0 -3.0 -5.0 1995 1996 1997 1998 1999 2000 2001

Financial services TOTAL Industry Other services (except financial services, government and education)

Source : STATEC

26 1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY 1.1 - Growth GDP real growth rate in Luxembourg

10.0 % 8.0 % 2001-2005: 2.0% 1992-1996: 2.7% (forecasts for 6.0 % 1997-2000: 7.4% 2002-2005) 4.0 % 2.0 % 1985-1991: 7.3% 0.0 % 1991 1987 1997 1993 1995 1992 1988 1994 1986 1989 1998 2001 1996 1999 1990 2003 2005 2002 2004 2000

Source : STATEC were unable to offset the decline in GVA in financial services. Banks and other financial institutions reacted to lower incomes (due to the fall in stock markets) by cutting expenditure (on personnel, overheads and investment), thus acting as a brake on other domestic sectors that are commercially dependent on them. The downturn in activity is reflected in a delayed yet significant deterioration in the labour market, which expanded until the end of 2002; unemployment in parallel rose heavily by over 20 % in terms of the total number of job seekers. Luxembourg was apparently unable to avoid the upward trend in structural unemployment: even if unemployment falls in a period of strong economic growth it no longer reaches the lowest level prevailing before the period of expansion (see section 2.1 for the development of unemployment).

1.1.3. “WEALTH” PER CAPITA

The absolute level of GDP and GDP per capita are often considered indicators of the “wealth” of a country and its inhabitants. If the comparison is to be relevant, however, differences in price levels and consumption habits between countries must obviously be taken into account, adjusting them by purchasing power parities (PPP). GDP per capita is then expressed as the “purchasing power standard” (PPS). For Luxembourg, the non-resident cross-border labour force - which represents over one-third of the jobs in the Luxembourg economy - contributes to the formation of value added and earns wages and salaries, but is not taken into account in the denominator of the ratio of GDP per capita. It is therefore better to base comparisons on “Gross National Income” (GNI), which accounts for flows of factors between Luxembourg and the exterior (particularly the “exported” wages and salaries of cross-border workers). Since 1960, Luxembourg has been among the best performing countries in terms of GNI per capita (expressed in PPS).With 1 329 PPS, the Grand Duchy is exceeded only by the United States (1 509 PPS) and Switzerland (1 579 PPS). It was only from the early 1980s, however, that Luxembourg forged ahead of the other industrialised countries and the differential widened. In 2001, GNI per capita in Luxembourg was around 34 000 PPS, compared to 29 000 for the United States, which was in second position on this scale. However, neither the ratios of GDP per capita nor GNI per capita take account of the structure of GDP, which can be characterised by different share weights, according to the different countries, of gross fixed capital formation, final government consumption and final household consumption. Comparison of the level of final household consumption or effective individual consumption (in PPS) per country - relatively lower in Luxembourg in comparison with other European countries (as a % of GDP) - may give a more realistic view of a population’s standard of living. This indicator

1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY 27 1.1 - Growth Gross national income per capita 1980 (in PPS)

10 000 8 000 6 000 4 000 2 000 0 US L CH CAN D S F DK NL B ANO I JP UK FINE IRL P

Gross national income per capita 2001 (in PPS)

35 000 30 000 25 000 20 000 15 000 10 000 5 000 0 LUSNOCANCH DK NL AUK B IRL F I D JP SFIN E P

Source : European Commission D = Germany before unification in 1980, Germany unified in 2001

is useful for comparing differentials in wealth in terms of the purchasing power of residents of different countries, but it does not account for income reinvested, which contributes to future wealth. The use of this method (level of consumption per capita) leads to the conclusion that, while the purchasing power of Luxembourg residents exceeded the average purchasing power of the European Union by more than 42 % in 2001, the differential in relation to countries such as Austria, the United Kingdom, Norway, Switzerland, Denmark and Germany was much lower than would be suggested by considering GDP per capita alone (resp. GNI/inhabitant). Furthermore, a country’s production of wealth may also be understood by means of the ratios of GDP/employment or GDP/hour worked, which are basic measures of an economy’s productivity. In 1999, GDP per hour worked in Luxembourg was 142.1, based on index of 100 for the European Union as a whole. This index was 124.4 in Denmark and 117.4 in Belgium. Therefore, the measurement of a country’s “wealth” largely depends on the methods of measurement used. In addition, for Luxembourg - a country of the size of a region in large countries - the “regional centre” aspect also plays a role. A comparison with other regions may provide useful additional information. The graph showing GDP per region shows the “richest” regions, the poorest regions of the EU, and the regions neighbouring Luxembourg. While Luxembourg is among the regions with the highest GDP per capita, it loses first place (which it occupied in the comparison between countries) to Inner London and Brussels, and is only

28 1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY 1.1 - Growth GDP per capita and consumption per capita in 2001 (index 100 for the European Union)

GDP per capita Effective individual Price level index consumption* index

in current in purchasing in current in purchasing in current in purchasing euros power standard (PPS) euros power standard (PPS) euros power standard (PPS)

Belgium 106 108 103 103 98 99 Denmark 144 116 132 105 124 126 Germany 108 103 108 105 105 103 Greece 51 64 54 69 80 78 Spain 70 84 67 83 83 81 France 104 103 101 102 101 99 Ireland 127 117 100 91 109 110 Italy 90 102 91 100 88 91 Luxembourg 206 188 154 142 110 108 Netherlands 115 115 100 104 100 96 Austria 112 111 109 109 101 100 Portugal 53 71 54 72 74 75 Finland 113 104 101 88 108 115 Sweden 118 102 112 93 116 120 United Kingdom 116 103 128 112 113 114 Total 100 100 100 100 100 100 Norway 179 143 145 108 125 134 Switzerland 163 117 157 108 139 145

Source: EUROSTAT. N.B.: provisional results for 2001. *Effective individual consumption = final consumption expenditure of households and non-profit institutions serving households (NPISH) + goods and services for individual consumption supplied by the government free of charge and at reduced prices, such as education and health.

1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY 29 1.1 - Growth GDP per hour worked in 1999 (EU-15 average = 100)

150 100 50 0 LDKB FNL D S AIRL I UK EU-15 FIN E EL P

Source: EUROSTAT, INSEE calculations (Economie et statistique, No. 354, 2002)

slightly higher than Hamburg. It should also be pointed out in this context that GDP per capita in the regions neighbouring Luxembourg (Lorraine, Province of Belgian Luxembourg, Trier, Sarre) is, to varying degrees, below the average GDP per capita in the European Union, and that the differential in relation to Luxembourg is a result of this. Within the Grande Région (Saarland, Lorraine and Luxembourg), Luxembourg is a dynamic entity comparable to other regional centres or agglomerations in Europe, but obviously with the distinctive feature of a sovereign country that conducts its own economic, financial and social policy. GDP per capita is only an accounting and partial view of the welfare of a country’s or region’s inhabitants. Therefore, international and scientific organisations have tried to use development indicators that take social, health, educational and environmental aspects into account. The most famous of these indicators is the “human development index” (HDI), published annually since

Share of the population (%) according to the level of disposable income (1996)

according to original income (before social transfers)

< 60 % 60-100 % 100-140 % 140 % and +

Belgium 28 31 24 17 Denmark 30 33 25 12 Germany 23 32 25 20 Greece 23 29 22 27 Spain 26 28 19 26 France 27 29 23 21 Ireland 33 23 16 28 Italy 21 31 21 27 Luxembourg 24 31 21 23 Netherlands 24 34 20 22 Austria 24 36 23 18 Portugal 27 27 19 27 United Kingdom 32 23 18 27 EU 13 26 29 22 23

Source: Eurostat. N.B.:The “low incomes” or “monetary poverty” threshold is set at 60 % of the national median total income.

30 1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY 1.1 - Growth GDP (in PPS) per capita in 2000 (EU-15 = 100)

Inner London (UK) 241 Brussels Capital (B) 218 Luxembourg (L) 195 Hamburg (D) 182 Île de France (F) 158 EU 15 100 Saarland (D) 97 Trier (D) 85 Lorraine (F) 83 Province de Luxembourg (B) 76 Extremadura (E) 53 Açores (P) 52 Dytiki Ellada (EL) 51 Réunion (F) 50 Ipeiros (EL) 47

0 100 200 300

Source : EUROSTAT

according to total income (after social transfers – excluding pensions)

< 60 % 60-100 % 100-140 % 140 % and +

17 33 28 22 11 39 33 17 16 34 27 23 21 29 22 28 18 31 21 29 16 34 27 23 18 32 19 31 19 31 22 28 12 37 24 26 12 38 25 25 13 37 27 23 22 28 21 29 19 31 21 29 17 33 24 26

For each country, people are divided into four groups, first according to their original equivalised income and then according to their total equivalised income (after transfers): less than 60 % of the national median total income (poverty threshold); from 60 to less tha n 100 % of this median; from 100 to less than 140 % of this median; 140 % and more of this median. For the two distributions (original income and total income), the median used is that relating to the distribution of total income.

1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY 31 1.1 - Growth 1990 by the United Nations Development Programme (UNDP).This is a summary indicator established on the basis of partial indicators relating to health (indicator: life expectancy at birth), education (indicator: gross rate of schooling, literacy rate) and economic performance (GDP per capita). Luxembourg was only in sixteenth place in the HDI classification for 2002. This is due, on the one hand, to the level of life expectancy at birth (taken as an indicator of public health), which is 77.4 years in Luxembourg compared to 81.0 in Japan, 79.7 in Sweden and 78.5 in Norway, for example. It is due, on the other hand, to a methodological problem concerning the rate of schooling, which for Luxembourg does not take into consideration Luxembourg students attending foreign universities because of the lack of complete university courses in Luxembourg. Therefore, the HDI can be criticized from a methodological point of view, particularly as regards the weighting of indicators and the choice of variables, though it does have the virtue of broadening the outlook on well-being beyond economic performance alone in terms of GDP per capita (see section 3.2 for details on the human development index). Interest has recently focused on income distribution and the poverty rate as indicators of social progress and development.The table showing the division of the population according to income level contains the most recent comparative figures available in this area (1996). It should be noted that, since the structure of incomes changes very slowly, the 1996 figures reflect the current situation rather accurately. With 61 % of the population living on an income after social transfers amounting to between 60 % and 140 % of the median income, Luxembourg is among the countries - like France (also 61 % of the population living on an income falling within this range), Germany (61 %), the Netherlands (63 %) or Belgium (61 %) - in which the “average”social strata are the most numerous.The percentage of the population of Luxembourg living on incomes below the monetary poverty threshold (60 % of the national median income) is one of the lowest in Europe. However, the use of incomes before transfers provides a view that is far less clear, and Luxembourg would tend to be around the middle of the list of European countries.What is more, the rather strong dispersal of gross monthly wages and salaries paid in Luxembourg (see section 3.1) confirms that incomes before transfers are not distributed more equally than in most European countries. The impact of social transfers determines the relatively egalitarian structure of incomes, and the weak share of low incomes in Luxembourg.

1.1.4. PRICES, WAGES AND SALARIES

In the long term, consumer price or wage inflation in Luxembourg is no different from that in its principal trading partners (Belgium, France, Germany and the Netherlands), which is hardly surprising, since inflation in Luxembourg is largely “imported”. This parallel is due to the small size and high degree of openness of the Luxembourg economy. In overall terms, inflation in Luxembourg and its main trading partners has been determined by the same phenomena, as can be seen in the graphs showing the development of inflation and labour costs. The very low inflation from 1985 followed a decade (1975-1985) of very high inflation that sometimes exceeded 10 %. Inflation in Europe and in Luxembourg itself has been marked by the following events over the past 30 years: - the 1974 and 1979 oil crises; - the rise in the US dollar between 1980 and 1985; - the oil counter-crisis in 1986-1987; - overheating in Germany in 1991/1992 due to reunification;

32 1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY 1.1 - Growth - the tying of the Luxembourg franc/Belgian franc to the Deutschmark since the end of the 1980s; - the introduction of the single currency in 1999; - a surge in oil prices in 1999/2000, which caused a rise in consumer prices in Europe as a whole. Over recent years, Luxembourg has been marked by slightly higher consumer price and wage inflation than its principal trading partners, apart from the Netherlands. This differential may be due to the swifter transmission of external crises because of the automatic indexing system, a mechanism which ensures that pay is automatically adjusted to the cost of living index.

Inflation rate (consumer price)

18 % 13 % 8 % 3 % -2 % 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

Luxembourg France Germany EU15 Belgium

Sources : European Commission, STATEC

Rate of development of average labour costs

25 % 20 % 15 % 10 % 5 % 0 % 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

Luxembourg France Germany EU15 Belgium

Sources : European Commission, STATEC

1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY 33 1.1 - Growth 1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY

1.2 Factors of growth and competitiveness

34 1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY 1.2 - Factors of growth and competitiveness Productivity, competitiveness and prosperity: a conceptual framework

An economy’s total output depends on available resources (natural resources, production structure, labour, accumulation of physical capital, accumulation of human capital) and the productivity with which these resources are brought together to produce goods and services, measured by GDP, resp. national income. Productivity is the measure of the efficiency with which human and physical capital and other resources are combined in economic activities.

This is merely an “accounting” framework of analysis, however, which does not take account of other aspects that underlie economic development, such as geographical situation, integration (e.g. international trade), institutions and the broader social context. The geographical situation relates to the advantages and disadvantages arising out of the physical location of a country (climate, proximity of waterways, other transport infrastructure, etc.), while integration relates to the benefits (or costs) of participating in international trade in goods, services, capital and labour. Within this context, the question of competitiveness arises from economic integration. For D. RODRIK, geography, integration and institutions are the deep determinants of economic development, while capital, labour and productivity are classified as proximate causes of growth. Furthermore, adapting the institutional determinants of development to cyclical factors is a rather slow and difficult process, hence the interest in paying them a great deal of attention rather than overlooking them.

Productivity, competitiveness and prosperity are closely related but not interchangeable concepts. The notion of “productivity” applies mainly to businesses and labour, while “competitiveness” is linked more to “markets”. Productivity is clearly a central aspect of competitiveness in that it helps to determine - besides the development of the nominal wage and the exchange rate - relative production costs in relation to competitors. The link, however, is neither automatic nor exclusive. Competitiveness is also connected to the presence of businesses in markets (commercial promotion, for example), the attractiveness of the country (foreign investment), the production structure (adaptation of production to international demand), and finally the institutional and social framework. All the evidence suggests that causal relations are not a one-way process. Growth makes it easier to set up “quality” institutions (efficiency and lack of corruption) and a competitive fiscal policy.The existence of the inverse causal relationship, however, cannot really be challenged.

The notion of “prosperity”concerns society as a whole and can be analysed through the increase in real income (by adjusting earnings to growth in productivity, for example), equity, citizens’ participation, and environmental protection, indicators which are currently often brought together under the broad theme of “sustainable development”.

Therefore, growth and competitiveness depend on the availability of resources (production structure, capital and labour) and their allocation (productivity) as well as on contextual factors (geography, institutions and social context).

1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY 35 1.2 - Factors of growth and competitiveness 1.2.1. THE AVAILABILITY AND EFFICIENCY OF RESOURCE ALLOCATION

1.2.1.1. Production structure: the predominant sector Historically, the growth of the Luxembourg economy has been connected to a natural resource, i.e. iron ore, which provided the foundation for the rapid development of the iron and steel industry. Since the beginning of industrialisation, Luxembourg’s production structure has been marked by a constant factor - the domination of one economic sector: iron and steel until 1974, and financial services from the early 1980s.

Share in the total value added of Employment in the steel industry the Luxembourg economy (in %) and financial services

Steel industry Financial services Steel industry Financial services

Source : STATEC

On the one hand, this apparent domination by a particular economic sector is the result of the small size of the country, which means that the impact of a (competitive) sector that is experien- cing strong growth is particularly visible in terms of the global economy and in some measure conceals the development of other (albeit) dynamic sectors. However, the graph also reflects the fact that it is (or was) a case of buoyant sectors adapted to international demand. During the “thirty glorious years”following the Second World War, the iron and steel industry flourished, thanks to adjustments in the production structure and innovations (LD-AC process, continuous casting). Financial globalisation provided the Luxembourg financial market with the framework for expansion that was evidently due to the favourable and flexible legal context, but also to the adaptation of financial products offered on an expanding global financial market. The induced (or indirect) economic effects of the financial sector are also important. Many economic activities, such as computer services, real estate and construction or cleaning services, security and surveillance, are closely linked to the development of financial services. Details on the weight of the financial sector in the Luxembourg economy can be found in section 2.2.2.1. The impact of the financial sector is not restricted to economic output per se.The “Comité pour le Développement de la Place Financiaire” (Financial Market Development Committee) estimates that over 40 % of State budget revenue is directly attributable to financial services.This tax contribution is crucial to the health of Luxembourg’s public finances, which are notably characterised by insignificant debt in comparison to GDP, but also by the implementation of a competitive fiscal policy. Tax and social security contributions - particularly welfare charges - are low compared to neighbouring countries, which makes it possible to keep labour costs competitive and attractive (see section 1.2.2.2.).

36 1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY 1.2 - Factors of growth and competitiveness 1.2.1.2. Physical capital: sustained investment Capital accumulation is one of the foundations of an economy’s power and strength. Growth in the stock of capital per worker helps determine the productivity of labour. The technical progress that generally accompanies new investment has a direct influence on the performance of an economy, measured by multifactorial productivity. From 1985 to 2001, Luxembourg experienced exceptional growth in investment (an average of over 8 % per annum) and GDP.Investment must also have had to rise at the same rate as GDP - and even at a slightly higher rate - for the share of gross fixed capital formation (GFCF) to reach the level it did during the years 1996-2001, i.e. close to 23 % of GDP.The level of investment (share in GDP) during the period 1985-2001 was one of the highest in Europe. In general the average rate of growth of GFCF and the level of GFCF (percentage of GFCF in GDP) has been relatively stable in Luxembourg since 1960. The period 1981-1985 was a negative exception that was rapidly forgotten because of the significant growth in investment from 1985 to 1990, though this was not the only possible scenario. Investment in other countries such as Ireland, Finland or Sweden, for example, experienced much more erratic development than in Luxembourg from 1985 to 2001. In other countries (France, Belgium and Germany), investment growth rates were much weaker over the same period. From 1960 to 2001 as a whole, particularly 1985 to 2001, investment in the Luxembourg economy seemed to have been sufficiently sustained to renew and expand productive capacity satisfactorily. This is also a sign that investors have confidence in the competitiveness of the location of production units and services in Luxembourg.

Gross fixed capital formation. Annual average growth rate 1985-2001 (in %)

10.0

5.0

0.0 L P IRL E US B EL UK DK NL F AEU-15 JP I D S FIN

Gross fixed capital formation. Share in GDP from 1985 to 2001 (annual average in %)

0 JP P AE L NL D FIN EL EU-15 B F DK I IRL S US UK

Source : European Commission, STATEC N.B: From 1991 with the new Länder

1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY 37 1.2 - Factors of growth and competitiveness 1.2.1.3. Labour and demography: the essential contribution of foreign labour Growth in the Luxembourg economy over the past 15 years is reflected in the growth of employment. During the ten years 1991-2001, the average employment growth rate in Luxembourg was 3.6 % per annum, compared to 0.5 % in Belgium, 0.5 % in France, 1.9 % in the Netherlands and 0.4 % in the Fifteen during the same period. Only Ireland, which, unlike Luxembourg, is in a stage of cat- ching up, recorded comparable figures. It should be noted that in terms of employment the economic downturn from 2001 in Luxembourg was only felt with a time lag of one year. The employment growth rate was still 5.6 % in 2001, and stood at the same level as in 2000. STATEC forecasts a 3.2 % growth in employment for 2002 and 1.4 % for 2003.

Total employment (annual average variation in %)

Moyenne B DK *D F IRL L NL EU-15

1961-1970 0.5 1.1 0.2 0.6 0.0 0.6 1.9 0.3 1971-1980 0.2 0.3 0.2 0.5 0.9 1.2 0.7 0.3 1981-1990 0.1 0.3 0.5 0.3 -0.2 1.7 1.1 0.5 1991-2001 0.5 0.5 0.3 0.7 3.8 3.6 1.9 0.4

Source: European Commission; *D = excluding new Länder before 1990, including new Länder from 1991

The demand for labour brought about by economic growth, particularly in the predominant sectors such as iron and steel and subsequently financial and other services, could only be met by using foreign labour (immigrants and cross-border workers). The number of jobs occupied by Luxembourg nationals remained virtually constant from 1980 (just over 100 000 wage earners and self-employed workers), while the number of cross-border workers rose from 3 700 in 1961 to 17 000 in 1985, followed by a spectacular rise to over 100 000 in 2001. At the start of 2002, cross- border workers occupied over 37 % of paid jobs in Luxembourg. These developments are also explained by the unemployment differential between neighbouring regions and Luxembourg (see section 2.1) and the attractive wages and salaries paid in the country. The number of foreign workers living and employed in Luxembourg, which stood at 17 000 in 1960, rose to 38 000 in 1985 and to more than 70 000 in 2001. Cross-border workers and immigrants as a whole represent the majority in total employment in the Luxembourg economy. At present, around 35 % of wage earners employed in Luxembourg are natives of the country, compared to 70 % in 1970. This foreign labour (immigrants and cross-border workers) has in addition always acted as a regu- lator in the economic history of Luxembourg. This characteristic has made it easier for employment to adjust rapidly during downswings in the economy, while making it possible to offset the risks of social tension that might accompany waves of layoffs. Comparison of net annual immigration rates (inflows-outflows/average population) and the rate of growth of GDP in volume (brought forward one year) shows a clear correlation between the two curves.This one-year carrying forward in GDP is justified by the delayed reaction of migration flows to economic development. The “valve” functioned perfectly during the crises of the mid- 1960s and from 1974 to 1983 (iron and steel crisis).

38 1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY 1.2 - Factors of growth and competitiveness Cross-border workers Saar - Lor - Lux - Rheinland-Pfalz - Wallonie in 2001

100

150 Wallonie

27 000 14 000 Rheinland-Pfalz

300 120

Lux. 3 100 12 600 3 000 30 21 200 130 200 Saar 52 000 25 900

120 80 1 000 2 200 Lorraine

1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY 39 1.2 - Factors of growth and competitiveness GDP fluctuations and net immigration rate

in %

15 10 5 0

-5 1960 1965 1970 1975 1980 1985 1990 1995 2000

GDP_1 variation rate Net immigration rate

Source: STATEC. N.B.:The GDP series is carried forward by one year.

Recourse to immigrant and cross-border labour goes hand-in-hand with a certain segmentation of the labour market. Nationals have been able to focus partly on the protected sector, i.e., general government, railways and the para-public sector (energy, water and national health). Almost 40 % of the working population with Luxembourg nationality works in the public and para-public administration, 90 % of which is “reserved”for Luxembourg nationals. Luxembourgers are virtually absent in certain economic sectors: they occupy only 15 % of all paid jobs in the construction sector, for example, while the proportion employed in hotels, restaurants, cafés and catering is little more than 10 %.

40 1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY 1.2 - Factors of growth and competitiveness Weight of cross-border workers, Luxembourg nationals and foreign residents by sectors (March 2002)

Hotels, restaurants, cafés and catering Construction Real estate, business services Other services Financial services Agriculture, viticulture, forestry Trade Industry Transport and communications Health and social services Power and water General government and education

0 % 20 % 40 % 60 % 80 % 100 %

Cross-border workersLuxembourgers Foreigners resident in Luxembourg

Source : Inspection générale de la sécurité sociale

There is some “specialisation” by nationality and country of residence. By way of example, a high proportion of Portuguese nationals resident in Luxembourg work in the construction sector, while Germans who live in the country work mostly in financial and business services. The share of cross-border workers is highest in business services, industry, financial services, trade and construction. Therefore, immigrants and cross-border labour contribute not only the necessary “quantity” of labour, but also help adjust the structure of qualifications to the needs of the economy.

Social security expenditure 1980-1999 (in % of GDP)

35 30 25 20 15 10 5 0 IRL P EL IFINBNLDKDF

1980 1999

Source : EUROSTAT

1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY 41 1.2 - Factors of growth and competitiveness Dependency rate and public expenditure on pensions

Dependency rate of the elderly (%) Public expenditure on pensions Population over 65 years of age / Population from (including most replacement income granted to 15 to 64 years of age people of 55 years of age and above),% of GDP

2000 2020 2000 2020

B 26 33 B 10.0 11.4 DK 22 32 DK 10.5 13.8 D 24 34 D 11.8 12.6 EL 26 33 EL 12.6 15.4 E2531E9.49.9 F 24 33 F 12.1 15.0 IRL 17 22 IRL 4.6 6.7 I 27 37 I 13.8 14.8 L 21 28 L 7.4 8.2 NL 20 30 NL 7.9 11.1 A 23 32 A 14.5 16.0 P 23 29 P 9.8 13.1 FIN 22 36 FIN 11.3 12.9 S 27 35 S 9.0 10.7 UK 24 29 UK 5.5 4.9 EU-15 24 32 EU 10.4 11.5

Source : EUROSTAT Source: Economic Policy Committee (EU)

The central position of immigration in the Luxembourg economy is not only apparent in the labour market. The characteristics of this relatively young immigrant population - whose fertility rate actually exceeds that of nationals - make the dependency rate lower than in most other European countries, even in the medium term (i.e. up to 2020).The general fertility rate from 1979 to 1981 was 64 per thousand for the foreign population compared with 47 per thousand for the national population. During the late 1990s, the rates began to converge when the national population increased (from 1996 to 1998, the fertility rate of the foreign population was 62 per thousand, compared with 58 per thousand for the national population). During the late 1990s and early 2000s, the weight of social security benefits in GDP in Luxembourg was weaker than in 1980, contrary to most other European countries. Clearly, this was partly due to the mechanical effect of the significant growth in GDP,though the development of the population structure was also a factor. According to an analysis conducted by the EU Economic Policy Committee Working Party on ageing, public expenditure on pensions (in relation to GDP) in Luxembourg in 2000 was at the lower end of the scale of European countries. Only Ireland (whose population structure is even more favourable than Luxembourg’s) and Great Britain (whose pension system is based more closely on the second and third pillars, i.e. additional insurance and private insurance), performed better. Furthermore, the increase in this expenditure is much less sensitive in Luxembourg than in neighbouring countries, though these scenarios must obviously be viewed with caution. On the one hand, pension systems and the means of funding them (e.g. contributory base, second and third

42 1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY 1.2 - Factors of growth and competitiveness pillars etc.) may be subject to significant structural changes. On the other hand, the underlying assumptions of projections - rate of growth of GDP, net immigration rates and fertility - may not be borne out. Projections for Luxembourg are based on an average growth rate of 4 % per annum in GDP, a 2.1 % growth in the productivity of labour and, by correlation, a substantial increase in employment, i.e. a continuous influx of cross-border workers and immigrants. This is plainly an optimistic view. A 4 % average growth rate would be close to the exceptional rates achieved from 1985 to 2000, and would be much higher than the average for the EU as a whole (1.6 % growth in GDP for the period 2000-2050, according to Economic Policy Committee forecasts). Nevertheless, Luxembourg’s situation in terms of pension funding appears more favourable than in many other countries. Development in the short and medium term would make it possible to limit expenditure on pensions to a competitive level, while simultaneously guaranteeing a certain flexibility in budget policy, and maintenance of competitive tax and social security contributions in particular (see section 1.2.2.2.). Like other European countries, however, Luxembourg cannot avoid discussion of the structural reform of pension systems. This discussion will be even more urgent if an upturn in growth is not in the offing. The economic downswing of 2001/2002 clearly shows that Luxembourg is not immune to such developments.

1.2.1.4. Productivity and labour costs The development of productivity is generally associated to the rate at which labour is replaced by capital. Growth in employment and growth in productivity are often considered contradictory, though this does not appear to be the case in Luxembourg, where growth in employment and growth in productivity went hand in hand from 1980 to 2000. Productivity in the Luxembourg economy seems to follow fluctuations and trends in value added, and the sustained rate of growth in productivity means that growth in real wages and salaries does not undermine competitiveness.

Development of the average real labour costs and GDP per employed person in Luxembourg (1961-2001) en % 15 10 5 0 -5 -10 1971 1981 1961 1977 1991 1973 1975 1987 1983 1985 1967 1979 1997 1963 1993 1965 1995 1989 2001 1969 1999 Trend in work productivity Trend in the salary variation per employed (GDP at 1995 prices per employed person) person in real terms, GDP deflator, whole economy Annual variation in work productivity Annual variation in salary per employed (GDP at 1995 prices person in real terms, GDP deflator, per employed person) whole economy

Source : STATEC

1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY 43 1.2 - Factors of growth and competitiveness As far as long-term development is concerned, GDP per person employed (a measurement of the apparent productivity of labour) tends to develop in cycles and was characterised by a downward trend from 1974 to 1981, consistent growth from 1982/1983 to 1990, and another downward trend from 1991. It should be noted, however, that the level of productivity in Luxembourg, in terms of GDP per person employed, compared favourably with that in most European and neighbouring countries in the 1990s. Only Ireland, which experienced a veritable economic boom during the 1990s, stood well ahead of Luxembourg and the rest of Europe.

Variation rate of GDP per employed person, of average real labour costs and of real unit labour costs from 1991 to 2000 (annual average variation in %)

3.5 2.5 1.5 0.5 - 0.5 BDKD F IRLNLL - 1.5 - 2.5

GDP per employed person Average labour costs (GDP deflator) Real unit labour costs Source : STATEC, Commission européenne

In terms of wages and salaries, there was an upswing in the mid-1970s in parallel with the economic crisis and a resulting fall in productivity, leading to an increase in real unit labour costs. The increase in labour costs was due in particular to a pay settlement giving rise to a very significant general increase in earnings in the iron and steel industry as the crisis broke. Adjusting to the crisis involved significant “pay restraint”, reflected in a downward trend in real average labour costs (= average nominal labour costs: price of GDP). In 1982, the automatic mechanism for adjusting wages and salaries to the cost of living (the sliding scale) was also temporarily suspended. This adjustment seems to have helped re-establish the competitiveness of the Luxembourg economy by enabling it to consolidate its position in the European markets on which it largely depended. The full sliding-scale mechanism was reintroduced in stages in 1984 and 1986. From the mid- 1980s, wages and salaries tended to develop in line with productivity, even if progress in real average labour costs slightly exceeded productivity from 1985 to 1990. During the 1990s, on the other hand, the average rate of growth of labour costs fell in relation to productivity, a sign of some

Unit labour costs and productivity in the economy as a whole (growth rate in %)

1985-1990 1990-1995 1995-2000 2001 2002

Productivity 4.6 2.1 1.8 -3.3 -2.0 Average labour costs (real) 5.9 0.5 1.0 0.2 2.1 Real unit labour costs 1.3 -1.5 -0.7 3.6 4.1 Share of wages and salaries in value added (in %) 50.4 52.6 47.9 50.5 52.6

Source: STATEC N.B.: Forecasts for 2002 Productivity = Gross value added by volume (GVA): employment Real average labour costs = (wage bill: paid employment): price of GVA Real unit labour costs = real average labour costs: productivity

44 1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY 1.2 - Factors of growth and competitiveness wage restraint. This situation was also illustrated by the decrease in the share of wages and salaries in value added, which fell from an average of 52.6 % from 1990 to 1995 to 47.9 % from 1995 to 2000. The Luxembourg economy avoided the upward pressure on wages and salaries that may have occurred in response to the small size of its labour market by exploiting the labour market in the Grande Région and even beyond. The development of real unit labour costs is the most reliable way of assessing whether the country’s competitiveness, in terms of labour costs, is improving or deteriorating. At the same time, this indicator accounts for the prices of products sold (and the economic structure underlying price levels) and productivity. As in other areas, the effects of the 2001/2002 economic downturn were significant. The negative variation in productivity had a direct impact on the upward trend in real unit labour costs. In coming years, the competitiveness of the Luxembourg economy will depend on the economic upswing and the speed at which wages and salaries adjust to productivity, and also on the speed and effectiveness of this adjustment in competing economies.

Total factor productivity

The results of the development of the apparent productivity of labour in the economy as a whole have been submitted. A similar analysis will be conducted for economic sectors (see section 2). The variation in the apparent productivity of labour is defined by the relationship between value added (expressed in volume or at constant prices) and employment (number of people), and describes the efficiency of the production process by measuring the (physical) units produced by the worker. The same notion can be applied to the apparent productivity of capital (value added: stock of capital).

Another notion of productivity relates to the actual efficiency of the production process and to inherent organisational aspects that cannot be measured by the apparent productivity of labour (or capital). This is referred to as “total factor productivity”. By default, it also includes any improvement in physical or human capital not measured elsewhere.

Total factor productivity can be measured by more or less sophisticated methods. The simplest approach has been adopted, based on a Cobb-Douglas production function at constant yields: 1-α α Yt = At*Kt * Lt

where Yt = gross value added in volume in the year t At = level of total factor productivity in the year t Kt = stock of capital in the year t (net, at constant prices) Lt = employment in the year t α = share of wages and salaries (relationship between total wage bill and gross nominal value added)

A logarithmic decomposition and rearrangement of the terms gives: α α dlog(At) = dlog(Yt)-(1- )*dlog(Kt)- *dlog(Lt). This equation enables the development of total factor productivity to be calculated. Since economic variations are likely to upset major trends over the short term, the series concerned should be observed only over the long term.

1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY 45 1.2 - Factors of growth and competitiveness 1985-2002 dlog(Yt) α (1-α)*dlog(Kt) α*dlog(Lt) dlog(At) (value added) (share of (stock of capital) (employment) (total wages and factor salaries) productivity)

% development 5.4 0.50 2.2 1.7 1.4

Between 1985 and 2002, total factor productivity increased at an average of 1.4 % per annum. This figure is quite close to that observed for other European countries.

Total factor productivity (1985 = 100)

140 130 120 110 100 1985 1987 1989 1991 1993 1995 1997 1999 2001

Source : STATEC

It should be noted that in 2001 and 2002 total factor productivity witnessed a relatively significant fall in Luxembourg. This situation was due to a sharp slowdown in economic growth to which factors of production have not yet been adjusted.

46 1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY 1.2 - Factors of growth and competitiveness Intra-EU exports of goods as % of total exports in 2000

90 80 70 60 50 40 30 20 10 0 LPNL B E DK EU-15 IRL AF UK S FIN I

Source : European Commission

1.2.2. CONTEXTUAL FACTORS

1.2.2.1. Economic integration As Luxembourg is a very small landlocked country, it has sought to become part of larger economic organisations since its independence in 1839: the “Zollverein” until 1918, the Belgo- Luxembourg Economic Union in 1921 and the Benelux after the Second World War. Luxembourg was also a co-founder of the ECSC (1951) and one of the six signatory countries of the Treaty of Rome (1957), and has not become a seat of the European Community by chance. Furthermore, the Luxembourg population is well aware of the importance to the country of European economic integration, at least if credence is given to the public opinion poll published regularly in the Eurobarometer. According to the spring 2002 poll, over 80 % of Luxembourgers consider EU membership a “good thing”, while only 53 % of the population of the EU as a whole holds this opinion. Since 1980, support for EU membership has never fallen below 70 % in Luxembourg. Compared to other European countries, Luxembourg is also the most heavily dependent on intra- European trade. Almost 84 % of Luxembourg exports remained within the Fifteen, compared to 62.3 % for Europe as a whole. Similarly, 83 % of Luxembourg imports come from other European countries, compared to 59 % for the Union as a whole.

1.2.2.2. The role of public authorities In general, the public authorities have three major categories of measures for implementing economic policy: sectoral policies, “horizontal” policies and fiscal policy (with its corollary, public expenditure), which may simultaneously involve aspects of a sectoral and horizontal nature. Sectoral policies that allow the public authorities to have a direct influence on the production structure include economic diversification policy (framework law on economic expansion, Socié- té nationale de crédit et d’investissement), research and development and innovation policy, the e-Luxembourg initiative (dissemination of new communication technologies), the law on e-commerce, the 2000-2006 rural development plan, the action plan for SMEs launched in 2001, the

1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY 47 1.2 - Factors of growth and competitiveness audiovisual production policy (the 1988 law creating a temporary fiscal system based on audiovisual investment certificates and creation of the Fonds national de soutien à la production audio- visuelle (National audiovisual production support fond) in 1990), etc. In the financial sector, the transposition in 1988 of the December 1985 European Directive on UCITS (undertakings for collective investment in transferable securities) decisively stimulated the cross-border marketing of investment funds. More recently, the public authorities have remained active. In December 2002, Luxembourg was the first State to transpose two new European directives, dating from January 2002, fostering the cross-border marketing of undertakings for collective investment (UCI) by broadening the range of assets in which they could invest. In the area of financial services, reference must also be made to the implementation of the 1999 law on pension funds. The results of sectoral policies in certain areas,such as industrial diversification,are also appreciable (see section 2.2). In other areas, such as research and development and innovation, initiatives are still too fresh for their effects to be assessed. “Horizontal”policies mean those that go beyond the sectoral dimension (specific sector or area of action) and which define the general framework of economic development. In 1999, a national sustainable development plan was adopted by the Conseil de gouvernement. Similarly, the law of 21 May 1999 on regional development planning (which replaces the law of 20 March 1974) and the new regional development programme are significant benchmarks. These regulations establish new planning instruments that promote a regional approach (regional and sectoral development plans and land use plans) and adhere to the concept of sustainable development. It should also be pointed out that the public authorities now attach increasing importance to cross-border cooperation within the framework of the Grande Région. Among the policies that define the general framework of economic development, the introduction of public infrastructure is also important. In the area of road infrastructure, Luxembourg’s adhesion to the international road network has been a priority since the 1970s. More generally, Luxembourg’s rate of public investment (gross fixed capital formation by general government) compared with GDP is the highest in the Fifteen. All these economic policy initiatives form part of a development marked by liberalisation within the context of the globalisation of the economy, and by the increasing influence of Community policies over national policies (e.g. stability pact and common agricultural policy). In the area of the liberalisation of telecommunications, energy distribution and rail transport - promised since the early 1990s at Community level - the two trends also overlap. Public finances (taxation and expenditure) are clearly still the most important and perhaps most effective tool available to the public authorities in the field of economic and social policy. Fiscal policy currently stands in an area of tension between vague desires for tax harmonisation at Community level and tax competition between States that try to promote the competitiveness of their economies by fiscal measures.

Road network 1970-2002

Year 1970 1980 1990 2002

km State road network 2 831 2 871 2 775 2 875 National routes 865 868 869 837 Motorways 7 44 78 126 Other roads 1 959 1 959 1 828 1 891

Source: Administration des ponts et chaussées N.B.: Does not include by-roads

48 1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY 1.2 - Factors of growth and competitiveness General government expenditure (in % of GDP) General government revenue (in % of GDP)

65 65 60 60 55 55 50 50 45 45 40 40 35 35 30 30 1991 1991 1997 1997 1993 1993 1995 1995 1992 1992 1994 1994 1998 1998 2001 2001 1996 1999 1996 1999 1990 1990 2002 2002 2000 2000

BDFNLLUS JP DK FIN

Source : European Commission. N.B.: forecasts for 2002

The relative importance of total general government expenditure in Luxembourg (central and local government and social security) is at the lower end of the scale of European countries. Such expenditure amounted to 40.4 % of GDP in 2001, compared to an average of 47.1 % in the Fifteen. It is nevertheless higher than in the United States (32.3 % of GDP in 2001), the United Kingdom (40.3 % of GDP in 2001) and Japan, even if the percentage in the latter is close to that in Luxembourg. Overall, the weight of public expenditure (% of GDP) tended to fall in virtually all European countries from 1992/1993 to 2000. This was a combined effect of the constraints of convergence criteria and the stability pact, the significant growth in GDP in many European countries, particularly Luxembourg, in the second half of the 1990s, and “fiscal competition” between countries. While general government expenditure in Luxembourg fell from over 45 % of GDP in 1996 to 40.4 % of GDP in 2001, the economic downturn in 2001/2002 had a mechanical effect on the increase in the weight of public expenditure in GDP, though this was the case for most of the industrialised countries. As far as the structure of expenditure is concerned, the table showing general government expenditure in 2001 clearly summarises the striking aspects: 1. The share of general government collective consumption expenditure is relatively weak, which is symptomatic of a State apparatus which is not oversized, at least if GDP is taken as the basis for comparison. This is also confirmed by another indicator: the weight of the earnings of general government employees in GDP. In 2001, this corresponded to 8.3 % of GDP in Luxembourg, compared to an average of 10.3 % in the countries of the Fifteen as a whole. Clearly, these percentages do not give an indication of the level of earnings of general government employees with respect to purchasing power, but reflect solely the weight in GDP of expenditure on wages and salaries. 2. Public investment (gross fixed capital formation), also generally considered as favourable to growth, is high: 4.4 % of GDP in Luxembourg in 2001 compared with an average of 2.3 % in the European Union. Since the mid-1970s, moreover, this investment has always been at the top end of the scale of European countries. 3. Social transfers in kind and other than in kind are below the European average when their level in relation to GDP is considered (25.2 % of GDP compared with 28.4 % in EU 15). This is partly connected to the fact that strong growth in the economy has kept unemployment relatively low

1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY 49 1.2 - Factors of growth and competitiveness Structure of general government expenditure in 2001 (% of GDP)

Collective Social Social Gross fixed consumption transfers Other transfers capital Interest Subsidies Total of general other than expenditure in kind formation government in kind

DK 7.8 17.7 17.0 1.7 4.1 2.0 3.6 53.9 F 9.1 14.2 17.9 3.3 3.2 1.2 3.8 52.7 B 7.9 13.8 15.5 1.5 6.6 1.6 2.5 49.4 D 7.9 11.1 18.9 1.7 3.3 1.6 3.8 48.3 EU-15 8.0 12.2 16.2 2.3 3.6 1.3 3.5 47.1 NL 10.9 12.3 11.6 3.4 3.5 1.5 3.2 46.4 L 7.0 10.3 14.9 4.4 0.3 1.7 1.8 40.4 Source : European Commission

and guaranteed rather high incomes for people with a job, and also to the relatively favourable population structure,i.e.,a lower dependency rate than in most other European countries (see section 1.2.1.3).This does not prevent the weight of social transfers in kind and other than in kind as a whole representing over 60 % of total general government expenditure in Luxembourg. 4. General government expenditure on interest in Luxembourg is very weak in relation to GDP. This is because the Luxembourg public authorities were able to avoid indebtedness during the 1974-1983 crisis, thanks in particular to the rapid growth in financial services that helped boost public revenue. Much of the differential in favour of Luxembourg in relation to general government expenditure is due to this fact. In 2001, Luxembourg’s public debt represented only 5.7 % of GDP,compared with an average of 63.0 % of GDP in the Fifteen. The level of tax and social security contributions is also very favourable in Luxembourg, even if the differential in relation to neighbouring countries is smaller than for expenditure: total general government revenue amounted to 46.5 % of GDP in Luxembourg in 2001, compared with 49.8 % in Belgium, 51.3 % in France, 46.5 % in the Netherlands and 45.5 % in Germany.In the United States, Japan and the United Kingdom the level of contributions is lower, while in Scandinavia overall fiscal pressure is much higher. In 2001, total general government revenue amounted to 62.3 % of GDP in Sweden, 57 % in Denmark and 54.1 % in Finland. The principal difference in Luxembourg compared with most industrialised countries arises from the positive differential between revenue and expenditure. Over the past ten years, the surplus in public finances has risen, particularly during the years of high growth between 1997 and 2000. The net financing capacity of general government (including social security) increased from 2.7 % of GDP in 1995 to 5.8 % in 2000. In 2001, the financing capacity of general government fell to 5.2 % of GDP, notably following the implementation of the first stage of tax reform. The economic downturn means that the public net financing capacity will tend towards zero in 2002.

General government consolidated gross debt in 2001 (% of GDP)

B DK D F L NL EU-15

108.6 44.7 59.5 57.3 5.7 52.8 63.0

Source : European Commission , STATEC

50 1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY 1.2 - Factors of growth and competitiveness Compensation of employees, general government, in 2001 (in % of GDP)

20.0

15.0

10.0

5.0

0.0 DK S P F FIN B EL I E EU-15 ANL IRL L D UK

Gross fixed capital formation of general government in 2001 (in % of GDP)

5.0 4.0 3.0 2.0 1.0 0.0 L IRL P EL NL F E S FIN I EU-15 DK D B AUK

General government expenditure on interest in 2001 (in % of GDP)

7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 B EL I DK EU-15 S NL AD F E P FIN UK IRL L

Social transfers in kind and other than in kind in 2001 (in % of GDP)

35 30 25 20 15 10 5 0 DK S F AFIN D B EU-15 I UK L P NL EL E IRL

Source : European Commission, STATEC

1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY 51 1.2 - Factors of growth and competitiveness Reserves, which amounted to almost 11 % of GDP in 2000, were built up in prosperous years. Social security, furthermore, particularly pension insurance, also profited from this development.The level of the reserves of the pension insurance scheme went from 2.19 of total annual provisions in 1985 to 3.04 in 2001.

The 2001/2002 tax reform, which was decided before the economic crisis took effect in 2001, takes account of the increase in the differential between expenditure and revenue since 1996/1997 and is a response to the tax reforms introduced in other European countries. This reform affects the taxation of both individuals and companies. By way of example, the maximum marginal rate of taxation of natural persons (maximum fiscal pressure) fell from 46 % in 2000 to 38 % in 2002, one of the lowest rates in Europe as a whole.The nominal tax burden of companies fell from 37.45 % in 2001 to 30.38 % in 2002, due to a reduction in the tax on local authority revenue, rates of local commercial tax and the rate of deduction of tax on the return on capital in particular. The level of general government revenue is only one aspect of the question. The structure of tax and social security contributions is at least as important,an area in which Luxembourg enjoys specific advantages that are very favourable to its competitiveness. A preliminary analysis of the revenue structure shows that the share of received social contributions is lower than in neighbouring countries and in the Fifteen as a whole.This aspect obviously has a positive effect on indirect labour costs. It should be noted, however, that a corollary of the fall in the share of received social security contributions in general government revenue is increasing “taxation” of the revenue of social security schemes. The share of public contributions to social security current revenue went from 38.6 % in 1985 to 45.3 % in 2001. In addition, public contributions to social security are higher in

Structure of general goverment current revenue in 2001

D F NL B EU-15 L

0% 20% 40% 60% 80% 100%

Social security contributions received Taxes linked to imports and production Current taxes on income and wealth Other current revenue Source : European Commission

Public debt and reserves 1995-2001*

Debt ( consolidated between sectors)

Total Central government Local government Total as % of GDP

million euro in % 1995 875.4 478.7 396.8 6.6 2000 1 161.2 713.1 448.1 5.7 2001 1 201.6 720.8 480.9 5.7

Sources:Trésorerie de l’Etat, Inspection générale des finances, STATEC. N.B: *Excluding social security; … = data not available

52 1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY 1.2 - Factors of growth and competitiveness Luxembourg than in neighbouring countries.This increase by the State is mainly advantageous to companies, whose share of contributions in revenue is falling (from 19.1 % in 1985 to 17.9 % in 2001). The extent of the public contribution is even more striking when the basis for comparison is the State budget.This contribution, including the scheme for civil servants, amounted to almost 56 % of total ordinary budget expenditure. A comparison at European level of the structure of hourly labour costs in industry clearly shows the competitiveness of the level of indirect labour costs (consisting mainly of social contributions payable by employers) in Luxembourg.

Reserves

Total Budget reserve Special funds reserve Total as % of GDP

million euro in % 594.9 128.9 466.0 4.5 2 211.2 503.2 1 708.0 10.8 … … … ...

1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY 53 1.2 - Factors of growth and competitiveness Structure of social security revenue (as % of total)

1985 2001

Contributions, including 54.9 49.9 - wage earners and self-employed 20.1 22.5 - companies 19.1 17.9 - general government 3.4 2.7 Public contributions 38.6 45.3 Return on capital and others 6.5 4.8

Total 100.0 100.0

Source : Inspection générale de la sécurité sociale

Division of social security revenue in 1999

100 % 80 % 60 % 40 % 20 % 0 % L EU-15 D F B NL

Public contributions Employers' contributions Household contributions Other revenue

Source : EUROSTAT

Besides employers’ social security contributions, the two other deductions that determine labour costs are direct taxes on wages and salaries and social security contributions payable by employees. The analysis of aggregates of general government revenue does not provide a satis- factory response in terms of the general rate of taxation of paid employment. “Current taxes on income and wealth”are in fact determined as much by the rate of taxation as by the extent of the wage bill, which in Luxembourg has undergone exceptional growth parallel to that of employment. Direct taxes on company revenue are also included in this aggregate. However, the notion of “implicit tax rate on labour” can be used to assess the overall taxation of paid employment. Deductions from paid employment that define the “implicit tax rate on labour” include social security contributions payable by employers and wage earners, and taxes on wages and salaries. These deductions are often considered to discourage wage earners from working more, or to discourage the unemployed from accepting a regular contract of employment. More generally, the “implicit tax rate on labour” affects labour costs and may have an impact on the cost-competitiveness of an economy. In the area of the structure of tax and social security contributions, Luxembourg seems to have followed a special route. In the 1970s, the increase in tax pressure due to rising public expenditure was mostly passed on to the taxation on labour. This development changed radically from the end of the 1970s.The taxation on employed labour stabilised in Luxembourg, while in many other European countries the upward trend continued. Only a few countries, such as the Netherlands

54 1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY 1.2 - Factors of growth and competitiveness Hourly labour costs in industry in 1999 Structure of labour costs in industry in 1999 (in euros) (in % of total cost) 30 100 % 25 80 % 20 60 % 15 10 40 % 5 20 % 0 0 % I I L L F F S S E E P P B B A A D D EL EL NL NL IRL IRL DK DK UK UK FIN FIN

Direct cost Indirect cost Direct cost Indirect cost

Source: EUROSTAT. N.B.: Direct cost = direct earnings (wages and salaries, bonuses), earnings for days not worked and benefits in kind; indirect cost = mainly social contributions payable by the employer, and vocational training expenditure. and Ireland, adopted similar measures to Luxembourg in the early 1980s. In Luxembourg, the average personnal income tax rate (ratio of personal income taxes paid by individuals/total of gross wages and salaries), rose from 7.2 % in 1970 to 16.7 % in 1977 and remained at roughly this level until 1994 (16.3 %). During the second half of the 1990s, Luxembourg, like most other European countries, began to cut taxation on labour, following the recommendations of many economists and international organisations. The average personal income tax rate in Luxembourg was 12.0 % in 2001, compared with 15.9 % in the Fifteen. It should be pointed out that in Luxembourg the corollary of this policy of containing the “implicit tax rate on labour” involves growth in the “implicit tax rate on consumption” (VAT, excise duties, etc.), defined by the ratio “taxes on consumption/value of consumption after taxation”. On the one hand, this development was due to the policy of harmonising VAT at Community level at the end of the 1980s, but also seems to be the result of an option in favour of stabilising deductions from wages and salaries, and labour costs, which is reflected in the development of the “implicit tax rate on labour” in Luxembourg.

Implicit tax rate on employed labour (in %) Implicit tax rate on consumption (in %)

50 30 45 25 40

35 20 30 25 15 20 10 15 10 5 1991 1991 1973 1973 1985 1985 1982 1982 1976 1979 1976 1979 1997 1997 1970 1970 1988 1988 1994 1994 2000 2000 BDF IRLL NL US EU-15

Source: Carlos Martinez-Mongay - ECFIN’s effective tax rates. Properties and comparisons with other tax indicators, European Commission, Economic Papers, No. 146 N.B: Implicit tax rate on labour = social security contributions of employers and wage earners + other non wage labour costs + personal taxes on wages and salaries/total pretax labour income ; Implicit tax rate on consumption = taxes on consumption/value of private consumption in the economic area after taxation.

1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY 55 1.2 - Factors of growth and competitiveness The lowering of deductions from wages and salaries does not only have an effect on labour costs. The fact that cuts in gross wages and salaries are less significant than in most other European countries reinforces the attractiveness of net wages and salaries (see sections 3.1 and 3.3 for the general structure of deductions from wages and salaries).

1.2.2.3. The social context Among the factors that determine the growth and competitiveness of the Luxembourg economy, the social context in which it develops seems to have a rather positive effect. The “social peace” that marks social relations in Luxembourg is an initial characteristic that is difficult to dispute. Obviously, GDP per capita growth, which is among the highest in the world, largely explains the limited number of open social conflicts. It has created the “wealth” of Luxembourg’s inhabitants and entails a very low rate of unemployment compared with the rest of Europe.The radicalisation of social demands is therefore the exception.The rate of unemployment in Luxembourg averaged 2.6 % from 1996 to 2001, compared with 9.4 % in the Fifteen. Two other characteristics are related to this trend in social relations: the relatively equal division of incomes after social transfers (see section 1.1.3.) and the role of the “safety valve” played by foreign labour during economic downturns, making it possible to avoid social conflicts (cf. section 1.2.1.3.). Even if the number of fixed-term contracts has increased considerably in Luxembourg, rising from 3.3 % of all contracts of employment in 1990 to 5.8 % in 2001, contracts of indefinite duration continue to be the rule. The percentage of fixed-term contracts is lower than in most other

56 1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY 1.2 - Factors of growth and competitiveness Average unemployment rate 1996-2001 (in %)

20.0 15.0 10.0 5.0 0.0 E FIN I F EL EU-15 D B S IRL UK DK P ANL L

Source : European Commission

European countries and in the Fifteen as a whole (13.4 % fixed-term contracts). These figures reflect the formal aspect of labour relations in Luxembourg and give an initial indication of the stability of employment. An ILO study relating to the end of the 1990s confirms the persistence of “lasting employment” in Luxembourg. Generally, countries with a low percentage of workers who have given less than one year’s service also tend to have a significant percentage of workers who have given many years’ service (over 10 years). Luxembourg falls within this group, which also includes Japan, Italy, Greece and Belgium. The other end of the scale includes the United States, the United Kingdom and Denmark. Within the context of the globalisation and liberalisation of the economy, the persistence of forms of lasting employment is often considered unfavourable to labour market flexibility and growth. However, the stability of labour relations also helps maintain a largely peaceful social environment, which is clearly attractive to investors. Finally, part-time work is less common in Luxembourg than in most other European countries. In 2001, the proportion of part-time work was 10.3 % in Luxembourg, but 17.9 % in the Fifteen. This situation is not positive in itself. A labour market in which part-time work is underdeveloped may exclude certain categories of people, such as those bringing up children. The low frequency of

Part-time and full-time workers Fixed-term and indefinite contracts in 2001 (% of total employment) in 2001 (% of total employment)

EL IRL E L I UK L A P B FIN DK F I IRL D A EL EU-15 EU-15 B S DK NL D F S FIN UK P NL E 0 % 20 % 40 % 60 % 80 % 100 % 0 % 20 % 40 % 60 % 80 % 100 % Part-time workers Fixed-term contracts Full-time workers Indefinite contracts

Source : EUROSTAT

1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY 57 1.2 - Factors of growth and competitiveness Division of jobs by length of service at the end of the 1990s (in %) 55 EL 50 I S B F 45 L JP P FIN 40 D E IRL 35 NL UK DK

Over 10 years Over 30 25 US 20 5.0 10.0 15.0 20.0 25.0 30.0 Less than one year

Source: AUER P., CAZES S. – “L’emploi durable persiste dans les pays industrialisés”, in: Revue Internationale du Travail, vol. 139, No. 4, 2000. N.B.: Figures relate to 1998.

part-time work is more indicative of the persistence of traditional forms of labour relations (piece- work and stability of labour relations) and social relations in Luxembourg. Clearly, the favourable objective data on unemployment, social relations and the standard of living do not have the positive impact referred to above if the population’s subjective judgment of their material situation is negative. Comparison of European data on the percentage of the popu-

Objective poverty and subjective poverty

Risk-of-poverty Subjective poverty indicator indicator

% of households living on incomes below % of people who consider 60 % of the national median income (1999) themselves poor (2001)*

Belgium 16 32 Denmark 9 9 Germany 16 14 Greece 22 54 Spain 19 34 France 18 30 Irland 17 24 Italy 20 41 Luxembourg 12 8 Netherlands 12 18 Austria 13 16 Portugal 20 66 Finland 8 30 Sweden 10 20 United Kingdom 21 27

Source: EUROSTAT and EUROBAROMETER , 56.1 (October 2002). * People who consider their net income below what they consider essential to have a decent standard of living

58 1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY 1.2 - Factors of growth and competitiveness lation living below the monetary poverty threshold, which is 60 % of the national median income, and the percentage of people who consider themselves poor and claim that they do not have the necessary income to enjoy a decent standard of living clearly shows that the subjective judgment and the objective material situation may well differ. The risk-of-poverty indicator, which shows the percentage of people living below the threshold of 60 % of the national median income, does not indicate differences in the standard of living in absolute terms between countries, given that this threshold is higher in a rich country (such as Luxembourg) than in a poor country. It does, however, provide an indication of the “relative” risk of poverty in a country, a risk that is smaller in Luxembourg than in most other European countries. Comparison with the subjective poverty indicator provides additional information. Together with Denmark, Germany, Austria, the Netherlands and Ireland, Luxembourg is one of the countries in which subjective judgment and objective data are very close. The Luxembourg “social model” also falls within an institutional framework marked by specific features, just three aspects of which are outlined below: - the automatic indexation of wages and salaries and certain social benefits to the cost of living. At present, the sliding-scale system applied in Luxembourg provides for wages and salaries and social benefits to be adjusted when overall inflation amounts to 2.5 percentage points of the cost of living index. The system was initially applied to the wages of civil servants and railway employees from 1921. From 1965, it was mandatory for collective agreements to include a sliding- scale clause and the system was generalised in 1975. Since the 1960s, the sliding scale has been regularly criticised for the harmful effect it has on inflation and labour costs. Even if this were true, this measure should be judged by offsetting the assumed negative consequences and the positive social effects. Automatic indexation eliminates a potential stumbling block in collective

1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY 59 1.2 - Factors of growth and competitiveness bargaining between management and labour. Moreover, the government can also suspend the sliding-scale mechanism, which it did in 1982 following the second oil crisis when the economic downswing hit the country hard. At the end of the crisis, the indexation mechanism was gradually re-established in 1984 and 1986. - introduction of the minimum guaranteed income (MGI) in 1986. The MGI is an additional benefit awarded, under certain conditions, up to the limit of a threshold of resources determined according to the composition of the domestic household, irrespective of the causes leading to the difficulty. The number of households benefiting from the MGI rose from 2 675 in 1986 to 5 853 in 2002. - tripartite consultation. Tripartite consultation, which brings together representatives of employers, labour and the public authorities, was created in response to the iron and steel crisis. The law of 24 December 1977 institutionalised a “Tripartite Coordination Committee”that was to be convened if the economic and social situation deteriorated. In 1979, the “Tripartite Iron and Steel Conference” reached a first agreement, which was amended in 1981, on restructuring and modernising the iron and steel industry. Over the years, sectoral tripartite agreements were negotiated. The tripartite system rapidly developed from an effective crisis management tool into a consultation mechanism that systematically seeks consensual solutions for economic and social problems that do not necessarily constitute a crisis. Delimiting and defining the areas of competence of other consultative bodies such as the “Economic and Social Council” (set up in 1966) clearly creates problems. More basically, coordination of the political decision-making process in Luxembourg, which is often “short-circuited” by decisions taken within the tripartite system, has changed.This form of tripartite consultation is not restricted to Luxembourg. In Ireland and the Netherlands, for instance, comparable models were set up during the 1980s. One of the specific features of Luxembourg in this area appears to lie in the socio-cultural framework, which is characterised by its simple way of establishing contacts between political, trade union and management decision-makers due to the country’s small size.

1.2.2.4. Growth, competitiveness and prosperity: a “virtuous spiral” The Luxembourg “social model” often boils down to its purely institutional dimension, i.e., tripartite consultation, though the model actually involves economic, institutional, cultural and social aspects. Neoclassical economic theories generally see growth as a function of the stock of capital, of “labour” and of the level of knowledge. New theories of endogenous growth highlight the role of the public authorities in relation to factors of supply such as investment in human capital and infrastructure, and industrial and research and development policy. More recently the emerging notion of “social capital”,a concept whose foundations are yet to be consolidated, has been focusing on the positive effects of social cohesion and shared “standards” and “values” on economic performance. In Luxembourg, economic growth driven partly but not exclusively by the financial sector has made it possible to release the necessary fiscal resources to enable an effective social security policy to be adopted without putting pressure on public finances. Indebtedness has been avoided and the overall level of tax and social security contributions kept below that in most other European countries. Deductions have also been structured so that the taxation on labour is limited, which has a favourable impact on labour costs, and therefore on the competitiveness of businesses and the country’s attractiveness to investors and on the net gains of wage earners. Taxation is just one aspect of public intervention. Currently, economic diversification policies, research and development as well as innovation and investment in infrastructure are also key dimensions of public policies.

60 1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY 1.2 - Factors of growth and competitiveness Growth in the economy is reflected in increases in wages and salaries and in the standard of living, which is currently one of the highest in the world. This standard of living, low unemployment and the significance and effectiveness of social transfers in turn form the basis for relatively harmonious social relations that are expressed in social consultation within the tripartite system. If the “social peace” and social cohesion that characterise Luxembourg are not the cause of its economic growth, they are nevertheless aspects that contribute to its attractiveness and, according to the recent theory of “social capital”, to the economy’s performance. Moreover, if the country’s small size and the economy’s degree of openness involve risks linked to exposure to external crises, these characteristics also have positive potential. Proximity makes it possible to shorten decision-making chains. Furthermore, since economic integration in larger economic spaces is a constant factor in Luxembourg’s economic history, adaptation to globalisation could be less problematic than in other countries, where the degree of openness has not been as high. From the mid-1980s until 2000, all the abovementioned aspects meshed positively, contributing to the development of a “virtuous spiral”. The 2001/2002 economic downturn will put the structure of this “spiral” to the test. In 2002, collective dismissals were carried out in certain economic sectors. In addition, company decisions are taken increasingly often outside Luxembourg within the context of the globalisation of the economy. Social partners and the public authorities will have to address issues such as the flexibilisation of the labour market, labour costs, reform of the pension system by apportionment, etc. The years to come will challenge the reliability of the Luxembourg social model.

The virtuous spiral of the Luxembourg economy towards the end of the 20th century

Adaptation of attractiveness, incl. New businesses - national and cross-border infrastructure - legal framework - institutions Social peace - training and research Increase in standard - ...... of living

Competitive Attractive wages social contributions and salaries

Funding capacity

Budget surplus Growth Competitive businesses

1 - RECENT DEVELOPMENTS IN THE LUXEMBOURG ECONOMY 61 1.2 - Factors of growth and competitiveness 2 - ECONOMIC STRUCTURES

2.1 Residential population, working population and employment

62 2 - ECONOMIC STRUCTURES 2.1 - Residential population, working population and employment Sustained demographic growth Whereas the number of inhabitants in the Grand Duchy was less than 340 000 in the 1970 population census, the 450 000 mark will be exceeded during the first half of the present decade. So in 30 years, the residential population has grown by some 100 000. A comparison with neighbouring and nearby countries shows that this demographic growth is rather unusual, and that during the nineties in particular Luxembourg stood out from the rest. The increase of 30 % was distinctly higher than that recorded in Belgium, the FRG (before reunification) or Austria. In France and Switzerland, the increase was only half as much and, among all the countries considered, only the Netherlands comes anywhere close.

Demographic growth in selected countries (1970 = 100.0)

Year Luxembourg Belgium France Germany Netherlands Switzerland Austria

1970 100.0 100.0 100.0 100.0 100.0 100.0 100.0 1980 107.4 102.0 106.3 100.4 108.7 102.2 101.2 1990 112.1 103.0 112.0 102.4 114.9 108.2 103.1 2000 130.4 106.2 116.8 109.4 123.4 116.8 108.9

Source : EUROSTAT

The salient feature of demographic growth in Luxembourg is the dominant role played by immigration. Nationals themselves saw their numbers stagnating, and without naturalisations and “options” they would even have fallen. Between 1970 and 2001, the records show 114 877 native deaths against 90 995 births, leaving a natural negative balance of 23 882. This deficit was more than offset by foreign residents taking up Luxembourg nationality. However, it should be noted that this “integration” trend remained modest, considering the big increase in the stock of foreign population eligible to acquire Luxembourg nationality. Going back to the 1950s, we find that the curve showing rates of increase in the population closely follows the one showing the net rate of immigration. Luxembourg’s demographic development is influenced by migratory movements that are much larger than natural movements (births and

Rate of population increase: total, natural, net immigration (in ‰)

18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 -2.00 -4.00 1972 1952 1974 1978 1954 1958 1982 1976 1956 1992 1962 1970 1984 1950 1988 1994 1964 1986 1998 1968 1980 1996 1966 1990 1960 2000 Excess births/deaths Net immigration Total increase Source : STATEC

2 - ECONOMIC STRUCTURES 63 2.1 - Residential population, working population and employment Annual average migratory balance 1990-2000 per 1000 inhabitants

12.00

10.00

8.00

6.00

4.00

2.00

0.00 L D CH AEL DK S NL EU-15 IRL NO I UK B FIN E F IS P

Source : EUROSTAT

deaths).Whereas the excess of births over deaths rarely exceeds a rate of 4 ‰, migratory balances have peaks as high as 14 ‰. The particularly dynamic growth over the past decade, following the much more modest growth of the 1980s, results mainly from a big increase in annual migratory balances. Luxembourg’s migratory balance stood at an annual average of more than 10 ‰ during the 1990- 2000 decade, whereas in the 15 EU countries, the corresponding figure was about 2.3 ‰. The contribution of foreigners to the rise in population isn’t limited just to annual migratory flows. Natural, mainly positive balances contribute as well. Owing to their particularly young age profile, there are relatively few deaths and the number of births is continually rising. In 2001, it rose above that of natives for the first time. All these developments have led to a continual rise in the proportion of foreigners in the residential population, which rose from 18.4 % in 1970 to 37.5 % in 2002. No such percentage has been reached in any other European country.Among the countries with a large proportion of foreigners, we should cite Liechtenstein (34 %) and Switzerland (20 %). In practically all the other countries, the proportion of foreigners remains below 10 %.

Residential population (nationals and foreigners)

460 000 440 000 420 000 400 000 380 000 360 000 340 000 320 000 300 000 1981 1975 1972 1978 1987 1963 1993 1984 1966 1969 1996 1999 1960 1990

Source : STATEC

64 2 - ECONOMIC STRUCTURES 2.1 - Residential population, working population and employment Excess of births over deaths Annual number of births (nationals, foreigners) (nationals, foreigners)

2 500 4 000 2 000 3 500 1 500 3 000 1 000 500 2 500 0 2 000 -500 1 500 -1 000 1 000 -1 500 -2 000 500 -2 500 0 1991 1991 1973 1973 1985 1985 1982 1982 1967 1967 1997 1976 1979 1997 1976 1979 1970 1970 1988 1988 1994 1994 2000 2000 Nationals Foreigners Nationals Foreigners

Source : STATEC

Marriage, divorce and fertility rates: changing behaviour As in other European countries, the number of marriages, divorces and births is affected by changes in demographic behaviour.The spread of non-marital unions and the increasingly strong propensity to live alone, are contributing to the fall in marriages between single people, as shown by the change in first marriage indicators. If the proportion of single people entering a first marriage observed over the past few years is maintained in the future, then 50 % of them would never marry. Another indication of this relative disaffection with marriage is the percentage of births outside marriage. It was about 4 % around 1970, and now stands at more than 20 %. This decrease in marriage is coupled with an increase in divorce. The behaviour observed over the past few years seems to suggest that half the married couples will eventually get divorced. During the 1970s, the clear reduction in fertility among women of Luxembourg nationality caused a certain amount of concern.The fall in the conjunctural fertility indicator (average number of children per woman calculated, for a given year, from the levels of fertility by age of all generations of child- bearing age) seemed spectacular.It fell from 2.36 around 1960 to 1.38 around 1985. Of course,if you refer to the number of children brought into the world by women born in the same year and not to this fictitious generation as a base for calculating the conjunctural indicator, the reduction in fertility is much less pronounced, while remaining very real. Seen, as unusual, in European terms, it soon became apparent that this was affecting a great many countries, especially Southern countries with a traditionally high level of fertility, such as Italy and Portugal. Developments in these countries did not leave their natives established in Luxembourg unaffected, as the conjunctural indicator for foreign women also fell sharply, as the related chart shows. At a certain point, the level was almost the same as for natives, but the latest figures again show a widening gap.

Decline in mortality Over a period of 30 years, life expectancy at birth (the synthetic indicator normally used to measure progress recorded on the mortality front) has increased by eight years for men and six years for women. Today, it stands at about 75 years for men and some 81 years for women. The clear decline in infant mortality has played a central role in this trend. The number of deaths of infants

2 - ECONOMIC STRUCTURES 65 2.1 - Residential population, working population and employment Conjunctural fertility indicator (natives and foreigners)

2.50 2.25 2.00 1.75 1.50 1.25 1.00 1972 1974 1978 1982 1976 1992 1970 1984 1988 1994 1986 1998 1980 1996 1990 2000 Natives Foreigners Source : STATEC

under one year of age per 1 000 live births has dropped through several levels. Between 1970 and 1975, it remained higher than 15 on average. Then, for nearly 10 years, it stood between 10 and 15. After 1985, it fell and remained below 10. Over the past few years, it has hovered around five, which matches the level in many European countries. This drop in mortality can also be observed at more advanced ages. Male life expectancy at 70 years old increased from 9.5 years in 1970 to 12.2 years in 2000.For women,it increased from 11.9 years to 15.5 years.

66 2 - ECONOMIC STRUCTURES 2.1 - Residential population, working population and employment Fertility and infant mortality in certain European countries

Year Luxembourg Belgium France Germany Italy Portugal Austria Switzerland

Conjunctural fertility indicator

1970 1.97 2.25 2.47 1.99 2.43 3.01 2.29 2.10 1980 1.49 1.68 1.95 1.45 1.64 2.25 1.65 1.55 1990 1.60 1.62 1.78 1.45 1.33 1.57 1.45 1.58 2000 1.79 1.66 1.89 1.36 1.23 1.52 1.34 1.50

Infant mortality (per 1 000 live births)

1970 24.9 21.1 18.2 23.4 29.3 58.4 25.6 15.1 1980 11.6 12.2 10.1 12.7 14.4 24.2 14.4 9.1 1990 7.4 6.6 7.4 7.1 8.2 11.0 7.9 6.9 2000 5.1 4.9 4.8 4.6 4.6 5.5 4.8 5.0

Source : STATEC

However, these improvements should be put into perspective. In its White Paper “Health for All”, published in 1994, the Ministry of Health recognised that “the comparative rates of mortality by age and gender are higher than in most EU countries”. Regarding the causes of death, the same document states that between the late 1970s and the late 1980s, “the cancer death rates are increasing while deaths from cardio-vascular disease are tending to decrease.The most spectacular deterioration is seen in the case of deaths from breast cancer (+34.6 %)”.

Infant mortality (deaths under one year of age per 1000 life births)

25.0 20.0 15.0 10.0 5.0 0.0 1972 1974 1978 1982 1976 1992 1970 1984 1988 1994 1998 1986 1980 1996 1990 2000

Source : STATEC Life expectancies at different ages

Year Men Women

age 0 age 50 age 70 age 0 age 50 age 70

1970 67.3 22.4 9.5 74.5 27.5 11.9 1980 70.0 23.6 9.9 76.7 29.2 13.0 1990 72.6 26.4 11.9 79.1 31.5 14.9 2000 74.7 27.4 12.2 81.1 32.8 15.5

Source : STATEC

2 - ECONOMIC STRUCTURES 67 2.1 - Residential population, working population and employment People aged over 65 and 80

65 and over 80 and over

Year No. of as % of the No. of as % of the people total population people total population

1970 42 800 12.6 5 900 1.7 1980 49 600 13.6 8 200 2.3 1990 50 800 13.4 11 600 3.1 2000 61 100 14.0 13 000 3.0

Source : STATEC

An ageing population? Generally, the ageing of a population is gauged by the proportion of people over a particular age, with the choice of this demographic threshold (60, 65 or 70 years) being largely arbitrary. A distinction is often made between the “third age”, covering people who are between 65 and 79 years old, and the “fourth age” entered at 80. People aged 65 and over have increased in number from 42 800 in 1970 to 61 000 in 2000 (+42.8 %). The level of increase for those aged 80 and over was 20.3 % (5 900 in 1970 and 13 000 in 2000).

68 2 - ECONOMIC STRUCTURES 2.1 - Residential population, working population and employment Two factors, one relating to the base and the other to the tip of the age pyramid, can cause ageing: a drop in birth rates and an increase in longevity. So the demographic process set in motion by sparse generations succeeding full generations gradually leads to an increase in the relative weight of older people. At a certain point, the sparse generations find themselves confronted with the full generations reaching the age of retirement. A clearly increasing life expectancy at higher ages (see above) obviously helps swell the numbers involved. Although there is an undeniable increase in the absolute number of elderly people, their relative weight in the total population is only increasing much more slowly.This is due to strong net immigration, which is almost continually feeding the younger age groups.

Approaching 700 000 inhabitants? The accelerating demographic growth during the first half of the 1990s led STATEC to propose, in its population forecasts, a variant resulting in more than 700 000 inhabitants by the year 2050. Alongside increased fertility (with an average number of children per woman of 1.95 after 2020), the annual net migration of some 4 000 people, equal to that observed prior to the base year and maintained over the entire forecast period, explains this large increase. As soon as they are based on a net immigration of around 4 000, the scenarios produced by the International Labour Office, the UN, EUROSTAT and the Central Bank of Luxembourg all arrive at a similar conclusion: in 50 years’ time, Luxembourg will have some 700 000 inhabitants. The as- sumption that high immigration will be maintained is only valid if you bank on high economic growth creating a big demand for labour. There’s another uncertainty surrounding the numbers of this new labour force that will come and live in the Grand Duchy. Can’t future labour demands be met by even greater reliance on cross-border workers?

STATEC 1995 population forecasts

800 000 750 000 700 000 650 000 600 000 550 000 500 000 450 000 400 000 350 000 1995 2000 2010 2020 2030 2040 2050

Net migration assumptions: 1000 2500 4000

Source : STATEC

2 - ECONOMIC STRUCTURES 69 2.1 - Residential population, working population and employment Employment: strong growth since the mid-1980s The pattern of the curve tracing the annual growth rates in domestic employment since 1970 shows that the remarkable dynamism of the past few years is not the norm. During the 10 years following the onset of the steel industry crisis in 1975, employment stagnated or was even declining at certain points. It was only later that employment recovered, with an average annual rate of increase of 3.5 % and a rise of over 110 000 between 1986 and 2001 (compared with 20 000 during the 1970-1985 period). In mid-2002, the domestic employment level reached 285 000.

Annual growth rates in domestic employment (in %)

6.0 5.0 4.0 3.0 2.0 1.0 0.0 -1.0 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001

Source : STATEC

Employment by professional status

1970 1981

Professional status Total Nationals Foreigners Total Nationals Foreigners

All statuses 119 672 93 575 26 097 145 334 100 761 44 573 Self-employed + employers 13 526 12 443 1 083 14 401 12 194 2 207 Workers 60 962 42 175 18 787 67 718 38 155 29 563 Employees + civil servants 45 184 38 957 6 227 63 215 50 412 12 803

All statuses 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % Self-employed + employers 11.3 % 13.3 % 4.1 % 9.9 % 12.1 % 5.0 % Workers 50.9 % 45.1 % 72.0 % 46.6 % 37.9 % 66.3 % Employees + civil servants 37.8 % 41.6 % 23.9 % 43.5 % 50.0 % 28.7 %

All statuses 100.0 % 78.2 % 21.8 % 100.0 % 69.3 % 30.7 % Self-employed + employers 100.0 % 92.0 % 8.0 % 100.0 % 84.7 % 15.3 % Workers 100.0 % 69.2 % 30.8 % 100.0 % 56.3 % 43.7 % Employees + civil servants 100.0 % 86.2 % 13.8 % 100.0 % 79.7 % 20.3 %

Source : STATEC

70 2 - ECONOMIC STRUCTURES 2.1 - Residential population, working population and employment Domestic employment 1990-2000 (1990 = 100)

145 140 135 130 125 120 115 110 105 100 Saar Lorraine Luxembourg Rhineland Wallonia Palatinate Source : STATEC

The remarkable nature of the growth in employment becomes even more apparent when you compare it with that of bordering regions. In Luxembourg, employment has risen by more than 40 %. Although the Rhineland-Palatinate is still registering a slight rise with a rate of increase just above 15 %, the Saar, Lorraine and Wallonia areas are stagnating.

1991 2001

Total Nationals Foreigners Total Nationals Foreigners

158 095 102 468 55 627 186 381 107 370 79 011 14 917 11 689 3 228 20 011 13 906 6 105 63 526 32 101 31 425 64 582 25 783 38 799 79 652 58 678 20 974 101 788 67 701 34 087

100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 9.4 % 11.4 % 5.8 % 10.7 % 10.9 % 7.7 % 40.2 % 31.3 % 56.5 % 34.7 % 29.9 % 49.1 % 50.4 % 57.3 % 37.7 % 54.6 % 54.7 % 43.1 %

100.0 % 64.8 % 35.2 % 100.0 % 57.6 % 42.4 % 100.0 % 78.4 % 21.6 % 100.0 % 69.5 % 30.5 % 100.0 % 50.5 % 49.5 % 100.0 % 39.9 % 60.1 % 100.0 % 73.7 % 26.3 % 100.0 % 66.5 % 33.5 %

2 - ECONOMIC STRUCTURES 71 2.1 - Residential population, working population and employment Increasing employment in the service sector There have been profound changes in the distribution by activity sector. In industry, the decline of the steel sector led to a distinct fall in employment which slid from some 68 000 in 1975 to less than 55 000 ten years later. The revival observed since then has been mainly in the construction industry. However, the salient feature remains the extraordinary boom in services, where the number of workers has doubled over the past 25 years. The development of the financial market and the growing needs of the public sector have been the driving force behind this trend.Today, the service sector accounts for more than three-quarters of total employment. These changes have had an effect on professional status, with a constant decrease in the proportion of labourers and non-salaried workers. Whereas in 1970, half the people employed on Grand Duchy territory were still workers, this proportion had shrunk to around 38 % in 2000. At the same time, the proportion of employees and civil servants grew by 30 % to more than 55 %. Between 1970 and 1990, the course of non-salaried workers was affected above all by the decline in agriculture. Stabilisation of their absolute number over the recent period cannot hide a loss of relative importance in a situation where salaried employment is growing strongly.

Employment by major activity sector

100 %

80 % Services

60 %

40 % Industry

20 %

Agriculture 0 %

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

Source : STATEC

Contribution made by foreigners It’s not so much the growth of employment in the service sector (also observed in other European countries) that characterises the Luxembourg economy,but more the explosion in the demand for labour and the way in which this demand has been satisfied. For many years, there has not been enough purely native labour to meet labour requirements, as shown by the chart relating to total domestic employment and native employment. The supply of people living in Luxembourg is determined mainly by the number of people of working age, which generally means 15 to 64 year-olds. Although the relevant numbers of nationals varied little between 1970 and 2001, the level of participation in economic life, measured by the rate of activity, underwent profound changes. In the under-25 age bracket, further education for both men and women has caused a drastic fall in rates of activity for the ages in question. In the

72 2 - ECONOMIC STRUCTURES 2.1 - Residential population, working population and employment Total domestic employment and native employment thousand 300 250 200 150 100 50 0 1971 1977 1953 1974 1983 1956 1959 1965 1995 1962 1992 1968 1986 1989 1998 2001 1980

Total domestic employment Native employment Source : STATEC case of 15 to 19 year-old men, for instance, it has decreased from 51.9 % to 18.0 %. At the same time, more and more men of Luxembourg nationality are leaving the labour market between the ages of 55 and 64. As a result, their socio-demographic potential has diminished considerably, so that the clear increase in female activity has, in the end, only resulted in a relatively modest rise in the supply of native labour. Foreigners established in the Grand Duchy accounted for more than 85 % of the increase of 67 500 units of total resident labour available between 1970 and 2001.

2 - ECONOMIC STRUCTURES 73 2.1 - Residential population, working population and employment These foreigners have made a decisive contribution to increasing the numbers of people of working age. Each year, there is net positive immigration and immigrants born abroad are reaching the age of entry into the labour market. Finally, we should take into consideration the growing proportion of births among immigrant women. Fifteen years later, these births swell the numbers of people of working age. In addition to this demographic contribution, foreigners’ higher rates of activity should be noted. However, even this very large amount of immigration is not enough to meet a demand for labour that is growing at an extremely rapid pace. Since 1985, reliance on cross-border workers living in one of the three adjacent countries has increased continually. There are more than 100 000 of these workers, and their share of total salaried employment exceeds 37 %. More than half origi- nate from France, just under 30 % from Belgium and nearly 20 % from Germany. This massive influx of cross-border workers holds the key to the change in the Luxembourg labour market over the past 20 years. Coupled with the continual expansion of immigrant labour established in the Grand Duchy, this has led to a drop in the natives’ relative share of total salaried employment. This has fallen from some 70 % around 1970 to less than 35 %.

Working population aged 15 – 64

Total population Nationals

Year Working population People age 15-64 Rate of activity Working population

Both sexes

1970 126 461 221 835 57.0 % 99 686 1981 151 729 247 558 61.3 % 105 727 1991 1 167 240 266 460 62.8 % 106 466 2001 2 193 900 295 300 65.7 % 109 700

Men

1970 93 638 110 298 84.9 % 74 165 1981 101 347 123 864 81.8 % 71 284 1991 1 105 864 135 200 78.3 % 68 719 2001 2 114 100 149 400 76.4 % 65 800

Women

1970 32 823 111 537 29.4 % 25 521 1981 50 382 123 694 40.7 % 34 443 1991 1 60 742 131 260 46.3 % 37 747 2001 2 79 800 145 900 54.7 % 43 900

1 In the 91 PC, nationality details are missing for a certain number of people listed. 2 The working population is estimated by applying the rates of activity obtained from respondents to the overall numbers of people known. Source : STATEC

74 2 - ECONOMIC STRUCTURES 2.1 - Residential population, working population and employment Female activity rates (in %)

90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 15-19 20-24 25-29 35-39 40-44 45-49 50-54 55-59 60-6430.34 1960 PC Female Nationals 2001 PC Female Nationals 1960 PC Female Foreigners 2001 PC Female Foreigners

Source: STATEC N.B. PC = population census

Foreigners

People age 15-64 Rate of activity Working population People age 15-64 Rate of activity

179 917 55.4 % 26 775 41 918 63.9 % 180 865 58.5 % 46 002 66 693 69.0 % 180 187 59.1 % 60 774 85 887 70.8 % 176 200 62.3 % 84 200 119 100 70.7 %

89 088 83.2 % 19 473 21 210 91.8 % 90 225 79.0 % 30 063 33 639 89.4 % 91 251 75.3 % 37 145 43 734 84.9 % 89 500 73.5 % 48 300 59 900 80.6 %

90 829 28.1 % 7 302 20 708 35.3 % 90 640 38.0 % 15 939 33 054 48.2 % 88 936 42.4 % 22 788 42 153 54.1 % 86 700 50.6 % 35 900 59 200 60.6 %

2 - ECONOMIC STRUCTURES 75 2.1 - Residential population, working population and employment Low level of unemployment The vigorous growth in the demand for labour explains why unemployment remains relatively low in Luxembourg. The unemployment rate rarely exceeds 3 %. It should be noted that a certain number of people who are unemployed, or threatened with unemployment, benefit from various work programmes and are not included in the unemployment figures. For example, during the recession in the steel industry, employees assigned to the Anti-Crisis Division (ACD) could escape unemployment. Since 1997, job-seekers benefiting from a remunerated work programme are no longer included in the official unemployment figure published by the Employment Office. By including them, it’s possible to obtain the “official expanded” unemployment figure, which is also shown on the related chart. Although the profile of the unemployment trend in the Grande Region (Saar-Lor- Lux/Rhineland-Palatinate/Wallonia) barely differs from that of national unemployment, it does remain at a higher level.

Salarial employment by nationality and residence

100 % Cross-border workers

80 % Foreign residents 60 %

40 % Nationals

20 %

0 %

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

Source : STATEC

Level of unemployment in Luxembourg and the Grande Région

6.0 % 5.0 % 4.0 % 3.0 % 2.0 % 1.0 % 0.0 % 1970 1974 1978 1982 1986 1990 1994 1998 2002

Official unemployment level (EO) ILO unemployment level Official expanded unemployment level Grande Région unemployment level

Source : STATEC

76 2 - ECONOMIC STRUCTURES 2.1 - Residential population, working population and employment National Action Plan for Employment The main recommendation addressed to Luxembourg by the EU relates to levels of employment, i.e. the proportion of people exercising a paid activity.These levels are judged too low for the 55 to 64 age group and for women in general. To analyse the reasons older workers quit their professional life early, the government and social partners have decided to have an in-depth study conducted on this subject. As regards female employment, they were of the opinion that the steady progress observed over the past few years shows that Luxembourg is on the right track.

Employment rates and EU targets (2001) (in %)

90 EU targets: 80 Total 70 Women 60 Older workers 50 40 30 20 10 0 B DK D EL E F IRL I L NL AP FIN S UK EU-15

Total employment rate (15-64) Female employment rate (15-64) Older workers' employment rate (55-64)

Source: EUROSTAT (Labour Force Survey). N.B. relates to residents only

Although Luxembourg’s level remains below the EU target (over 60 %), the female employment rate increased by 8.3 % between 1995 and 2001, and is more than 50 %. According to EU targets, the employment rate for older workers (age 55 to 64) should reach about 50 %. In Luxembourg, the level was 24.4 % in 2001 and has hardly increased since 1995. Among the 15 EU countries, only Belgium has a lower level (24.1 %).

2 - ECONOMIC STRUCTURES 77 2.1 - Residential population, working population and employment 2 - ECONOMIC STRUCTURES

2.2 Productive structure

78 2 - ECONOMIC STRUCTURES 2.2 - Productive structure 2.2.1. FROM INDUSTRIAL ECONOMY TO SERVICE ECONOMY: AN OVERVIEW

2.2.1.1. Radical and rapid changes Luxembourg’s productive structure went through radical and extremely rapid transformations over the last quarter of the 20th century. Whereas in 1974, the steel industry still accounted for 25 % of the sum of values added in Luxembourg’s economy, it accounted for only 12 % by 1975, following the crisis linked with the first oil crisis, which hit this industry very hard. The steel crisis, which was thought to be of a temporary nature at first, turned out to be structural. It resulted, mainly, from the excess capacity in steel production around the world. In Luxembourg, installations producing crude steel saw their usage rate fall from 96% in 1974 to 55 % in 1982. In the early 1980s, there were even some fears of losing this industrial sector, which had been part of Luxembourg’s economic and social fabric for a century.This sombre picture was completed in 1981, with the closure of the last operating iron mine. In the end, metallurgy only represented 2.4 % of the sum of values added in 1995 and slipped below the 2 % mark in 2001. However, this figure covers a more complex reality. After fighting for their survival, with the government’s help, companies in this sector firmly set about modernising their production tools. This modernisation led, in the 1990s, to the complete replacement of the blast-furnace system by the electric system. These efforts resulted in the major productivity gains achieved in this sector.Whereas it still took

Structure of the sum of values added at basic prices (in %)

Agriculture 2.0 % 0.6 % Metallurgy 9.8 % 1.9 %

Other manufacturing industries 12.2 % 8.9 % Electricity, gas, water 1.8 % 1.2 % Construction 4.3 % 5.9 %

Commerce, Horeca, transport and communications 20.3 % 22.4 %

Financial activities

21.6 % 24.9 %

Real estate, rental and business services 11.7 % 18.2 %

Public administration services 6.5 % 5.5 %

Education, health and social welfare 6.6 % 7.6 % Community, social, personal and domestic services 3.2 % 2.9 % 1985 2001

Source : STATEC

2 - ECONOMIC STRUCTURES 79 2.2 - Productive structure Employment by sector

Agriculture, hunting and forestry; fishing and aquaculture

Industry, including energy

Construction

Commerce; car and domestic appliance repair; hotels and restaurants, transport and communications Sales; car and domestic appliance repair Hotel, restaurants, cafés and catering services Transport and communications

Financial activities; real estate; business services Financial services Real estate, rental and business services Real estate activities Renting without operator Computer and related activities Services mainly for businesses, R&D

Other service activities Public administration services Education Health and social services Other community, social and personal services Domestic services

Total for all sectors

nearly 10 hours of labour per tonne of rolled steel in 1975, the corresponding labour time was only about two hours by the late 1990s. The difficulties in the steel sector during the 1975-1985 period were reflected in Luxembourg’s overall economic structure. According to population censuses, the proportion of the resident population working in industry dropped from 44 % in 1970 to 34 % in 1981 and 25% in 1991.The proportion in manufacturing industry (excluding construction and the energy sector) tumbled to a similar extent, from 44 % of the sum of values added in 1970 to 25 % in 1980, and down to around 20 % in 1990. Nevertheless, this downward trend in industry, due to the problems in steel that carried massive weight in the industrial fabric, tends to hide the relatively good performance of industries other than steel, and we shouldn’t underestimate the success of the industrial diversification measures introduced even before the crisis. By a “stroke of luck”, the buoyant and dynamic sector that steel had been until 1975 was replaced - at the height of the crisis - by a no less dynamic sector, namely the banks and the financial sector.

80 2 - ECONOMIC STRUCTURES 2.2 - Productive structure 1985 1995 2001 1985 1995 2001

in thousands of people in % of total employment

6.8 4.2 3.6 4.2 2.0 1.3

38.2 34.7 35.7 23.7 16.2 12.9

14.2 24.2 27.1 8.8 11.3 9.8

46.9 59.7 74.4 29.1 27.9 26.9 27.0 33.2 38.8 16.8 15.5 14.0 8.7 11.2 12.6 5.4 5.2 4.5 11.2 15.4 22.9 7.0 7.2 8.3

19.9 44.1 76.3 12.4 20.6 27.5 11.2 22.1 32.9 7.0 10.3 11.9 8.7 22.0 43.4 5.4 10.3 15.7 0.9 1.8 2.5 0.6 0.8 0.9 0.3 0.5 0.7 0.2 0.2 0.3 0.3 1.9 4.8 0.2 0.9 1.7 7.2 17.9 35.4 4.5 8.4 12.8

35.0 47.2 60.1 21.7 22.1 21.7 11.0 11.9 14.8 6.8 5.6 5.3 7.6 9.6 12.6 4.7 4.5 4.5 7.3 13.1 16.5 4.5 6.1 6.0 5.0 8.0 9.9 3.1 3.7 3.6 4.1 4.6 6.3 2.5 2.1 2.3

161.1 214.0 277.0 100.0 100.0 100.0

Until the 1960s, the activities of the Luxembourg financial market had been more or less confined to the domestic/regional marketplace. Paradoxically, the start of the boom in the financial market was linked to restrictive rulings and legislation imposed on financial markets abroad, particularly in the United States and Germany.To limit the export of capital, a special tax on foreign bond certificates purchased by American residents was introduced by the American authorities in 1963. Consequently, borrowers turned to other markets to cover their dollar requirements.This gave rise to the first “Euro-bond” denominated in “Eurodollars” issued in Luxembourg. Another ruling from the American authorities, setting a limit on how much multinationals of American origin could invest in their sites abroad,forced these multinationals to seek finance on foreign markets,among which Luxembourg was one of the best placed.The latter half of the 1960s saw the emergence of Luxembourg as the centre of the Euromarket which expanded to include other currencies, notably the Deutschmark. German banks were prompted to establish themselves in Luxembourg because the German Central Bank compelled them to deposit a minimum non-remunerated reserve,

2 - ECONOMIC STRUCTURES 81 2.2 - Productive structure Gross value added at basic prices - GVA (at current prices) by sector

Agriculture, hunting and forestry; fishing and aquaculture

Industry, including energy

Construction

Other service activities Public administration services Education Health and social services Other community, social and personal services Domestic services

Total for all sectors

which wasn’t the case in Luxembourg, as the country didn’t have a central bank of its own. Also, during the 1970s, the rise in oil prices drained large amounts of “petrodollars”out of oil-producing countries and into Luxembourg banks. The number of banks in Luxembourg rose from 37 in 1970 to 118 in 1985 and the sum of the balance sheets reached 190 billion euros in 1985, compared with 6 billion euros in 1970. Employment in banking grew from 3 700 in 1970 to over 10 000 in 1985. The importance that the financial sector assumed in Luxembourg’s economic fabric during the 1970-1985 period, is best expressed in terms of its share of the sum of values added,which increased from 4 % in 1970 to more than 21 % in 1985. So, unlike most European countries,Luxembourg was able to rely on the emergence of a new buoyant sector during the crisis from 1975 to 1985.From 1978, therefore, the GDP growth rate began to exceed the average growth rate of neighbouring countries (Germany, Belgium and France).The growth stimulated by the dynamism of this sector,and the fiscal revenues that came from it,enabled the Luxembourg government in particular to maintain its redistribution efforts without having to resort to borrowing - borrowing which, in neighbouring countries, meant considerable expenditure on servicing the debt.

82 2 - ECONOMIC STRUCTURES 2.2 - Productive structure 1985 1995 2001 1985 1995 2001

in millions of euros in % of GVA

130.3 145.9 139.1 2.0 1.0 0.6

1 566.5 2 131.7 2 650.9 23.8 15.0 12.0

285.8 880.6 1 295.3 4.3 6.2 5.9

1 338.0 2 974.3 4 959.8 20.3 20.9 22.4 801.4 1 477.4 2 103.5 12.2 10.4 9.5 144.3 348.0 460.5 2.2 2.4 2.1 392.2 1 149.0 2 395.9 6.0 8.1 10.8

2 192.1 5 712.3 9 519.8 33.3 40.2 43.1 1 420.0 3 264.8 5 492.8 21.6 23.0 24.9 772.1 2 447.5 4 026.9 11.7 17.2 18.2 530.6 1 518.3 2 075.8 8.1 10.7 9.4 25.1 109.1 132.4 0.4 0.8 0.6 12.7 101.7 295.4 0.2 0.7 1.3 203.7 718.4 1 523.4 3.1 5.1 6.9

1 065.5 2 378.7 3 536.4 16.2 16.7 16.0 425.2 832.9 1 209.4 6.5 5.9 5.5 248.4 553.8 821.2 3.8 3.9 3.7 185.3 531.2 854.8 2.8 3.7 3.9 175.7 399.8 543.8 2.7 2.8 2.5 31.0 61.0 107.2 0.5 0.4 0.5

6 578.2 14 223.5 22 101.3 100.0 100.0 100.0

2 - ECONOMIC STRUCTURES 83 2.2 - Productive structure 2.2.1.2. End result: an economy largely dominated by services In the last decade of the 20th century, the service sector of the Luxembourg economy developed at an accelerating pace, which meant that by 2001, manufacturing industry’s share of the sum of values added was only 11%. Given that the electricity, gas and water sectors and the agriculture sector now accounted for only 1.2 % and 0.6 % respectively of this sum, and that the share of the construction sector stood at 5.9 %, services as a whole (commerce, financial services, property and

Structure of gross value added and employment in 2000

Agriculture Manufacturing Construction Commerce, Financial and Other services industry transport and business (public services, etc.) communications services

Gross value added (as % of total economy)

EU-15 2.2 22.9 5.3 21.0 27.2 21.4 Luxembourg 0.7 12.1 5.7 22.2 43.8 15.5 Belgium 1.5 20.8 5.0 20.4 28.7 23.6 France 2.8 20.9 4.5 18.6 29.6 23.5 Germany 1.2 25.2 4.9 17.2 30.4 21.1 Netherlands 2.8 20.7 5.7 21.8 26.6 22.5

Employment (as % of total employment)

EU-15 4.4 19.7 7.2 25.4 13.9 29.3 Luxembourg 1.6 13.3 9.9 27.1 26.6 21.6 Belgium 2.1 17.5 6.0 22.9 15.3 36.2 France 4.4 17.1 6.4 23.6 16.1 32.4 Germany 2.5 22.2 7.1 25.1 14.6 28.4 Netherlands 3.4 13.9 6.1 26.0 19.8 30.9

Source : EUROSTAT, STATEC

Level of productivity by sector in 2000 (gross value added/employment; euros, current prices)

Agriculture Manufacturing industry Construction

Euros EU=100 Euros EU=100 Euros EU=100 (thous.) (thous.) (thous.)

EU-15 23.5 100 55.4 100 35.2 100 Luxembourg 34.7 148 72.2 130 45.4 129 Belgium 41.1 175 69.1 125 48.5 138 France 35.5 151 67.3 121 39.4 112 Germany 22.8 97 55.7 101 33.7 96 Netherlands 37.1 158 66.8 121 42.3 120

Source : STATEC, EUROSTAT

84 2 - ECONOMIC STRUCTURES 2.2 - Productive structure business services, other services like public administration, education, community services) contributed more than 80 % of the total value added in 2001. So compared with other European countries, Luxembourg’s productive structure shows certain peculiarities:a farming and industrial sector with a lower relative value than most other European countries, but a highly developed service sector dominated by financial and business services. These characteristics are echoed in the employment structure, but to a slightly lesser degree. Employment in services accounts for about 75 % of total employment in Luxembourg. With regard to the performance of the major economic sectors in terms of productivity, it should be noted that Luxembourg is quite well placed within the European context. Productivity statistics calculated purely from the relationship between value added and employment should be treated with some caution. Notably, this calculation does not take labour time into account. Nevertheless, a comparison of the approximate figures is interesting. Setting aside the farming sector and the construction sector (where performance seems fairly average, at least in comparison with certain neighbouring countries), the level of apparent labour productivity (gross value added/employment) in the other sectors comes high up the European ladder. In the financial services and business services sector, the intrinsically high level of the value added from financial intermediation and financial auxiliaries easily explains this situation. The value added per person employed in financial intermediation (banks) reached some 200,000 euros in 2000, compared with 79,200 euros per person employed in the Luxembourg economy as a whole. In other economic sectors and fields, the level of productivity tends to result from the rational use of resources and investments and/or a respective increase or reduction in employment leading to productivity gains. As far as the sectors grouped under “other services” are concerned, it is largely a case of “non-market” services provided by the State (education, public administration, part of the health sector, etc.). The reason for the high level of productivity in this sector could be that public expenditure has reached a high level, but this expenditure is “managed” by and divided among a relatively small number of people employed in branches of this sector, at least comparing its workforce with total employment, which showed exceptional growth between 1985 and 2001.

2.2.1.3. Dynamic sectors and sectors in relative decline A presentation that analyses only the structures by major sectors and for given years is simplistic, in that the dynamics and performance of the various subsectors or fields are not properly reflected. This is especially true because financial services constitute a high-value-added sector that automatically makes the other sectors look relatively unimportant.

Commerce, transport Financial and Other services Total and communications business services (public services, etc.)

Euros EU=100 Euros EU=100 Euros EU=100 Euros EU=100 (thous.) (thous.) (thous.) (thous.)

39.5 100 93.1 100 34.7 100 47.7 100 65.0 164 130.3 140 60.0 173 79.2 166 52.1 132 109.1 117 38.0 110 58.3 122 43.6 110 101.7 109 40.1 116 55.3 116 33.7 85 102.8 110 36.4 105 49.2 103 37.7 95 60.4 65 32.7 94 44.9 94

2 - ECONOMIC STRUCTURES 85 2.2 - Productive structure The tables and charts in this chapter give a good overview of the change pattern in employment, in value added and in productivity levels and trends in Luxembourg. It is clear that financial services (financial intermediation, insurance and financial auxiliaries) is the dominant economic sector in the Luxembourg economy at the start of the 21st century: it’s share of value added has risen from 21.6 % in 1985 to 24.9 % in 2001. Employment, which stood at 11 000 in 1985 (7 % of total employment) reached 33 000 in 2001 (11.9 % of total employment). These figures certainly don’t reflect the true importance of financial services. For example, banks have contributed to the boom in real estate, rental and business services and to establishing the construction sector as an important strand of Luxembourg’s economic fabric. Real estate, rental and business services are growing most strongly out of all Luxembourg’s economic sectors, in terms of value added and employment. In 2001, employment in this sector stood at 43 400 (15.7 % of total employment in 2001), compared with 8 700 in 1985 (5.4 % of total employment). The share of the sum of values added showed slightly less growth, rising from 11.7 % in 1985 to 18.2 % in 2001.Therefore, growth in this sector has been marked by “lots of jobs”, or to put it in a “negative”way,significant losses in productivity.However, this statement is less valid for property-related activities, where the high level of productivity results from the charging of rent in this field of activity, than for business services (accounting, legal advice, advertising, cleaning services, technical firms, etc.).We shall return later to this very diverse sector. As well as financial services, real estate, rental and business services, we should highlight the progress in another service sector, namely transport and communications. In 1985, this entire sector employed 11 200 people, i.e. 7 % of total employment. In 2001, with around 23 000 employed, it accounted for 8.3 % of employment. In terms of value added, the rise is even sharper: from 6 % of

86 2 - ECONOMIC STRUCTURES 2.2 - Productive structure Finished buildings

4 000 3 500 3 000 2 500 2 000 1 500 1 000 500 0 1970 1975 1980 1990 1995 20001985 Number of buildings Number of dwellings Volume built (1000 m3)

Source : STATEC the sum of values added in 1985, transport and communications rose to nearly 12 % in 2001. Moreover, the productivity gains in the whole of this sector, due in particular to telecommunications, are exceptional. Over the 1985-2001 period as a whole, the rate of increase in productivity reached 8.6 % p.a. on average, compared with 2.4 % for the whole economy and 4.7 % for industry. The three most dynamic sectors briefly described above are dealt with in more detail in chapter 2.2.2. In the construction sector, the slight rise in the share of the sum of values added between 1985 and 2001 (from 4.3 % to 5.9 %) actually hides a big increase in employment and value added in absolute terms. In 1985, about 14 000 people were employed in construction.The number exceeded the 27 000 mark in 2001. At constant prices (reference year 1995), the value added in this sector more than doubled between 1985 and 2001.This rise results from the big increase in the population living in Luxembourg, work on infrastructures by public authorities and property investments by economic agents. The trend in the construction sector is illustrated by the trend in building permits. The number of houses for which permits were issued rose from 2 500 p.a. in 1980 to 3 400 in 2000. The statistics on finished buildings are also revealing, especially with regard to the volume built. It should be noted, however, that the productivity gains in this sector are low, and that growth has been a- chieved through massive recruitment of workers, especially cross-border and immigrant workers. The economic, but also social, importance of the construction sector is also increased by the fact that it supports a great number of craft firms and SMEs.The notion of handicrafts doesn’t appear in official nomenclatures, but the craft sector corresponds basically to the small firms in industry and certain services affiliated to the Luxembourg Chambre des Métiers (Chamber of Handicrafts). In 1980, out of the 4 018 craft firms, 1 527 were operating in the construction and housing sector. In 2001, out of the 4 271 craft firms in existence, nearly 2 000 were working in this sector. They employed 34 195 out of the total of 49 910 employees working in the craft industry,i.e. around 70% of total salaried craft employment, and more than 12 % of employment in the whole economy. All the same, some large construction firms have also emerged.The two largest in the sector, Soludec S.A. and the Compagnie de Construction (CDC), each employed more than 500 people at the end of 2001. Also, there was considerable growth in property-related activities (property developers, property dealers, estate agents, property managers, etc.). The number of people employed in this sector rose from 900 in 1985 to 2 500 in 2001.

2 - ECONOMIC STRUCTURES 87 2.2 - Productive structure The trade sector (wholesale trade and commercial agents, retail trade, car selling and repair) occupies an intermediary position between the dynamic sectors quoted above and sectors “in decline”. Employment in this sector grew at a steady pace (from 27 000 people in 1985 to 38 800 in 2001). However, the even stronger growth in employment in other services meant that trade’s share of employment shrank slightly during the same period (16.8 % of total employment in 1985, 14 % in 2001). There was a similar trend in value added: trade represented 12.2 % of the total value added in the Luxembourg economy in 1985 and 9.5 % in 2001. The increase, within the retail trade of big outlets (supermarkets and hypermarkets) belonging to major Luxembourg and foreign chains (Cactus, Courthéoux/Match/Profi, Monopol/Delhaize, Auchan, etc.) should be noted. At the end of 2001, the Cactus group was the country’s second-largest employer, with a workforce of nearly 3 700. The Match and Auchan groups employed 970 and 690 respectively. The number of legal entities (firms) in the retail trade fell from 3 400 in 1985 to about 2 800 in 2001. Conversely, the number of people employed grew strongly from 13 800 in 1985 to 18 200 in 2001. During the same year, the wholesale trade employed 14 200 people, and car selling and repair 6 400.

Retail trade (1985 = 100)

130 120 110 100 90 80 1985 1987 1989 1991 1993 1995 1997 1999 2001

Number of companies People employed

Source : STATEC

Over the past few years, the growth rates in the wholesale trade and car selling, in terms of productivity and employment, have been higher than those in the retail trade. Productivity gains in the wholesale trade reached 5 % p.a. on average during the 1985-2001 period, compared with just over 1 % in the retail trade. In the wholesale trade/commercial agents sector, some large groups were formed: late in 2001, the “La Provençale” company (wholesale foods) employed some 450 people, the Siemens group (electrical and electronic equipment and computing services) 380 and the “Batichimie” company (wholesale building materials) 310. As for car selling and repair,expansion resulted largely from the increase in the number of vehicles registered in Luxembourg, a trend which was in turn linked with the favourable trend in purchasing power and demographic growth.The total number of vehicles registered in the country more than doubled in 20 years, rising from 155 865 in 1980 to 333 137 in 2001. The sale of second-hand vehicles abroad also showed a big increase. It is worth highlighting health and social services (hospitals, medical laboratories, para-medical activities, etc.) among the very dynamic sectors. Employment in this sector rose from 7 300 to 16 500 during the 1985-2001 period, and the share of total employment from 4.5 % to 6 %. This was a consequence of the increased “supply” of health treatments and the growth in demand, resulting in particular from the ageing of the population. It is no accident that Luxembourg’s hospitals and elderly care services are starting to claim a place among the country’s biggest employers: the Luxembourg Hospital Complex had some 1 360 people in its employ at the end of

88 2 - ECONOMIC STRUCTURES 2.2 - Productive structure Commercial fields 1985-2001 (growth, employment and productivity) Average annual growth rates

Commerce (total)

Retail trade

Car selling and repair

Wholesale trade

-1.0 % 0.0 % 1.0 % 2.0 % 3.0 % 4.0 % 5.0 % 6.0 % 7.0 % 8.0 % 9.0 %

GVA variation in volume Productivity Employment

Source : STATEC

2 - ECONOMIC STRUCTURES 89 2.2 - Productive structure 2001 (eleventh biggest employer in the country), Esch City Hospital around 990, the “Servior” group (managing integrated centres for the elderly and State care homes) 970 and the “Hëllef Doheem” Foundation (home help) some 690. The creation of extensive home-help structures resulted from the introduction of compulsory dependency insurance in 1998. To talk of “declining”sectors when analysing how Luxembourg’s productive structure has evolved may seem incongruous, in a context where GDP grew more than 5 % a year on average during the 1985-2001 period. Practically all economic sectors participated in this growth, stimulated by financial services. Nevertheless, we should mention three activity sectors which, to varying degrees, have not (or only partially) participated in this trend. For a start there is agriculture, and also the HORECA sector (hotel and catering services) and the industrial sector as a whole. The decline in the economic importance of agriculture since the beginning of industrialisation follows the logical pattern of development of economic structures, and is not peculiar to Luxembourg.This development has continued over recent years. Luxembourg’s agricultural industry’s share of the sum of values added fell from 4 % in 1980 to 2 % in 1985 and 0.6 % in 2001. Across the European Union, this same trend reduced agriculture’s share of total values added from some 4 % in 1980 to 2.2 % in 2000. On top of this long-term trend, there are the structural problems in agriculture (linked with the pressure on farming prices) which are affecting the whole of Europe too. At current prices, the gross value added in Luxembourg’s agricultural industry has hardly changed over the entire 1985-2001 period: 130.3 million euros in 1985, 139.1 million euros in 2001. These figures show a fairly stagnant situation, at least if you compare them with the trend in the Luxembourg economy as a whole (value added at current prices = 6 578.2 million euros in 1985 and 22 101.3 million euros in 2001). The fall in employment can also be perceived as a sign of problems in the agricultural industry. Although in 1985, 6 800 people were still employed in this sector (4.2 % of total employment) there were only 3 600 by 2001 (1.3 % of total employment). On the other hand, this reduction in employment has made it possible to achieve important productivity gains. The average annual growth rate in productivity (value added at constant prices/employment) in agriculture was more than 5 % over the 1985-2001 period as a whole. This figure even beats the rate for the industrial sector, which was 4.7 % over the same period.The productivity gains in agriculture occurred mainly during the 1991-1995 period, while the 1996-2001 period showed a slight regression.

Development of farming areas Number of farms of 2 ha or more and average area

thousand ha thousandha 80 60 14

75 50 12 10 70 40 8 65 30 6 60 20 4 55 10 2 50 0 0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 Arable land Meadow, pasture Farms Average area

Source : STATEC

90 2 - ECONOMIC STRUCTURES 2.2 - Productive structure The income per person employed in agriculture has only managed to remain stable (or more pre- cisely rise in line with the rising incomes of people employed in other economic sectors) thanks to this “rationalisation”in terms of employment.The change in the number of farms and the average area per farm is also revealing in this respect. The recorded number of farms covering more than 2 ha (approx. 5 acres) fell from 6 433 in 1970 to 3 280 in 1990, and reached 2 314 in 2001. Conversely, the average area per farm over 2 ha rose from 20.8 ha (51.4 acres) in 1970 to 38.4 ha (94.9 acres) in 1990, and exceeded the 55 ha (135.9 acre) mark in 2001. The recent change in Luxembourg’s agricultural industry should also be viewed from the angle of the production structure. Given that the natural quality of Luxembourg soils prevents specialisation in crop production, people have consequently turned to animal farming. Milk production, which accounts for about 50 % of commercialised agricultural output, is the mainstay of Luxembourg’s agricultural industry. In March 1984, the Council of the European Committees took the decision to limit the overproduction of milk in the Community using a system of milk quotas. This regulation had quite an impact on Luxembourg’s milk production, which had risen from 216 900 tonnes in 1970 to 300 463 tonnes in 1985. In 2001, milk production stood at only 269 674 tonnes, representing a decrease of about 30 000 tonnes in 15 years. At the same time, the structure of the Grand Duchy’s dairy sector changed considerably, tending towards rationalisation.The quota regulations seemed to impose a “critical size” on farms. The number of milk-producers fell from 2 226 in 1984/1985 to 1 105 in 2001/2002, while the average quota per farm rose from 131 626 kg of milk to 242 367 kg over the same time period. The milk yield per cow increased in equally dra- matic proportions, rising from 4 401 kg in 1985 to more than 6 200 kg in 2001. And this improved yield explains why the number of dairy cows decreased over the same period (68 346 head of cat- tle in 1985 compared with 42 854 in 2001). To counter the structural difficulties it was facing, Luxembourg’s agricultural industry engaged in a quest for quality and promoted national products.The Marque Nationale quality label created in

2 - ECONOMIC STRUCTURES 91 2.2 - Productive structure Commercialised farming production

1980 1985 1990 1995 2000 2001

in thousands of euros (exclusive VAT)

Total 111 176.7 166 837.0 184 271.4 167 560.0 165 366.0 166 683.0

Crop production9 493.1 14 031.7 15 701.5 13 576.8 15 660.5 15 584.8

Animal production 101 683.6 152 805.3 168 569.9 153 983.2 149 933.6 151 098.5 Beef (including veal) 34 702.7 50 320.0 48 372.0 48 929.1 44 786.7 35 935.3 Pork 11 738.3 16 286.1 17 015.8 15 160.5 18 503.2 19 994.0 Milk 51 661.0 83 986.8 99 643.8 83 035.1 82 162.5 88 790.6 Other 3 581.6 2 212.4 3 538.3 6 858.5 4 481.2 6 378.6

Source: Rural Economy Dept.

1932, which applied mainly to Luxembourg wines, was extended in 1989 to pork and ham. The Produit du Terroir collective brand, enabling products to be traced, was introduced by Luxembourg’s Chambre d’Agriculture in 1994 for beef. Certification under this brand was applied to potatoes from 1999. During the 1990s, other quality labels emerged for organic and bio-dynamic products of Luxembourg’s agricultural industry. Between 1988 and 2001, the number of organic farms rose from eight to 49, and the area farmed using organic production methods rose from 368 ha (909 acres) in 1988 to 3 234 ha (7 991 acres) in 2001. There was a real boom, although this area should be compared with the total area of agricultural land which stood at 127 942 ha (316 157 acres) in 2001, broken down into 61 365 ha (151 639 acres) of arable land and 65 114 ha (160 903 acres) of meadow and pasture. Within this context, we should note that the use of fertilisers seems to have levelled off since the early 1990s. For example, the amount of nitrogenous (N) fertilisers used per hectare cultivated, which rose sharply from 78 kg in 1970 to 157 kg in 1990, was reduced to 142 kg in 2000. Wine-growing has followed a concentration trend similar to that in agriculture. In 1980, the number of wine-growing establishments was 1 224. By 2001, there were only 536 left, while the area devoted to viticulture remained more or less stable:1 282 ha (3 168 acres) in 1980 and 1 342 ha (3 316 acres) in 2001. Wine-growing estates covering more than 5 ha (12.3 acres), which can be described as relatively “large” establishments, made up only 5 % of the total wine-growing area in 1980, but their share reached nearly 60 % in 2001. While agriculture has had to contend with pressure on prices and comply with Community regulations on milk quotas, wine-growing has been subjected to increasing competition from foreign wines, both on national territory and abroad. The total amount of wine imported into Luxembourg reached 248 228 hl (5 .46 mill. gallons) in 2000/2001, whereas it had only been 171 738 hl (3.78 mill. gallons) in 1985/1986. The average annual output of Luxembourg wine was about 150 000 hl (3.30 mill. gallons) between 1980 and 2000. The average yield per hectare has tended to stabilise recently. As in agriculture, the wine-growing community is trying to deal with the competition by concentrating on quality, diversification and commercial promotion. The second sector which doesn’t seem to have echoed the growth pattern of the Luxembourg economy over the last decade of the 20th century is the sector of hotels, restaurants, cafés and catering (HORECA sector), at least if we think in terms of comparative performance. Its share of the sum of values added rose from 2.2 % in 1985 to 2.4 % in 1990, but slumped back to 2.1 % in 2001.

92 2 - ECONOMIC STRUCTURES 2.2 - Productive structure Total wine yield and wine-growing areas in production

300 000 4 000 3 500 250 000 3 000 200 000 2 500 150 000 2 000 1 500 100 000 Total wine yield (in hl) Total 1 000 50 000 500

0 0 (in ha) in production areas Wine-growing 1910 1870 1850 1970 1930 1950 1920 1840 1880 1940 1860 1890 1980 1960 1990 1900 2000 Total wine yield (in hl) Trend in total wine (average over 10-year period) Wine-growing areas in production (in ha)

Source : Institut viti-vinicole, STATEC

We can certainly see an increase of some 40 % in value added in volume (at constant prices) over 15 years, but this increase occurred mainly during the 1985-1990 period. Also, employment in this sector has increased quite considerably, rising from 8 700 in 1985 to 12 600 in 2001. Given that the rate of growth for value added in volume is slightly less than that for employment, this means that the HORECA sector must be registering poorer productivity (index 100 in 1985, 97 in 2001). In addition, the level of productivity (gross value added at current prices/employment) in comparison with the economy as a whole is low: 36 500 euros per job in the HORECA sector compared with 80 000 euros in the economy as a whole. As the productivity calculation does not take hours of labour into account, these figures should obviously be treated with some caution, especially as part-time work seems rather more prevalent in the HORECA sector than in the other sectors. Nevertheless, the approximate figures leave no room for doubt. Trends in the different branches of the HORECA sector should however be clarified. Between 1985 and 2001, the number of restaurants more than doubled, with 416 employing 2 749 people in 1985 compared with 901 employing 5 782 in 2001.The number of cafés,on the other hand,fell from 1 641 in 1985 to 1 147 in 2001, and employment from 3 285 to 2 883.This two-fold trend, an increase in the economic importance of restaurants and a reduction in that of cafés, results from changes in eating and recreational habits, but also flexible working hours and increased purchasing power. The hotel industry generally maintained its position over the entire 1985-2001 period. Employment remained stable at around 2 700 employees (2 726 in 2001), whereas the number of businesses fell slightly. This relative stagnation in terms of employment should be seen in the light of tourism trends in Luxembourg. The country regions with a history of tourism, such as the Ardennes, Mëllerdall or Moselle region seem to be finding it hard to maintain the level achieved in the early 1980s. The slight increase in guest-nights for the country as a whole is due to the Central region, where the capital is situated. This stems from the boom in business tourism and cultural tourism. Also, the modest nature of the rise in guest-nights (growth of 5% between the periods 1981-1985 and 1996-2001) is not due to the number of tourists. Arrivals increased from 717 000 (annual average) for the period 1981-1985 to 841 000 for the period 1996-2001, constituting a rise of 17 %. Travel and tourism habits appear to be the determining factor, with short stays now being favoured.

2 - ECONOMIC STRUCTURES 93 2.2 - Productive structure Hotels, restaurants, cafés, catering Hotels, restaurants, cafés, catering Number of companies People employed

1 800 6 000 1 600 5 000 1 400 1 200 4 000 1 000 3 000 800 600 2 000 400 1 000 200 0 0 Hotels Restaurants Cafés Canteens and Hotels Restaurants Cafés Canteens and caterers caterers

1985 2001 1985 2001

Source : STATEC

94 2 - ECONOMIC STRUCTURES 2.2 - Productive structure Guest-nights by tourist region (annual averages, all types of accommodation)

Total Centre Ardennes Mëllerdall Moselle South

1981-1985 2 507 748 724 590 935 465 614 592 196 205 36 895 1986-1990 2 539 888 877 263 847 432 584 024 187 564 43 604 1991-1995 2 766 820 1 042 219 902 705 590 643 169 336 61 918 1996-2001 2 640 255 1 030 336 830 249 529 062 169 887 80 720

Source : STATEC

In the HORECA sector, the growth in “canteens and caterers” should be highlighted. This sector includes notably group catering which is expanding vigorously and is an activity that could be likened to “business services”. The two largest companies in this sector, Compass Group Luxembourg and Sodexho, had 850 and 750 people in their employ respectively at the end of 2001. However, this employment figure includes activities linked with old people’s homes, in which the two groups have recently become involved. One last sector whose overall importance to Luxembourg’s economy is tending to decrease is industry as a whole. Industry, including energy, saw its share of the sum of values added drop from 23.8 % in 1985 to 12 % in 2001. There was a comparable fall in industrial employment’s share of total employment (23.7 % in 1985 and 12.9 % in 2001). However, this decline is largely attributable to the steel industry, as other industrial sectors (plastics, rubber, textiles, etc.) are developing in a very dynamic way, in terms of value added, employment and productivity. During the last quarter of the 20th century, the industrial sector has become very diversified. We will come back to this sector later (chapter 2.2.2.4).

2.2.1.4. Imposed changes and intentional changes A description of how Luxembourg’s economic structure has evolved may give the impression that these changes have been more imposed than intentional. Obviously, Luxembourg was hit by the first and second oil crises and the steel crisis. Likewise, the origins of the boom in the financial market tend to be attributable to factors outside Luxembourg. Agricultural developments have been determined partly by the Common Agricultural Policy, and the structural problems in this sector stretch beyond Luxembourg. In addition, Luxembourg’s economic development is tied in with a more general liberalisation and globalisation trend. Nevertheless, the deliberate policies implemented by Luxembourg’s public authorities have had measurable economic effects. The basic tool among economic policies is obviously fiscal policy. The level and structure of tax and social security deductions (dealt with in another part of this document) have an impact on labour costs and employees’ net earnings in particular, and help make Luxembourg attractive. Conscious of the problem of vulnerability to external crises resulting from a monolithic industrial structure, which was heavily dominated by the steel industry until the 1974-1975 crisis, the public authorities also attempted, even before this crisis, to exert a more direct influence on the evolution of economic structures, especially the development of the industrial sector. Motivation for the implementation of a deliberate economic diversification policy also came from the need to maintain an economic balance between regions. This balance was threatened by the decline in agricultural jobs, a decline that affected the north of the country in particular. Traditional industrial firms spread around the country (glove-making, cloth-making, tanning, etc.) had also started

2 - ECONOMIC STRUCTURES 95 2.2 - Productive structure to disappear during the interwar period. The last tannery (the IDEAL company based in Wiltz) closed down in 1959. During the post-war period, the first sizeable foreign industrial company set up a plant in Luxembourg in 1951.This was the tyre-manufacturer Goodyear, which established itself in Colmar- Berg in the north of the country to gain a foothold in the European market. This remained an isolated event until the late 1950s. The creation of the “Board of Industrial Development” in 1959 marked the beginning of economic canvassing activities in the United States. Between 1962 and 1964, around 20 industrial firms, mainly originating from the US, established themselves in Luxembourg, the largest being DuPont de Nemours in 1963. We should also note that by the end of 2001 Goodyear was the third-biggest employer in the country, with a workforce of 3,590. Employment at DuPont de Nemours reached 1 240 (fourteenth-biggest employer in the country). The canvassing and promotional activities pursued in many countries by the “Board”, which has since become the Comité de développement économique (Economic Development Committee) on which the Hereditary Grand-Duke traditionally serves as honorary president, have continued since the late 1950s. The framework law of 2 June 1962, renewed and improved in 1967, 1973 and 1986, soon became the “framework law on economic expansion” and aimed to enhance the economy’s overall structure, improve the regional balance and stimulate expansion by introducing a range of fiscal measures and various types of aid. These included interest rate subsidies for credit institutions granting reduced-rate loans financing investments, State guarantee applicable to some of these loans, capital grants, tax relief and State acquisition of real estate for setting up new businesses. A first report drawn up in 1972 showed 49 new implantations and 10 000 jobs created between 1959 and 1972. When the steel industry was in danger of collapsing during the 1970s, the diversification policy was supported by the law of 25 July 1977,setting up temporary fiscal aid for investment and, by the law of 2 August 1977, creating the Société Nationale de Crédit et d’Investissement/SNCI (National Credit and Investment Company/NCIC) which supplemented fiscal and budgetary diversification instruments with schemes for long-term credit and equity participation. Between 1975 and 2001, nearly 170 new companies established themselves in Luxembourg, benefiting in one way or another from diversification measures. Employment in these companies stood at 15 407 on 31 December 2001.

Establishment of new businesses and employment

Businesses Employment

Year Number Variation Number Variation (at 31.12) (since 1975) (since 1975)

1993 119 - 9 226 - 1994 126 + 7 9 758 + 532 1995 127 + 1 10 449 + 691 1996 127 0 10 892 + 443 1997 133 + 6 11 765 + 873 1998 137 + 4 12 736 + 971 1999 146 + 9 13 507 + 771 2000 162 + 16 14 637 + 1 130 2001 176 + 14 15 407 + 770

Source: Ministry for Economic Affairs

96 2 - ECONOMIC STRUCTURES 2.2 - Productive structure Research and development policy - R&D

Years Budgetary contributions Innovation loans granted by NCIC

annual average Number of R&D investment Funds Number of R&D investment Innovation for the periods: projects provided for allocated projects investment loans (in mill. euros) (in mill. euros) (in mill. euros) (in mill. euros)

1991-1995 7 15.3 3.2 6 14.4 2.9 1996-2001 13 46.2 7.9 7 26.8 6.6

Source: Ministry for Economic Affairs

From the early 1980s, there was increasing recognition of the importance of innovation and research/development (R&D) for the growth of the economy. The law of 9 March 1987 relating to the organisation of research and technological development in the public sector, plus technology transfer and scientific and technical cooperation among businesses and the public sector, laid the legal foundations for the creation of Public Research Centres (PRC). Cooperation among PRCs and the private sector increased continually from the late 1980s. In addition, the law of 27 July 1993 provided for government budgetary contributions to efforts made by businesses in the R&D domain, while the National Credit and Investment Company (NCIC) was authorised to grant loans for innovation. At the end of 2001, the Henry Tudor Centre was the largest of all the Public Research Centres in terms of employment, with some 180 employees. Within the same context, it is worth highlighting the creation in 1984 of “Luxinnovation”, a joint initiative from the Luxembourg government and employers’ associations. This organisation, relaunched in 1998 in the form of an “Economic Interest Group (EIG)”, was responsible for assisting businesses wanting to get involved in innovation projects. The Fonds National de la Recherche (National Research Fund) created by the law of 31 May 1999 and the plans to create a Université de Luxembourg, developing the current Centre Universitaire, should help promote research and development. According to a EUROSTAT survey conducted in 1996, 42 % of Luxembourg’s industrial manufacturing firms and 48 % of service-sector firms were engaged in innovation activities. Almost half of these innovative firms in the service sector were cooperating on R&D with other firms or institutions. We should note that an “innovative firm” means a firm that has brought new or improved products onto the market, or implemented procedures of this nature. Compared with neighbouring countries, these figures are not bad at all, particularly in the service sector (48 % innovative firms) which has a dominant influence on Luxembourg’s economy. For example, innovative firms only represented 13 % of all service firms in Belgium. The corresponding figures were 31 % in the service sector in France, 36 % in the Netherlands, 40 % on average among the 15 EU countries, but 58 % in Ireland and 55 % in Austria. Besides innovation and research & development, modernising the economic structure also means implementing new information and communication technologies (NICTs). To promote the spread and use of NICTs, the government played its part by launching the “e-Luxembourg” programme in 2000, in answer to the “e-Europe” Community initiative approved in June 2000 at the Feira European Council. In this same sector, the law of 14 August 2000 relating to e-commerce very quickly transposed the 1999/93 Directive relating to a Community framework for electronic signa- tures, the Directive relating to certain legal aspects of information society services and certain provisions of the 97/7/EEC Directive concerning the distance selling of goods and services other than financial services. Despite these initiatives, it cannot be denied that Luxembourg still has a lot of work to do in this domain. According to the 2001 edition of the Summary Innovation Index published by the

2 - ECONOMIC STRUCTURES 97 2.2 - Productive structure Summary Innovation Index (SII) in 2001

8.0

6.0

4.0

2.0 F AB L E I EL P 0.0

-2.0 S US FIN UK JP DK NL IRL D

-4.0

-6.0

-8.0

-10.0

Source: European Commission, Ministry for Economic Affairs. N.B. index corrected, taking into account the “ICT (Information and Communication Technologies) expenditure / GDP” indicator in Luxembourg

European Commission, Luxembourg is situated below the European average for innovation and in eleventh place among the 15 EU countries on the “innovation scoreboard”. For each separate index (SME innovation activities, venture capital, continuing training, etc.), the summary index analyses whether a country is placed below (negative point) or above (positive point) the Community average, and then takes an average of available indexes. Even though Luxembourg’s score needs to be put into perspective, given that some indicators were not available/ignored (like ICT expenditure/

Percentage of employees who haven’t undergone any training offered by their employer over the past 5 years (1996 and 2001)

1996 2001 2001-1996

Germany 51.7 44.5 -7.2 Austria 53.5 51.4 -2.1 Belgium 68.2 65.1 -3.1 Denmark 35.8 22.9 -12.9 Spain 69.8 71.1 1.3 Finland 28.5 26.2 -2.3 France 61.7 67.1 5.4 Great Britain 52.6 45.6 -7.0 Greece 76.5 77.5 1.0 Ireland 58.7 62.5 3.8 Italy 78.8 62.0 -16.8 Luxembourg 66.8 48.9 -17.9 Netherlands 49.3 45.9 -3.4 Portugal 70.6 78.2 7.6 Sweden 30.9 34.2 3.3

Source: Eurobarometer 56.1, October 2002

98 2 - ECONOMIC STRUCTURES 2.2 - Productive structure GDP), the poor performance stemming mainly from “negative” indicators for SME innovation and the low number of high-tech patents applied for shows that the country still has plenty of room for improvement on this front. Nevertheless, some indexes suggest that we are well on the way towards the advent of a society of information and knowledge. In the human resources sector, it is worth noting that, according to a study conducted by the European Foundation for Working Conditions, the percentage of employees having undergone a training course paid for or provided by their employer over the past 12 months, rose from 25 % in 1995 to 32 % in 2000. The percentage now stands at the same level as that in Germany and Belgium, while remaining behind countries such as Finland (55 % in 2000), Denmark (49 %) and the Netherlands (46 %). Another recent survey conducted within the Eurobarometer framework confirms this trend, showing that the number of employees who haven’t undergone any further training offered by their employer over the past 5 years has decreased significantly in Luxembourg. Initiatives launched by public authorities in the continuing training field have accentuated this trend. In 1992, the Institut National pour le développement de la Formation Professionnelle Continue/INFPC (National Institute for the Development of Conti- nuous Vocational Training/NICVT) was created. The law of 22 June 1999, modified by the law of 10 June 2002, aimed at supporting and developing continuous vocational training, provided for either “direct aid” amounting to 10 % net of tax of the amount invested by the company in continuous vocational training, or a “tax rebate”equivalent to 10% of the amount invested by the company in training, taken off income tax. Against this background, we should also point out that employment in “knowledge-intensive” services, including primarily air transport, post and telecommunications, computing activities, financial intermediation, education and health, increased in Luxembourg from 30.5 % of total employment in 1995 to 35.8 % in 2001, representing a rise of 5.3 %. By way of comparison, employment in “knowledge-intensive” services has increased by only 3.0% on average among the 15 EU countries, from 29.9 % of total employment in 1995 to 32.9 % in 2001. Other factors confirm these impressions. Employment in high-tech services, including post and telecommunications, information technology and R&D services, stands slightly below the European average: 3.1 % of total employment in 2001 in Luxembourg, compared with 3.6 % of total employment across the 15 EU countries. At 8.3 %, however, Luxembourg’s annual rate of growth in employment in these services between 1996 and 2001 was among the highest in Europe, compared with 6.1% across the 15 EU countries. Similarly, according to indicators showing the distribution and use of the Internet among the public and within businesses, Luxembourg is moving closer to countries that are performing best on this front. The percentage of households connected to the Internet increased from 26.9 % in

Average annual growth rate in employment in higth-tech services 1996-2001 (in %)

20.0

15.0

10.0

5.0

0.0 P D F EL I AEU-15 FIN DK B S L UK E NL IRL

Source: EUROSTAT N.B. High-tech services: Post and telecommunications, information technology, R&D services

2 - ECONOMIC STRUCTURES 99 2.2 - Productive structure Internet penetration - Household connection rate

70 % 60 % 50 % 40 % 30 % 20 % 10 % 0 % NL DK S L FIN A IRL UK D B F I P E EL EU-15

March 2000 June 2001 June 2002 Source : Eurobaromètre

March 2000 to 55 % in June 2002. In June 2002, 62 % of the Luxembourg population claimed to use the Internet (compared with 51 % on average in the European Union). In June 2002, 26 % of the population claimed to regularly or occasionally buy products or services online, compared with 20 % on average in the European Union. Only Great Britain scores better than Luxembourg on this front. Furthermore, the percentage of Luxembourg businesses with access to the Web rose from 26 % in 1998 to over 60 % in January 2001, according to a recent STATEC study. Nevertheless, there is still progress to be made in this area. In 2001, only 19 % of Luxembourg businesses claimed to use e-commerce for their purchasing, compared with an average of 26 % for European businesses. Telecommunications, the sector of the future if ever there was one, is another economic sector in which deliberate policy is reflected. In 1986, the Luxembourg government backed the creation of the Société Européenne des Satellites (SES) by granting it a concession (renewed in 1993) to broadcast audiovisual programmes via satellite in accordance with the regulations of the International Telecommunication Union (ITU) and by providing 20% of the seed capital. During the 1990s, the SES-ASTRA satellite system became the biggest operator of satellite services in Europe. Between 1999 and 2000, the SES group became a “global player”by acquiring stakes in satellite service operators in Asia, South America and Northern Europe. In 2001, SES-GLOBAL resulted from ASTRA’s merger with AMERICOM, one of the leading operators in the United States.We will return to these developments in chapter 2.2.2.3.

2.2.1.5. A diversified economy, despite the financial sector’s dominance It would be hard to deny that financial services (banks and financial auxiliaries) constitute the key (supporting) element of Luxembourg’s economy.Luxembourg has made this discovery over recent years (since 2001), during which dwindling results in financial activities, due mainly to the crisis on the stock markets, have had an impact on GDP.The GDP growth rate, which was 6.8 % on average during the 1995-2000 period, fell to 1% in 2001. However, to dwell on this aspect resulting from the impact of financial services on value added would be too simplistic. The diversity of the economic fabric is revealed more clearly by analysing the trends in the various economic fields and sectors, in terms of increased productivity and value added in volume (at constant prices), plus changes in employment. Diversity is also reflected in the differences in productivity levels and pay levels between sectors. Several observations need to be made:

100 2 - ECONOMIC STRUCTURES 2.2 - Productive structure 1. Nearly all the economic sectors and fields contribute to growth. There are a few notable exceptions:growth in agriculture is weak and that in the sector of hotels,restaurants,cafés and catering services is not managing to follow the trend in the economy as a whole. In industry, the relative decline of the steel industry has mainly reduced the overall weight of this sector in the economy. On the other hand, it can be seen that other industrial sectors, including chemicals, rubber, plastics, textiles, electrical and electronic equipment, are developing in a more dynamic way. 2. Some sectors are developing favourably if we refer to growth (in volume) of gross value added and to employment, but less positively in terms of productivity. For instance, growth in productivity in the construction industry is very low (1 % on average per annum during the 1985-2001 period compared with 2.4 % for the economy as a whole). Conversely, employment and gross value added at constant prices in construction practically doubled between 1985 and 2001. This also applies to services provided mainly for businesses. These services have created many jobs: employment rose from 7 200 in 1985 to 35 400 in 2001.The business services’share of gross value added rose from 3.1 % to 6.9 %. However, productivity in this sector seems to have fallen significantly (approximately -2 % p.a. on average). Even financial services can be placed in this category. During the 1985-2000 period, productivity rose by only 1.2 % p.a., and only 0.3 % p.a. if you count the year 2001, which saw the financial sector declining. It is true that the level of productivity remains high in financial intermediation.

2 - ECONOMIC STRUCTURES 101 2.2 - Productive structure 3. Some sectors whose weight in the economy continues to decline, such as agriculture and steel, can nevertheless show significant productivity gains: more than 5 % p.a. for agriculture and more than 8 % p.a. for the steel industry during the 1985-2001 period. These productivity gains have been achieved largely by cutting the number of people employed and, in the case of the steel industry, through heavy investment linked with replacing the blast-furnace system with the electric system. As far as agriculture is concerned, we should point out that productivity gains were mainly achieved during the 1991-1995 period (+14.2 % p.a. 1991 to 1995), while the situation deteriorated between 1996 and 2001 (+0.6 % p.a. 1996 to 2001). 4.There are only three major sectors (transport and communications, the wholesale trade and car selling) in which consistent productivity gains go hand in hand with growing employment. 5. The levels of productivity are very diverse. We will ignore the extremely high productivity in the real estate business, which is distorted due to the charging of rents in this field of activities.

Level of productivity and pay per employee per sector

Agriculture, hunting and forestry; fishing and aquaculture

Industry, including energy

Construction

Commerce; car and domestic appliance repair; hotels and restaurants, transport and communications Sales; car and domestic appliance repair Hotels, restaurants, cafés and catering services Transport and communications

Financial activities; property, business services Financial services Real estate, rental and business services Real estate activities Renting without operator Computer and related activities Services mainly for businesses, R&D

Other service activities Public administration services Education Health and social services Other community, social and personal services Domestic services

Total for all sectors

102 2 - ECONOMIC STRUCTURES 2.2 - Productive structure Therefore, rental services and financial services are the sectors that show the highest level of productivity. At the other end of the scale, we find the hotel and catering industry, agriculture, business services and construction. Industry as a whole slots between these two extremes. 6. Employee pay levels correspond to productivity levels, with high average pay in financial intermediation, lower pay in the hotel and catering industry, construction, commerce and business services. Average pay per employee in the public sector (public administration and education) comes midway between the low-pay and high-pay sectors. In the following chapter, the spotlight will be turned on three of the most dynamic sectors in Luxembourg’s productive structure: financial services, computing activities, business services and recreational activities, as well as transport and communications. Additional comments will also be made about the industrial sector which, by European comparison, has developed quite favourably during the 1985-2001 period.

Productivity Pay per employee (GVA at current prices/employment) (total pay/number of employees)

1985 1995 2001 1985 1995 2001

in thousands of euros in thousands of euros

19.2 34.8 38.6 16.3 27.9 33.1

41.0 72.2 74.3 23.942.944.2

20.1 45.4 47.8 16.0 29.8 30.8

28.5 65.0 66.7 18.7 32.934.5 29.7 54.4 54.2 15.8 28.6 30.1 16.6 35.3 36.5 13.4 23.5 24.6 35.0 101.3 104.6 27.8 44.3 45.7

110.2 130.3 124.8 29.8 50.2 52.0 126.8 180.5 167.0 36.5 71.8 72.9 88.7 93.6 92.8 20.0 32.8 34.8 589.6 830.8 830.3 17.2 32.1 33.1 83.7 161.9 189.1 23.3 38.8 42.5 42.3 66.4 61.5 36.0 48.5 50.5 28.3 41.8 43.0 19.5 30.8 32.5

30.4 57.0 58.8 22.8 44.3 46.2 38.7 79.5 81.7 28.4 57.7 59.4 32.7 63.7 65.2 29.5 58.1 59.4 25.4 47.4 51.8 17.6 36.3 38.8 35.1 57.8 54.9 19.2 38.4 39.2 7.6 14.0 17.0 7.6 14.0 17.0

40.8 79.2 79.8 22.2 41.2 42.9

2 - ECONOMIC STRUCTURES 103 2.2 - Productive structure Breakdown of growth in certain fields between 1985 and 2001 (employment and productivity) Average annual variation rates

Total economy

Agriculture Hotels, restaurants, cafés and catering

Retail trade

Metallurgy

Total industry

Construction

Car selling and repair

Financial services

Wholesale trade

Services mainly for businesses, R&D Transport and communications

-5.0 % %-1.0 %-3.0 1.0 % 3.0 % 5.0 % 7.0 % 9.0 % 11.0 % 13.0 % 15.0 % GVA variation in volume Productivity Employment

Source : STATEC

104 2 - ECONOMIC STRUCTURES 2.2 - Productive structure 2.2.2 SPOTLIGHTS

2.2.2.1 The financial sector: the heart of the Luxembourg economy

A. Luxembourg’s development as a financial centre The emergence of Luxembourg as a financial centre has mainly been encouraged by its favourable legal and tax regimes, which have become particularly attractive as a result of outside factors such as the adoption of fiscal measures in third countries. Its main distinctive features are banking confidentiality, the fact that interest on savings is not taxed at source (this applies until 2004), the flexible system in terms of banking provisions, and active measures to combat money laundering. Other factors have boosted Luxembourg’s expansion as a financial centre: its rapid transposition of European Union directives, the effectiveness of its prudential supervision, its skilled, multilin- gual workforce, convenient geographical location and competitive operating costs, particularly in terms of income tax and national insurance.

• Holding companies and SOPARFIs The development of holding companies was the first main factor in Luxembourg’s growth as a centre of finance. The 1929 law on holding companies made it highly attractive to foreign capital, for example by exempting profits and capital gains from tax and not deducting tax at source.The growth of holding companies gained added impetus in 1965 when their legal framework was extended. The one major drawback of holding companies set up under the 1929 law is that they do not benefit from dual taxation agreements or the European directive establishing a common tax regime between parent companies and their EU subsidiaries.This was remedied by an act passed in 1990 creating “sociétés commerciales de participations financières” (SOPARFIs).

The growth of holding companies in Luxembourg

Break due to removal of non-trading companies from government data 45 16 000 40 14 000 35 12 000 30 10 000 25 8 000

Capital (EURCapital bn) 20 6 000 15 4 000 10 Number of companies 5 2 000 0 0 1981 1975 1972 1978 1987 1963 1993 1984 1966 1969 1996 1999 1960 1990 NumberCapital

Source : Administration de l’Enregistrement et des Domaines

2 - ECONOMIC STRUCTURES 105 2.2 - Productive structure Total quotation line-items on the Luxembourg stock exchange

25 000

20 000

15 000

Number of lines 10 000

5 000

0 1981 1975 1972 1987 1978 1993 1963 1984 1996 1999 1966 1969 1990 1960 Other quotation line items Shares and OPCs External and international bonds

Source : Luxembourg stock exchange

• The stock exchange Although the Luxembourg stock exchange was set up in 1928, it did not really get off the ground until some 40 years later. The exchange admitted its first Luxembourg investment fund in 1962, but these funds began growing very rapidly for another 20 years. The world’s first international foreign-currency bond was quoted in Luxembourg in April 1969, and this innovation enabled the stock exchange to benefit from the increasing flow of eurocurrencies into the country.They were converted into eurobonds and offered to debtors around the world in the form of syndicated loans.The stock exchange enjoyed a growing international role as a major centre for the quotation of eurobonds. March 1981 saw the introduction of gold trading,stimulated by Germany’s introduction of VAT on gold coins in the previous year, France’s abolition of anonymous gold buying and Switzerland’s taxation of gold deposits.This was a great success,but subsequently declined as a result of Swiss and German tax changes (1983) which wiped out the benefits offered by Luxembourg.

106 2 - ECONOMIC STRUCTURES 2.2 - Productive structure Over the years, the Luxembourg stock exchange has consolidated its predominant role in international bonds and investment funds. It has two niche markets: issuance and quotation (with less emphasis on transactions) and bonds (with less emphasis on shares and warrants).

• Banks The number of foreign banks in Luxembourg has grown not continuously but in waves, as third countries have implemented tax and regulatory measures and other policies which are unfavourable to their citizens. Luxembourg’s preferential fiscal and regulatory treatment of the banking sector has made it a popular destination for foreign banks, and there have been considerable inflows of private funds. An analysis of new bank setups and bank asset volumes clearly shows how Luxembourg’s legal and fiscal environment has benefited the growth of local and foreign banks. - In the early 1950s, the presence of banks in Luxembourg was mainly the result of geographical proximity-related factors. In 1950 there were fourteen of them, twelve from the Belgium- Luxembourg Economic Union (BLEU) and two from France, mainly serving the domestic market and the surrounding region. The international financial market did not really get off the ground until the 1960s onwards. - In 1960, the first American bank established a subsidiary in Luxembourg, in response to the United States’ adoption in 1958 of regulation Q, which places a maximum limit on the rates which American banks can pay on dollar deposits. - The first eurobond, denominated in eurodollars, was created in 1963. This was issued in Luxembourg because of the low costs involved and the fact that tax was not deducted at source. The Euro-issues market was partly stimulated by the interest equalization tax imposed in the United States between 1963 and 1973 on bond interest to limit European countries’ borrowings from the US. - The eurocurrency and eurobond markets continued to grow during the 1960s. In addition, many German banks set up shop in Luxembourg to avoid the taxation of compulsory reserves by the Bundesbank.

The growth of banks in Luxembourg

250 25 First wave First wave of German Beginning of private 225 of American banks, and arrival of banking and asset 20 200 banks Swiss banks management startups 15 175 10 150 5 125 0 100 First Second wave Arrival of -5

Number of banks eurobond of American Scandinavian troduction of deduction banks banks In 75 at source in Germany -10 50 -15

Beginning of wave Annual change in number of banks 25 of mergers and acquisitions -20 0 -25 1972 1974 1978 1982 1976 1992 1962 1970 1984 1988 1994 1964 1986 1998 1968 1980 1996 1966 1990 1960 2002 2000

Change on previous year Number of banks at year end

Source : Central Bank of Luxembourg Commentary: STATEC

2 - ECONOMIC STRUCTURES 107 2.2 - Productive structure Balance-sheet total of banks established in Luxembourg

700

600

500

400 EUR bn 300

200

100

0 1981 1975 1972 1987 1978 1993 1963 1984 1996 1999 1966 1969 1990 1960 2002

Source : Central Bank of Luxembourg

- In the early 70s, Swiss banks began setting up subsidiaries to profit from the euromarket and the presence of German banks. - During the mid-70s, American banks established subsidiaries and branches to take advantage of Luxembourg’s banking confidentiality and non-deduction of tax at source. - At the end of that decade, Scandinavian banks began arriving with the aim of avoiding the ban on foreign currency lending in their home countries. - In the mid-1980s, a number of banks set up operations in Luxembourg in order to place a greater focus on private banking business. - From 1992 onwards, a new wave of German bank setups occurred after the re-introduction of savings tax deductions at source in Germany. - In 1995, however, the number of banks in Luxembourg began to decline, not because the country had become any less attractive as a financial centre but because of the wave of mergers and acquisitions which had started to affect Europe as a whole. For this reason, although the number of banks has fallen, their total assets have continued to rise.

• Undertakings for Collective Investment (UCIs) Luxembourg’s first “fonds commun de placement” (FCP) was created in 1959 after the holding companies tax regime was extended to FCP management companies.“Organismes de placement collectif” (OPCs) did not take off until 1983 when Luxembourg, anticipating forthcoming Community regulation of undertakings for collective investment in transferable securities (UCITs), set up a modern and flexible legislative framework granting separate tax status to UCIs and also creating the legal concept of the “Société d'investissement à capital variable” (SICAV). Further impetus came in March 1988 with the transposition into national law of the December 1985 European directive on UCITs. This granted a “European passport” to Luxembourg SICAVs: a single licensing procedure whereby once a harmonised fund had been licensed in a member state, it could sell its shares in any other member state simply by giving notice that it intended to do so.

108 2 - ECONOMIC STRUCTURES 2.2 - Productive structure Total net assets Luxembourg UCI promoters’ countries of origin, of Luxembourg UCIs based on net assets

900

800 Other 10 %

700 France 5 % Switzerland 24 % U.K. 6 % 600

500

400 EUR bn 300

200 Belgium 9 % 100 Unites States 18 % 0 Italy 11 % 1991 1973 1985 1982 1967 1976 1979 1997 1970 1988 1994 Germany 17 % 2000

SICAVs Others Source : Commission de Surveillance du Secteur Financier Source : Commission de Surveillance du Secteur Financier (CSSF) (March 2002)

Luxembourg was very quick to transpose the directive, giving it a big head start over many of its competitors. Its tax legislation was also highly competitive from the outset, because Luxembourg SICAVs are not taxed on their revenue or capital. They are required only to pay a small registration fee of EUR 1 200 and an annual subscription charge of between 0.01 % and 0.06 % of their total assets, depending on the fund.

• Insurance companies Until recently, Luxembourg’s insurance sector concentrated exclusively on the domestic market. It did not acquire an international focus until 1984, with the creation of a legal framework for reinsurance companies and the development of a free provision of services.The small size of the market, and the need to share risk, led many foreign insurance companies to establish operations in Luxembourg. Until the first Luxembourg-owned company was established in 1920, the market consisted entirely of branches of foreign companies. However, their major role in the domestic market declined over time as the market itself grew. In the late 1980s, the number of Luxembourg companies over- took that of branches of foreign companies as the free provision of services expanded. However, the market is still dominated by companies set up with foreign capital. Since the late 1980s, total premiums issued have continued to grow at a very steady rate. Between 1980 and 1990 they rose by an average of 14.7 % a year. From 1990 to 2000 they increased by 33.1 %, with non-life premiums growing by an average of 11.7 % per annum compared to 48.3 % for life. The latter accounted for 29.8 % of the total in 1990 and 87.8 % in 2000. This very significant premium growth is mainly due to the expansion of FPS (free provision of services) life insurance. Although non-life business also expanded beyond national frontiers, it is cross- border FPS life insurance which currently dominates the market covered by Luxembourg insurers.

2 - ECONOMIC STRUCTURES 109 2.2 - Productive structure Licensed insurance companies

120 100 80 60 40 20

Number of companies 0 1960 1970 1980 1990 2000 2001

Branches of foreign companies Companies under Luxembourg law

Source : Commisariat aux Assurances

The increasing diversity of FPS products meant that they remained attractive to the public. Luxembourg currently has a 47 % share of the FPS market, closely followed by Ireland. More than 90 % of cross-border premiums in the European Economic Area come from these two countries.

• Reinsurance Since the creation in 1984 of a legal framework for reinsurance companies, Luxembourg has been home to a large and growing number of captive reinsurers. In 2000, these companies’ total technical provisions amounted to EUR 11.9 billion. Reinsurance is the practice whereby an insurance company pays a premium for transferring part of its risk to another company, the reinsurer. Most Luxembourg reinsurers are captives; in other words, they are set up by a company or group of companies to reinsure only the risks incurred by the company or group. There are many advantages for an international group acting as its own

Insurance premiums issued

8 000

7 000

6 000

5 000

4 000

3 000 EUR Million 2 000

1 000

0 1981 1991 1987 1983 1985 1982 1997 1993 1995 1992 1984 1988 1994 1986 1998 1989 2001 1980 1996 1999 1990 2000

Life Non-life Source : Commissariat aux Assurances

110 2 - ECONOMIC STRUCTURES 2.2 - Productive structure Premiums received

Foreign life 81 % Luxembourg non-life 8 %

Foreign non-life 7 %

Luxembourg life 4 %

Source : Commissariat aux Assurances (2001) insurer; having a captive allows it to share the risk faced by the parent company and its domestic and foreign subsidiaries and reduce the cost of cover well below the premiums it would have paid to an outside insurer. The simplicity of Luxembourg legislation encourages the creation of new and innovative products, especially as provisions are tax-deductible, and these companies enjoy a highly advantageous tax position for a number of reasons: - The relatively high provision rate - The ability to create provisions for fluctuations in claims rates in addition to the usual technical provisions - The ability to carry forward profits tax-free, subject to certain conditions and limits. Over the years, Luxembourg has gradually risen to become the fifth most popular host country for captive companies. An analysis of their geographical domiciles clearly shows the offshore nature of the market. In 1998, two thirds of captives created around the world were offshore.

Luxembourg reinsurance companies

300

250

200

150

100

50 Number of companies 0 1991 1987 1985 1997 1993 1995 1992 1984 1984 1988 1994 1986 1989 1998 2001 1996 1999 1990 2000 before

Source : Commissariat aux Assurances

2 - ECONOMIC STRUCTURES 111 2.2 - Productive structure Number of captives by domicile

Domicile Nombre

Bermuda 1 497 Cayman Islands 485 United States 452 Guernsey 360 Luxembourg 255 Barbados 215 Isle of Man 175 Ireland 151 British Virgin Islands 80 Singapore 51 Bahamas 23 Switzerland 23 British Columbia 16 Curação 15 Jersey 14 Gibraltar 10

Source: Reinsurance, January 2000 (figures for 1998)

• Other players As the financial sector has expanded, so have other related areas such as IT, accountancy, advertising, property and management consultancy.These new service companies employ a similar number of people to the financial sector itself, accounting for 10 % of total domestic employment. Of these, the most important development for Luxembourg’s role as a financial sector has undoubtedly been the creation of Cedel (now Clearstream) which connects the world’s securities clearing and settlement transactions. The company currently carries out over 500 000 settlements a day covering more than 200 000 securities in over 34 markets. Its turnover is three times that of its nearest competitor. Clearstream also offers other services such as securities custody, liquidity and treasury management, cash financing and securities lending.

B. The main pillars of the financial sector today While Luxembourg’s initial role as a financial centre was built on Euro-issues and holding companies, today it has four main pillars: interbank business, private banking, OPC administration and FPS insurance.

• The interbank market Over the years, large amounts of capital have been directed towards Luxembourg. Given the small size of the domestic market, these are mainly placed abroad, particularly with other banks. Luxembourg is currently Europe’s fourth largest interbank market, and the world’s ninth largest in terms of external positions vis-à-vis the banking sector.

112 2 - ECONOMIC STRUCTURES 2.2 - Productive structure Banks’ external asset position (as at 31 December 2001)

United Kingdom Japan United States Germany Cayman Island Switzerland France Luxembourg Singapore Hong Kong Netherlands Belgium Bahamas Ireland

0 500 1 000 1 500 2 000 2 500 USD bn Vis-à-vis all sectors Vis-à-vis banking sector

Source : Banque des réglements internationaux (BRI)

• Private Banking The various stages of Luxembourg’s development as a financial centre are reflected in the original nationalities of the banks operating there. Geographical proximity is the key factor for the sector: 52 % of the banks come from the surrounding countries. For the reasons mentioned above, Swiss, American and Scandinavian banks also have a strong presence. But more than a third come from countries other than these, showing how international the business has become, particularly in the area of private banking.

Banks’ countries of origin

Other countries 19 % BLEU 13 %

Japan 3 %

United States 5 %

Scandinavia 5 % Germany 30 %

Switzerland 6 %

Italy 10 % France 9 %

Source: Central Bank of Luxembourg (30 September 2002)

2 - ECONOMIC STRUCTURES 113 2.2 - Productive structure Luxembourg banks’ gross profits (at year end)

9 000

8 000

7 000

6 000

5 000

4 000

3 000 EUR million 2 000

1 000

0 1981 1977 1991 1978 1987 1983 1985 1982 1997 1979 1993 1995 1992 1984 1988 1994 1986 1989 1998 2001 1980 1999 1996 1990 2002 2000 Margin on interest Net commission revenue Other revenue

Source : Central Bank of Luxembourg

The importance of private banking has continued to grow since the mid-1980s. The sector now has a large international clientele seeking to benefit from a huge range of financial and investment products. Although there are few reliable statistics available, a 1998 study of individuals with financial assets of over USD 1 million concluded that 6 % to 8 % of offshore private banking is located in Luxembourg, compared to 30 % to 35 % in Switzerland. Luxembourg has therefore positioned itself as an international centre of excellence in terms of asset management.

• UCI administration and distribution Luxembourg’s attraction as a financial hub is not limited to promoters from countries outside the European Union seeking to benefit from the “European passport”, such as the United States and Switzerland. Even inside the Union, the country has become a centre for administration and, more recently, funds distribution, and over the years it has acquired very specific know-how in these areas. It is the undisputed leader in cross-border sales of investment funds; of the twenty promoters distributing their funds in more than one EU country in July 2000, eighteen were based in Luxembourg. Although these figures are still modest, they do show that the single market in investment funds has yet to become a reality and there is considerable scope for development. Luxembourg has essentially specialised in what are known as Part I funds under the 1988 law. Part II funds are closed for repurchase and not promoted in the European Union, or are sold to the public only in countries outside the EU. This categorisation is largely the same as that operated in other European countries. In the space of only a few years Luxembourg has become the world’s second largest centre for investment funds after the United States, and it has recently overtaken France. It has a European market share of over 22 %, and Luxembourg assets account for over 16 % of the world total excluding the US.

114 2 - ECONOMIC STRUCTURES 2.2 - Productive structure Net actives of OPCs by applicable law

Part I of the law of 1988 76 % Part II of the law of 1988 20 %

Institutional OPCs 4 %

Source: Commission de Surveillance du Secteur Financier (May 2002)

Despite the large concentration of players, Luxembourg has not yet experienced any growth in its asset management business. Only a few international groups, such as Fortis, Dexia and KBC, have made Luxembourg their centre for private banking.

• The FPS market In 2001, 78 Luxembourg insurance companies were authorised to operate on a free provision of services (FPS) basis. 43 % of the country’s FPS life premiums came from Belgian residents, and related mainly to branch 23 products (life insurance linked to an investment fund). The second external market is France, where the tax treatment of life insurance has become considerably tougher as a result of legislative changes. Luxembourg products offer many benefits to French citizens, particularly in terms of asset transmission, and are covered by banking confidentiality.

The world investment fund market as at 31 December 2001

Resident country Values in mia EUR % of total

United States 7 914 417 59.9 Luxembourg 851 060 6.4 France 800 200 6.1 Italy 403 678 3.1 Japon 390 227 3.0 United Kingdom 389 441 2.9 Australia 379 004 2.9 Canada 303 941 2.3 Germany 239 666 1.8 Irland 215 188 1.6 Hong Kong 192 980 1.5 Various 1 102 043 8.5

Source: Fédération Européenne des Fonds et Sociétés d’Investissement (FESSI)

2 - ECONOMIC STRUCTURES 115 2.2 - Productive structure Life insurance premiums by underwriting country (2001)

United Kingdom 8 % Other EEA 3 %

Spain 3 % Non-EEA 7 %

Italy 3 % Luxembourg 5 %

France 14 % Germany 11 %

Belgium 46 % Source : Commissariat aux Assurances

Life premiums issued in Luxembourg represent only 6 % of the total. Apart from FPS business, the country’s large number of private banking clients is also profitable for insurers.They sell numerous products to institutional clients, who use them as asset management tools for their own clients, most of them foreign.

Issued premiums under the free provision of services (FPS) in 2000

Pays 1 Premiums EUR million % of country premiums % of total

Belgium : : : Denmark 35 0.3 0.5 Germany 246 0.2 3.3 Spain 1 0.0 0.0 France 113 0.1 1.5 Irland 3 218 27.0 43.3 Italy 53 0.1 0.7 Luxembourg 3 496 52.0 47.1 Netherlands : : : Austria : : : Portugal 1 0.0 0.0 Finland 9 0.1 0.1 Sweden 102 0.5 1.4 United Kingdom : : : Iceland 0 0.0 0.0 Norway 155 2.4 2.1 Switzerland : : : Total 7 428 1.3 100.0

1. FPS relates to the EEA countries Source: Eurostat

116 2 - ECONOMIC STRUCTURES 2.2 - Productive structure On average, however, only 1.3 % of premiums issued in the EEA come from FPS business.This figure illustrates the fact that the single market in insurance still has not been completed. There have been particular problems connected with the diversity of languages in Europe, and special regulations which make it difficult or impossible to sign insurance contracts. Also, in certain circum- stances, regulations not strictly forming part of insurance legislation can be regarded as an obs- tacle to international insurance operations. The FPS market therefore has considerable potential for expansion over the coming years. The future of Luxembourg’s life insurance market is therefore a promising one. In 2000, 23 % of total EU household financial assets consisted of technical insurance provisions. In view of trends in European standards of living, even if this proportion remains constant the total volume of life insurance products should increase considerably. This should benefit Luxembourg life insurers, who currently earn over 90 % of their premiums from abroad.

C. The importance of the financial sector to the Luxembourg economy Even in 1970, Luxembourg’s financial sector was a slightly more important part of the economy than in other countries. During the following decades its relative weight increased in all the industrialised economies, but it grew at an unparalleled rate in Luxembourg.The financial sector is now the main driving force of the country’s economy, directly generating around 25 % of its added value, employing some 12 % of the total workforce, and accounting for over 40 % of tax receipts. The sector is therefore crucial to Luxembourg’s external trade balance; it accounted for 77.6 % of the surplus on the service balance of trade in 2001. In other words, exports of financial services compensate for the deficits generated by other items, and in particular the commercial and revenue balances. It is very difficult to quantify the sector’s indirect effects, though they are known to be significant. They depend on a number of assumptions, for example concerning the proportion of banking employees’ income spent in Luxembourg and the proportion of the property market stimulated

Financial sector added value

20 18 16 14 12 10 8 6

% of total added value 4 2 0 France Union United Ireland Belgium Germany European Kingdom Switzerland Luxembourg 1970 (U.K. = 1972) 1995 (Switzerland = 1994)

Source : Eurostat, National Accounts ESA 79

2 - ECONOMIC STRUCTURES 117 2.2 - Productive structure by the financial sector. That said, one recent study concluded that a 10 % increase in the financial sector’s added value would cause a 1.5 percentage-point increase in growth in the rest of the merchant economy. Given that the former increased by an average of 9.5 % a year from 1995 to 2001, these results would explain why Luxembourg has for a number of years enjoyed higher growth rates than most industrialised countries.

Overview of studies carried out into the importance of the financial sector to the Luxembourg economy

Importance of financial services based on the main economic aggregates

(STATEC) Proportion of total value added, national accounts 2001 24.9 % Proportion of total employment, national accounts 2001 11.9 % Financial services surplus / Total services surplus, current balance 2001 77.6 % Financial services exports / Total services exports, current balance 2001 62.4 %

Direct contribution to state budgetary receipts, 1999

(Comité pour le Développement de la Place Financière, 1999) Financial sector 40.4 % Banks 22.7 % UCIs 13.1 % Insurers 3.1 % Other professionals 1.5 %

Total contribution to state budgetary receipts, 1999

(Comité pour le Développement de la Place Financière, 1999) Financial sector 46.6 % Banks 26.1 % UCIs 14.8 % Insurers 3.7 % Other professionals 2.0 %

Impact of the funds industry on the economy, 1998

(Association luxembourgeoise des fonds d’investissement, ALFI) Proportion of total employment 2.5 % Proportion of budget 12.3 %

Impact of finance sector growth on other sectors, 1970-99*

Competitiveness of the Luxembourg economy in 2001: STATEC, CREA, CRP-GL and CUNLUX 15.0 %

* a 10 % increase in financial sector value added implies a 1.5-point increase in the growth of the rest of the merchant economy

118 2 - ECONOMIC STRUCTURES 2.2 - Productive structure D. The challenges Although Luxembourg’s growth as a financial centre was initially boosted mainly by its preferential tax and regulatory regimes,many of these benefits have since ceased to exist,or are in the process of doing so. At the same time, financial players are working hard to innovate, in terms of the legal framework and new products, and to achieve an international niche based on other competitive benefits. One of these benefits, the absence of compulsory reserves, proved a particular attraction to German and other banks in the early 1960s.This has ceased to exist since the creation in June 1998 of the European Central Bank, which is responsible for monetary policy in the euro zone.The same rules apply to all countries in the zone, which means that all banks are subject to the same requirements concerning reserves. The most significant challenge facing Luxembourg as a financial centre is European tax harmonisation. A policy agreement was reached by the Council of the European Union in January 2003 concerning a directive on the taxation of savings, known as the fiscal package.The Council concluded that the EU’s ultimate objective should be to share information on as wide a basis as possible. However, this cannot be done until sufficient assurances have been received from certain third countries concerning the application of "equivalent measures" to those laid down in the European directives. Although twelve countries will be automatically sharing information, Luxembourg will not. Instead, it is to introduce a 15 % deduction at source for three years from 1 January 2005, 20 % from 1 January 2008 and 35 % from 1 January 2011. It will not automatically share information until the

2 - ECONOMIC STRUCTURES 119 2.2 - Productive structure date on which “equivalent measures” have been introduced by certain third countries (Switzerland, Liechtenstein, San Marino, Monaco and Andorra, the condition being fulfilled in the case of the United States) and all dependent or associated territories of the European Union (the Channel Islands, the Isle of Man and Caribbean dependent or associated territories). This require- ment must be adopted by a unanimous decision of the Council. It may be vetoed by Luxembourg if, for example, this is required by changes in the international situation. Meanwhile, banking confidentiality has been consolidated in the long term. The savings taxation directive applies only to individuals, and to the payment of interest on certain financial products such as savings accounts and term deposits. The future development of the financial sector will inevitably involve promoting Luxembourg’s image as a financial centre of excellence within the European Union, meeting the highest international standards of quality and productivity. Aware of this fact, the government set up a committee for the development of the Luxembourg financial sector in April 2000. This is responsible for defining a development strategy for the sector,and is supported by Profil,a body created by the Association des Banques et Banquiers (ABBL), which is responsible for image strategy. However, there is still no institutional promotion arm in operation. A number of promotion initiatives have also been carried out by the private sector over the last few years. For example the “Association Luxembourgeoise des Fonds d’Investissement” (ALFI) recently launched such an international campaign, aimed particularly at hedge funds. Both the public and private sectors are making considerable efforts to prevent money laundering and financial crime, which should eventually improve Luxembourg’s image abroad and make it even more competitive. One important example is the law of 1998, which expanded the crimina- lisation of money laundering beyond drug trafficking and banks, and the institutionalisation in February 2002 of an anti-laundering steering committee. Luxembourg also conforms strictly with the recommendations of the Financial Action Task Force on Money Laundering. The law of 1997 on mortgage bond issuing banks allows banks established in Luxembourg to issue a new type of debt security providing bearers with special extra-sound guarantees. Only three such banks had been set up by mid-2002, but the law aims to exploit a gap in the market which shows considerable potential, and to ensure that Luxembourg becomes a specialist centre for this type of product within the European Community. The subscription tax payable by compartments of institutional funds was reduced from 0.06 % to 0.05 % with effect from 1 January 2002, in another example of the efforts being made to keep Luxembourg competitive with new financial centres such as Dublin. In 1999, another new law came into force in Luxembourg creating pension funds in the form of “sociétés d’épargne pension à capital variable” (SEPCAVs) and “associations d’épargne pension” (ASSEP). This was the first legislation of its kind in the European Union, in the sense that it was adopted from a Community rather than exclusively national perspective, unlike other member states’laws. Although only five pension funds have been approved to date, the law opens the door to a highly promising market. On 4 June 2002 the Council of Economics and Finance Ministers (ECOFIN) reached a political agreement on this subject, and particularly the principle of mutual recognition of supervision regimes, known as home country control. This will make it possible to create a European “passport” for pension funds, similar to that which has allowed SICAVs to develop in Luxembourg. By their very nature, financial products lend themselves particularly well to distance selling. According to a study carried out in late 2002, 38 % of banks in Luxembourg have a presence on the internet and fifteen online banking sites have been identified. Although this figures are still small,

120 2 - ECONOMIC STRUCTURES 2.2 - Productive structure Luxembourg has staked a great deal on the future of new technology. It was the first European country to create a specific, clearly defined and secure legal framework for e-commerce. Although there are few reliable statistics on online sales of insurance products, a number of surveys appear to indicate that this is still a very small market and largely concentrated in the United States. In 1999 only 0.02 % of premiums were collected via the internet in Europe, compared to 0.20 % in the US. Changes in this area may contribute to Luxembourg’s expansion, particularly in terms of online sales of FPS products and online customer service. The Luxembourg School of Finance (LSF) was launched at the beginning of 2003.This offers Master of Science degrees in banking and finance, and is also setting up a research department leading to a doctorate in finance. It is another example of Luxembourg’s determination to develop its role as a financial centre on the basis of internal know-how rather than by achieving domination of niche markets. In the domestic insurance market, article 111 bis of the “loi sur les impôts”(tax incentives for additional third-pillar pensions) should favour the development of retirement savings products which are currently almost totally neglected by the Luxembourg public.These products should capture a part of the savings made available by the gradual disappearance of SICAVs established under the Loi Rau. In the reinsurance market, there is a certain amount of pressure being exerted within the European Union which should result, among other things, in a harmonisation of provision rates. This would lead to a decrease in rates in Luxembourg, thereby negating one of its main attractions in this respect. There are also a number of initiatives in progress designed to abolish “fiscal niches”. For example, the French government has announced its intention of modifying all of its tax agreements to tax French companies on the profits of subsidiaries in countries with privileged taxation systems. Reinsurance captives in Luxembourg are being targeted in the same way as docks in Dublin, the holding companies of Dutch participations and Swiss treasury centres. As a result of this pressure, a grand-ducal regulation came into force on 1 January 2002 allowing Luxembourg to comply with the code of conduct on company taxation. Following this step, a number of insurance companies expressed confidence in the future of Luxembourg captives and announced plans to expand their Luxembourg-based international business. The attacks on 11 September 2001 caused increases in insurance premiums for major industrial risks of between 50 % and 200 %. European companies also had difficulty obtaining terrorism insurance, particularly for chemical plants, offshore oil platforms and large buildings. As a result, a growing number of leading companies are seeking to insure themselves, using captives.The rapid rise in premiums will also lead existing reinsurance companies to retain more risk, and thus to increase their technical reserves. In this context, five insurance companies have set up the first specialist terrorist risk insurer, Special Risk Insurance and Reinsurance (SRIR). This is based in Luxembourg, where it also has specific management and underwriting teams, and operates independently of the companies that founded it.

2.2.2.2. Information technology, business services and leisure businesses: job creators Information technology and services provided mainly to businesses are generally aggregated within a broader ensemble, which also includes real estate businesses and leasing/hire services (car hire, hire of machinery and equipment for the construction industry, hire of office and IT equipment, etc.).

2 - ECONOMIC STRUCTURES 121 2.2 - Productive structure Real estate and rental services, IT activities and services provided mainly to businesses

1985 2001 1985 2001

Employment per sector

in thousands of people in % of the total economy Real estate, rental and business services (total) 8.7 43.4 5.4 15.7 Real estate activities 0.9 2.5 0.6 0.9 Rental activities 0.3 0.7 0.2 0.3 IT activities 0.3 4.8 0.2 1.7 Services provided mainly to businesses, R&D 7.2 35.4 4.5 12.8

Gross value added GVA (at current prices) per sector

in million euro in % of the total economy Real estate, rental and business services (total) 772.1 4 026.911.7 18.2 Real estate activities 530.6 2 075.8 8.1 9.4 Rental activities 25.1 132.4 0.4 0.6 IT activities 12.7 295.4 0.2 1.3 Services provided mainly to businesses, R&D 203.7 1 523.4 3.1 6.9

Source : STATEC

During the last 15 years of the 20th century, this whole sector experienced unprecedented expansion. In absolute value terms, employment practically quintupled and represented approximately 16 % of total employment in the Luxembourg economy in 2001. The proportion of value added in the total value added rose from 11.7 % in 1985 to over 18.2 % in 2001. At an aggregated level, this presentation does not enable major differences to be detected between real estate activities on the one hand and IT activities and business services on the other. The significance of the real estate sector in the Luxembourg economy, which accounts for nearly 10 % of the total value added, results from a national accounting rule that both actual and impu- ted rent is included in this economic sector.

Information technology and services provided to businesses from 1985 to 2001 (Growth, employment and productivity) Average annual variation rates

Total economy Services provided mainly to businesses, R&D

IT activities

-3.0 % 2.0 % 7.0 % 12.0 % 17.0 % GVA variation in volume Productivity Employment

Source : STATEC

122 2 - ECONOMIC STRUCTURES 2.2 - Productive structure IT activities, comprising consulting in information technology systems, software production, data processing, database activities, etc., currently constitute the most dynamic sector of the economy in terms of employment and value added, even if this expansion has been achieved with loss of productivity. From 300 people in 1985, employment rose to nearly 4 800 in 2001. The share of IT activities in the total value added of the Luxembourg economy increased from 0.2 % to 1.3 % over the same period. The expansion in business services results from two parallel trends: outsourcing of activities and functions that were previously carried out in-house by industrial companies,and the emergence of new technologies, particularly in the field of information and communication technologies (ITC). Within the sector itself, there is a juxtaposition of activities requiring the use of specialist staff, including accounting services,architecture and engineering,management consultants,legal advi- sors, R&D, etc., and activities requiring less skilled staff, such as cleaning, surveillance and security, etc. By way of example:in 2001, the value added per job generated in architecture and engineering was approximately 77 800 euro. On the other hand, in security and surveillance activities, the value added per job does not exceed 32 900 euro. Differences in pay levels also reflect that diversity: 28 650 euro of gross pay per job in security and surveillance in 2001, and 38 830 euro per month in architecture and engineering. In the research and development sector, we find public research centres and a large private centre, Delphi Automotive Systems Luxembourg S.A., which carries out technical research in the motor industry and which employed 640 people at the end of 2001.There is also the Goodyear Research Centre. Among the important sectors in employment terms,cleaning services (with over 5 300 employed in 2001), accounting services (with 4 600 employed) and architecture and engineering (with around 3 600 employed) deserve special mention. The highest rates of increase are also recorded in these sectors, as well as the management consultancy and market research fields, where employment rose from 357 in 1985 to 1 803 in 2001. Architecture and engineering have been boosted by a fast-growing construction industry. Paul Wurth S.A., a subsidiary of the steel-manufacturing group ARCELOR, which was part of the metalworking sector (metal structures) until 1997, was reclassified in 1998 into the engineering sector. This is a sign of the changes in the manufacturing sector, where expansion is increasingly dependant on innovation and design work, forming the basis of production itself. We observed a considerable increase in the number of companies in the whole business services sector, specifically in the fields of management consultancy, accounting and architecture and engineering. The sector as a whole consists of many small and medium-sized firms, a phenomenon which could help explain the relatively low level and low increase in productivity. However, this characteristic did not prevent the emergence of a number of large companies. We should mention the relatively high concentration in the cleaning sector, which is dominated by a few large groups: Pedus (with 2 000 employed at the end of 2001), Nettoservice (730 employees), ISS Servisystem (650 employees), Onet Luxembourg (490 employees) and Express Services (460 employees) which employ around 75 % of the personnel in the cleaning sector. The same applies to the security services sector, which is largely dominated by the Securitas and Securicor companies (830 and 870 employees respectively at the end of 2001). Besides their security activities, the two groups also market electronic surveillance systems. Among the management consultancies,as well as in the accounting sector,a few large groups have emerged: PricewaterhouseCoopers (with 570 employees at the end of 2001), Deloitte&Touche (approximately 700 employees), Arthur Andersen (440 employees), KPMG Group (330 employees), Compagnie fiduciaire (210 employees) and Ernst&Young (200 employees).In 2002,Arthur Andersen and Ernst&Young merged, a sign of the reorganisation of the sector worldwide.

2 - ECONOMIC STRUCTURES 123 2.2 - Productive structure The available statistics relating to the activities of the selection and provision of staff sector show a sharp rise in temporary employment in the Luxembourg economy. Activities of companies in the business services sector are not limited to the domestic market. In 2001, total exports of business services accounted for a little over 6 % of the total exports of goods and services. From 1995 to 2001, these exports rose from 1.02 billion euro to 1.86 billion euro.

Development of some segments of business services from 1985 onward

Sector Year Number Number Gross value added of firms of persons employed at factor cost (in 1000 euro, excluding VAT)

Research and development 1985 ...... 1995 15 1 611 118 648 2001 21 1 814 114 617

Legal services 1985 209 656 19 432 1995 374 1 056 56 501 2001 527 1 483 169 971

Accounting services 1985 222 1 168 38 467 1995 613 2 689 141 970 2001 808 4 605 358 374

Market research and opinion polls, 1985 79 357 10 332 management consultancy 1995 555 776 52 496 2001 983 1 803 86 774

Security services 1985 ...... 1995 19 1 037 30 015 2001 36 1 690 55 537

Architecture and engineering 1985 260 743 27 598 1995 596 1 905 85 475 2001 857 3 633 282 711

Advertising 1985 87 311 8 501 1995 186 536 19 748 2001 313 931 34 112

Selection and provision 1990 20 817 13 972 of staff 1995 56 3 472 62 832 2001 89 11 824 141 048

Cleaning services 1985 ...... 1995 92 3 513 58 541 2001 108 5 310 86 169

Source: STATEC

124 2 - ECONOMIC STRUCTURES 2.2 - Productive structure The dynamic leisure activities sector, which includes recreational, cultural and sporting activities, is also worthy of note. Employment in this sector virtually doubled between 1985 and 2001, rising from 1 700 in 1985 to 3 200 in 2001. Gross value added at current prices witnessed comparable growth, rising from 126 million euro in 1985 to 291.5 million in 2000. The reduction to 267.3 million euro in 2001 appears to be due to the general economic downturn affecting the country’s economy. In absolute value, the importance of this sector to the Luxembourg economy is relatively low (1.2 % of GVA and 1.2 % of total employees in 2001), but it has great development potential.

Recreational, cultural and sporting activities

1985 1990 1995 2000 2001

Total employees (in thousands) 1.7 2.2 2.6 3.1 3.2 Gross value added at current prices (in million euro) 126.0 116.8 217.9 291.5 267.3

Source : STATEC

Audiovisual services are one of the most dynamic fields in this sector. Its rapid expansion is connected with the presence in Luxembourg of the CLT (Compagnie Luxembourgeoise de Télédiffusion, which became the RTL Group in 2000), SES (Société Européenne des Satellites, now SES-Global), as well as initiatives undertaken by the relevant authorities (see also chapter 2.2.2.3 on telecommunications). In the field of audiovisual production, introduction of the law of 13 December 1988 sought to attract investors into audiovisual production by setting up temporary tax breaks based on audiovisual investment certificates. This law was revised on 21 December 1998. In 2001 alone, audiovisual investment certificates worth 50 million euro were issued. Over the whole period from 1989 to 2001, the total amount of certificates issued was 284 million euro. Furthermore, a “National fund to support audiovisual production” to promote the creation of audiovisual works in Luxembourg and encourage production, co-production and distribution of audiovisual works was set up by the law of 11 April 1990. Within the same context, the National Audiovisual Centre (CNA) was opened in 1989. Its main aim is to promote the Luxembourg film industry, and archive and restore the national audiovisual heritage.

Cinemas in the Grand Duchy of Luxembourg

1990 1995 2001

Total number of visitors 1 547 964 671 720 1 413 900 Gross revenue (in EUR) 1 … 3 283.2 8 535.2 Cinemas Number of sites 9 9 11 Number of screens 17 17 25 Number of seats … 3 100 5 025 Screenings of films on first showing 220 144 284

Source: Centre national de l’audiovisuel 1 Estimates.

2 - ECONOMIC STRUCTURES 125 2.2 - Productive structure Audiovisual investment certificates issued from 1989 to 2001

60 000 000

50 000 000

40 000 000

30 000 000

20 000 000 Amounts in EURAmounts

10 000 000

0 1991 1997 1993 1995 1992 1994 1998 1989 2001 1999 1996 1990 2000

Source : Centre national de l’audiovisuel

Cinemas overcame the crisis of the 1970s and early 1980s. In 1995/1996, the Utopia company, which was founded in 1988 from the cine-club movement, built the first multiplex cinema in Luxembourg (Utopolis). Supply and demand have now been matched, enabling the society to expand vigorously by extending its presence in Luxembourg, as well as in neighbouring countries, including Longwy in France and the Cinecity network at Aarschot, Lommel and Mechelen in Belgium.The number of cinema-goers in Luxembourg rose from approximately 672 000 in 1995 to 1 413 900 in 2001. In the radio and television sector, we must obviously mention the RTL Group in Luxembourg.The company’s origins date back to 1929. Based on a broadcasting concession granted by the Luxembourg government, the CLR (Compagnie Luxembourgeoise de la Radio) operated the Radio Luxembourg station from 1932 onwards, and its European role soon came to the fore by broadcasting radio programmes in English, French and German. Television broadcasting started in the 1950s and, in 1954, CLR changed its name to CLT (Compagnie Luxembourgeoise de Télédiffusion). Liberalisation and deregulation of audiovisual media from the mid-eighties onwards enabled CLT to expand its activities in Germany, France, Belgium, the Netherlands, the United Kingdom, Sweden, Hungary and Austria. The end of the 1990s was characterised by a major restructuring of the whole audiovisual services sector in Europe. In 1997, CLT merged with the large German audiovisual group UFA. In 2000, the merger of CLT-UFA with the British company Pearson TV gave rise to the RTL Group. The company, in which the German group Bertelsmann holds a majority stake, is the leading European audiovisual services group. It controls 18 radio stations, 24 TV stations and 85 Internet sites in 11 countries, and produces over 10 000 hours of programmes per year. Each day, over 140 million viewers watch TV stations controlled by RTL Group, including RTL, RTL II, Vox in Germany, M6 in France, RTL-TVI and Club RTL in Belgium. At the end of 2001, RTL Group, whose headquarters is in Luxembourg, employed some 620 staff. Following the liberalisation of the airwaves under the law of 27 July 1991 on electronic media, new radio stations were established for the audience living in Luxembourg. Before that law, the Luxembourg-language radio station RTL (belonging to CLT) held a monopoly.In 2002, two national radio stations, four regional stations and around 20 local radio stations were broadcasting radio programmes. In addition, there are six television programmes intended mainly for a domestic audience.

126 2 - ECONOMIC STRUCTURES 2.2 - Productive structure 2.2.2.3. Transport and communications: emergence of telecommunications and air transport Besides financial and business services, transport and communications form the third highly dynamic sector in Luxembourg’s economic fabric. In the sector as a whole, employment doubled from 1985 to 2001, from approximately 11 000 in 1985 to over 22 000 in 2001, and its share of total value added in the economy rose from 6 % to nearly 11 %.

Transport and communications from 1985 to 2001 (Growth, employment and productivity) Average annual growth rates

Total economy

Transport and communications

0 % 1.0 % 3.0 % 5.0 % 7.0 % 9.0 % 11.0 % 13.0 % 15.0 % GVA variation in volume Productivity Employment

Source : STATEC

As with other sectors of the economy, examination of aggregated data on transport and communications does not reveal the considerable differences in its component parts. Closer examination tells us that growth in this field is largely due to telecommunications, air transport and road transport. In the transport sector, we can observe a stagnation in the number of employees in rail transport, i.e. mainly within Luxembourg National Railways (Société nationale des chemins de fer luxembourgeois, or SNCFL), from 1995 onwards. However, this phenomenon must be seen in the light of previous trends marked by a decline in employment. The SNCFL workforce declined from 4 254 in 1980 to 3 237 in 1995.This underlines the difficulties facing rail transport in finding its way in competition with road transport, and also corresponds to the implementation of a rationalisation policy for running the company.The number of passengers fell from 14 million in 1980 to 11.1 million in 1996 and has recovered quite strongly in recent years, reaching 13.6 million passengers in 2001. The improvement in the integration of Luxembourg’s network with the international network and the quality of rail links with other countries is currently a key concern for the SNCFL and the government. Within this context, the electrification of the Luxembourg-Liège line was completed in May 2000 and, in January 2002, a Franco-Luxembourg agreement relating to the connection of Luxembourg to the East-European high-speed train was signed, involving provisions for financial support from the Luxembourg State. This agreement should enable the travelling time between Luxembourg and Paris to be cut from the present 3.3 hours to 2.15 hours in 2006/2007. During a second phase, the travelling time between Luxembourg and Strasbourg should be reduced from 2.05 to 1.25 hours. Due to congestion on the Luxembourg road network as a result of the growth in population and employment (particularly cross-border employment), as well as the rise in the number of cars, the authorities are focusing on the development and modernisation of public transport, particularly the rail network. The “Mobilitéit.lu” project should increase the number of passengers using public transport from the present 12 % to 25 % in the medium term. Overall, rail traffic of goods has remained at the same level as in 1980: 665 million tonne-km in 1980, 683 million tonne-km in 2000 and 634 million tonne-km in 2001. On the other hand,

2 - ECONOMIC STRUCTURES 127 2.2 - Productive structure Transport and communications

Sector Year Number Number of Gross value added of firms persons employed at factor cost (in 1000 euro, excluding VAT)

Transport (total) 1995 807 12 048 660 698 2001 1022 18 262 1 202 412

Rail transport 1995 1 3 240 169 987 2001 2 3 258 176 040

Scheduled passenger transport 1995 44 1 223 68 200 (bus) 2001 42 1 739 100 053

Passenger transport by taxis and 1995 125 304 7 478 other passenger transport by road 2001 129 395 11 438

Transport of goods by road 1995 394 3 506 153 286 2001 501 6 085 367 144

River transport, air transport 1995 243 3 775 261 747 and auxiliary transport services 2001 348 6 785 547 737

Posts and telecommunications (total) 1995 70 3 245 453 586 2001 113 4 253 1 031 628

Postal and mail services 1995 24 2 822 222 318 2001 45 3 189 310 785

Telecommunications 1995 46 423 231 268 2001 68 1 064 720 843

Source: STATEC

transport of goods by road is booming. Between 1995 and 2001 alone, road transport firms recrui- ted nearly 2 500 additional employees, and over 100 firms were set up in the sector. Moreover, many foreign companies attracted by the competitive social security taxes have set up business in Luxembourg. International traffic (transport of goods outside Luxembourg) by vehicles registered in Luxembourg accounts for a large proportion of the growth. The category of river transport,air transport and auxiliary transport services is actually dominated by air transport. As far as river transport is concerned, we note a stagnation in the activities of the port of Mertert on the canalised section of the Moselle. In 1980, 1 706 321 tonnes were trans- shipped in the river port, while the corresponding figure was 1 591 281 tonnes in 2001. On the other hand, air transport is growing rapidly. Two large airlines are based at Luxembourg Airport, namely Luxair (passenger transport) and Cargolux (cargo transport). The Luxembourg State and the “Banque et Caisse d’Epargne de l’Etat” hold 26.8 % and 15.6 % respectively of the

128 2 - ECONOMIC STRUCTURES 2.2 - Productive structure Transport of goods by road - International traffic abroad (in 1 000 tonnes-km)

9 000 000 8 181 262 8 000 000 7 000 000 6 000 000 5 000 000

4 000 000 3 341 362 3 000 000 2 752 797 2 000 000 1 000 000 610 704 0 1986 1991 1995 2001

Source : STATEC shares in Luxair, a company which in turn owns a 34.9 % stake in Cargolux.The two companies are among the country’s largest employers. At the end of 2001, Luxair employed 2 260 staff and Cargolux 1 120. The number of passengers transported by Luxair rose from 320 000 in 1982 to 621 000 in 1992 and 1 142 319 in 2001. Besides scheduled flights, Luxair is also a tour operator, and offers package holidays that have experienced considerable expansion in recent years. The group’s turnover rose from 172.5 million euro in 1994 to 282.8 million euro in 2001. The air cargo company Cargolux, co-founded in 1970 by Luxair, now serves around 50 destinations with a fleet of 10 Boeing 747 aircraft,and is among the world’s largest air cargo companies. In 1996, a new Cargocenter managed by Luxair, covering an area of 55 000 m2 and with an annual cargo capacity of 500 000 tonnes, was inaugurated at Luxembourg Airport. In 2000, the amount of tonne-km of cargo carried by Cargolux rose to 3 813 million, compared with 2 261 million in 1993. The profit after tax of Cargolux increased from 7.3 million USD in 1996 to 32.9 million USD in 2000.

Commercial traffic at Luxembourg Airport

Passengers (number) Cargo (in tonnes) 1 800 000 600 000 1 600 000 500 000 1 400 000 1 200 000 400 000 1 000 000 300 000 800 000 600 000 200 000 400 000 100 000 200 000 0 0 1981 1991 1987 1983 1985 1982 1997 1993 1995 1992 1984 1988 1994 1998 1989 1986 2001 1980 1999 1996 1990 2000 Passengers Cargo

Source : Ministry of Transport

2 - ECONOMIC STRUCTURES 129 2.2 - Productive structure These developments are reflected in the traffic at Luxembourg Airport. The total number of lan- dings and take-offs rose from 54 604 in 1980 to 69 662 in 1995 and 86 165 in 2001. Cargo transport was characterised by a real boom in the 1990s, rising from 143 667 tonnes in 1990 to 510 965 tonnes in 2001. Likewise, the number of passengers increased considerably from 1 072 264 in 1990 to 1 625 323 in 2001. It should be pointed out that the spin-off from air transport into the tourism and logistics sectors has been substantial. Telecommunications have experienced the greatest expansion in the economic sector of transport and communications over recent years. The share of telecommunications in value added in the sector increased from 21 % in 1995 to over 32 % in 2001. Telecommunications represented around 2 % of the total value added of the whole Luxembourg economy in 1990, 2.5 % in 1995 and nearly 3 % in 2001. Following the liberalisation of telecommunications and the postal service from 1992 within the context of the European Union policy on the subject, the Post and Telecommunications company (P&T) now has to contend with competition. At the end of 2001, the public P&T company employed 2 750 staff. The Société Européenne de Communication S.A., the direct competitor of P&T, particularly with its “Tango” network in the field of mobile telephony, reported having 290 employees on the same date. The sizeable growth in the sector is shown in the statistics of the Post & Telecommunications company. While it is true that the number of lines and the number of telephone calls grew at an exceptional rate from 1990 onwards, the increase in popularity of mobile telephony is the most spectacular. The number of subscribers to the LUXGSM mobile telephony system run by P&T rose from approximately 27 000 in 1995 to 246 482 in 2001.The total number of mobile telephone subscribers was approximately 380 000 at the end of 2000.This figure corresponds to 87 subscribers per 100 inhabitants, while in the Europe of the 15, the average number of mobile phone subscribers per 100 inhabitants was 63.5.

Installations and telephone calls (P&T)

1970 1980 1985 1990 1995 2001

Number of lines 81 645 131 660 151 525 183 700 230 512 346 763 Number of calls (minutes billed) National calls (thousands) … … … …. 1 302 125 1 700 407 International calls Outgoing (thousands) 14 840 51 688 80 865 150 619 232 198 332 980 Incoming (thousands) 13 300 34 000 52 000 89 000 178 000 287 299 Mobile phone subscribers – – – 578 26 838 246 482

Source: P&T … = missing data

The expansion in telecommunications is not only quantitative, there are also qualitative aspects, as companies operating on the market have to adapt to the emergence of new information and communication technologies, particularly the Internet. The number of digital lines (ISDN or Integrated Services Digital Network) operated by the P&T,which was 6 112 in 1997, reached 155 366

130 2 - ECONOMIC STRUCTURES 2.2 - Productive structure in 2001.The level of penetration of ISDN (share of total lines) was 44.7 % in 2001,one of the highest levels in the world. In June 2001, nearly half Luxembourg’s Internet surfers had ISDN Internet access, compared with an average of 16 % in the European Union. The new ADSL technology (Asymmetric Digital Subscriber Line) giving broadband Internet access was introduced in 1999, and is expected to witness similar expansion. In May 2002, three licences for establishing and operating 3G (3rd generation) mobile telephony services were awarded.The three operators who were offered a UMTS licence (Universal Mobile Telecommunications System) are Tango S.A., Orange Communications Luxembourg S.A. and the Entreprise des Postes and Telecommunications. Moreover, P&T and Tango are also Internet service providers. The Internet traffic of P&T rose from 26 million minutes in 1997 to 534 million in 2001.

Analogue and digital lines (P&T)

350 000

300 000

250 000

200 000

150 000

100 000

50 000

0 1995 1996 1997 1998 1999 2000 2001

Telephone lines (total) of which ISDN lines

Source: P&T

In the telecommunications sector, we should also mention satellite transmission. Société Européenne des Satellites (SES) was set up in 1986, based on a concession granted by the Grand Duchy of Luxembourg for broadcasting audiovisual programmes. SES is authorised to operate the ASTRA satellite system in accordance with the procedures for coordinating, notifying and recording geostationary orbit positions and frequencies at the International Frequency Registration Board (IFRB), under the regulations of the International Telecommunications Union (ITU) in Geneva. Originally, the Luxembourg State brought in 20 % of the capital via two Luxembourg public-sector establishments, the present Banque et Caisse d’Epargne de l’Etat and the Société nationale de crédit et d’investissement (SNCI). The remaining 80 % was shared among nine European private-sector companies. In 1993, the concession was renewed and prolonged until 2010, while enabling the scope of SES’ activities to broaden by granting exclusive rights to the orbital position 18.2° East, still within the framework of the procedures laid down for the award of frequency bands by the ITU. The first satellite was launched in 1988 and the SES-ASTRA system continued to develop throughout the 1990s, becoming Europe’s largest operator of satellite services. The Earth Control Station (satellite operating centre, equipment providing uplinks) is located in Betzdorf. SES employed 350 staff in Luxembourg at the end of 2001, compared with 147 at the end of 1994.

2 - ECONOMIC STRUCTURES 131 2.2 - Productive structure Internet traffic (P&T) (thousands minutes)

600 000

500 000

400 000

300 000

200 000

100 000

0 1996 1997 1998 1999 2000 2001

Source: P&T

With 12 satellites, SES-ASTRA was reaching 91.3 million households in 30 European countries at the end of 2001, either by cable (57.6 million households), or directly (33.7 million households). Moreover, 80 % of European households with a satellite dish or a cable subscription can receive the audiovisual programmes broadcast by ASTRA. The number of analogue and digital radio and television stations distributed was over 1 100 at the end of 2001. Over recent years, the SES group has expanded its range into the field of digital television broadcasting. In 2001, 14 million European households received digital programmes broadcast by ASTRA. This figure represents a market share of 80 % of the total number of households with digital equipment in Europe. With ASTRA-NET, SES has created a platform providing interactive broadband services, including high- speed Internet, multimedia and distance learning. Between 1999 and 2001, SES underwent a fundamental change. From a European player, the company became a global player, acquiring stakes in companies that are large operators in Asia (AsiaSat), the Nordic countries and Eastern Europe (Nordic Satellite AB which manages the Sirius

SES ASTRA – number of households served in SES ASTRA – satellite digital television services in Europe (in millions) Europe (Number of households in millions) 100 18 90 16 80 14 70 12 60 10 50 8 40 30 6 20 4 10 2 0 0 1997 1998 1999 2000 2001 1997 1993 1995 1992 1994 1998 2001 1999 1996 2000 Number of digital households receiving Cable Satellite programmes broadcast by Astra Total number of digital households

Source: SES

132 2 - ECONOMIC STRUCTURES 2.2 - Productive structure satellites) and in South America (Nahuelsat in Argentina, Star One, the operator of the Brasilsat satellites). At the end of 2000, the satellite services of the SES group and its partners were able to reach nearly 80 % of the world’s population. In 2001,SES-GLOBAL was created from the association of ASTRA and AMERICOM,one of the largest operators of fixed satellite services in the United States. Now, with its own 29 satellites and 13 satellites belonging to partner companies, SES-GLOBAL covers 95 % of the world’s population.The Luxembourg State, and the public-sector companies Banque et Caisse d’Epargne de l’Etat and Société nationale de crédit et d’investissement, jointly hold 16.67 % of the shares in SES-GLOBAL and jointly hold one-third of the voting rights of shareholders. While the expansion of SES has a direct economic impact with regard to tax, employment and value added, it may also form a magnet for content providers or companies offering multimedia content over the Internet. The company Europe Online, which was set up in 1999 and also has its headquarters in Betzdorf, provides digital content via a hybrid satellite/terrestrial broadband Internet platform. With 110 staff members at the end of 2001, the company uses several complete transponders of the ASTRA satellite system.

Turnover and profits of the SES group (million euro)

1995 1996 1997 1998 1999 2000 *2001

Turnover 256.2 351.0 448.1 516.9 725.2 835.9 897.6 Profit 71.3 118.9 158.8 176.2 201.3 244.5 291.9

Source: SES * for 2001, the statistics do not reflect the impact of the acquisition of AMERICOM, which took effect on 9 November 2001.

2 - ECONOMIC STRUCTURES 133 2.2 - Productive structure 2.2.2.4 A diversified, high-performance industrial sector

Appearance of a sector in relative decline Considering the trend of the overall importance of industry to the Luxembourg economy, we might come to the conclusion that it is a sector threatened with extinction. The share of the industrial sector (including energy but excluding construction) in the total value added of the whole economy is falling sharply: from 47 % in 1970 to 23.8 % in 1985 to 12.0 % in 2001.

Share of industry in the total value added (in %)

50.0 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 1970 1985 2001 Industry (total) Metallurgy Other industries

Source: STATEC N.B.: Industry including energy but excluding construction

But here, a first nuance is required. It is mainly the steel industry, which forms part of the “metallurgy” sector in the nomenclature of economic activities, whose importance to the economic fabric is diminishing. The other industrial sectors are holding up much better overall. Moreover, the dynamism of an economic sector cannot be judged only on the basis of its importance to the economy.The exceptional expansion of services in Luxembourg, due to the mechanism of comparison, makes the other sectors appear in decline. The value added at current prices of the whole industrial sector experienced substantial growth from 1985 to 2001, rising from 1 566 million euro to 2 651 million euro. Growth in productivity (value added at constant prices/job) is also worthy of note: it averaged 4.7 % over the period 1985- 2001. Even if industrial employment diminished over the period 1985-2001, it should be pointed out that Luxembourg was one of the few European countries in which employment grew slightly between 1995 and 2001.The index of Luxembourg’s industrial production, excluding construction, rose from 100 in 1995 to 122.1 in 2000, whereas in the Europe of the 15, industrial production only reached the index 116.

134 2 - ECONOMIC STRUCTURES 2.2 - Productive structure Steel industry production

Millions of tonnes 7 6 5 4 3 2 1 0 1991 1961 1973 1955 1952 1985 1958 1982 1967 1997 1976 1979 1970 1988 1946 1994 1949 1964 2000 Steel Rolled productsCast iron Steel Rolled productsCast

Source : Federation of Luxembourg steel industries

Restructuring of the steel industry Even developments in the steel industry do not have only “negative”aspects. First of all, the sector remains an important strand in the Luxembourg industrial fabric (about 16 % of the total value added of industry in 2001). Next, it should be pointed out that since 1995 the value added of steel- making started growing again after having fallen substantially from 1985 to 1995. From 3.437 million tonnes of rolled products in 1996, production rose to 4.518 tonnes in 2001. At the same time, this favourable trend seems to be linked to the stabilization in steel prices over the second half of the 1990s. By neutralizing the price variations, steel-making even experienced considerable growth in value added in volume from 1985 to 2001. Finally, thanks to sizeable investments, made particularly within the framework of the replacement of the cast iron-steel process by the electric arc method in the 1990s, and a major reduction in employment, the rate of productivity growth exceeded an annual average of 8 % during the period 1985-2001. In response to the challenges of globalisation, a change in the scale of steel companies was required. From the 1980s onwards, after a series of mergers, acquisitions and rationalization that started in the 1960s and which continued through the years of recession, there was only one Luxembourg steelmaking company left, “Aciéries Réunies de Burbach-Eich-Dudelange” (ARBED), founded in 1911. ARBED already had interests in Brazil (from 1921), Belgium (SIDMAR set up in Gand in 1962), Korea (1978), the United States (1991) and Germany (1991 and 1994) and entered into a strategic partner- ship with Spanish steelmaker ACERALIA in 1997. In 2001, ARBED, ACERALIA and the French company USINOR merged to form the ARCELOR Group, which is currently the world’s largest steel- making group, with an annual production of 43.5 million tonnes (5 % of the world’s steel production) and which employs almost 110 000 staff in over 60 countries. ARCELOR, whose registered office is in Luxembourg, remains the country’s largest employer with 7 020 staff employed at the end of 2001. Despite the rather favourable recent trend in the Luxembourg steel industry,it is nevertheless true that the sector remains more dependent than other industries on the world economic situation, particularly as regards prices.

2 - ECONOMIC STRUCTURES 135 2.2 - Productive structure Employment in industry

Sector

Industry, including energy

Extraction products

Manufactured products Products of the agricultural and food industries Products of the textile and clothing industries Paper and cardboard; published or reproduced products Chemicals Rubber or plastic products Other non-metal mineral products Products of metallurgy and metalworking industries Metallurgy Metalworking Machinery and equipment Electrical and electronic equipment Transport equipment Other manufactured products

Electricity, gas and water

Gross value added (GVA) of industry at basic prices (at current prices)

Sector

Industry, including energy

Extraction products

Electricity, gas and water

136 2 - ECONOMIC STRUCTURES 2.2 - Productive structure 1985 1995 2001 1985 1995 2001

In thousands of persons in % of employment in industry

38.2 34.7 35.7 100.0 100.0 100.0

0.4 0.3 0.3 1.0 0.90.8

36.5 32.9 33.9 95.5 94.8 95.0 3.6 4.0 4.3 9.4 11.5 12.0 1.0 1.1 1.0 2.6 3.2 2.8 2.0 2.1 2.8 5.2 6.1 7.8 0.7 1.3 1.5 1.8 3.7 4.2 4.5 3.7 3.8 11.8 10.7 10.6 2.6 3.1 3.0 6.8 8.9 8.4 16.9 11.8 10.7 44.2 34.0 30.0 13.4 7.7 5.9 35.1 22.2 16.5 3.5 4.1 4.8 9.2 11.8 13.4 3.4 2.9 2.9 8.9 8.4 8.1 1.0 1.8 2.1 2.6 5.2 5.9 0.3 0.3 0.3 0.8 0.9 0.8 0.6 1.0 1.4 1.6 2.9 3.9

1.3 1.5 1.5 3.4 4.3 4.2

1985 1995 2001 1985 1995 2001

In millions of euros In % of GVA of industry

1 566.5 2 131.7 2 650.9100.0 100.0 100.0

11.5 21.1 31.5 0.7 1.0 1.2

1 433.3 1 910.9 2 359.3 91.5 89.6 89.0 100.6 170.6 196.8 6.4 8.0 7.4 47.4 164.7 204.0 3.0 7.7 7.7 48.5 118.3 168.5 3.1 5.5 6.4 42.1 132.5 199.4 2.7 6.2 7.5 189.1 296.8 349.5 12.1 13.9 13.2 92.4 212.2 210.9 5.9 10.0 8.0 756.6 548.5 705.6 48.3 25.7 26.6 647.8 345.2 429.9 41.4 16.2 16.2 108.8 203.3 275.7 6.9 9.5 10.4 110.0 151.4 154.8 7.0 7.1 5.8 25.3 66.6 92.1 1.6 3.1 3.5 6.2 9.2 10.4 0.4 0.4 0.4 15.2 40.1 67.3 1.0 1.9 2.5

121.6 199.7 260.1 7.8 9.4 9.8

2 - ECONOMIC STRUCTURES 137 2.2 - Productive structure Investment in steel industry (in ECU/EUR per Change in steel prices from 1985 tonne of gross steel produced) (index 1995 = 100)

50 2.00 45 1.80 40 35 1.60 30 1.40 25 20 1.20 15 1.00 10 0.80 5 0 0.60 1991 1974 1987 1978 1985 1982 1997 1976 1993 1995 1992 1992 1984 1988 1988 1994 1994 1986 1989 1998 1986 1998 2001 1980 1996 1999 1996 1990 1990 2000 2000

Luxembourg Europe

Sources : EUROSTAT, CECA Source : STATEC Europe = up to 1981 EU-6 +UK+IRL+DK from 1982 + EL; from 1986 +E +P; ECU until 1998, EUR from 1999

In the “Nomenclature of economic activities” (NACE) that applies in the European Union, the “metallurgy” sector includes, besides steel-making, any fields relating to the primary conversion of metals. In this sector,“Circuit Foil Luxembourg S.A” forms part of the ARCELOR group, works in copper processing and employed 410 staff at the end of 2001. In addition, “Pechiney Eurofoil Luxembourg SA”, which produces aluminium foil, has been based in the country since 1983, and employed 290 staff at the end of 2001.

Dynamic industrial sectors The fact that Luxembourg is a very small country necessarily has repercussions on the way in which branches of industry should be interpreted. One or two companies dominate many branches.The means that a company’s results, and more specifically its competitiveness, can have repercussions on a whole industry. On the other hand, if the production of one exporting sector responds to expanding global (or European) demand, it is probable that the few companies in this sector will experience exceptional development. It should be added that the production of a single company may be divided into different production sectors according to the “Nomenclature of Economic Activities”. The company DuPont de Nemours sells both products that are classified as textiles (Typar) and plastics (Mylar). Goodyear produces both textiles (cords for tyres) and rubber products (tyres). In addition, a medium-term overall analysis (1985-2001) does not reveal the short-term changes that certain sectors have undergone. By way of example, the sound performance of the steel industry is mainly over the period from 1995 to 2000, whereas the “rubber and plastics”sector had its most favourable years between 1985 and 1995. Nevertheless, the graphics and tables relating to the performance of the various industrial sectors in terms of employment, productivity and trend in value added enable us to identify the dynamic industries over the medium term.

138 2 - ECONOMIC STRUCTURES 2.2 - Productive structure The “textiles, rubber and plastics, chemicals” cluster The textile sector has experienced rapid expansion since 1985.This expansion is not that of “traditional” textiles, which is actually in decline, but rather that of synthetic fibres. In this production, the products of “DuPont de Nemours Engineering Products”, such as the Typar highly resistant non-woven mats (carpet backing) and Tyvek thermo-bonded polyethylene, play a key role. We should also mention the production of cords for tyres by Goodyear and “Textilcord Steinfort”, as well as car trim produced by “SAI Automotive Silux S.A.”, a company that belongs to the Sommer Allibert Group.The share of the textile industry in the total value added of industry rose from 3.0 % in 1985 to 7.7 % in 2001, most of that progress being recorded during the years prior to 1995. Given that employment in this sector has remained practically unchanged, growth has been accompanied by very sizeable productivity increases.

“Textiles, chemicals, rubber and plastic’s cluster “Metallurgy, metalworking” cluster (share in industrial value added) (share in industrial value added)

50 % 50 % 45 % 45 % 6.9% 40 % 40 % 35 % 35 % 30 % 30 % 25 % 25 % 20 % 13.9% 13.2% 20 % 41.4% 9.5% 10.4% 15 % 15 % 7.7% 10 % 12.1% 7.7% 10 % 16.2% 16.2% 5 % 3.0% 7.5% 5 % 6.2% 0 % 2.7% 0 % 1985 1995 2001 1985 1995 2001

Chemicals Textiles Rubber and plastics Metallurgy Metalworking

Source : STATEC

2 - ECONOMIC STRUCTURES 139 2.2 - Productive structure The development of the rubber and plastics sector is also rather dynamic. Its share in the value added of industry rose from 12.1 % in 1985 to nearly 14 % in 1995, and then levelled off to 13.2 % of the value added of industry in 2001. Tyre production by Goodyear is obviously one of the most important elements in this field. Products in this sector also include polyester films such as Mylar and Cronar, the flagship products of DuPont de Nemours and DuPont Teijin Films in Luxembourg. The polyester films are used as a base for magnetic tapes or films, as well as a medium for printing barcodes, as films for condensers and as packaging films for food and household use. Polyester films are also present in miniature electronic components, smart cards, etc. Besides large companies such as Goodyear and DuPont de Nemours, which employed 3 590 and 1 240 staff respectively at the end of 2001, a number of other important companies in the rubber and plastics sector are based in the country:“Euro Composites S.A.” (production of ultralight materials), which employed 320 staff at the end of 2001, and “Duscholux” (acrylic bathtubs, shower cubicles, etc.), which had 260 employees at the same date. Like the textile and rubber and plastics sectors, the chemical industry has positive results to report. Its share of industrial value added reached 7.5 % in 2001, compared with 2.7 % in 1985. The arrival in 1991 of “TDK Recording Media Europe S.A”, which produces cassettes and disks for audio and video recording and employed 820 staff at the end of 2001, gave a boost to this sector.The second- largest company in the sector, in terms of employment, is “Chemolux”, which manufactures cleaning products and employed 265 staff at the end of 2001. Even if growth in the textile, rubber and plastics and chemicals sector, which is dominated by three large companies (Goodyear, DuPont de Nemours and TDK), was unable to compensate the entire slowdown in steel-making, it is nevertheless one of the main strands of Luxembourg’s industrial fabric. The sector contributes nearly 30 % of industrial value added as a whole and employs nearly 20 % of the labour in industry. In 2001, “metallurgy and metalworking” and “textiles, chemicals, rubber and plastics” together accounted for over 55 % of industrial value added. It should be noted that the three sectors of chemicals, textiles, rubber and plastics reported substantial productivity gains.

Other industries making progress While, overall, the pace of growth of textiles, chemicals, rubber and plastics has been rather inhi- bited since 1995, metallurgy and metalworking activities seem to have stabilized and developed

140 2 - ECONOMIC STRUCTURES 2.2 - Productive structure positively after having experienced a fall since 1974. We have already seen that the steel-making results have improved over recent years.We should also add substantial growth in the metalworking sector, which accounts for mechanical workshops, structural steel workshops, toolmaking, metals processing and coating, etc. In this sector, we find companies in the ARCELOR steel-making group:“Paul Wurth S.A.” (structural steelwork and engineering) which employed over 550 staff at the end of 2001, and formed part of this sector until 1997, before being reclassified in the sector of business services (under “engineering”); “Ewald Giebel” (electroplating of cold-rolled products) which had 170 employees at the end of 2001, and “Galvalange” (production of electroplated sheet steel) which employed 190 people at the same date. Besides these companies in the ARCELOR group, there is CERAMETAL, another large company that works in powder metallurgy. This company makes parts from hard metal, particularly from tung- sten, for machinery and tools used in wood- and metalworking. Other applications range from rolls used in mill-stands to the balls incorporated into ballpoint pens. At the end of 2001, the CERAMETAL Group employed 710 staff in Luxembourg, and 1 400 worldwide, with subsidiaries in Germany, Switzerland, the United Kingdom, China and the United States. The electrical and electronic equipment sector remains modest in absolute value terms. It represented only 3.5 % of industrial value added in 2001. Nevertheless, growth in the sector, both in terms of employment and productivity, is worthy of note. Two companies are responsible for this growth.The first,“IEE (International Electronics & Engineering) Automotive S.à r.l.”,was founded in 1989 and manufactures electronic pressure sensors, and employed 650 staff at the end of 2001. The sensors are used, in particular, in airbag deployment systems for detecting and classifying passengers in cars, etc. The second,“ELTH S.A.”, produces bimetallic thermostats and thermistors, and employed around 720 staff at the end of 2001. The importance of the non-metallic mineral products sector has also increased in the industrial fabric since 1985. The sector comprises the glass industry, porcelain and cement, concrete and items made of concrete.The share of this branch of industry rose from 5.9 % in 1985 to 10 % in 1995 of industrial value added. During the second half of the 1990s, there was a levelling-off in the expansion of the branch, which represented 8 % of value added in 2001. Four large groups dominate this sector. The “Guardian” group produces flat glass and glass for the motor industry, with almost 1 200 employees at the end of 2001. The “Villeroy & Boch” group, which employed 740 people at the end of 2001, manufactures porcelain tableware. The “Groupe Ciments Luxembourgeois” produces cement and, through its company “Chaux de Contern SA”, construction materials. The group employed 490 people at the end of 2001. “Bétons Feidt S.à r.l.” produces pre-mixed concrete and items made of concrete, and is the fourth-largest company in the sector, employing 290 staff. It goes without saying that the development of the latter two companies is linked to the construction boom in Luxembourg. The heterogeneous other manufactured products sector is also extremely dynamic, even though its share of the total industrial value added remains relatively small (2.5 % in 2001), but is rising fast. The sector includes the “Rubbermaid” company, which arrived in Luxembourg in 1994 and produces plastic toys. The company employed around 500 staff in 2001.“Kronospan Sanem Ltd et Cie”, which has been manufacturing fibreboard panels since 1995, employs over 300 staff. “Avery Dennison Luxembourg S.A.”, which has been making pressure-sensitive adhesives in Luxembourg since 1990, employed 220 staff at the end of 2001. The electricity, gas and water sector is also doing well. The positive developing is almost entirely due to electricity distribution, a sector largely dominated by “CEGEDEL”, which employed around 500 staff in 2001. The results of the machinery and equipment sector are more mixed. Growth was rather high, match- ing the average growth of the industrial sector until 1995. During the second half of the 1990s,

2 - ECONOMIC STRUCTURES 141 2.2 - Productive structure however, growth in volume and value added was low. This situation is reflected in its share of industrial value added, which fell from 7.1 % in 1995 to 5.8 % in 2001. In this sector, we find companies such as “Husky”, which assembles injection-moulding machines and employed 620 staff in 2001. The “Rotarex” group also features in this sector. The “Ceodeux” companies belonging to this group produce special equipment for gas, high-pressure industrial valves, valves for fire extingui- shers and sprinkler systems, etc. The whole Rotarex group employed 550 staff in 2001.

Successful diversification Scientific analyses corroborate the impression given by these industrial sectors since 1985 that industrial diversification has been a success.Within the context of reports on the competitiveness of the Luxembourg economy published by STATEC, researchers at the “Applied Economics Research Unit” of the Public Research Centre – University Centre put forward a “diversification indicator” based on variance of shares of value added in each branch, which enables us to disperse total value added via the branches. The indicator shows that Luxembourg’s industrial structure, after having been marked by monolithism due to the importance of the steel industry, is starting to approach the diversification indicator for other “small” European countries.

Indicator of industrial diversification

0.92

0.90

0.88

0.86

0.84

0.82

0.80 1971 1981 1977 1991 1973 1975 1972 1974 1978 1987 1983 1985 1982 1976 1979 1997 1993 1995 1992 1970 1984 1988 1994 1986 1989 1998 2001 1980 1996 1999 1990 2000

Source: STATEC, CRP-CU CREA

The appeal of a diversified economy, and particularly a diversified industrial sector, is due to reduced vulnerability to specific downturns in certain industrial sectors. However, more than most other industrial sectors, steel-making is dependent on the international economic situation. According to recent studies, steel-making has practically no influence over the prices it can charge (“price-taker”), whereas new industries appear to be able to pass on at least part of increased costs in the prices they charge (“price-setter”), which may result from increases in raw materials prices or wages. In addition, when considering the development of various branches of industry over the period 1985-2001, the effects of that diversification appear quite clearly. While branches such as non- metallic mineral products (glass, porcelain, cement, etc.), rubber and plastics and textiles, which expanded extremely quickly from 1985 to 1995, experienced more modest growth from the mid- 1990s, other branches picked up where they left off at that time. Metalworking, chemicals,

142 2 - ECONOMIC STRUCTURES 2.2 - Productive structure electrical and electronic equipment and new industries grouped together under “other manufacturing industries” are branches marked by an acceleration in the rate of growth. Of course, the downturn in the economic situation since 2001 has not spared Luxembourg’s industry.While the results for 2001 remained very positive, growth in the sector appeared rather weak in 2002. As it is not possible to forecast the future pattern of the world economic situation, which largely determines the progress of an open economy like Luxembourg, it is not easy to forecast future developments. From the structural viewpoint, Luxembourg’s industry seems to have more strings to its bow than it had a quarter of a century ago.

Breakdown of growth of certain industrial sectors from 1985 to 2001 (employment and productivity) Average annual variation rate

Industry including energy Products of the agricultural and food industries Machinery and equipment Transport equipment Paper and cardboard, published, printed or reproducted products Metallurgy Other non-metal mineral products Metalworking Production and distribution of electricity, gas and heat Rubber and plastic products Electrical and electronic equipment Chemicals Other manufactured products Textile products -5.0 % 0.0 % 5.0 % 10.0 % 15.0 % Variation of GVA in volume Productivity Employment

Source: STATEC

2 - ECONOMIC STRUCTURES 143 2.2 - Productive structure 2 - ÉCONOMIC STRUCTURES

2.3 External economic relations

144 2 - ECONOMIC STRUCTURES 2.3 - External economic relations An open economy From the beginning of its industrial development,a very small economy in geographical terms has no choice but to be open to the outside world, an obligation that imposes itself in various areas from access to the factors of production and technology to the procurement and sale of goods and services. Throughout its economic development, Luxembourg has made major use of foreign capital and workers originating from other countries. Moreover, it has found itself obliged to import a large number of goods and services and to export a substantial part of its production. In 2001 Luxembourg was by far the most open economy of all the European Union member states.

Exports of goods and services as a percentage of GDP at current prices in 2001

160 151.1 140 120 100 94.4 85 80 65.8 60 52.2 47.6 44.2 41 37.8 40 36.4 35.1 32.6 30.4 28.828.8 27.7 24.7 20 10.8 10.4 0 U.K. USA Italy EU-15 Spain Japan EUR 12 France Greece Ireland Austria Finland Sweden Belgium Portugal Germany Denmark Netherlands Luxembourg

Source: European Commission

Many efforts towards integration and long experience of international competition can most probably be considered as assets in an economic environment that is becoming ever more international, not to mention global in character. In terms of its current account balance, Luxembourg has for the greater part been successful in achieving international integration and in implementing structural change. Its specialisation in promising and high-performance sectors has enabled Luxembourg to reinforce the surplus in its current account balance.

Foreign investment It is generally accepted that capital stock is a crucial aspect of economic development. Thus, for a closed economy, a country’s level of investment depends on national savings. An open economy, and a small economy at that, can and indeed must build on its investment opportunities by uti- lising foreign capital. Obviously, this exposes the economy to a degree of external dependence. The first true industrial revolution in Luxembourg (during the second half of the 19th century) was only possible thanks to the provision of foreign capital and technology from Germany and Belgium. Certainly, in the beginning, exceptional Luxembourg citizens played an important part and over the course of time a number of Luxembourg engineers took on managerial roles. However, there is no denying that the input of foreign financing and know-how was critical in get- ting the economy off the ground in the first place.

2 - ECONOMIC STRUCTURES 145 2.3 - External economic relations Foreign direct investment per head of population in 2000 (in USD)

70 000 60 000 59 563 50 000 40 000 30 000 20 024 20 000 17 179 15 292 12 068 9 327 10 000 7 267 6 297 5 463 3 662 0 UE-15 Spain Irland Sweden Germany Denmark excl. banks excl. Netherlands Luxembourg Luxembourg United Kingdom Source:World Investment Report, STATEC

At the time, this foreign support was a condition sine qua non, since Luxembourg, having only gained its independence in 1839, was a poor agricultural nation. It was its openness to foreign capital that brought the country major industry and ensured genuine economic take-off. During the phase of reconstruction after the Second World War, and more specifically from the late 1950s onwards, the powers that be initiated policies designed to diversify the means of production. Despite Luxembourg’s high standard of living and significant national savings, diversification was to a very large extent based on the input of foreign capital.With some rare exceptions, the main new industrial or tertiary activities launched in Luxembourg since the end of the 1950s trace their routes back to foreign support. In 2002, eleven of the thirteen top industrial companies are subject to direct foreign investment. In the banking sector, nearly every single one of the some 180 banks is dependent on abroad.Whilst it is German capital that dominates in the banking sector, it is US money that predominates in industry. Despite its dynamic development and the increase in its financing capacity, the Luxembourg economy makes regular use of foreign resources.What singles out this geographically very small economy is that its residents can easily invest in property or – through banks – in foreign investment vehicles and that foreign capital seeks and regularly finds opportunities for investment in Luxembourg in the production of goods and services.

Foreign workforce In most countries the availability of a workforce is based on demographic trends, with migratory trends only being of marginal significance. In Luxembourg, however, immigration has largely characterised and accompanied the various phases of economic expansion. Immigration, notably from Germany, has been in evidence since the early phases of industrialisation. In successive waves, other workers from Italy and subsequently from Portugal have met the needs of many economic sectors. Over the last few years, use of foreign workers has become in- evitable given the exceptional expansion of activities and a demographic evolution that has not been sufficient to keep up with the demand for workers. Since the mid-1980s, there has been a clear demand for frontier workers.

146 2 - ECONOMIC STRUCTURES 2.3 - External economic relations Structure of salaried workforce in Luxembourg in 2001 (as a % of total)

Cross-border workers 37.5

Foreign residents 27.0

Luxembourg residents 35.5

0 5 10 15 20 25 30 35 40 45

Source : STATEC

Otherwise bound by the constraints of its small size and its demographics, the supply of a workforce in Luxembourg becomes practically unlimited as soon as cross-border workers enter the equation. Moreover, recourse to labour resources is also dependent on remuneration. A dilemma may arise: - to ensure a sufficiently large supply of workers, high salaries must be guaranteed; - to encourage new investment, salary costs must be competitive. Currently, Luxembourg is succeeding in meeting these two criteria, thanks in particular to the fact that its indirect labour costs (social security + professional training + other expenses) are lower than those in neighbouring countries. Without being a low-pay country, the level of non-wage labour costs remains lower than in the majority of EU member states.

Trade in goods and services During the last twenty-five years of the 20th century, fundamental structural changes in the Luxembourg economy had a clear impact on external trade. Whilst exported goods were worth twice as much as exported services in 1970, the export of goods now only accounts for a fraction of the country’s export activity. The domination of the services sector has, in addition, created a distortion between the resulting balances in terms of goods and services: whilst the balance of service transactions surplus has grown, the trade balance deficit is tending to worsen. The reasons behind this turnaround are clear. Its origin lies in the crisis in the steel industry and the expansion of banking in evidence since the mid-1970s. It should be noted, however, that service activities other than banking have also broken through in no small measures onto foreign markets,accounting nowadays for almost half the export of goods,compared with scarcely one seventh in 1970. As well as this turnaround in the relative importance of the trade in goods on the one hand and services on the other, the respective surpluses/deficits are characterised by one specific phenomenon: with the exception of a slight deficit in 1964, Luxembourg’s current account was consistently in the black, with a surplus that continued to grow until the mid-1990s. Taking into account the predominance of the industrial sector, the balance of trade largely determined the current account balance until the early 1970s. Since 1975, only the balance of services has been in the black,with the balance of trade and the balance of transfers showing a deficit that has now become structural.

2 - ECONOMIC STRUCTURES 147 2.3 - External economic relations Exports of goods and services – Main categories in decreasing order of importance in 2001

1995 1996 1997

Financial services 3 845 4 677 5 947 Base metals and articles of base metal 2 002 1 764 2 070 Machinery and equipment 934 1 088 1 195 Travel 1316 1 345 1 548 Other business services 1015 1 158 1 222 Transport services 535 577 821 Insurance services 448 536 640 Plastics, rubber 798 779 805 Communication services 263 383 442 Textiles and products using these textiles 392 291 341 Subtotal 11 54912 59815 030 Other goods and services 2 546 2 730 3 092 Total Goods 6 264 6 096 6 865 Total Services 7 830 9 233 11 257 Total Goods and Services 14 094 15 328 18 122 Share of subtotal in grand total 81.9 82.2 82.9

Source : STATEC – 1 Average annual rate of increase – 2 Relative share

Imports of goods and services – Main categories in decreasing order of importance in 2001

1995 1996 1997

Financial services 2 331 2 893 3 698 Machinery and equipment 1 263 1 344 1 542 Other business services 936 1 100 1 187 Base metals and articles of base metal 1 322 1 225 1 355 Transport equipment 1 017 1 065 1 340 Travel 868 913 996 Mineral and energy products 677 705 740 Transport services 484 555 684 Chemical products 631 572 615 Insurance services 346 446 468 Subtotal 9 875 10 818 12 625 Other goods and services 3 118 3 272 3 763 Total Goods 7 502 7 575 8 672 Total Services 5 491 6 515 7 716 Total Goods and Services 12 993 14 090 16 387 Share of subtotal in grand total 76.0 76.8 77.0

Source : STATEC – 1 Average annual rate of increase – 2 Relative share

148 2 - ECONOMIC STRUCTURES 2.3 - External economic relations 1998 1999 2000 2001 Var 1 95-01PR 2 1995 PR 2 2001

Unit: EUR millions

7 004 9 454 13 966 13 772 23.7 27.3 42.8 2 153 2 118 2 564 2 582 4.3 14.2 8.0 1 679 1 877 2 317 2 498 17.8 6.6 7.8 1 573 1 708 1 956 2 138 8.4 9.3 6.7 1 382 1 361 1 579 1 755 9.6 7.2 5.5 892 1 076 1 444 1 528 18.0 3.8 4.5 665 840 1 029 1 038 15.0 3.2 3.2 856 814 869 902 2.1 5.7 2.8 468 579 734 823 20.9 1.9 2.6 409 430 448 487 3.7 2.8 1.5 17 081 20 257 26 906 27 439 15.5 81.9 85.3 3 358 3 642 4 193 4 716 10.8 18.1 14.7 7 697 8 046 9 387 10 087 8.3 44.4 31.4 12 742 15 853 21 712 22 067 18.8 55.6 68.6 20 43923 900 31 100 32 154 14.7 100.0 100.00 83.6 84.8 86.5 85.3

1998 1999 2000 2001 Var 1 95-01PR 2 1995 PR 2 2001

Unit: EUR millions

4 469 5 875 8 259 8 198 23.3 17.9 29.6 2 052 2 149 2 598 2 809 14.3 9.7 10.1 1 272 1 308 1 720 1 947 13.0 7.2 7.0 1 554 1 433 1 836 1 837 5.6 10.2 6.6 1 476 2 045 1 771 1 801 10.0 7.8 6.5 1 202 1 242 1 427 1 637 11.1 6.7 5.9 650 711 1 159 1 069 7.9 5.2 3.9 669 770 905 1 026 13.4 3.7 3.7 681 735 819 797 4.0 4.9 2.9 504 612 745 720 13.0 2.7 2.6 14 52916 881 21 23921 842 14.1 76.0 78.8 4 161 4 374 5 041 5 890 11.2 24.0 21.2 9 770 10 474 11 956 12 850 9.4 57.7 46.3 8 920 10 780 14 324 14 881 18.1 42.3 53.7 18 690 21 255 26 280 27 732 13.5 100.0 100.0 77.7 79.4 80.8 78.8

2 - ECONOMIC STRUCTURES 149 2.3 - External economic relations Trade in goods

Structural trading deficit Dependence on imported energy, an increase in the import of intermediates and the tripling in household consumption are the major factors behind the worsening of the trade deficit since the mid-1970s. However, the structural adaptation of the Luxembourg economy has also contributed to a widening trade deficit. In effect, most service activities require major investment at the outset,which results,notably,in the import of capital goods. Furthermore, throughout the production of services, material goods channelled into intermediate consumption and/or providing support in terms of trade in services are also purchased abroad. Whilst the import of capital goods and intermediates affects the trade balance, tertiary sales are included in the balance of services. To this direct effect of structural adaptation can be added another induced effect - spending power generated in the tertiary sector is partially responsible for the purchase of imported consumer goods. Thus the trade balance is increasingly influenced by factors other than the trade in goods relating to physical production activity (industry).

Product diversification Over the last thirty years, the structure of goods exports has substantially changed to the extent that, today, metallic products only represent one third of the total value, compared with two- thirds in 1973. This upheaval is due as much to the collapse of the iron and steel industry and the subsequent restructuring of the industry as to the positive effects of industrial diversification. Despite the greater specialisation in intermediates, the range of exported products has grown: to products with a long tradition (e.g. agri-foodstuffs, tyres, plastic and textile products, earthen- ware) can be added, among others, glass, non-ferrous metals (copper and aluminium), paper and IT.

150 2 - ECONOMIC STRUCTURES 2.3 - External economic relations Luxembourg's current account 1995-2001

8 000 7 500 7 000 6 500 6 000 5 500 5 000 4 500 4 000 3 500 3 000 2 500 2 000 1 500 1 000 EUR millions 500 0 -500 -1 000 -1 500 -2 000 -2 500 -3 000 -3 500 1995 1996 1997 1998 1999 2000 2001 Compensation for labour Current transfers Goods Investment income Current balance Services

Source : STATEC

Leaving aside this general trend, a breakdown by product group reveals some structural characteristics and, in particular, two forms of diversification: intra-range and innovative. Luxembourg has traditionally been largely dependent on the import of raw materials and energy products. However, over the past three decades, supplies in semi-finished products have taken the place of some raw materials. Compared with earlier periods, imports of products channelled into intermediate consumption are presented in more developed forms. Mineral and energy products – which until 1982 represented one quarter of all imports – have fallen in importance to one tenth of total imports following the decline in iron and steel, the relative fall in oil prices and energy-saving efforts. The reinforcing and modernisation of the productive structure, on the one hand, and efforts to diversify industrial and service sectors on the other, are the reason behind some of the impetus lend to the import of capital goods. Periodic restructuring of industrial equipment is a basic neces- sity to remain competitive and is responsible for major imports of plant and equipment. To this traditional demand from the industrial sector can also be added major procurement on the part of the service sectors – importers of sophisticated and high-technology goods (e.g. communication equipment, aircraft etc.). The increase in demographics and the upward trend in standard of living have sparked off increased imports in all types of consumer good. Since the 1980s, the phenomenon has been reinforced

2 - ECONOMIC STRUCTURES 151 2.3 - External economic relations by import/export activities, as well as by increasing imports of consumer goods destined for non- residents (fuel, tobacco, alcohol etc.).

Geographic concentration The geographic structure of efforts has remained relatively stable over recent decades with the share of intra-Community exports having represented approx. 80 % and with neighbouring countries accounting for as much as 60 %. A redistribution has taken place between these three markets. The Belgian market has become less important in relation to the German and French markets. More generally, Luxembourg’s main export market lies within the founding members of the European Community.This can be explained both by reasons of geographical proximity and general economic relations, and by the particular effects of the creation of the Common Market. Exports to the other (new) member states of the European Union generally account for less than one percent of total exports. The general orientation towards the Community market does however depend to some degree on the product group in question. There are significant differences between the five main product groups in terms of both level and development. As far as the first product group is concerned – metals – there has been a slight drop in market share. On several occasions this sector has attempted to engage more strongly in large-scale exports (extra-Community) as a means of selling some of its production. Other very dynamic sectors, such as plastics and tyres, have also succeeded in gaining a foothold in other continents, which explains the relative fall in sales in the European Union. Belgium is by far the main supplier country to Luxembourg, followed by Germany. Accounting for between 10 and 15 % of Luxembourg imports, France lies in third place. Overall, the three neighbouring countries, in terms of direct origin, account for more than 80 % of Luxembourg’s total imports. Even if this predominance is less marked in terms of country of origin, it nevertheless remains substantial (in the region of 70 %). Overall, Luxembourg procures 95 % of its imports from the “old continent”.Traditionally, the EFTA states and the United States have been the main source of non-EU imports. Over the last few years, the rise in imports from Asia has resulted in a balance between imports from EFTA countries, imports from the Americas and Asian imports.

Growing services surplus The growing balance of service transactions surplus is due in the first instance to Luxembourg’s net income from its international activities linked to the provision of financial services. It should be stressed, however, that services other than banking likewise contribute to the positive results in the balance of services, including air transport, audiovisual, telecommunications, insurance and income from “travel”. Income from travel activities constitutes the most important category after financial services. Between 1995 and 2001 the total amount almost doubled.This category is not limited to tourism in the strict sense of the word – i.e. spending by non-residents who spend at least one night in Luxembourg. It also includes spending by day trippers, cross-border workers and other non-residents passing through Luxembourg who do their shopping on its territory. Purchases of products subject to excise duty (perfume, tobacco, alcohol) by non-residents account for a major share of the income categorised under “travel”. Moreover, spending by frontier workers, at approx. 786 million euros in 2002, is also constantly rising based on the substantial annual increase in the size of this group .

152 2 - ECONOMIC STRUCTURES 2.3 - External economic relations Whilst capital revenue is still in the black, earnings from work has recorded an ever larger deficit since the mid-1980s. The exceptional rate of growth recorded over recent years in the number of cross-border workers employed in Luxembourg is responsible for this trend – in 2000, more than 100 000 cross-border workers were registered in Luxembourg, compared with 17 000 back in 1985.

Revenue flows in relation to remuneration of salaried employees

1995 1996 1997 1998 1999 2000 2001

Unit: Millions of euros

Credit 531.6 548.54 574.4 589.1 611.4 627.2 644.0 Debit 1 617.9 1 768.8 1 968.2 2 205.3 2 532.1 2 956.3 3 507.1 Balance -1 086.3 -1 220.2 -1 393.8 -1 616.2 -1 920.7 -2 329.1 -2 863.1

Source : STATEC

The credit side includes the gross income (including social contributions and taxes) of residents who work abroad and, on the debit side, total gross income paid to non-resident salaried employees who work in Luxembourg.The latter obviously relates to the remuneration of the large number of cross-border workers. The per-head wage bill of a frontier worker has risen from EUR 21 150 to EUR 36 040, equating to an average annual rise of 3.6 %. The credit side, by analogy, includes the remuneration of some (700) resident salaried employees who work in a neighbouring country as well as those international civil services and local agents who live in Luxembourg and work for an international organisation based either in Luxembourg or abroad. In 2001, 7 700 lived in Luxembourg, out of a total of 9 500 working in the country. The remaining 1 800 were living in the neighbouring region. The organisations concerned obviously primarily include the European institutions, most of which are located in Kirchberg. Other international organisations include NAMSA and Eurocontrol. International civil servants and local agents resident in Luxembourg received an average annual salary of EUR 77 590.

2 - ECONOMIC STRUCTURES 153 2.3 - External economic relations 3 - SOCIAL SYSTEM

3.1 Wages and salaries

154 3 - SOCIAL SYSTEM 3.1 - Wages and salaries Share of wages/profits The relative proportion of “wealth” created which is returned to the factor of production “labour” is often considered a key indicator of the primary distribution of income. Several types of more or less similar aggregates can be adopted as a denominator or numerator.The Community statistics presented below relate salaries to GDP at factor cost. For Luxembourg, this means that both salaries earned by cross-border workers and the value they produce are taken into account.The wages share is adjusted by incorporating the proportion of income of entrepreneurs corresponding to the remuneration of their labour, and not to the capital that they have invested. If we look at the pattern of the wages share over time, other corrections may prove necessary if the relative importance of paid employees in the working population increases.The wages share may increase, even if the wage per employee remains constant or falls. The Germans refer to this as the “bereinigte Lohnquote”. In Luxembourg, according to figures published by the European Commission, the wages share was extremely low in the 1960s, when it did not exceed 60 %. In 1974/1975, there was exceptional growth in the wages share, due to the combined effect of stagnation in GDP and an excessive increase in wages connected, inter alia, to the effects of a pay agreement in the steel industry.The agreement was negotiated before the recession hit, leading to a large increase in pay rates. The drop in the wages share from 1982 to 1985/1986 was the consequence of the pay restraint policy that provided, in particular, for the suspension of automatic index-linking of pay to the cost of living (“sliding wage scale”). The mechanism was reintroduced gradually in 1984 and 1986. From 1986 to 1995, the wages share remained stable, and then fell slightly from 1996 to 2000. The increases in 2001 and 2002 result from the weakness of GDP growth and the delayed adjustment of salaries. Throughout this period, the wages share in Luxembourg remained lower than that observed in practically all other European countries. The relationship between annual variations in real terms of average wage costs and that of the apparent productivity of labour, which is obtained by dividing the annual increase in GDP by the number of employees, also provides indications about the trend in the share of the benefits of growth between wage income and income from property.The first half of the 1980s was marked

Adjusted wages share Real wage cost and apparent productivity of In % of GDP at factor cost labour in Luxembourg (annual variation in %)

85 8.0

80 6.0

75 4.0

70 2.0

65 0.0

60 -2.0

55 -4.0

50 -6.0 1981 1991 1975 1987 1983 1985 1985 1997 1993 1995 1965 1995 1970 1989 2001 1980 1999 1990 1960 2000 B D L NL EU-15 IRL Apparent productivity Real wage cost of labour

Source : European Commission Source : STATEC N.B. : Forecasts for 2002

3 - SOCIAL SYSTEM 155 3.1 - Wages and salaries by a much lower increase in wage costs in comparison with productivity. Later, if we overlook certain time lags, the two curves have profiles that are more or less similar until around the end of the past decade. During the recent period, a slight but regular increase in wage costs has gone hand in hand with marked fluctuations in productivity.

Pay While for companies, wages and salaries are one of the components of the cost of production, for employees, they represent the main source of income.The standard of living of a large proportion of the population depends on the amount of wages paid. Later in this document, we will see that other elements, including various social security benefits and deductions from pay, are taken into account when calculating the standard of living of a household. As a substantial proportion of wages and salaries are destined for consumer spending, the trend in retail prices must be considered if it is intended to form an idea of real spending power. Real wages are estimated by defla- ting them by the relevant price index. Luxembourg is one of the few countries that still has automatic, full linking of salaries to changes in prices (sliding scale). When the half-yearly average of the retail price index increases by 2.5 %, wages and salaries are increased by the same amount.When collective bargaining agreements or pay agreements in the public sector are signed, negotiations do not relate to any adaptation of salaries to reflect inflation. The annual average wage cost also serves as an indicator to measure the level of pay received by employees. It does have the advantage of covering all sectors of the economy. In current euro, it rose from 16 021 in 1980 to 42 863 in 2001 (+167.5 %). After allowing for inflation, it rose by only 37.7 %. The annual figures highlight the pronounced pay restraint during the first half of the 1980s, resulting from, inter alia, the brake applied to the sliding pay scale after the devaluation of the Belgian franc in 1982. Adjustments in the social minimum wage (SSM) were largely based on the general trend in pay, so it is not surprising that the two developed in parallel. In real terms, the minimum social wage

Average wage cost and social minimum wage (1980 = 100)

280.0 260.0 240.0 220.0 200.0 180.0 160.0 140.0 120.0 100.0 80.0 1980 1982 1984 1988 1990 1992 1994 1996 1998 20001986 Social minimum wage in current EUR Deflated social minimum wage Average wage cost in current EUR Deflated average wage cost

Source : STATEC

156 3 - SOCIAL SYSTEM 3.1 - Wages and salaries Gross monthly social minimum wage in Europe (1980-2001)

Country 1980 1990 2000 2001

*in euro per month

Belgium 551 853 1 103 1 131 Spain 256 451 496 506 France 407 753 1 066 1 104 Luxembourg 475 802 1 206 1 282 Netherlands 671 877 1 092 1 167 Portugal 132 225 371 390 United Kingdom … … 1 005 1 050

Source : EUROSTAT *euro per month, at historic exchange rates

Minimum wage as % of gross average manual worker’s wage (1999)

Belgium Spain France Luxembourg Netherlands Portugal United Kingdom

53.7 36.0 60.3 48.2 49.1 52.0 39.8

Source : European Commission

increased by 38.9 % during the period under consideration. In 2001, it reached, on a national average, 1 282.35 euro per month and, on 1 January 2003, the average monthly amount of the SSM was set at 1 368.74 euro. In absolute value, the level of the social minimum wage in Luxembourg exceeded that of the other European countries during the 1990s. Nevertheless, an international comparison dating from 1999 shows that, if we compare the minimum wage to the gross average salary for a manual worker, Luxembourg comes behind countries such as France, Belgium and Portugal, even if the absolute level remains higher. As for the number of people receiving the social minimum wage and the distribution of these employees by economic sector, the statistics of the Inspection générale de la sécurité sociale (IGSS- the social security inspectorate) provide additional information. The proportion of employees paid at the minimum social wage increased sharply in the 1990s, from 14 % of total employees in 1993 to nearly 17 % in 1999. This proportion is then reduced to reach some 15 % of employees in 2002. As for the distribution of these employees by economic sector and gender, we first observe an over-representation of women compared to men in the whole economy. In the total gainfully employed population on 31 March 2002, one man in eight was paid the minimum wage, whereas one woman in five worked for a salary close to the minimum wage. The highest proportion of workers paid the minimum wage is in the retail sector, catering and the accommodation industry, and that was in absolute terms (15 845 employees) or in relative share: in this sector 25 % of men and 44 % of women are paid the minimum wage (SSM). This sector alone employs 43 % of all workers paid the minimum wage, while retailing, restaurants and the accommodation industry employ only 17 % of all workers.

3 - SOCIAL SYSTEM 157 3.1 - Wages and salaries Distribution of employees paid the minimum wage per economic sector (as at 31 March 2002)

Economic sector Men As % of number of men Women As % of number of women Total in gainful employment in gainful employment in the sector in question in the sector in question

Agriculture, viticulture and sylviculture 360 37 65 26 425 Industry 2 455 9 1 960 31 4 415 Energy and water 5 1 0 2 5 Construction 3 975 15 260 15 4 235 Commerce, catering and accommodation, repairs 6 270 25 9 575 44 15 845 Transport and communications 1 195 8 330 9 1 525 Financial intermediation 155 1 160 1 315 Real estate, leasing/ rentals, business services 2 325 11 2 030 14 4 355 Other services 2 420 16 3 480 12 5 900

All sectors 19 160 13 17 860 19 37 020

Source : Inspection générale de la sécurité sociale (IGSS)

Changes in wages and salaries vary sharply depending on the sector of activity and occupational status. To illustrate this we can compare, for example, workers in industry to employees in financial intermediation (banking industry). The rate of increase of deflated hourly earnings of the former does not exceed 10 %, and the variations from one year to another are negative in many instances. The monthly earnings of white-collar employees, on the other hand, increases by nearly 50 %. Changes that have occurred in the internal structure of these two sub-populations could explain these divergent patterns.The annual figures are actually weighted averages that depend in particular on the breakdown by age, seniority or skills of the population concerned. Pay generally rises

Hourly earnings of workers on industry and monthly wages of employees in the financial intermediation industry ( deflated by the retail price index, 1980 = 100)

160 150 140 130 120 110. 100 90 80 1980 1982 1984 1988 1990 1992 1994 1996 1998 20001986 Earnings of manual workers in industry Earnings of employees of financial intermediation

Source : STATEC

158 3 - SOCIAL SYSTEM 3.1 - Wages and salaries with age, and rejuvenation can entail a reduction of average salary or wages, without the salaries received by the various age groups being reduced. This may also apply if more skilled workers are replaced by less skilled ones. The average age of the dependent labour force employed in the Grand Duchy is tending to fall, due to the annual admissions of new immigrants and cross-border workers, where those under 35 years of age predominate.This trend is again reinforced by the low levels of employees over 55 years of age. It remains to be seen whether the much more sizeable rejuvenation of manual workers in industry compared with that among employees in the banking sector could be behind this far lower increase in salaries. All the sources available show that it is not. There is another explanation: the reduction in the number of steel workers who traditionally received higher wages than their colleagues in other sectors.While that structural change within the working population in industry has undoubtedly played a role, it is not possible to attribute these sharp divergences to that change alone.

International comparisons: Luxembourg among the leaders EUROSTAT publishes comparative statistics relating to the gross monthly earnings of full-time employees in industry and in services, excluding public administration, showing that Luxembourg is in the leading group with Switzerland and Denmark. In these three countries, gross monthly earnings exceeded EUR 3 000 in 1999. In the three neighbouring countries, these earnings were EUR 2 127 in France, EUR 2 572 in Germany and EUR 2 745 in Belgium respectively.It should be borne in mind that these figures do not take account of the real purchasing power of the various amounts, nor the various deductions such as direct taxes and social security contributions.

Gross monthly earnings in industry and services in the Europe of 15, the United States and Japan

1995 1996 1997 1998 1999 2000

in euro

Belgium 2 703 2 703 2 689 2 746 : : Denmark : 2 993 2 946 3 047 3 282 3 418 Germany 2 537 2 503 2 496 2 573 2 688 2 731 Greece 1 145 1 250 1 344 1 328 : : Spain 1 115 1 150 1 155 1 179 1 208 1 234 France : 1 808 2 075 2 127 2 162 : Ireland 2 174 2 285 2 539 2 541 : : Italy 1 361 : : : : : Luxembourg 3 091 3 068 3 084 3 112 3 213 3 319 Netherlands 2 085 2 082 2 100 2 207 2 287 : Austria 1 826 1 850 1 827 1 854 1 905 1 940 Portugal : : 640 645 : : Finland 1 950 2 001 1 985 2 031 2 109 : Sweden : 2 176 2 245 2 242 2 351 2 628 United Kingdom : 1 890 2 316 2 462 2 707 3 049 United States 1 307 1 388 1 623 1 709 1 857 2 230 Japan 2 289 2 064 2 106 1 966 2 319 2 853

Source: EUROSTAT

3 - SOCIAL SYSTEM 159 3.1 - Wages and salaries Concerning these various deductions, we can refer to OECD figures. These deductions consist of tax on salaries as well as social security contributions (employer’s and employee’s share).The relevant graph shows the deductions in % of the labour costs of a manual worker in manufacturing industry, living alone and whose gross salary is equal to the average gross salary. The rates of deduction vary considerably from one country to another:Luxembourg is in the group of countries where they are relatively low. In 2000, the average of deduction was 35 % in the Grand Duchy of Luxembourg, whereas the average in the European Union was 44 %. Only a few European countries, including Portugal, Ireland and the United Kingdom, as well as the United States and Japan, perform better in this respect. It should be borne in mind that the relatively low level of deductions in Luxembourg is mainly due to a: - comparatively low rate of income tax. It is 11 % in Luxembourg for a worker earning the average wage, while the corresponding deduction is 21 % in Belgium and 18 % in Germany. - relatively low level of employers’social security contributions. It is 12 % in Luxembourg compared with 25 % in Belgium, 17 % in Germany, 29 % in France, etc. For details of the figures, refer to Chapter 3.3). It is probably not necessary to reiterate that it is the increasing transfer of the burden of financing social security to general taxation that has enabled deductions to be kept at the current level in Luxembourg (see Chapter 1.2).

Level and structure of the compulsory deduction in % of labour costs in 2000 1 (income tax and employees’ and employers’ social security contributions)

50 Average for EU15 40

0 BDSFINFINLADKEELLPUSUKIRLJP

Employees' social security contribution Income tax Employers' social security contribution

Source : OECD. 1 This is based on deductions from the wages of a single person earning one salary equal to that of the average worker.

Structure of salaries We have seen that there may be considerable discrepancies between various categories of wage- earners. Some are widely accepted in our societies, who find it normal that a manager earns more than a skilled worker and that a skilled worker earns more than an unskilled colleague. Likewise, it is usually accepted that wages and salaries increase with age, in other words that there is a premium for seniority. The figures concerning gross monthly wages per socio-economic category, taken from the wage structure survey in 1995, confirm that these differentiations reflect the reality: average pay increases as employees in the hierarchy of jobs, or as seniority increases.

160 3 - SOCIAL SYSTEM 3.1 - Wages and salaries Gross monthly wages (in EUR) per socio-economic category and gender according to age

Socio-economic Seniority (in years) category Less than 2 3 à 5 6 à 10 11 à 15 16 à 20 21 and over

Managers Both genders 4 029.43 4 539.48 5 034.69 5 413.67 6 032.24 6 605.89 Men 4 231.59 4 717.69 5 304.77 5 594.01 6 009.61 6 745.41 Women 3 501.87 3 867.86 4 074.97 4 707.77 6 134.05 5 718.06

Technicians Both genders 2 775.96 3 127.90 3 462.38 3 711.07 3 987.32 4 486.65 Men 2 855.78 3 277.30 3 627.97 3 758.91 4 146.76 4 577.95 Women 2 642.45 2 871.25 3 205.51 3 612.73 3 458.61 4 047.43

Administrative employees Both genders 2 026.60 2 149.39 2 446.61 2 813.12 3 085.08 3 360.92 Men 2 088.80 2 195.17 2 560.96 2 979.68 3 159.92 3 433.15 Women 1 988.38 2 117.51 2 368.50 2 574.30 2 899.09 3 027.18

Skilled manual workers Both genders 1 840.09 2 006.50 2 173.60 2 416.00 2 548.37 2 606.30 Men 1 863.49 2 041.53 2 210.09 2 453.77 2 574.65 2 616.09 Women 1 458.08 1 552.11 1 645.27 1 833.82 1 848.67 1 752.86

Unskilled manual workers Both genders 1 470.21 1 564.80 1 767.70 1 957.32 2 153.05 2 372.24 Men 1 559.47 1 669.66 1 901.44 2 153.05 2 259.38 2 476.16 Women 1 318.07 1 400.70 1 501.07 1 665.00 1 764.13 1 914.36

Source: STATEC N.B. Data from the wage structure survey of 1995

But it also appears that, in general, wages of women are lower than those of their male counter- parts and that the gap tends to widen with age. Concerning these differences,we have to mention discrimination. In the same age category and the same socio-economic category, women earn less than men. It seems that career breaks, generally to have children, count against women. EURO- STAT publishes comparative statistics concerning the earnings of women and men. Even though methodological problems introduce a bias (for Luxembourg, only salaries of non-manual workers are taken into account), Luxembourg’s performance on equal pay for men and women does not seem to be among the best in Europe. The pay gap between women and men is due, on the one hand, to differences in structure of female and male employment (e.g.: position in the professional hierarchy and therefore pay, length of career, seniority in the company, etc.). Furthermore, there is a difference that cannot be explained by all the other characteristics of the employee. A recent study by the CEPS/Instead, based on results for 2000 of the survey carried out each year within the context of the PSELL socio-economic panel, reveals the following results:

3 - SOCIAL SYSTEM 161 3.1 - Wages and salaries - the average pay gap between men and women in Luxembourg was about 30 % in 2000; - the structural differences in female and male employment (profession, experience, seniority, training, etc.) have an impact of around 15 %; - a percentage of more than 10 % discrepancy is “unexplained”, and it could be assumed that this is gender discrimination, pure and simple.

Women’s earnings as a percentage of men’s earnings in 1999 (industry and services) 90 80 70 60 50 40 30 20 10 0 S DK F FIN US ED NL P ELB IRL A L JP

Source : EUROSTAT. N.B.: Earnings of full-time employees. L and B: only non-manual employees

As far as the pay gap caused by structural factors is concerned, over 40 % is attributable to the job or profession occupied, one-third to the difference in length of career (cf. career breaks for women), 7 % to seniority in the form, 6 % to a difference in training levels, 4 % to the fact of being employed in the private sector or the public sector.The remainder of the discrepancy of structural origin results from factors such as overtime, the size of the company, etc.

Breakdown of the pay gap between women and men

Other factors Company status Unexplained 12 % Training Seniority

Structural 16 % Experience

72 % Profession

Source: CEPS/Instead, PSELL 2000 (Blandine Lejealle). Reading: the average pay gap between men and women is 28 %. The discrepancy that is structural in origin is 16 %. Among the factors explaining the structural discrepancy, the profession or post occupied accounts for 40 %, experience (length of career) counts for one-third. A wage difference of 12 % between men and women is “unexplained”.

162 3 - SOCIAL SYSTEM 3.1 - Wages and salaries The data collected in the survey on wage structures also enables the increase in salaries procured for an additional year of education to be evaluated. After 15 years of education, including primary school, an additional year of education would generate an increase of 9.8 % in salary among men and 7.6 % among women. Earnings functions with qualitative variables estimated from this same data highlight the additional earnings that a certain number of characteristics of the job or the wage-earner can pro- cure. It can be shown that, all other things being equal, a resident of Luxembourg nationality earns 8.8 % more than a cross-border worker, and that this effect is still 2.6 % compared with a foreigner resident in the Grand Duchy. The survey on wage structure is used to analyse the inequalities in wages at Community level. By classifying the population of wage-earners in the sample in ascending order according to their gross monthly wage, dividing it into ten equal parts with each part containing the same number of observations, we obtain decile categories. The limits of these categories are called deciles. For a given distribution, there will be nine deciles. The ratio between the last (9th decile) and the first (D9/D1) is usually known as the “interdecile ratio”. The EUROSTAT table contains other ratios where the median decile is used.

Dispersion of gross monthly salaries in the Europe of 15

Country D5/D1D9/D5 D9/D1

Belgium 1.382 1.657 2.289 Denmark 1.441 1.644 2.369 Germany 1.435 1.635 2.345 Greece 1.562 1.867 2.917 Spain 1.731 1.941 3.361 France 1.476 2.060 3.041 Ireland 1.717 1.955 3.357 Italy 1.426 1.673 2.387 Luxembourg 1.582 1.701 2.691 Netherlands 1.545 1.727 2.667 Austria 1.495 1.745 2.610 Portugal 1.578 2.470 3.899 Finland 1.376 1.562 2.149 Sweden 1.313 1.541 2.023 United Kingdom 1.794 1.882 3.377

Source : European Commission, EUROSTAT. N.B.: Data taken from the 1995 survey on wage structure

The gap between the best-paid employees and those at the bottom of the pay-scale is greatest in Portugal, and lowest in Sweden. Luxembourg is in an intermediate position, with an interdecile ratio of 2.691. If, on the other hand, we refer to the median decile and the first, we can only observe that Luxembourg is among the most inegalitarian countries as far as gross wages are concerned.

3 - SOCIAL SYSTEM 163 3.1 - Wages and salaries 3 - SOCIAL SYSTEM

3.2 Standard of living and living conditions

164 3 - SOCIAL SYSTEM 3.2 - Standard of living and living conditions Disposable income An initial way of understanding the standard of living of a population is to refer to monetary indicators, for example, macroeconomic aggregates such as gross domestic product or gross national product related to the number of inhabitants. From the microeconomic viewpoint, this concerns disposable income or consumer spending per household calculated from individual data gathered during surveys.What is striking in this respect is not so much that Luxembourg is at the top of the list, but rather that it is so far ahead of the other countries. For the second country (Belgium), the indicator used (disposable income) is 28 % lower and the gap is 39 % compared with the community average. The question arises as to why, in this comparison, Luxembourg is so far ahead of the other EU countries, while it only appears in the leading group when one considers salaries and the wages alone. An initial explanation would be that replacement earnings, such as pensions or unemployment benefit, are particularly high. Concerning pensions, they are much higher than those observed in other countries. Expressed in PPS, they amount to over 20 000, whereas for all other countries they do not exceed 15 000, and the community average is approximately 11 000 (1995 figures). Becoming unemployed almost always entails a considerable fall in the household’s resources, and the low number of unemployed people certainly has largely positive effects on the average

Disposable income per household in the Europe of 15, percentages of poor households and dispersion of income (1999)

Disposable income in Percentage of households Percentage of households Ratio between the share PPS per adult whose disposable income whose disposable income is of total disposable equivalent - is less than 60 % of the less than 60 % of the median income of the richest 20 % equivalent median disposable income disposable income. of households and the 20 % Luxembourg = 100 BEFORE TRANSFERS AFTER TRANSFERS of poorest households

EU-15 61 26 18 5.4 Belgium 78 28 16 5.8 Denmark 69 26 9 2.7 Germany 69 24 16 4.8 Greece 42 23 22 6.5 Spain 44 25 19 6.8 France 64 28 18 4.7 Ireland 60 33 17 5.3 Italy 49 23 20 5.9 Luxembourg 100 26 12 4.6 Netherlands 69 21 12 4.4 Austria 67 25 13 3.8 Portugal 39 27 20 7.2 Finland 53 37 8 3.0 Sweden 56 30 10 3.4 United Kingdom 71 33 21 5.7

Source: European Commission EUROSTAT

3 - SOCIAL SYSTEM 165 3.2 - Standard of living and living conditions Disposable income, adult equivalent, PPS

The disposable income of a household is equal to the income received by the various members of the household (wages, rent, interest and various benefits) from which we deduct taxes, social security contributions and other deductions. For a given disposable income, the living standard of a couple with no children is generally higher than that of a couple with several dependent children. Due to economies of scale (it does not take twice as much energy to cook two steaks instead of one), the disposable income is not divided by the size of the household. The size and composition of a household are taken into account by means of adult equivalents (or consumption units). Within a household, the first adult is equal to one unit, while that of the other members is a fraction (for example 0.8, 0.5, 0.3, 0.1). Living standards are therefore measured by dividing disposable income by the total of the various weightings. There are different scales or systems of weightings. The most common, such as those used by the OECD, allocate the higher weighting to persons other than the reference person and particularly to children. Others based on the hypothesis of very large economies of scale, assign them a much lower weighting. Scales of the first type entail sharp falls in living standards of families with large numbers of children.With the latter, it is the relative position of households consisting of a single person that deteriorates, and the reduction in living standards of households with children becomes much lower.

In order to facilitate comparisons between countries, we use purchasing power parities (PPPs). PPPs are defined as conversion factors that even out the purchasing power of various currencies by eliminating divergences in price levels between countries. Put most simply, PPPs are nothing more than price ratios. The volume of economic aggregates, or income respectively, in purchasing power standard (PPS) is obtained by dividing their original value in national currency by the corresponding PPP.By way of example, and to simplify: In Germany GDP per head was around 25 200 euro in 2001. Given that price levels in Germany were index 104.79 based on index 100 for Europe as a whole, the amount of 25 200 should be divided by 1.0479. GDP per head in Germany expressed in PPS is therefore 24 050. Having eliminated the difference in price levels, this amount can validly be compared to that of other European countries whose price levels have been determined (compared to the European average) and calculated the GDP per head in PPS. Income, or consumer expenditure, expressed in PPS allows comparison of “real” purchasing power between different countries.

For comparisons it is necessary to take account of indirect taxation charged on consumer expenditure, the amount of which is relatively higher for households with lower incomes devoting a large proportion of their resources to consumption.This aspect should not be overlooked in comparisons between countries. International comparisons may be distorted by the exclusion of public goods and services (education, health and culture) from which households benefit. So high direct taxes reducing disposable income can have the effect of making available a large amount of public goods or services.

166 3 - SOCIAL SYSTEM 3.2 - Standard of living and living conditions amount of these resources. The very generous family policy implemented for the past 15 years obviously has substantial repercussions on the impact of households with dependent children. We have already mentioned the low rate of deductions on salaries which reduce the difference between gross and net income more than in most other countries.

Poverty and inequality of income The measurement of poverty put forward by the EU Commission (EUROSTAT) starts out from the distribution of income per household within a given country. It is relative in character and thresh- olds of poverty vary from one country to another, because they are not tied to a fixed amount of disposable income that is identical throughout the EU. Households with disposable income below 60 % of the national median are considered poor. The median is the value of a distribution which divides them into two equal parts. This proportion of poor households is often calculated before

Average and median living standard and level of low incomes according to a socio-demographic typo- logy of households (2000)

Types of household Distribution of Average living Median living Level of low types of household standard standard incomes 1 in the population as a whole

in % Euros/month Euros/month in %

Non-family households 2 28.2 2 369 2 000 10.3 Single fathers or mothers with dependent children 3.4 1 796 1 600 25.4 Single fathers or mothers with adult children 2.7 2 351 2 190 7.5 Nuclear families 3 without dependent children 21.2 2 608 2 222 7.3 Nuclear families with 1 dependent child 10.3 2 282 2 101 11.2 Nuclear families with 2 dependent children 11.3 2 115 1 820 15.0 Nuclear families with 3 or more dependent children 4.9 1 831 1 703 25.3 Family “clans”4 without dependent children 12.3 2 361 2 116 8.0 Family “clans” with one dependent child 3.6 2 044 1 725 23.7 Family “clans” with 2 or more children 2.1 1 926 1 796 16.0 Total 100.0 2 314 2 016 11.7

Source : CEPS/INSTEAD 1) Level of low incomes = percentage of families with a living standard below 60 % of the median national living standard 2) Non-family households = basically people living alone 3) Nuclear family = families consisting only of a couple (married or not) with or without children 4) Family clans = families consisting of several adults (for example a couple with one or more relatives in the ascending line) with or without children

3 - SOCIAL SYSTEM 167 3.2 - Standard of living and living conditions and after social transfers. In this way, the effectiveness of redistribution policies can be evaluated. Without social transfers, Luxembourg records a poverty level equal to the Community average which was 26 % in 1999. By including these transfers in disposable income, this is greatly reduced to 12 %. The fact that it is now below the Community average of 18 % seems to show that the effects of transfers are relatively large. Scandinavian countries, Finland (8 %), Denmark (9 %) and Sweden (10 %) recorded the lowest poverty levels (after social transfers). But it should always be borne in mind that the relative character of the measurement implies that 12 % of the poor people in the Netherlands have lower income than the 12 % of poor people in Luxembourg. Inequalities in the distribution of income are highlighted by another indicator put forward by the Commission: the relationship between the share of total income of the richest 20 % and the poorest 20 %. In Luxembourg, the share of households at the top of the scale is 4.6 times greater than that of households at the bottom of the scale. While this ratio is lower than the community average of 5.4, those recorded in countries such as Sweden, Finland, Denmark and even Austria show a far more egalitarian distribution of income. In general, there is a rather close correlation between rates of poverty and inequality of income, and the most inegalitarian countries have the highest proportion of poor people. These differences in living standards can also be analysed according to a socio-demographic topo- logy of households. According to the results of the PSELL survey (Panel Socio-Économique “Liewen zu Lëtzebuerg” – Vivre au Luxembourg) conducted each year by CEPS/INSTEAD, single-parent and large families have the lowest standard of living (disposable income taking account of consumption units) in Luxembourg. The level of lower incomes - i.e. the level of households with the standard of living below 60 % of the median national income - is lowest among nuclear families without dependant children (7.3 %).

Macroeconomic aggregates: Luxembourg is still the “richest” The privileged position of Luxembourg is apparent once again if we refer to the gross national income per head. Chapter 1 contains an explanation of the reasons for preferring this aggregate to GDP,once they are related to the number of inhabitants. To have an overall picture concerning living standard indicators, we can juxtapose the evaluations of living standards based on the aggregates from national accounts (gross national income), and the other values calculated from individual data drawn from a sample survey (disposable income). As the third indicator of living standards, we can take into consideration wages and salaries (average wage costs). The table setting out the trends since 1995 of these three indicators in

Deflated income per household, wage costs, Gross National Product per inhabitant (1995=100.00)

Disposable income Average wage cost Gross national product per household per inhabitant

1995 100.00 100.00 100.00 1996 101.22 100.54 102.31 1997 103.14 101.48 105.80 1998 104.45 102.20 110.89 1999 106.66 104.64 114.78 2000 109.33 106.23 113.96

Source : STATEC, EUROSTAT

168 3 - SOCIAL SYSTEM 3.2 - Standard of living and living conditions Luxembourg shows that, in real terms, disposable income is increasing faster than wage costs, but less rapidly than gross national income per habitant. Even if these three indicators are not directly comparable, there is every reason to believe that during the period under consideration (1995- 2000), the living standards of residents have risen by approximately 10 %.

Consumer spending and household equipment The fact that residents of Luxembourg benefit from a standard of living which is well above that of the other countries of the European Union seems to be confirmed by figures relating to consumer spending by households, where the lead exceeds even that observed for income. The average annual expenditure by Luxembourg households, expressed in PPS, would be some 45 000, and that of the next country around 27 000. It must be said that these figures come from surveys on budgets of households which were carried out before 1999, and where the level of harmonisation probably has not achieved that of the Community panel on households used for the statistics on distribution and income. This situation may affect comparisons between countries. So it may appear surprising that, if we leave out Luxembourg, the range of consumer spending is much nar- rower than that of income. Likewise, the differences between blue and white collar as shown in the EUROSTAT table must be examined, taking account of these methodological reserves. With a discrepancy of +52.0 %, Luxembourg is in the company of countries known for being the most inegalitarian, i.e. Greece (+48.6 %), Portugal (71.1 %) and Spain (38.7 %).This difference slightly exceeds the 20 % in Belgium, Denmark, France and Sweden. It is much less pronounced in the Netherlands (+13.1 %) and in Austria (+11.8 %). Besides consumer spending, the levels of equipment of households with consumer goods are often believed to give indications about the standard of living. So we can see that the percentage of households with at least one car rose from 55.1 % in 1970 to 78.8 % in 2001. The best indicator to judge the progress made or to highlight differences between socio-economic categories relates to possession of a dishwasher. While two-thirds of today’s households have one, fewer than 5 % had one 30 years earlier.

Levels of equipment of households with consumer durables in Luxembourg (in %)

1970 2001

Washing machine 78.7 93.3 Fridge 85.6 97.7 Dishwasher 4.3 65.0 Car 55.1 78.7

Source : STATEC

The trend in consumption structure is another aspect of changes in living standards and conditions. We can use the weighting of the main consumer functions in the retail price index to measure the changes in the structure. These statistics should be treated with caution. The weighting only considers current spending, excluding in particular the “housing, heating and lighting” category interest on loans for the purchase of real estate. Rent was only introduced into the weighting in 1987.

3 - SOCIAL SYSTEM 169 3.2 - Standard of living and living conditions Average annual spending per household by socio-economic status of the reference person in 1999

Manual worker Other worker Self-employed

In thousands of euro*

Belgium 27.0 32.9 36.0 Denmark 24.5 29.5 34.4 Germany 26.2 : 32.3 Greece 22.8 32.7 26.9 Spain 19.9 27.6 21.4 France 22.4 27.5 29.8 Ireland : : : Italy 32.1 : 34.0 Luxembourg 38.7 59.0 58.4 Netherlands 27.5 31.1 30.5 Austria 28.0 31.3 33.5 Portugal 15.9 27.3 15.0 Finland 20.1 23.2 24.7 Sweden 20.6 25.0 34.2 United Kingdom 28.0 36.1 38.6

Source : EUROSTAT * amounts corrected by purchasing power parities, thus eliminating divergencies in price level

Weighting in % of the main consumption functions in the retail price index 1965 to 2002

100 90 80 70 60 50 40 30 20 10 0 1965 1984 1990 2002 Food, drink and tobacco Transport and communications Clothing and shoes Leisure, entertainment, education and culture Housing, water, electricty and fuels Other goods and services Furnishing, domestic appliances and maintenance Health

Source : STATEC

170 3 - SOCIAL SYSTEM 3.2 - Standard of living and living conditions Pensioner Other out of the labour force Unemployed Total

In thousands of euro*

20.4 21.6 14.3 27.4 16.5 14.0 16.2 23.4 : 14.3 15.9 23.5 17.8 16.4 18.5 23.4 15.4 12.2 16.8 20.0 17.7 13.3 15.4 22.3 : : : 22.2 22.7 19.2 21.3 27.2 40.4 31.6 30.6 45.2 21.7 16.8 15.7 25.7 20.3 21.6 22.8 26.5 9.9 11.9 14.9 16.3 12.3 11.3 11.8 18.2 18.0 16.4 15.7 21.7 18.9 17.5 16.7 27.6

Nevertheless, the associated graph enables the reader to notice three fundamental changes: - the share of food and drink in total consumption fell from nearly half in 1965 (47.5 %) to 36.3 % in 1984 and to 19.7 % in 2002; - on the other hand, the share of transport and communications in the weighting has practically tripled, rising from 6.7 % in 1965, to 13.1 % in 1984 and to 18.8 % in 2002; - another item in the consumption structure has expanded considerably: that of “leisure entertainment, education and culture”, which rose from 6 % in 1965 and in 1984 to 10.8 % in 2002; - and finally among other goods and services, we should mention spending in hotels, restaurants and cafés, where the proportion rose from 5 % to total consumption in 1990 to 7.1 % in 2002.

Human development Index The idea underlying the creation of a human development index (HDI) by the United Nations is that monetary income cannot be the only criteria to assess living standards and welfare achieved in a particular country.Besides gross domestic product (GDP) per inhabitant which, for reasons set out above, tends to overestimate the economic success of Luxembourg, two other statistics are introduced. One of them, life expectancy at birth, should provide indications on the health situation and the progress made in the field of health care. The other, mean years of schooling, which takes account of various levels of education, is used to measure the cultural level.The methodological indications concerning the production of this indicator shown in the appendix to the relevant report are not very clear. It seems, however, that the method of calculation leads the UN to underestimate the level of schooling (education enrolment ratio) in Luxembourg.

3 - SOCIAL SYSTEM 171 3.2 - Standard of living and living conditions The low level of the education index brings Luxembourg down from the first place that it would have as a result of its economic performance to 16th place. But it should also be noted that the life expectancy at birth indicator puts the country in an average position.

Human Development Index (2002)

HDI Country Life expectancy Adult literacy Combined primary, PIB per capita Ranking at birth rate secondary and tertiary (in PPP US$) (years) (% 15 years old education gross upwards) enrolment ratio (%)

1 Norway 78.5 .. 97 29 918 2 Sweden 79.7 .. 101 24 277 3 Canada 78.8 .. 97 27 840 4 Belgium 78.4 .. 109 27 178 5 Australia 78.9 .. 116 25 693 6 United States 77.0 .. 95 34 142 7 Iceland 79.2 .. 89 29 581 8 Netherlands 78.1 .. 102 25 657 9 Japan 81.0 .. 82 26 755 10 Finland 77.6 .. 103 24 996 11 Switzerland 78.9 .. 84 28 769 12 France 78.6 .. 94 24 223 13 United Kingdom 77.7 .. 106 23 509 14 Denmark 76.2 .. 97 27 627 15 Austria 78.1 .. 90 26 765 16 Luxembourg 77.4 .. 72 50 061 17 Germany 77.7 .. 94 25 103 18 Ireland 76.6 .. 91 29 866 19 New Zealand 77.6 .. 99 20 070 20 Italy 78.5 98.4 84 23 626 21 Spain 78.5 97.6 95 19 472 22 Israel 78.7 94.6 83 20 131 23 Hong Kong 79.5 93.5 63 25 153 24 Greece 78.2 97.2 81 16 501 25 Singapore 77.6 92.3 75 23 356 26 Cyprus 78.0 97.1 68 20 824 27 Korea, Rep. 74.9 97.8 90 17 380 28 Portugal 75.7 92.2 96 17 290 29 Slovenia 75.5 99.6 83 17 367 30 Malta 78.0 92.0 80 17 273

Source : UNO (2002)

172 3 - SOCIAL SYSTEM 3.2 - Standard of living and living conditions Education Even if the classification of the country according to the HDI sometimes produces surprising results, and it is certainly not immune from criticism, the results obtained by Luxembourg should provide food for thought. It is true that the overall level of education used in the HDI does not take account of attendance at education establishments abroad, but its relatively low level is probably the reflection of certain specific features of Luxembourg. The massive presence of immigrants who have not come to

Life Education GDP index Human GDP per expectancy index Development capita rank minus index Index (HDI) HDI rank

0.89 0.98 0.95 0.942 2 0.91 0.99 0.92 0.941 15 0.90 0.98 0.94 0.940 4 0.89 0.99 0.94 0.939 5 0.90 0.990.93 0.939 7 0.87 0.98 0.97 0.939 -4 0.90 0.96 0.95 0.936 -2 0.89 0.99 0.93 0.935 5 0.93 0.93 0.93 0.933 2 0.88 0.99 0.92 0.930 6 0.90 0.94 0.94 0.928 -5 0.89 0.97 0.92 0.928 6 0.88 0.99 0.91 0.928 7 0.85 0.98 0.94 0.926 -6 0.89 0.96 0.93 0.926 -5 0.87 0.901.00 0.925 -15 0.88 0.970.92 0.925 -2 0.86 0.96 0.95 0.925 -14 0.88 0.99 0.88 0.917 5 0.89 0.94 0.91 0.913 -1 0.89 0.97 0.88 0.913 4 0.90 0.91 0.89 0.896 1 0.91 0.83 0.92 0.888 -9 0.89 0.92 0.85 0.885 10 0.88 0.87 0.91 0.885 -4 0.88 0.88 0.89 0.883 -4 0.83 0.95 0.86 0.882 1 0.84 0.94 0.86 0.880 2 0.84 0.94 0.86 0.879 0 0.88 0.88 0.86 0.875 1

3 - SOCIAL SYSTEM 173 3.2 - Standard of living and living conditions Schooling rates in Luxembourg in the 15-19 year-old and 20-24 year-old age brackets in 2001 (in %)

Age bracket Total Nationals Foreigners

15 to 19 years 82.1 85.2 77.0 20 to 24 years 35.0 42.5 24.6

Source: STATEC

Luxembourg to study but to work,and therefore having low levels of education,drags the national level downward. We may also wonder whether the absence of complete university courses in the country does not act against Luxembourg, as the relatively high cost of university education abroad may have a deterrent effect for a certain number of residents. Figures taken from the general census of the population in 2001 show two things clearly. Firstly, the schooling rate of 20- to 24-year-olds (35.0 %) is much lower than that of 15- to 19-year-olds (82.1 %). If we consider that between 20 and 24 years of age, the great majority of people who are still in education are attending higher education establishments, we can conclude that in Luxembourg, this proportion is only approximately 30 % in the age group under consideration. Concerning differences in schooling between Luxembourg nationals and foreigners, we observe that while among 15- to 19-year-olds, the discrepancy is still quite low with rates of 85.2 % and 77.0 % respectively.This widens greatly in the next 5-year age bracket. The rate in question is only 24.6 % for foreigners while it reaches 42.5 % for Luxembourg nationals. Education is one of the fields in Luxembourg where improvement is possible and necessary.This is also clear from the comparative table concerning the percentage of the population who have completed at least the second cycle of secondary education, per age group, in 2000. In the 25- to 29-year-old age bracket, only 70 % of the Luxembourg population completed the second cycle of secondary education. Only three other countries came behind Luxembourg: Ireland, Spain and Portugal. By comparing these results with those of the age range from 50 to 64, which reflect the

Percentage of the population having completed at least the second cycle of secondary education, by age bracket, 2000

100 90 80 70 60 50 40 30 20 10 0 UK DK FIN S D A F EU-15 NL EL L IRL E P

25-29 year 50-64 year Source : EUROSTAT – Labour Force Survey (LFS) N.B : Levels of education are defined according to the CITE classification (Classification internationale type de l’éducation) of UNESCO dated 1997.

174 3 - SOCIAL SYSTEM 3.2 - Standard of living and living conditions Young people leaving school prematurely and not studying or training in 2000 (in %)*

50 45 40 35 30 25 20 15 10 5 0 P I EIRL L NL EL D F B DK A FIN S

Source : EUROSTAT – Labour Force Survey (LFS) * Proportion of young people from 18 to 24 years of age having only completed the first cycle of secondary education and not studying or training operation of the school system 30 to 35 years ago, we also note that progress in this area is less significant in Luxembourg than in many European countries. In 2000, the proportion of young people leaving school prematurely and not continuing their education or any training (proportion of young people aged 18 to 24 who attended only the first cycle of secondary education) was 17 % in Luxembourg.With this rate Luxembourg is doing better than the average for Europe of 15 (20 % of young people leaving school prematurely), but less well than its neighbours (12 % in Belgium, 15 % in Germany and 13 % in France). The results of the Nordic countries are also better than those of Luxembourg (12 % of young people leaving school early in Denmark and 8 % in Sweden). Finally, we cannot remain silent about the mediocre results achieved by Luxembourg in the PISA survey (Programme for International Student Assessment) of the OECD conducted in 2000. In each of the three fields evaluated (reading, mathematics and sciences), the study did not so much concern the verification of knowledge laid down in the curriculum as the ability to apply that knowledge. Luxembourg can only claim very poor results compared with other OECD countries. In the three fields evaluated, Luxembourg came in 29th place among 31 countries that took part in the study. In reading, Finland, Canada and New Zealand came top of the list. Among EU countries, Luxembourg came last, with Germany coming in 12th place. It is therefore understandable that the government considers education one of its priority areas of action.

Indicators of sustainable development In accordance with the decisions taken by the first United Nations conference on the Environment and Development, Luxembourg drew up a national action plan for sustainable development (NPSD) aimed at achieving a number of objectives in fields such as socio-economic equity, social welfare, the economy and protection of the natural and human environment. The results of the implementation of the NPSD will be verified using a system of performance indicators that enable progress to be evaluated. A first list of 27 sustainable development indicators has been drawn up. It includes nine social indicators, nine economic indicators and nine environmental

3 - SOCIAL SYSTEM 175 3.2 - Standard of living and living conditions indicators. Some of the social and economic indicators, such as the poverty level or GDP per head, have already been presented, so we shall limit our remarks to a number of the environmental indicators set out in a brochure published on this subject by the Environment Ministry in 2002, outlining the objectives of government policy in this field.

• Encouraging a different kind of mobility The objective of the strategy “mobilitéit.lu” promoted by the transport ministry “is to guarantee and manage mobility for all, by limiting the environmental effects of road transport, without affecting economic growth”. It is a matter of encouraging “a mobility policy based on curtailing the increase in individual traffic and accelerated development of supply of public transport with a view to improving the breakdown between modes of transport (relative share of the number of journeys carried out by public transport in the total number of journeys carried out by motorised vehicles during a working day) in favour of public transport”. According to the Traffic Model Unit, this proportion will rise from 11.1 % in 1997 to 12.3 % in 2002, the objective being to increase it to 25 % over the medium term (in 2020).

• Reducing emissions of greenhouse gases Luxembourg has set itself the objective, already set out by Luxembourg within the context of the Kyoto Protocol in 1997, of reducing emissions of greenhouse gases by 28 % by 2010 compared with 1990.The six gases responsible for the greenhouse effect are carbon dioxide (CO2), methane (CH4) nitrous oxide (N2O) and fluorinated industrial gases (HFC, PFC and SF6). The replacement during the 1990s of blast furnaces in the Luxembourg steel industry by the electric arc process significantly reduced the emissions of the gases in question. It appears that in recent years we have seen a reversal of this trend for which the transport sector is largely responsible.

Emissions of 6 greenhouse gases in tonnes/year of equivalent CO2, 1991-2001

t/an (GWP100) 14 000 13 000 12 000 11 000 10 000 9 000 8 000 7 000 6 000 5 000 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Objective of the NPSD (72% of the figure adopted for 1990 emissions during the approval of contributions by Member States, or 13.8 million tonnes) IPCC approach CORINAIR approach

Source :Environment Ministry. N.B. The CORINAIR approach does not count sales of fuel to non-residents which are included in the IPCC approach (International Panel on Climate Change). GWP100 = “Global Warming Potential”

176 3 - SOCIAL SYSTEM 3.2 - Standard of living and living conditions Phytosanitary condition of the forests (all species combined) 1985-2000

80 % 70 % 60 % 50 % 40 % 30 % 20 % 10 % 0 % 1985 1987 1989 1991 1993 1995 1997 1999 2000

healthy sick or dead trees

Source : Environment Ministry

3 - SOCIAL SYSTEM 177 3.2 - Standard of living and living conditions Changes in gross energy consumption, GDP and energy intensity, 1990-2001

índices (1990=100) 180 170 160 150 140 130 120 110 100 90 80 70 60 50 1990 1991 1992 1994 1995 1996 1997 1998 1999 2000 20011993

Energy intensity Gross energy consumption GDP at constant prices

Source: Environment Ministry

• Ensuring sustainable development of the forests The health of trees is measured using a range of 17 criteria such as the state of treetops, loss of leaves or the nature of discoloration. Between 1985 and 2000, the percentage of trees considered healthy fell from nearly 80 % to less than 45 %. Various analyses have shown that this deterioration mainly affects beech trees.

• Improving energy efficiency and promoting the use of renewable resources The objective of the National Plan for Sustainable Development (NPSD) is to reduce the energy intensity, i.e. the gross energy consumption per unit of GDP,by 20 % between 1993 and 2010. This objective has already been achieved. But this result is due mainly to growth in GDP which was higher than that of the gross consumption of energy defined by the total energy needs of the country (importation and energy produced on national soil). Energy consumption fell between 1990 and 1995 from the 3.56 MTPE (millions of tonnes petroleum equivalent) 3.32 MTPE. From 1995, onwards the trend was reversed. In 2001, 3.82 MPTE were consumed in Luxembourg, or an increase of over 15 % compared with 1995. It was the increase in demand from transport, over 90 % between 1990 and 2000, which was responsible for this change. On the other hand, demand from industry fell by 45 % during the same period, due mainly to the fall in coal imports resulting from the replacement of the cast iron-steel process by the electric-arc process in the steel industry. In the energy field, the NPSD also set objectives of covering 45 % of the consumption of the national electricity grid from national production by 2005 and doubling the share of renewable energy and co-generation by 2010. In 2000, renewable energy represented 3.9 % of final electricity consumption of the national grid, of which 80 % came from hydroelectric stations and 16.5 % came from wind power. The share of co-generation was 5.6 % of this consumption during the same year.

178 3 - SOCIAL SYSTEM 3.2 - Standard of living and living conditions Percentage of watercourses with excessive biochemical and organic pollution (summer months) 1990- 2001

18 % 16 % 14 % 12 % 10 % 8 % 6 % 4 % 2 % 0 % 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Source: Environment Ministry

The new gas and steam turbine power station built at Esch-sur-Alzette should enable targets to be met for co-generation and generate 45 % of consumption by national production.

• Improving the quality of watercourses “What is at issue is to protect the quality of water and guarantee the conservation, or even development, of a balanced ecosystem rich in biological diversity.”The indicator chosen is the percentage of watercourses with high or excessive biochemical and organic pollution (summer months). Activity reports by the Ministry of the Environment show a positive change in the last decade.

• Sustainable land use in Luxembourg The growth in the population raises the questions of land use, forms of construction (in which individual houses are currently dominant) and conservation of a balanced ecosystem. The percentage of the national territory occupied by buildings and communication routes has increased significantly during the last decade, rising from 7.47 % (19 136 hectares) in 1990 to 10 % (25 860 hectares) in 1999. These figures correspond to land use of two hectares per day. The target of the national plan for sustainable development is to reduce its annual consumption by 50 % between now and 2010. The increase in the percentage of land devoted to building has occurred at the expense of agricultural land, the share of which in national territory fell from 57.1 % in 1990 to 54.4 % in 1999.The law of 21 May 1999 relating to land use and the new land use steering plan established new planning instruments, including regional land use plans, sectoral land use plans and comprehensive development area maps, which should meet the requirements for an integrated approach in this field. During the recent discussion on the prospect of Luxembourg having over 700 000 inhabitants in 2050, the question of excessive urbanisation, with the underlying idea of “unsustainable”increase in the population density (inhabitants per square kilometre), was on the agenda.This density rose from approximately 114 inhabitants per square kilometre at the start of the 1980s to 170 inhabitants per square kilometre in 2001. The concentrations are highest in the centre of the country, where the capital is located, and in the south.With regard to development since 1980, we observe a reduction of the density in the City of Luxembourg, and an increase in the surrounding com- munes.

3 - SOCIAL SYSTEM 179 3.2 - Standard of living and living conditions Population density 2001

Legend 18 to 49 hab/km2 50 to 99 hab/km2 100 to 199 hab/km2 200 to 499 hab/km2 500 to 1 895 hab/km2

0515 1020 kilometres

Source: Statec

Evolution of population density from 1981 to 2001

Legend -2.8 to -0.1 % 0.0 to 24.9 % 25.0 to 49.9 % 50.0 to 74.9% 75 to 116.5 %

0 5 10 15 20 kilometres

Source: Statec

180 3 - SOCIAL SYSTEM 3.2 - Standard of living and living conditions Density of the population in 1999 (inhabitants/square km)

450 400 350 300 250 200 150 100 50 0 Trier (D) Trier Liège (B) Brabant Brabant Alsace (F) wallon (B) wallon Namur (B) Pfalz (D) Pfalz Lorraine (F) Lorraine Koblenz (D) Koblenz Hainaut (B) Ardenne (F) Ardenne Saarland (D) Champagne Rheinhessen Luxembourg (L) Luxembourg Luxembourg (B) Luxembourg

Source : EUROSTAT

A comparison of the population density in Luxembourg taken overall with that of other European regions provides useful additional detail. In the relevant graph, we have restricted ourselves to regions located in the vicinity of Luxembourg. The population density of the country ranges between that of sparsely inhabited regions, such as the Belgian Province of Luxembourg or Champagne-Ardenne, and that part of regions where the population is rather dense such as in the Saar, Hainaut, etc. However, even with 700 000 inhabitants, Luxembourg would not reach the current figures of the Saar where population density (417 inhabitants per square kilometre) is still far from that of conurbations such as Ile de France (912), Düsseldorf (996), Hamburg (2 254), Cologne (578), Brussels (5 918), etc.

3 - SOCIAL SYSTEM 181 3.2 - Standard of living and living conditions 3 - SOCIAL SYSTEM

3.3 Social security

182 3 - SOCIAL SYSTEM 3.3 - Social security During the second half of the 20th century, the slow process of extending social security to the whole of the working population of Luxembourg was completed. As is the case in other countries, coverage of the main risks such as illness or old age is organized per socio-economic category.The scheme governing family allowances, on the other hand, is universal.

Increased expenditure and economic growth The growth in total social welfare spending (+218.9 %), from 1 356.40 million euro in 1985 to 4 325.90 million euro in 2000, may seem high. But compared with total wealth, this does not represent mushrooming, and the relative share GDP remained more or less stable around 20 %. This relative stability is also shown by the real terms increases in the two variables that are virtually identical (of the order of 140 %).This parallelism does not mean, probably, that high growth dragged social welfare expenditure upwards. Rather, it enabled their share in the economy to remain constant.

Change, in real terms, in social security spending and economic growth (1985-2000)

300.00 250.00 200.00 150.00 100.00 50.00 0.00

1985 1990 1995 2000

GDP Social security benefits

Source : Inspection générale de la sécurité sociale (IGSS)

Relatively low level of social welfare spending in Luxembourg In the Europe of 15, Luxembourg has the highest social welfare spending per head in absolute terms. It exceeds the level in Denmark, which is in second place, by 13.6 %. Compared with the Community average, the gap is 46.8 %. But if we consider their share in percentage of GDP, Luxembourg is among the countries where this is lowest. Luxembourg’s economic performance means that the country does not have to devote an excessive proportion of its resources to social welfare.

Pensions and health care: 80 % of total spending Pensions and health care still represent around 80 % of total welfare spending. So we can say that the solidarity established by the social welfare system is not so much that between rich and poor as between those in employment and retired, and between those who are healthy and those who are sick.

3 - SOCIAL SYSTEM 183 3.3 - Social security Social security spending in the Europe of 15 (1999)

Social security benefits Social security benefits per inhabitant in PPS in % of GDP

EU-15 5 594 27.6 Belgium 6 146 28.2 Denmark 7 233 29.4 Germany 6 395 29.6 Greece 3 529 25.5 Spain 3 323 20.0 France 6 061 30.3 Ireland 3 353 14.7 Italy 5 313 25.3 Luxembourg 8 214 21.9 Netherlands 6 485 28.1 Austria 6 128 28.6 Portugal 5 629 22.9 Finland 6 515 26.7 Sweden 5 572 32.9 United Kingdom 7 013 26.9

Source : EUROSTAT

The proportion of these two functions is tending to decline in favour of spending relating to the family. While the latter only accounted for a little over 9 % of the total in 1985, its relative share rose to 17 % 15 years later. Within the “health” function, the “invalidity” item is continuing to fall, and the clear reduction between 1995 and 2000 was concurrent with the appearance of an item for dependency insurance established in 1998.

Functional breakdown of social security benefits in % of the total

Fonction 1985 1990 1995 2000

Health 40.7 39.4 37.8 38.2 of which: Sickness 23.3 24.0 23.6 23.4 Dependency 3.1 Invalidity 13.6 12.3 11.3 8.7 Occupational accidents and illnesses 3.8 3.1 2.9 3.0 Retirement, survivor’s pensions 48.0 47.6 46.6 42.1 Maternity, family allowances 9.1 10.9 13.3 16.9 Unemployment, placement 1.4 0.9 2.2 2.3 Housing, miscellaneous 0.8 1.3 0.1 0.4 Total 100.0 100.0 100.0 100.0

Source : IGSS

184 3 - SOCIAL SYSTEM 3.3 - Social security Growth in the expenditure of the various functions of the social security (1985=100)

500 450 400 350 300 250 200 150 100 50 0 Health Pensions Family Unemployment Housing

1985 1990 1995 2000

Source : IGSS

It should be noted that the increase in unemployment over the last decade has been reflected in a relatively faster increase in the item “unemployment”. The increasingly important role played by various benefits and allowances for families with dependent children also becomes apparent when we consider the rate of increase of expenditure on the various functions. From 1985 to 2000, they rose by 338 %, while pensions spending only doubled.

Deductions from wages (income tax and employees’ social security contributions) and impact of family allowances per category of family in 2000 (in % of gross salary)

5 0 -5 DK D B NL FIN S I A F L US UK IRL EEL P JP

Deduction from salary of a single person without children

Deduction concerning a married couple with a single income and 2 children

Deduction concerning a married couple with a single income and 2 children, after family allowances

Source : OECD. N.B : Standard salary of a manual working on average pay for manual workers

3 - SOCIAL SYSTEM 185 3.3 - Social security The policy in favour of families with dependent children cannot just be reduced to social security benefits (family allowances, etc.).This family policy - like all social policy - is characterised increasingly by a combination of fiscal and social measures. To realise the effects of social and fiscal measures in favour of families, we can calculate the impact on gross salaries of deductions (income tax and employees’ social security contributions) reduced by the allowances or benefits paid per category of family.The OECD publishes results of such a calculation each year for various standard salaries. We can say that, among the countries taken into consideration (EU 15, United States and Japan) and taking account of family allowances, Luxembourg is the only country where deductions from gross salary of a married couple with a single income (corresponding to the average wage of manual workers) with two dependent children is zero. Their income is slightly increased by the combined effect of family allowances and the relatively low rate of deduction for families with dependent children. By not taking account of family allowances, this rate of deduction on gross salary (income tax and employees’ social security contributions) is 14 % in Luxembourg for a married couple with a single income (corresponding to the wage of the average manual worker) and with two dependent children. On the other hand, it was 26 % in Austria, 31 % in Belgium, 20 % in Germany and 31 % in the Netherlands in 2000.

A crisis in the financing of the social security system? In many countries, there is talk of a crisis in the financing of the social security system because the rapid rise in expenditure is said to result in an increase in deductions that is deemed unsustainable. The situation is said to be aggravated by the inadequacy of economic growth preventing any reduction in this pressure. Luxembourg has another characteristic which is often considered unfavourable to the financial soundness of social security schemes, i.e. an average age on retirement that is relatively low in European comparisons, as shown by the relatively low employment rate among 55- to 64-year-olds (see Chapter 2.1). However, a crisis in the financing of the social security system was avoided in Luxembourg, thanks to the high increase in the number of workers paying contributions over the past 15 years, which has led to increasing revenue for the coffers of the social security system. This constant influx of labour, especially cross-border labour, has considerably rejuvenated the population covered, so that for the moment the effects of an ageing population on spending on pensions and health are hardly felt. The revenues of the social security system in Luxembourg are characterised by extremely high public contributions for this “Bismarkian” type of system, where the expenditure is financed, in principle, by social security contributions tied to salaries, and where benefits are reserved to members of the family. The use of taxation to cover expenditure is specific to a “Beveridgian” organisation of social security. It has a universal character and is not structured per socio-economic category.While we have seen that the family allowance system is playing an increasingly important role, the operation of the Luxembourg social security system remains fundamentally “Bismarkian”. At first sight, the role of contributions by the State may appear surprising. With a relative share of 47 %, Luxembourg is well above the Community average, which is 35.7 %. It is probably the wish of the authorities to maintain contribution levels and thereby indirect labour costs at a relatively low level, which explains this rampant fiscalisation of the Luxembourg social security system (see Chapter 1.2).

186 3 - SOCIAL SYSTEM 3.3 - Social security Structure of the revenue of the social security system in % of the total (1999)

Employers’ Households’ Public Other Total contributions contributions contribution revenue

EU-15 37.9 22.7 35.7 3.7 100.0 Belgium 49.4 22.4 25.7 2.5 100.0 Denmark 9.2 19.2 65.2 6.4 100.0 Germany 36.9 28.1 32.8 2.3 100.0 Greece 37.7 23.4 28.7 10.3 100.0 Spain 52.2 17.1 26.8 4.0 100.0 France 46.5 20.3 30.4 2.8 100.0 Ireland 24.2 14.8 59.8 1.2 100.0 Italy 43.6 14.4 38.9 3.1 100.0 Luxembourg 24.7 24.5 46.94.0 100.0 Netherlands 28.4 37.4 15.3 18.9 100.0 Austria 37.4 26.9 35.0 0.7 100.0 Portugal 27.6 16.8 40.9 14.7 100.0 Finland 37.2 12.8 43.4 6.6 100.0 Sweden 36.3 9.6 49.0 5.2 100.0 United Kingdom 27.7 24.1 47.3 1.0 100.0

Source : IGSS

3 - SOCIAL SYSTEM 187 3.3 - Social security Level and structure of compulsory deductions in % of labour costs (2000)

Standard salary of a manual worker, single with no children, earning the average wage of a manual worker in industry

Income Employees’ Employers’ Total tax social security social security contributions contributions

B21112556 D18171752 S195 2550 FIN 21 6 21 47 F99 2948 I147 2547 NL 7 25 14 45 A 7 14 24 45 DK 32 12 0 44 E95 2338 EL 2 12 22 36 L11121235 P59 1934 US 17 7 7 31 UK 14 7 9 30 IRL 14 5 11 29 JP 6 9 9 24

Source : OECD

It can be seen that,despite the relatively low rates practised in Luxembourg, the proportion of financing borne by Luxembourg households is high in comparison with the majority of EU countries.The effort required of Luxembourg employers, on the other hand, seems less, at least in the European comparisons. OECD statistics concerning deductions from salaries confirm this fact. Social security contributions paid by employers represent 12 % of labour costs of an average manual worker. With this rate, Luxembourg is closer to the United States, the United Kingdom and Ireland than to neighbouring or Nordic countries.

188 3 - SOCIAL SYSTEM 3.3 - Social security “VIRTUAL”BIBLIOGRAPHY

The Internet gives direct access to a growing number of documents on the development of Luxembourg’s economy and society. Below is a selection of interesting sites:

“SERVICE CENTRAL DE LA STATISTIQUE ET DES ETUDES ECONOMIQUES” (CENTRAL SERVICE FOR STATISTICS AND ECONOMIC STUDIES) (STATEC) www.statec.lu On the STATEC site, you can consult in particular: - quarterly economic reviews which provide an analysis of recent macroeconomic developments; - economic reports, a series which publishes an annual report on the competitiveness of the Luxembourg economy; - bulletins which publish detailed statistics relating to various subjects (external economic relations, population, employment, transport, tourism, agriculture, construction, etc.); - latest figures on national accounts; - short-term indicators (economic activity, prices, employment, etc.); - statistical yearbook containing all the statistical data on Luxembourg produced by STATEC and other government institutions; - bibliography relating to Luxembourg’s economic and social development.

“BANQUE CENTRALE DU LUXEMBOURG” (CENTRAL BANK OF LUXEMBOURG) (BCL) www.bcl.lu The CBL publishes an annual report, periodic bulletins and studies which are all available on the institution’s website. In these publications, you can find information on the overall development of the Luxembourg economy, the development of the financial sector, plus scientific studies on specific economic subjects.

“COMMISSION DE SURVEILLANCE DU SECTEUR FINANCIER” (COMMISSION FOR THE SUPERVISION OF THE FINANCIAL SECTOR) (CSSF) www.cssf.lu The “Commission”’s site gives access to information concerning the financial services (banks,OPC) in Luxembourg: legislation and regulation, statistics, news about the financial place, etc.

“CENTRE DE RECHERCHE PUBLIC-CENTRE UNIVERSITAIRE. CELLULE DE RECHERCHE EN ÉCONOMIE APPLIQUÉE” (UNIVERSITY - PUBLIC RESEARCH CENTRE. APPLIED ECONOMICS RESEARCH UNIT) (CRP-CU CREA) www.cu.lu/crea/ The papers of this institution deal mainly with research on the Luxembourg economy. The working documents are freely available.

“CENTRE DE RECHERCHE PUBLIC – GABRIEL LIPPMANN. LABORATOIRE DE DROIT ECONOMIQUE” (GABRIEL LIPPMANN - PUBLIC RESEARCH CENTRE. ECONOMIC LAW LABORATORY) (CRP-GL LDE) www-domino.crpgl.lu/web/lde.nsf The laboratory’s task is to consider modernising Luxembourg law in the various fields of business law and to propose suitable amendments and reforms. Consult the “virtual bibliography” - “Droit Luxembourgeois” (Luxembourg Law) section.

“VIRTUAL”BIBLIOGRAPHY 189 “CENTRE D'ÉTUDES DE POPULATIONS, DE PAUVRETÉ ET DE POLITIQUES SOCIO-ÉCONOMIQUES / INTERNATIONAL NETWORKS FOR STUDIES IN TECHNOLOGY, ENVIRONMENT, ALTERNATIVES, DEVELOPMENT” (CENTRE FOR POPULATION, POVERTY AND PUBLIC POLICY STUDIES / INTERNATIONAL NETWORKS FOR STUDIES IN TECHNOLOGY, ENVIRONMENT, ALTERNATIVES, DEVELOPMENT) (CEPS/INSTEAD) www.ceps.lu At this socio-economic research centre, they conduct studies on, inter alia, the development of living conditions in Luxembourg. You can consult the bibliography listing publications released in this context at http://www.ceps.lu/psell/publi/psellpub.htm. The documents published by the ‘Firms’ unit can be downloaded: http://www.ceps.lu/firm/firm.htm.

LUXEMBOURG GOVERNMENT www.gouvernement.lu/ This site is devoted to government news. Certain online “dossiers” relate to economic and social matters. In the ‘publications’ section, you can access the latest activity reports from all the ministries.

LUXEMBOURG MINISTRIES AND ADMINISTRATIONS www.etat.lu Server for the ministries and administrations of the Grand Duchy of Luxembourg.

LUXEMBOURG MINISTRY FOR ECONOMIC AFFAIRS www.etat.lu/ECO/ Under “Documentation et discours”, you will find the recent stances of the Minister for Economic Affairs, the ministry’s annual report and other documents relating to the Luxembourg economy.

LUXEMBOURG MINISTRY OF FINANCE www.etat.lu/FI/ The Ministry of Finance site provides information on Luxembourg’s public finances (budget, stability pact, etc.). You can also consult the site of the Inspection Générale des Finances/IGF (Inspectorate-General for Finance): www.etat.lu/IGF/.

CHAMBER OF DEPUTIES www.chd.lu The “documentary portal” enables you to access the parliamentary archives in particular (draft laws, proposed laws, opinions of professional chambers, etc.) from 1945 to the present day.

LEGILUX www.legilux.lu/ Legal portal of the Government of the Grand Duchy of Luxembourg (Official Journal of the Grand Duchy of Luxembourg, compendia of legislation, etc.).

190 “VIRTUAL”BIBLIOGRAPHY ABBREVIATIONS FOR COUNTRY NAMES IN TABLES AND CHARTS 15 EU countries EU-15 Germany D Norway NO Austria A Greece EL Portugal P Belgium B Irland IRL Spain E Canada CAN Italy I Sweden S Denmark DK Japan JP Switzerland CH Finland FIN Luxembourg L United Kingdom UK France F Netherlands NL United States of America US INDEX A D Accounting services...... 123, 124 Deaths...... 63, 64, 65, 67 Activity rate...... 74, 75 Density of population...... 179, 180, 181 Advertising...... 124 Dependency...... 42 Airport...... 129 Dependency insurance...... 90, 184 Air transport...... 129 Disposable income...... 30, 31, 165-168 Agriculture...... 8, 11, 15, 22, 72, 79, 84, 90 Dwellings...... 87 Animal production...... 92 E Architecture...... 123, 124 Audio-visual...... 48, 100, 125, 126, 131, 132 Earnings...... 155-163 Economic diversification...... 80, 95, 96, 142, 150 B Economic growth...... 7, 16, 17, 18, 20-61, 183 Balance of payments...... 24, 25, 147, 151 Education...... 41, 72, 79, 80, 82, 102, 103, 172-175 Banks...... 27, 80, 81, 82, 85, 107, Electricity...... 22, 79, 84, 136, 141, 143, 178 ...... 108, 112, 113, 114, 118, 119 Emigration...... 8 Beef...... 92 Employment ...... 16, 36, 38, 70-77, 80, 84-90, 96, 99, Births...... 63,64,65,66 ...... 101, 104, 122, 123, 124, 127, 136, 143 Blast furnaces...... 12, 79, 176 Employment rate...... 77 Buildings...... 40, 87, 179 Engineering...... 123, 124 Building permits...... 87 Environment...... 175 Bus...... 128 Exports...... 23-25, 47, 145, 148, 150, 151, 152 Business services...... 16, 22, 23, 41, 79, 80, 82, ...... 84, 85, 101, 102 121-124, 148 F C Farming areas...... 90 Farming production...... 92 Cast iron...... 7, 12, 135 Farms...... 90, 91 Causes of death...... 67 Fertility...... 65, 66 Chemicals...... 101, 136, 139, 140, 143, 148 Films...... 125 Cinema...... 125 Financial centre...... 105-121 Chômage...... 14, 26, 57, 58, 59, 78, 188, 189 Cinéma...... 129 Financial services ...... 15, 16, 21, 22, 26, 27, 36, 51, Cleaning services...... 36, 86 123, 124 ...... 80, 82, 84, 85, 100-103, Commerce...... 22, 41, 88, 89, 102, 104, 158 ...... 105-151, 148, 149, 152 Communications ...... 15, 102, 103, 104, Foreign trade...... 24,25,47,147 ...... 127, 128, 158, 171 Foreign investment...... 145, 146 Competitiveness ...... 5, 15, 16, 18, 19, 34, 35, Foreigners...... 7, 8, 10, 41, 64-66, 70-74, 174 ...... 44, 45, 48, 52, 56, 60 G Compulsory deductions...... 16, 54, 55, 60, 160, 188 Gross fixed Construction...... 15, 22, 41, 72, 79, 80, 82, 84, capital formation...... 23, 25, 28, 37, 49, 50, 51 ...... 87, 101, 103, 104, 141, 158, 179 Cows...... 91 H Craft...... 87 Health insurance...... 8, 184 Crop production...... 91, 92 Health...... 22, 23, 41, 67, 183, 184, 185 Cross-border workers ...... 16, 38, 39, 40, 41, 69, 74, Historical background...... 6 ..76, 127, 147 , 153, 159, 163, 186 Holding companies...... 105

INDEX 191 INDEX

Hotels...... 41, 92, 93, 94, 102, 171 Railways...... 127 Houses...... 87, 179 Reinsurance...... 110, 111, 112, 121 Household equipment...... 169 Rental services...... 102, 122 Household expenditure...... 23, 25, 28, 29, 165, 169 Research and development (R&D)...... 47, 97, 123, 124 I Restaurants...... 80, 82 , 92-94, 102 Immigration...... 7, 8, 10, 38, 40, 42, 63, 69, 74, 146 Retirement insurance...... 184 Imports...... 23-25, 148, 151, 152 River transport...... 128 Industry...... 9, 15, 23, 24, 26, 41, 55, 72, 79, Road transport...... 128, 129, 176 ...... 80, 82, 84, 102-104, 134-143 Inflation...... 26, 32, 33, 59, 156 Rolled steel products ...... 9, 12, 135 Innovation...... 97, 98 Rubber...... 138, 139, 140, 143, 148 Insurance...... 109, 110, 115 S Internet...... 99, 100 Invalidity insurance...... 184 Salaries...... 32, 33, 43, 54, 55, 56, 154-163, 168 Investment...... 7, 15, 16, 25, 48, 37, 97, 135, 145 Satellites...... 100, 131, 132, 133 Iron ore...... 7, 9, 10 Services ...... 9, 15, 22, 23, 24, 26, 41, 72, 79-80, L ...... 82, 84-85, 99, 101-102, 147-152 Labour costs ...... 16, 33, 43, 44, 45, 53, 55, 60, Sliding scale for wages...... 8, 13, 44, 59, 60, 155, 156 ...... 61, 95, 147, 160, 186, 188 Social protection...... 182-188 Legal services...... 124 Social security...... 8, 15, 16, 41, 42, 50-55, Life expectancy...... 65-69, 171, 172 ...... 60, 61, 160, 182-188 Living conditions...... 164 Standard of living...... 27-32, 164-181 M State budget...... 10, 43, 52, 53, 118 Marriages...... 65 Steel...... 7-8, 11, 79, 102, 135, 150 Milk...... 91, 92 Steel industry..... 7-15, 21, 36, 60, 70, 79, 102, 134-139, Minimum wage...... 12, 156, 157 ...... 142-143, 147, 150, 155, 176, 178 Mortality...... 65, 66 Moselle...... 93, 95, 128 Stock exchange...... 106 N T New businesses...... 96, 143 Taxation/Taxes ...... 44, 54, 55, 60, 105, 107-109, 117, O ...... 119, 120, 160, 185, 186, 188 Occupational accidents...... 184 Télécommunications ...... 99, 130-133 Telephone...... 130, 131 P Television...... 126, 132 Plastics...... 101, 136, 138, 139, 140, 143, 148, 152 Tourism...... 93, 94, 15 Population...... 7, 8, 63-69, 179-181 Pork...... 92 Tourist regions...... 95 Port of Mertert...... 128 Trade...... 22, 41, 88, 89, 102, 104, 158 Post...... 128 Transport...... 102, 104, 127-130, 148 , 176, 178 Private consumption...... 23, 25, 27, 28, 29, U ...... 55, 150, 169-171 Prices...... 26, 32, 33 Undertakings for Collective Productivity ...... 12, 18, 35, 43-46, 84, 85, 89, 90, Investment (UCI)...... 48, 108, 114, 118 ...... 100-104, 122, 127 , 143, 155 Unemployment...... 8, 26, 27, 38, 57, 58, 76 184, 185 Public debt...... 36, 50, 52 Public expenditure...... 10, 15, 16, 23, 49, 50, 51, 52 V Public finance...... 16, 36, 48-56 Value added...... 22, 26, 36, 82, 84, 85, 100-104, Public revenue...... 36, 50, 52, 54, 186-187 ...... 122-128, 134, 136, 139, 143 Purchasing power...... 27-30, 159, 166, 169 Purchasing Power Parities (PPP)...... 27, 166 W Purchasing Power Standard (PPS)...... 27, 166 Wages...... 32, 33, 43, 54, 55, 56, 154-163, 168 R Water...... 22, 136, 141, 158 179 Radio...... 126 Wine...... 92, 93 Rail transport...... 127, 128 Working population...... 8, 9, 74, 75

192 INDEX Central Service for Statistics and Economic Studies b.p. 304 L-2013 Luxembourg E-mail :[email protected] Internet :www.statec.lu