Is the 'Luxembourg Model' at a critical juncture?

The Chamber of Commerce has raised a fundamental question about the nation's economic future, asking, "Have we reached the end of the Luxembourg model?"

At a press conference on the national budget, Director General Carlo Thelen delivered a sobering assessment, stating: "We've been lacking growth for the last five years, and the outlook isn't brilliant either." He argued that the country's small, open economy has been significantly weakened by both the difficult geopolitical environment and internal structural problems.

Thelen explained that the traditional Luxembourg model – generating high tax revenues through a strong economy, competitive exports, and a vibrant international financial centre – is now at risk.

"The output, meaning what the economy produces, the wealth we create, requires ever more input", Thelen stated. "That is, ever more resources, which are becoming increasingly expensive and scarce."

One such critical resource is capital. Thelen noted that Luxembourg has historically been successful in attracting investment due to its tax advantages and political stability. However, he warned that the Grand Duchy is now being drawn into what he termed "the whole vortex of over-regulation" in Europe. This, in his view, is rendering Europe less attractive overall, thereby making jurisdictions outside the continent more appealing to investors.

Addressing another long-term challenge, Thelen pointed to the ageing population, which he said will have dramatic consequences for pensions, care, and healthcare systems. He concluded that it is therefore crucial for the country to continue attracting talent from abroad.

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Thelen issued a stark warning regarding the sustainability of Luxembourg's social model, linking it directly to the influx of foreign workers. "If all those people from third countries stop coming... and cross-border workers stop coming because they too are ageing... then our social system will no longer be sustainable", he stated. He argued that without this essential workforce, the country would lack the employment base required to fund its social security contributions.

Shifting his critique to the domestic labour market, Thelen observed that employment growth is now concentrated almost exclusively in the public sector. He criticised the automatic replacement of retiring civil servants without evaluating the necessity of the role, a practice he said creates "extremely strong competition" for the private sector. "And that, of course, has consequences for the availability of labour in the private sector", he noted.

Thelen concluded with a broader criticism of a shifting national ethos. He argued that Luxembourgish pragmatism has been lost in recent years, leading to a complete transformation "from a country of entrepreneurial spirit... to a country of controllers, inspectors, regulators, [and] compliance officers".

He further contrasted the concept of public service, suggesting that the civil service, instead of acting as "civil servants" to the population, often seems "more intent on putting obstacles in the way of the public and businesses". His final appeal was for a renewed focus on stimulating the economy to restore its competitiveness and attractiveness.