March 27, 2015

Luxembourg weathered the global economic crisis well, but must take additional steps to foster the diversification of the economy while ensuring the continuing health of its financial sector, according to the latest OECD Economic Survey of Luxembourg.

The Survey, presented in Luxembourg by OECD Secretary-General Angel Gurría and Luxembourg’s Finance Minister Pierre Gramegna, underlines the pivotal role played by the financial sector in generating high incomes and employment. It points to medium-term risks posed by high dependence on a single area of the economy, and recommends a range of reforms to underpin the emergence of new innovative industries.  

“Luxembourg is one of the most prosperous countries in the OECD, with enviable levels of income and well-being largely driven by the performance of the financial sector,” Mr Gurría said. “But securing high living standards for future generations will require more economic diversification, backed by structural reform.  Strengthening the education system, boosting innovation, and raising female labour force participation should be important elements of Luxembourg’s long-term strategy.”

Sound financial regulation will remain the key to strengthen the performance and resilience of the financial sector, the Survey says. As part of this strategy, regulators should ensure financial intermediaries maintain strong capital ratios to address potential financial market shocks from abroad and real estate risks in the domestic economy.

Assessment of systemic risks should be based on a comprehensive framework that accounts for linkages between banks and other relevant financial market actors, notably investment funds. Given that the bulk of banks in Luxembourg are affiliates of foreign groups, the authorities should seek clear procedures that govern the cross-border resolution of large banks, the Survey says.

In addition, Luxembourg needs to implement the remaining steps in upgrading its tax transparency regulations and continue active participation in international negotiations on coordinated action to combat tax base erosion and profit shifting of multinational enterprises, with changes to domestic legislation as necessary. Luxembourg has already made important steps towards greater tax transparency by being one of the “early adopters” of the new global standard on automatic exchange of information.

The OECD also recommends Luxembourg implement a range of measures to diversify its economy and raise productivity:
 
•boost innovation through greater investment in knowledge-based capital, increased R&D spending and stronger links between research institutions and the private sector;
•make regulation in services sectors more competition-friendly;
•enhance incentives to entrepreneurship;
•strengthen the education system; and
•boost women’s participation in the labour force.