Adapt or fade: Luxembourg’s race to sustain its lead as a land of plenty

Luxembourg stands atop a pile of superlatives: one of the world’s richest countries per capita, the world’s highest minimum wage, Europe’s highest purchasing power, one of the world’s freest and most open economies. Peace. Freedom. Democracy. Social cohesion.

But warnings, even doubts, are being raised about whether all this is sustainable.

Economic growth measured by gross domestic product (GDP), productivity, competitiveness, flexibility in public finances, innovation ranking, research spending, foreign investment, jobs expansion and even activity in the crucial banking and insurance sectors are all stagnant or declining.

“The golden age of Luxembourg growth is certainly behind us, at least for the next five years,” economic think tank Fondation Idea said in summarising the views of 115 economists, political decision-makers and others responding to an anonymous questionnaire earlier this year.

Facing the future through the past

Maybe Luxembourg is only beginning to recognise it, but it’s facing a transformational moment similar to the economic crisis of the 1970s, when the steel industry on which the Grand Duchy then depended was being pulled apart, said Serge Allegrezza, chairman of the advisory National Productivity Council.

The difference between then and now is that there isn’t the same shared urgency across society, with the country enjoying the comfort of political procrastination, said Allegrezza, who headed state statistics agency Statec for 21 years.

“Because of the accumulation of wealth, we can afford to do nothing,” he said, though that will not last. “We are no more in the ‘80s and ‘90s when we thought that everything was possible because of this big growth, and the only problem that we had is how to share this growth.”

The worry is that people are looking around and considering whether Luxembourg remains an attractive place for talent and capital to migrate as regulations multiply, homeownership stays out of reach for many, and living costs make it hard for employers to keep paying the high wages that exerted a pull on the borderlands.

“We have to get used to not experiencing the same dynamics as in the past,” national employment agency Adem’s director Isabelle Schlesser said after employment growth last year dropped to a historic low of under 1%.

Wealth creation

Perhaps most important of all, Luxembourg just isn’t as productive as it used to be.

Economic productivity – a concept similar to profitability for a company – measures what results from using amounts of labour, capital and equipment. Economists view high productivity as crucial to spinning off surpluses that make everyone prosperous and fuel Luxembourg’s abundant social model. Because the Grand Duchy’s financial and insurance sectors, vital to the economy since the 1980s, generate high results for the labour used, productivity has been much higher than in neighbouring countries or the eurozone more broadly.

But productivity per hour worked has stagnated since 2010, the National Productivity Council said in its annual report released in March. Productivity slumped between 2021 and 2023 – when it sank below its 2019 level, the council reported. Meanwhile, productivity increased in France, Germany, Belgium and across the eurozone between 2010 and 2023, the council said.

“Over the last ten years or so, the productivity slowdown, a well-known phenomenon in advanced economies, seems to be particularly marked in Luxembourg. And this is a cause for concern,” said University of Luxembourg economist and member of the national council Arnaud Bourgain.

In the numbers

At the heart of Luxembourg’s economic future is a stubborn equation: GDP = productivity growth + employment growth.

The more productive the combination of labour, property, machines and other tools are, the more profits are produced, the more that can be distributed, and the more the Grand Duchy attracts new workers and investors.

Luxembourg was about 40% more productive than other countries at the start of this century, but that has been cut in half, according to Statec estimates.

 “Other economies are catching up, and it’s becoming harder and harder to find the required manpower,” Statec director Tom Haas said in an interview.

Over the same time, Luxembourg’s GDP, which has supported public finances and pension funds for decades, will fall to 1-2% in the foreseeable future from a 3-4% norm a decade ago, Statec and the European Commission predict.

Staying upbeat

Though trend lines show that wealth creation, productivity and foreign investment have declined, Luxembourg’s economy is likely to be the envy of most of the world for years.

Luxembourg ranked seventh for innovation out of 39 EU and neighbouring countries in the European Commission’s annual ranking this year.

“The country’s economy is extremely dynamic and offers a favourable entrepreneurial culture, which is supported by a long tradition in terms of entrepreneurial education and training,” the report by outside experts said.

But the Grand Duchy’s innovation performance since 2018 was far less than the EU as a whole, with strong decreases in venture capital expenditures and employment in innovative enterprises, the report said. Investment in research and development, one measure of economic progress, accounts for less than 1% of its GDP and has declined over time.

Luxembourg climbed back into the world’s top 20 for competitiveness in the latest comparison by the Swiss-based IMD business school, thanks to the ranking model’s high regard for the country’s government efficiency. Economic performance was down from tenth globally five years ago to 35th last year, according to IMD.

The country also climbed into the top 20 in last year’s innovation rankings by the World Intellectual Property Organization, a UN agency.

“Is Luxembourg still in the race?” accounting and consulting giant PwC wondered in a blog post last year. “We are fairly certain that Luxembourg will stay in this race,” the firm said, but “the Grand Duchy needs to address its weak spots, such as the high cost of labour, the lack of affordable housing, and the above-mentioned remarkably low investment level in R&D.”

Adapting again

National leaders recognised years ago that it was unwise to depend on the financial sector to continue generating a quarter of national GDP. They’ve been trying to encourage space, communication, logistics, tourism, e-commerce and biotechnology companies with subsidies to launch and hire, and to develop new innovations.

Statec director Tom Haas © Photo credit: Anouk Antony

National leaders recognised years ago that it was unwise to depend on the financial sector to continue generating a quarter of national GDP. They’ve been trying to encourage space, communication, logistics, tourism, e-commerce and biotechnology companies with subsidies to launch and hire, and to develop new innovations.

With Luxembourg’s housing and commuting opportunities increasingly limited, “maintaining high and sustainable growth […] requires a shift from rapid growth in the labour force from immigration to a new growth model based on technical innovation and upgrading the skills of the current population,” the Organisation for Economic Co-operation and Development (OECD) said in a report this spring.

While mushrooming use of artificial intelligence could have a beneficial economic impact, especially in the financial sector, its effect over the next decade is projected by Statec to equate to about a third of the overall technological productivity impact that Luxembourg achieved during the 20th Century, Haas said.

“AI could help, but it’s only a slight shift upwards,” he said.

Statec’s and Haas’s projections through 2070 span from pessimistic – slow productivity and low investment – to a cheerier result in which private companies are incentivised to spend more on advancing technologies and Luxembourg keeps its notable productivity advantage for decades.

If trends of the past 20 years hold, “other economies slowly converge to our economy in terms of productivity level. And this means that at one point we will not have higher disposable income anymore. We will reach a point where it will be close to impossible to attract migrants because we cannot offer higher wages,” Haas said.

What matters, he says, is whether the country chooses to keep evolving – or watches as others catch up.

“Why should Luxembourg always have a more dynamic economy than other countries? Well, one answer would be because we are a small country and we are able to adapt quicker than big countries,” Haas said. “The economic system is sustainable if we maintain this capacity to adapt.”

If that adaptability falters and Luxembourg doesn’t confront an older population that requires increased public spending, maintains current tax policies, opts against using available open land in favour of keeping green space, and rejects high-rise housing, then the outcome is clear, Haas said. But then the country will have made a choice, he said.

With targeted reforms, productivity gains, and diversification into high value-added sectors, sustainability can be restored, Allegrezza said. Maybe that will come from innovations we can’t know, or artificial intelligence having a bigger impact than many can foresee, he said.

The important thing is ensuring a social stability that is one of Luxembourg’s top attractions for companies, Allegrezza said. If a technological revolution is already bubbling under our feet, plans are needed now to let people enjoy decent, useful, productive work and avoid the social fragmentation that breeds resentment, he said.

“The current model is not sustainable,” Allegrezza said. “I don’t want to give a message [that] I’m a doomsayer. I believe that we can do a lot.”

This story was first published in the autumn 2025 edition of the Luxembourg Times magazine.