Luxembourg

Luxembourg’s external balance is dominated by the large financial sector, which has supported current account surpluses in recent decades but has seen large disinvestment in the last quarters.

As part of the EU Next Generation instrument, Luxembourg’s Recovery and Resilience Facility is expected to receive by 2026 EUR82.7mn in grants. Luxembourg has already received EUR32.38mn, representing almost 40% of its total allocation. The updated plan retains its strong focus on the green transition, with 68.8% of the resources allocated to support climate objectives (from 60.9% in the initial plan), and significantly exceeding the minimum of 37% required by the RRF Regulation. 30% of the resources remained allocated to digital objectives. The plan continues to prioritize the digital transformation, including investments in research and innovation, the deployment of new technologies, the digitalization of public administration and measures to foster territorial, institutional and social cohesion. These initiatives are expected to actively engage the private sector in the transition. Further investments are planned in digital skills, digital connectivity and eHealth. The updated plan also maintains its focus on improving digital inclusion for the population and workers and advancing the digitalization of small and medium enterprises. However, a further diversification of economic activity will be necessary in the medium period.

Luxembourg’s competitive advantage in financial services will support recovering growth. The country is the world's second-largest investment fund center after the US and the most important private banking center in the Eurozone. The government has been aiming at economic diversification for a few years and has been encouraging the development of sectors such as communication and information technologies, logistics, e-commerce and biotechnologies.

However, labor productivity needs improvement in Luxembourg, given lower education levels compared to neighbor countries. The skills shortage has caused most of the jobs created in the financial sector to attract foreign nationals, causing Luxembourg's resident workforce to rely on public administration jobs or jobs in the steel sector, which are highly subject to foreign competition.