Has Luxembourg genuinely not felt the crisis as badly as it could have? “It is true that the first affected by the situation have been the commuters,” says Lucien Thiel, MP, President of the Special Commission on the Financial Crisis and Announcer of the Budget for 2010. He believes the Grand Duchy is entering a time of change that is not as simple as seeing out the crisis, jumping back onto a growth bandwagon and riding off into the sunset. Yet because it has affected the commuters in its first wave, and the effect on residents has generally been less of a body blow, this does not mean it is over, or that the illusion that Luxembourg “is a peaceful island in the middle of a rough sea” can be upheld.

“The next five years will be rather difficult,” Thiel continues, “first of all, the overall effects of the crisis have applied an abrupt brake to our long-lasting economic success. Secondly, it is not written in stone anywhere that we will ever return to former growth rates. Thirdly, the main engine of our economy, the financial sector, has come under serious pressure from our neighbours. Because of these, it seems unlikely that we will reach the cruise altitude of economic growth we saw in the 25 years prior to the crisis.” It must be pointed out that those “golden years” managed to offset the current situation as the government had the opportunity to accumulate reserves, while the “special configuration” of the financial services sector also played a part. These cannot last forever, just as recent policies cannot. Where is the exit?

The situation facing this country is a delicate one: short-term anti-cyclical policies are required, yet ultimately it would be reckless to live by them. Timing is a key issue, according to Thiel, with state revenues forecast to fall by 9% in 2010, and expenditure expected to rise 6%. “This will see public debt rise to 20% of GDP, and such levels will cause problems, so it is vital that we control expenditure.” How can this be done? “It will not be easy,” suggests Thiel. “We are facing tough savings on every corner, selective cuts in the social budget and tax increases that have to be formulated so as not to further damage or impede export activities.”

This delicate balancing act is what is facing the Tripartite over the coming months, but there are more clouds on the horizon, what Thiel terms as “the crisis behind the Crisis.”

These concern structural deficiencies in the national economy which have been masked by three decades of progress and “a more than comfortable standard of living.” Increased international competition when it comes to the financial sector, not to mention the readjustment of the Grand Duchy’s national framework to common market standards, mean that figures for GDP growth, which were normally around 5% in the golden years, will drop down to between 2 and 3%. And this marginal drop will have major repercussions on the prosperity enjoyed in this country. As Thiel states, “we will have to earn money before we can spend it, but also look at the way it is earned.”

The dependence on the financial sector could become dangerous going forward, and it is often repeated that this country’s economy needs diversification, but the threat of changing demographics in the population is also one that will need to be addressed. Accepting a debt burden to maintain a standard of living, especially in a time of reduced economic growth, is risky in the short term, but the burden of upholding the current pension system will be unbearable to future generations. According to the Social Services Authority in Luxembourg, employment in the country will need to treble by 2060 to maintain pension equilibrium, an annual average increase of 2.6% against the current 0.5%.

“This would mean we would need 250,000 resident workers and 930,000 foreign ones!” stresses Thiel, of a situation that is clearly unrealistic and highlights the urgent need for pension reform. “This alone will not be enough, however, and as well as reforms, diversification of the economy and consolidation of the financial services sector, we need to explore new growth models.”

It is no longer sufficient to look at GDP in terms of production, despite what the final letter signifies, but environmental and social aspects must be given equal consideration. This is “the GDP of well-being” according to Thiel, and the pillars of economy, sustainability and good social practice make it a model which will “ideally respond to the aspirations of our national community, focusing on the human condition and putting the human being at the centre.” There is much to be done, but it is surely worth the effort.