As the political year gets underway, with the budget to be tabled at the beginning of October and the pension reform to be presented, Chamber of Commerce director Carlo Thelen, opening the institution’s back-to-school conference--titled “It’s the Economy, Stupid!”--reiterated a fundamental principle: economic development is still the basis of all social progress and the foundation of society’s wellbeing. Without healthy functioning economies, everything is more difficult. However, it seems to him that this functioning is now under threat.

A model in danger

We observed this healthy functioning between 1990 and 2019, recalls Carlo Thelen. For more than three decades, Luxembourg enjoyed prosperity thanks to a virtuous circle: a dynamic economy, healthy public finances, an abundant workforce and a generous social model. This system, in which growth, employment and solidarity were mutually reinforcing, led to average annual growth of 3.5% between 1990 and 2019. But today, this system is under threat. The Luxembourg economic model is showing worrying signs of running out of steam, he believes, pointing to sluggish growth (1% this year), structurally stagnant productivity and an erosion of business margins, weakened by rising production costs and the growing burden of regulation.

In addition to these structural factors, in his view, there are two cyclical threats: the housing crisis, which, despite major investment in infrastructure and targeted government measures, continues to worsen, and the fact that social spending is rising faster than revenue, as a result of slower growth and an ageing population.

Reconstructing a virtuous circle

Conclusion? “The Luxembourg socio-economic model can no longer be financed in its current form.” Thelen calls for a rebuilding of the virtuous circle that is currently losing momentum. “The country must agree to evolve and transform itself,” he says, castigating “the reflexes of immobilism and of protecting what has already been achieved.”

How? By investing in the ecological, energy, digital and technological transitions. And above all, by tackling the challenge of a rapidly ageing population. “An ageing population, with a growing proportion of retired people and a shrinking contributory base, is jeopardising our pension and healthcare systems. Without reforms, they will not be able to maintain their current generosity, particularly for the highest pensions. A large majority of the Luxembourg population shares this analysis,” says Thelen, while regretting that the social partners have not managed to agree on the solutions to be adopted.

Protecting the acquis is not an option, he insists. “The time has come to update our software.” And he warns: “Inaction has a cost, an often hidden but very real cost. It is the cost of a social model that we will no longer be able to finance tomorrow because of a lack of assets to support it. It is the cost of over-regulation that slows down investment and therefore innovation. It is also the democratic cost of an economic and social system that is floundering and fuelling populism. This cost is not marginal.”

This article was originally published in French.