Source:
Column 1: calculated based on the component indices.
Column 2: World Bank (2009d). "World Development Indicators". Washington DC: World Bank.
Luxembourg- Quality of life and Social indicators CONTINUED
In more recent years, international uncertainty has caused a halt in growth rates and has substantially slowed production in Luxembourg. Following the crisis the nation faces weaker performance and an adverse effect on its living standards.
In response to this the Luxembourg government implemented a range of key social and economic strategies including the building of new infrastructure, tertiary education incentives and taxation benefits, all with the hope of ensuring long-term stability.
Although these strategies are expected to be immensely effective in future they have had little, to no effect in altering the Short term economic position. Rather, they have been implemented as a form of insurance guaranteeing long term development and high living standards.
Luxembourg- Employment and Unemployment
The Luxembourg labour market is often hard to compare with other OECD economies due to the miniscule size of its working population. Despite this on a national scale, rapid economic growth over the past two decades has substantially increased Luxembourg’s labour force.
As to be expected total employment has declined in relation to pre financial crisis periods. Furthermore domestic unemployment has risen to approximately 7.9% which is relatively high in comparison to other OECD economies. This high unemployment rate is often associated with the strong welfare benefits and safety nets for the unemployed. It is believed that these benefits do not offer an adequate incentive for the unemployed to successfully seek employment. Relaxed welfare policies like these are quite necessary in short term, as they ensure a minimum quality of life, however in the long term they pose a problem to the supply of domestic labour
Source2- Employment Growth of Luxembourg-Change in Thousands
As seen in the source above, Luxembourg’s labour market has been hit by the 2009 global financial crisis. This turmoil lead to unemployment rising from 4.2% in late 2007 to a staggering 8% in mid 2009. As a measure to increase supply of labour into the nation, the Luxembourg government has implemented a policy encouraging cross border workers to work in the domestic market. This policy also offers taxation benefits to international employees who spend their income within Luxembourg.
Luxembourg- Employment and Unemployment CONTINUED
These strategies have proven to be extremely efficacious, especially considering that approximately half of Luxembourg’s labour force comes from surrounding nations (France, Germany and Belgium). In the Short term these implementations provide the necessary working force to strengthen the economic recovery, while in the long term, increased spending by these international employees may boost economic activity and furthermore increase the demand for labour, lowering domestic unemployment.
Theses policies together will help to increase the population size as well as the participation rate, which ultimately determines the level national growth. This also shows how these strategies are effective in promoting the further economic development of Luxembourg.
Luxembourg- Recent patterns of inflation
The rate of inflation within Luxembourg is derived from the level of the consumer price index.(CPI). The CPI is a measure of the change in price of the goods and services that are purchased for consumption.
Resent trading patterns have shown that Luxembourg’s level of inflation is measured around 2.417%, which is relatively low in comparison to other European markets. This information simply tells us that the price of Goods and services has increase relatively slower, in comparison to the surrounding economies.
Source 3- Luxembourg Inflation rate over 7 Years
The major body that attempts to control the rate of inflation is the Central Bank of Luxembourg (BCL). This financial intermediary attempts to regulate its economy by maintaining inflation levels below 3%. This is ultimately achieved through the implementation of a monetary policy; which increases or decreases the interest that other financial institutions charge. While examining source 3 it becomes clear that inflation has been sufficiently regulated over the 7 year period. This is also evidence of the long term positive effect of the policy, as well as its contribution to the nation’s constant economic development.
Despite being so effective within the long run these policies are relatively unfelt within the short term as they often endure a time lag before influencing the market. This means that the BCL cannot influence the economic position immediately.
Luxembourg- Recent Patterns of and Domestic Production and Trade
Luxembourg has continued to be at the forefront of the global financial market and consequently the finance industry has become one of its largest domestic sectors. Over 25% of the employed population in Luxembourg have a role within the financial sector which is believed to significantly contributed to the nations impressive GDP.
Despite Luxembourg’s present reliance on the finance market, in previous decades Luxembourg’s production and exports were predominantly derived from resources and minerals like steel and aluminium. When supply of the resources became scarce Luxembourg shifted to a more comparatively advantageous field.
Source 4 – Real GDP growth of Luxembourg %
After falling by 3.4% in 2009 and further more in 2010, Luxembourg’s GDP is forecast to grow moderately by 1.3% in 2011.These figures show that the nation’s economy is continuing to be influenced from the recent turmoil domestically and abroad. Despite all this, Luxembourg’s financial sector continues to grow as international investors believe it is a safe European investment option.
These recent downswings in GDP have been largely affected by the drop in the demand for Luxembourg’s exported goods. Both exports and imports have steadily declined by around 7% from previous years. In response, there have been a range of efficient strategies employed to reduce cost of imports, and introduce cheaper goods in a more competitive market. This in turn has the long term effect of decreasing imported inflation, and inevitable it promotes economic growth and development within the economy.
Despite the advantages, this policy introduces an influx of competition into the domestic market, making it harder for the nation’s manufacturers and producers.
Luxembourg- The role of Government within Luxembourg
The Government of Luxembourg is heavily involved in the provision of goods and services within its economy. This is solely achieved through the successful use of its fiscal policy. In previous decades Luxembourg has been able to maintain high levels of budget surplus; however more recently, following the 2009 Global financial crisis (GFC) the nation has dipped into a deficit of around 1.1% of GDP. This has subsequently limited the ability for government expenditure.
Luxembourg- The role of Government within Luxembourg CONTINUED
Contrary to many other Developed economies, the Luxembourg government continues to play a substantial role in influencing the outcomes of its product and financial markets. This has been most evidently achieved within the government’s economic policy focused on supporting the financial sector throughout the GFC. The Luxembourg administration has continuously regulated the management of funds, and it has tightened legislation concerning the finance sector. This gave International investors confidence in Luxembourg as it promoted the integrity of its finance industry. It is quite obvious that policies like these have had a positive effect on the Luxembourg economy, and have allowed sustainable growth even in times of hardship.
Traditionally, it has been the government’s role to provide a range of goods and services, such as welfare, education and health care, with the aim of maintaining long-term economic development. However in recent months due to government debt, spending is expected to reduce by almost 20%. Examples of this reduced spending are seen with the freezing of pension rates, as well as the reduction of schooling benefits.
These strategies have been employed to limit current expenditure, and to ensure a sustainable future. Ironically they may have negative effects within the short term and will cause a fall in living standards.
Luxembourg- The effects of Globalisation
Globalisation has had a number of key effects on the economy of Luxembourg. The most obvious of these includes the increased ability for international investment and trade.
Luxembourg is centered on its finance industry, meaning that it relies heavily on the global stock market as a means of income. In 2008 over 20% of all earnings, were derived from the capital gains that came as a result of international investment. Without the aid of globalisation, international investment would be extremely difficult, stressing its importance.
As well as this, transnational trade relives some pressure off Luxembourg’s domestic market, once again exemplifying its importance.
Luxembourg is a strong supporter of multinational organisations, and this is evident as they are one of six founding members of the European Union. Having policies that links Luxembourg with other economies also allows domestic firms to expand their scale of production and sell internationally. When many firms increase their scale of production, it promotes growth within the economy and it sustains sound levels of development within the nation.
Luxembourg- Conclusion
Luxembourg has been an economy that has achieved rapid and sustained growth over the past 25 years, and its living standards are some of the highest in the OECD. However, in the recent years following the crisis output has contracted and unemployment has risen. This shows how heavily the nation has been exposed to the global downturn. Despite this strategies like the monetary and fiscal policy have effectively and successfully supported stabilisation and economic growth within the economy.
The nation has emerged as a major international financial centre, and this has been crucial to the development of the economy and the sustained living standards.
All in all, Luxembourg has been and continues to be a flourishing and prosperous Country.
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