Luxembourg GDP remains one of highest in the world

The Aaa rating on the debt issued by the government of Luxembourg is underpinned by low debt and substantial financial buffers, Moody's Investors Service said in its new sovereign credit analysis. Given their favourable starting point, government finances should be able to absorb the challenges posed by the economy's dependence on financial services and adverse demographic trends.
"Although the global economic and financial crisis has likely diminished its long-term economic strength somewhat, Luxembourg's GDP per capita remains one of the highest in the world and the highest in the EU," said Alexander Kockerbeck, author of the report.
Kockerbeck added that the geographic location of the country in the centre of Europe, the availability of a highly educated, multilingual (including cross-border) workforce and a 'first-mover advantage', i.e. early implementation of EU directives, which induced financial sector firms to settle there, have led to faster growth than the European average.
Nonetheless, amid the turmoil in the international economy, growth evaporated in 2008 and contracted around 4% in 2009. Only a moderate recovery is expected this year. However, Moody's cautions that future developments will mostly depend on the outlook for the global economy.
The relatively large size of Luxembourg's financial sector poses risks at present given capital market turbulence and recent/impending regulatory changes. Despite low debt today, the government finances also face pressures from the ageing of the workforce, both local and cross-border, with social security-related expenditures set to rise considerably in coming years. Kockerbeck pointed out that the extra spending associated with these trends could threaten long-term fiscal stability in the absence of structural reforms.
The probably long-lasting effects of the current crisis, tighter global and European financial regulation, and the likelihood of a loss in Luxembourg's growth potential could translate into a deterioration in its competitive position, but Moody's believes that its first-mover advantage will remain intact and it will retain its competitive edge in relative terms.
"The strong capitalisation of banks may yet play a stabilising role amidst an environment of financial and real uncertainty," Kockerbeck concluded. "However, increased economic diversification, perhaps through easing and promoting entrepreneurship, would assure greater resilience as the economy confronts the demographic and regulatory challenges ahead."