Three Indexations

Yesterday, the Kirchberg Conference Centre hosted the first preparatory meeting of Luxembourg's tripartite coordination committee. Government, employers, and unions gathered to discuss the economic fallout from the war in Iran. What emerged was a picture of a country squeezed from every direction, and no consensus on which way to turn.

STATEC, the national statistics office, presented two scenarios. The first assumes the war ends this month. The second, which the head of the employers' union UEL called the more realistic one, assumes the conflict continues through September with the Strait of Hormuz remaining closed. Under that scenario, Luxembourg could face a recession and [1] three automatic wage indexation adjustments by September 2027: one already expected in June, another potentially in September this year, and a third in September next year.

Three indexations in sixteen months. That is the kind of compounding that makes employers nervous and unions adamant.

The IMF's diagnosis

The International Monetary Fund published its annual report on Luxembourg last week, and its tone was blunt. The economy has still not regained its momentum. The financial centre remains resilient, but public finances are deteriorating. The fund recommends curbing expenditure, especially state wage costs, and pushing for more flexible work organisation and more affordable housing.

On the government's planned tax reform, the IMF was cautiously positive about the introduction of a single tax class and tax relief that could strengthen purchasing power. But it echoed the National Council of Public Finances in warning that there is [2] no counter-financing for the reform. The Ministry of Finance estimates it will cost €850 million in 2028 and €910 million the following year, with the budget deficit potentially reaching between 2.3 and 2.7% of GDP by 2029 unless offset by cuts or new revenue.

The unions: not being taken for fools

OGBL president Nora Back and LCGB president Patrick Dury held a rally for about 500 members on Tuesday evening. Their assessment of the day's preparatory talks: "not much came out of it."

Back criticised the government and employers for focusing only on competitiveness, productivity, and energy prices. People, she argued, had not been discussed. She pointed to poverty, the working poor, and people who can no longer afford a roof over their heads. The tripartite, she said, must not become a meeting where an energy price cap is decided and then celebrated as a victory.

Dury stressed that the unions had come with two priorities: safeguarding private-sector livelihoods and protecting purchasing power. On the minimum wage, Back pushed back against the portrayal of the unions' €300 increase demand as unreasonable, arguing that the money would flow straight back into the economy rather than into speculation.

Both made clear that if no agreement is reached during the formal tripartite in June, the unions will return to the streets.

The government's tightrope

Prime Minister Luc Frieden stated that the wage indexation system itself was "set in stone." But when pressed, he did not rule out postponing an indexation adjustment or introducing compensation measures, a distinction that may matter enormously in the coming weeks.

Frieden also said the aim of the tripartite was not to slow inflation but to look at the consequences for people and businesses. Asked about the energy price measures taken during the Ukraine war, he noted he had not been in politics at the time, and was focused on what the current government could do now.

Energy Commissioner Simeon Hagspiel presented some striking figures. Luxembourg imports 100% of its refined oil products, half from Belgium, mostly by road. Gas is 90% import-dependent. Oil products account for 60% of total energy consumption. Yet fuel at the pump remains cheaper than in all neighbouring countries and below the EU average, partly because the state subsidises network costs for electricity.

Tax reform on a wire

The Council of State issued its opinion on the tax reform, raising six formal objections, all of a technical nature mostly concerning married non-residents with taxable income in Luxembourg. These are not expected to block the reform.

The Council did, however, endorse the 25-year transitional period for couples currently in tax class 2, calling it constitutionally sound. Finance Minister Gilles Roth welcomed the "positive" opinion and said the objections were technical and could be sorted out.

The civil service union CGFP, meanwhile, called for immediate temporary tax relief, arguing that waiting for the full reform is not enough during a crisis. It wants an urgent adjustment of tax brackets to inflation.

Three weeks to propose something

The next formal tripartite meeting is expected in early June. Between now and then, all sides can propose measures. The question is whether those proposals will bridge the gap between an IMF that wants spending discipline, employers who fear the cost of three indexations, unions who say the social crisis is already here, and a government running out of fiscal room.

After the Ukraine war, Luxembourg introduced energy price caps. The Iran war is testing a different set of pressures: not just energy, but wages, taxes, and housing all at once. Three indexations would be a big number. So would €910 million in lost tax revenue. So would a growing group of people who cannot afford to live in the country where they work.

The tripartite has three weeks. All sides say they want dialogue. None of them sound like they agree on what dialogue is for.