Country Report Luxembourg June 2008 Updater

OVERVIEW

The coalition government of the Christian Social Party (CSV) and the Socialist Workers' Party (LSAP) will remain secure until the general election scheduled for June 2009. The government remains popular and the CSV and LSAP are likely to be in a position after the election to continue in office in the following parliamentary term. The prime minister, Jean-Claude Juncker, will try to play a constructive diplomatic role in bringing the EU through the crisis created by the rejection of the treaty of Lisbon in a referendum in Ireland, with the role in domestic affairs of the minister of justice, Treasury and budget, Luc Frieden, increasing. The Economist Intelligence Unit believes that economic growth is likely to slow from 4.5% in 2007 to around 3% in both 2008 and 2009, which will still be much stronger than the euro area average. Inflation is forecast to average 3.6% in 2008 and 2.8% in 2009.

Key changes from last month

Political outlook

The Irish referendum defeat of the Lisbon treaty means that Mr Juncker's hope of being offered the new role of longer-term president of the European Council at the start of 2009 has at least been deferred. Although widely considered a pro-integrationist, Mr Juncker has insisted on the need for solidarity with Ireland and is likely to try to play a diplomatic role in efforts to resolve the EU's current impasse.

Economic policy outlook

In line with its objective of economic diversification, the government has announced that it will provide €140m over five years to support three biotechnology projects.

Economic forecast

Luxembourg's inflation rate reached 4% in May. We have raised our average inflation forecasts for 2008 and 2009 to 3.6% and 2.8% respectively. As a result of weaker prospects for household consumption, we have lowered our GDP growth forecasts to 3.1% in 2008 and 3% in 2009.