Allowing member states to go into debt for defence outside the European budgetary framework. This is the idea behind the plan presented by the European Commission on 4 March. "If member states were to increase their defence spending by an average of 1.5% of GDP, this could create budgetary space of almost €650bn over a four-year period,” argued Commission president Ursula von der Leyen.
Does Luxembourg intend to exploit this additional budgetary margin? At this stage, the government is not committed to doing so. "Currently, the roadmap set by the government in June 2024 is still in force: 2% of gross national income (GNI) in 2030," replies the services of the defence minister, . "2% is indeed the level of ambition set and confirmed by all Nato allies at the Vilnius (2023) and Washington (2024) summits."
And to add: "In the current geopolitical context, the government is aware that our security and defence require joint action and effort. It is in this spirit that we welcome the orientation of the recent 'ReArm Europe' defence package presented by the European Commission. The government is continuing to reflect on the possibility of accelerating the trajectory, as well as its financing. A decision will be taken by the Council of Government ahead of the Nato summit."
2% of GNI by 2030?
Raising to 2% of GNI by 2030 already represents "a very significant effort,” stresses the Chamber of Commerce in a note published in September 2024 (available at the end of this article). "To meet this commitment, between 2024 and 2030, Luxembourg will increase its defence budget from €728m to €1.461bn, i.e., a doubling of the defence effort in six years."
Reaching the target of 2% of GNI before 2030 is not out of the question, explained finance minister (CSV) in an interview with 100.7 on Monday 17 March. But if, hypothetically, the country increased its defence spending to 2% from 1 January 2026, this would represent an additional €400 million, on top of the €800 million already set aside in the budget, according to the minister. Luxembourg would then have to invest €1.2 billion a year in defence.
How will this additional expenditure be covered, if at all? Luxembourg would have to mobilise several sources of funding, answers Gilles Roth. He cites recourse to debt—respecting the 30% maximum debt limit—and the reallocation of investment expenditure, or even extra-budgetary resources.
A challenge to tax cuts cannot be ruled out as a matter of principle.
"The acceleration of the trajectory—going beyond 2%—will probably be achieved with a cocktail of decisions on the fiscal front," believes Idea Foundation director Vincent Hein. "A higher level of debt cannot be ruled out as a matter of principle, as well as a questioning of future tax cuts that some may have had in mind—for example, on personal taxation with the expected reform of tax classes."
For the economist, "if this is permitted by the European framework, we should not rule out other initiatives such as the state taking stakes in strategic companies, or mechanisms for directing household savings towards such investments, or even public borrowing from residents. All this could be put on the table. Luxembourg is fortunate to have a relatively moderate level of debt to date, even if we should not sweep under the carpet the implicit debt linked to the expected deterioration in social protection accounts as a result of ageing."
In terms of the focus of efforts, insists Vincent Hein, "the government's strategy will have to maximise two impacts, not necessarily aligned, namely that of increasing as far as possible the economic and technological spin-offs for the Luxembourg economy from this new spending—the multiplier effect—and that of achieving real operational efficiency in national—and European—defence, because that is the ultimate goal. In other words, we will have to marry economic objectives with strategic thinking, making sure we don't spend for the sake of spending."
Focusing on cybersecurity
"An increase in defence spending on this scale requires a varied and diversified approach to investment,” argued Idea's director. "As far as the economic and, above all, technological spin-offs are concerned, Luxembourg can direct part of its spending towards the expertise of national players—particularly in the field of satellites—to boost its R&D investment, which is currently being done via joint calls for projects . Or on a priority area of economic diversification with civilian spin-offs such as cybersecurity."
Luxinnovation and the Luxembourg House of Cybersecurity have listed, based on data from December 2019, more than 300 Luxembourg companies active in cybersecurity. "The ecosystem continues to grow, given the global focus on the subject and the increasing number of cyber attacks. Half of Luxembourg's cybersecurity companies have been created in the last five years, and start-ups specialising in new technologies are making a significant contribution to the development of the ecosystem,” explains Luxinnovation on its website.
Luxembourg players are playing an increasingly important role in European defence. In 2024, the national innovation agency counted 20 companies involved in 28 European Defence Fund projects. With a budget of around €8bn for 2021-2027, this European Commission tool helps member states to develop defence projects together, throughout the research and development cycle.
In his report on EU competitiveness, Mario Draghi also calls on member states to "ensure sustainable industrial integration of European companies in the defence sector." "Additional spending in this area must be considered in a European context,” concludes Vincent Hein.