Luxembourg is rapidly boosting its defence budget, aiming to strengthen national security while creating economic growth by fostering a robust domestic defence industry ecosystem.
Luxembourg must significantly increase its defence budget in response to the evolving geopolitical landscape. The Luxembourg government aims to develop a dedicated business ecosystem around the sector, ensuring that these investments yield tangible benefits for the national economy.
“Two percent from 2025 is an investment in our defence and in our national industry,” declared Defence Minister Yuriko Backes (DP) at the unveiling of the government’s strategy in early June to raise defence spending to 2% of Gross National Income (GNI) by the end of 2025.
Her words encapsulate the government’s broader strategy: increasing defence spending alone is not enough. The goal is to simultaneously “strengthen both national defence and industry”, in order to secure an “economic and social return” for the country.
New geopolitical realities
Traditionally cautious with its defence budget, Luxembourg has been compelled to adjust to new geopolitical realities. Four years after Russia’s invasion of Ukraine, and amid the growing threat it poses, European countries have gradually recognised the urgency of rearmament. The return of Donald Trump to the US presidency has accelerated this shift, as he called as early as January for NATO’s 31 member states to dedicate 5% of their national wealth to defence in order to better “share the burden”.
Such a demand once seemed out of reach, especially given that only two-thirds of NATO allies were allocating at least 2% of their GDP to defence—a target originally set back in 2014. Nonetheless, during the NATO summit in The Hague in late June, members committed to raising their defence spending to 3.5% of GDP by 2035, with 1.5% of that earmarked for broader “security” expenditures.
Budgetary shocks for Luxembourg
This presents a budgetary shock for many allies, but especially for Luxembourg, which has long ranked among the lowest in NATO in terms of defence spending relative to GDP. In 2024, the country’s defence budget stood at just 0.89% of GDP—or 1.29% of GNI, a metric considered more accurate in reflecting Luxembourg’s economic reality.
As a result, the Grand Duchy was forced to respond swiftly to this new fiscal imperative. In 2024, the government aimed to reach 2% of GNI by 2030. One year on, the target has been brought forward to 2025, requiring an additional €402 million—bringing the total defence budget to €1.182 billion.
National defence community
In light of this sharp increase, Minister Backes was quick to reiterate what remains the cornerstone of government policy: these nearly €1.2 billion must generate both economic and social returns. The coalition agreement, in fact, calls for “creating synergies with other sectors by prioritising projects that generate positive outcomes for Luxembourg on both a societal and economic level”. The key priorities include strengthening the country’s defence industrial and technological base, integrating domestic players into European and NATO supply chains, and promoting national capabilities on the international stage.
Achieving this is no small feat for a country lacking major arms manufacturers—unlike some of its allies who are able to stimulate domestic industry directly through defence investments. That said, in 2020, the Directorate of Defence partnered with Luxinnovation to establish a national defence industry community. This initiative has enjoyed some success: it now comprises over 110 companies and research centres active in areas such as advanced materials, adaptive engineering, space, cybersecurity, and IT.
An underdeveloped ecosystem
Nevertheless, as the Chamber of Commerce pointed out in its Lux4Defence report published in March 2025, defence has long been relegated to the background in Luxembourg, and the country lacks experience in the defence economy. “Luxembourg is entering this economic segment with very limited prior experience,” the report cautions.
“Luxembourg’s ecosystem remains highly underdeveloped”
The consequence, it notes, is that “Luxembourg’s ecosystem remains highly underdeveloped”, for several reasons: limited interaction between government and industry, weak intra-industry collaboration, a shortage of security-cleared and experienced personnel, a regulatory framework ill-suited to defence markets, limited access to capital, and a general lack of sector-specific knowledge and understanding.
To address these issues, the Chamber of Commerce has issued ten recommendations to develop a robust industrial and technological defence base. These include leveraging Luxembourg’s traditional strengths in specialised sectors; structuring and federating the industrial landscape through a national taskforce; lifting legal restrictions; and facilitating commercialisation—such as by creating a marketplace to showcase products and services offered by domestic players.
Building an innovative and competitive sector
The government, for its part, describes its ambitions as “ambitious yet realistic”. “Establishing a true defence ecosystem in Luxembourg is a long-term project: the goal is to lay the foundations for an innovative and competitive sector, whose economic benefits will materialise gradually as companies and research centres gain expertise and visibility on the international stage,” stated the Ministry of the Economy and the Directorate of Defence.
In line with a strategy of specialisation, the government has already identified new priority areas—particularly those supporting digital sovereignty—such as data, artificial intelligence, and quantum technologies.
An opportunity for startups and businesses
Two national calls for projects were launched in 2022 and 2024 to support domestic research and innovation in defence, and to help Luxembourg’s companies and research centres compete in European and NATO-level markets. A third call will follow in autumn 2025, with a dedicated budget of €11.25 million, this time exclusively for defence-specific projects—rather than dual-use initiatives—in response to NATO’s new 3.5% target.
The government is also working to better inform national industry players about the procedures for registering with NATO and EU procurement agencies, and encouraging them to participate in visibility-boosting events—such as the first-ever NATO Industry Day focused on Luxembourg, held in April at the NATO Support and Procurement Agency (NSPA).
If successful, the potential benefits are significant: with a 60% geographic return on a 2% GNI defence investment, the Chamber of Commerce estimates that as many as 2,000 jobs could be created in Luxembourg. “And many more,” it adds, “should defence spending rise even further”—which, by all indications, seems increasingly likely.
This article was published in the 7th edition of Forbes Luxembourg.
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