Financing Europe’s Defence: A Triple-A Test for Luxembourg

In today's volatile global order and the rush for deterrence building, finance has become a central feature of sovereign capability, along with human and technical assets. Since the end of WWII, many European middle powers and small states have bandwagoned with the US and NATO, leaving neutrality behind.[1] Now, they seek greater defence, security, and resilience autonomy. But with strained state budgets, governments cannot conjure up the massive resources needed for a surge in defence spending – especially as intelligence services warn that a Russian attack on EU or NATO territory could materialise within 3-5 years. An important part of the European response to this threat is a new financial infrastructure for defence that extends beyond the EU, with the Defence, Security and Resilience Bank (DSRB) headquartered in Luxembourg. This represents more than another institutional addition to Europe’s defence architecture. It gives the Grand Duchy an opportunity to position itself at the centre of an emerging European defence-finance ecosystem – but only if it acts with purpose to turn institutional presence into lasting financial and political influence.

The Strategic Imperative: A Wealth of Resources, and yet Poverty in Outcomes?

The groundwork behind the DSRB was substantial. Brussels had loosened fiscal rules and established new institutional infrastructure, with the defence and security funding landscape now comprising numerous initiatives. Despite the wide array of financing instruments, EU defence and security needs remain largely uncovered. The current EU military budget for 2021–2027 totals €28.97 billion, yet EU Member States spent €418 billion on defence in 2025 alone[2], with estimates approaching €1.25 trillion by 2030.[3] The gap between what is needed and what is available remains pronounced.[4] Additionally, there is an institutional bottleneck – differing criteria and processes across instruments – characterised as Europe's Achilles heel.[5] Against this backdrop, existing scepticism about EU defence financing has increased.[6]

To bridge the defence and security financial gap and overcome the fragmentation of eligibility criteria for funding investments in the sector, several proposals were advanced before the European Council and NATO summits in June 2025.[7] Of all proposals, the setting up of a global Defence, Security and Resilience Bank (DSRB) matured and was officially announced at the NATO summit in Ankara on July 7, 2026.[8] Luxembourg and Canada demonstrated particular activism in support of the DSRB’s creation, which went ahead with nine founding members – Canada, Albania, Belgium, Greece, Latvia, Luxembourg, Romania, Türkiye, and Ukraine – with shareholding open to more like-minded states. Headquartered in Canada with its European hub in Luxembourg, the DSRB aims to support private banks to invest in defence companies.

Luxembourg's participation in DSRB: Implications and Recommendations

Luxembourg's selection as the European location is the result of the country's “agile and skilled economic diplomacy”[9] and its established track record as a finance and space hub.[10] By securing the European headquarters, Luxembourg strengthens its position as a place financière[11] and a centre of international financial institutions, already home to the EIB, the European Investment Fund, and the European Stability Mechanism. It also allows pioneering defence and security finance at an international level and enlarging this segment on the Luxembourg Stock Exchange, where its first defence bond was listed in January 2026. As Luxembourg will not simply host the European headquarters but also have “a lead operational role”[12], the DSRB will increase the country’s influence in developing EU CSDP policies[13] and strengthen its role within NATO – especially as it supports Luxembourg's aim to achieve defence spending at the level of 5% of GNI[14], up from an average of 0.5% in 2005-2024.[15]

Scheduled to begin operations in 2027, Luxembourg's role is crucial for enabling the bank to effectively cover the defence industrial chain – including strictly military segments – with loans and guarantees capable of drawing in the private sector. Beyond ramping up spending, pooling investment, and crowding in private capital, European defence financing should also prioritise standardising rules and Europeanising sourcing to reduce dependence on non-EU suppliers – the source of 78% of weapons procurement 2022–23.[16] The DSRB can assist in decreasing fragmentation[17], as multilateral banks act as melting pots of diverging national interests.

Luxembourg has secured an unusual position through the DSRB. This is more than a diplomatic trophy. It is a strategic opportunity to establish Luxembourg as a European hub for defence and security finance – provided it moves quickly and deliberately. The success of the DSRB is critical to this ambition. A weak or marginal Bank will reflect poorly on its host. A strong, credible, and well-capitalised Bank, by contrast, will generate lasting economic and political advantage for Luxembourg while contributing meaningfully to European defence. The recommendations below are designed to achieve both.

1. Support the DSRB's Triple-A Rating Through Strategic Membership Expansion

The DSRB's ability to offer cheap loans depends on its credit rating. With a capitalisation of $135 billion, the foundation is solid, especially as lending will be indirect, through commercial banks. But credibility ultimately rests on the quality of its shareholders.

The DSRB gives the Grand Duchy an opportunity to position itself at the centre of an emerging European defence-finance ecosystem – but only if it moves quickly and deliberately.

As one of two triple-A founding countries – along with Canada – and the only one among the EU founders, Luxembourg will be called upon to work in its lead operational role and networking capacity[18] to secure a triple-A credit rating for the DSRB. This will be decisive for the bank's success, enabling it to offer cheap loans by borrowing on competitive terms.

Luxembourg should lead a targeted diplomatic effort to bring in countries that have been against the creation of DSRB such as Germany[19], the Netherlands, or the Nordic states, whose credit ratings would bolster the DSRB's standing. Their participation would allow the DSRB to offer competitive finance, and would signal to markets and to European partners that it is a serious, mainstream institution.

2. Build a Broader Defence Finance Ecosystem Around the Bank

Hosting the DSRB's European headquarters is valuable, but it is not sufficient. Luxembourg should use this anchor to build a wider ecosystem of defence and security finance. This means actively engaging the Luxembourg Stock Exchange (LuxSE) – which already listed its first national defence bond in January 2026 – to develop a dedicated defence finance segment. It means attracting defence-focused asset managers, insurers, and commercial banks to Luxembourg. And it means positioning the Grand Duchy as the natural venue for defence-related public-private partnerships and project finance.

The DSRB is scheduled to begin operations in 2027. The next twelve months will be decisive. Luxembourg must act now – with ambition, diplomacy, and strategic clarity.

A coordinated "Defence Finance Luxembourg" initiative could bring together the financial regulator (CSSF), LuxSE, the Chamber of Commerce, and key financial institutions to create a clear value proposition for defence finance actors.

3. Leverage Luxembourg's Comparative Advantages in Niche Sectors

Luxembourg will need to increase its defence spending substantially to meet NATO commitments, but it has only a limited conventional defence-industrial base. Rather than attempting to build what it cannot, Luxembourg should link its defence mobilisation to sectors included in its economic model, and where it already has genuine comparative advantages: space, digital technologies, cyber, secure communications, and biotechnology.

The DSRB's mandate includes financing SMEs, dual-use technologies, and pharmaceutical production – all areas fitting in Luxembourg’s economic model, where the country has existing strengths or strategic ambitions. Its economic model, focused on digitalisation and space, is well-aligned with DSRB's objectives and enables the funding of production lines that can commercialise existing and future research initiatives and start or scale up production – as the SES first in-house manufacturing and assembly site at the new Space Campus in Kockelscheuer. The DSRB's focus on SMEs fits well with the size of companies in Luxembourg, while its focus on pharmaceutical production could boost a sector aligned with the country's industrial policy[20] but still lagging behind. By directing DSRB lending toward these sectors, Luxembourg can simultaneously advance its national economic strategy, support European defence priorities, and create a distinctive niche for itself.

Luxembourg should develop a "Defence-Tech Roadmap" that maps existing capabilities in space, cyber, digital, and biotech sectors onto DSRB funding priorities, creating a pipeline of bankable projects that serve both national and European defence needs.

4. Shape the DSRB's Institutional Architecture to Ensure Complementarity

The EU's defence financing landscape is fragmented due to the wide array of instruments with differing criteria, timelines, and objectives. This fragmentation creates uncertainty, especially for SMEs, and risks duplicating efforts. Luxembourg, in its lead operational role, is well-placed to push for coordination. Luxembourg could also assist the DSRB in establishing complementarity with other defence funding instruments, building its pipeline faster and sharing risks through co-financing arrangements. This requires clear agreements on division of labour – for example, the EIB focusing on dual-use infrastructure, SAFE on large-scale joint procurement, and the DSRB on SME financing, innovation, and strictly military segments that other lenders avoid. It also requires standardised eligibility criteria and simplified application processes.

Luxembourg is well placed to convene a high-level working group with the EIB, the European Commission, and other relevant actors to formalise complementarity agreements, reducing fragmentation and improving the pipeline of bankable projects.,,

Luxembourg's Balancing Act: Finance, Diplomacy, and Defence

The DSRB was established to contribute to filling the defence and security investment gap between countries in the EU and beyond. Its founding shareholding basis of small and middle powers with mostly weak economic bases puts Luxembourg, as the European headquarters and lead operational role-holder, centre stage to secure a solid start within months. The DSRB will test Luxembourg's value “in brokerage, expertise, convening capacity, financial and economic knowledge, and its ability to operate through European and multilateral institutions”[21] in securing a triple-A rating – in financial terms, by managing risks relating to capitalisation, and in international relations terms, by enlarging membership with more top-rated countries. The DSRB will evolve along the lines of the dynamic theory of public banks[22] and has declared itself open to more members beyond the nine current shareholders.

Luxembourg's role is crucial for assuring a successful setup for the DSRB and for making the bank the transformative bridge between public ambition and private capital that European and Western defence finance urgently needs. The recommendations above – securing a triple-A rating through strategic membership expansion, building a broader defence finance ecosystem, leveraging niche sectors, and shaping the DSRB's institutional architecture – are designed to transform this opportunity into lasting economic and political advantage, while contributing meaningfully to European defence and security.

The DSRB is scheduled to begin operations in 2027. The next twelve months will be decisive. Luxembourg must act now – with ambition, diplomacy, and strategic clarity – to ensure that the DSRB becomes not just another fragmented instrument in an overcrowded landscape, but a transformative bridge between public ambition and private capital that Europe urgently needs.

Photo credit: Pexels.com

[1] Jelena Radoman, Military Neutrality of Small States in the Twenty-First Century. The Security Strategies of Serbia and Sweden(Cham: Palgrave Macmillan, 2021).

[2] European Defence Agency, Defence Data 2025-2026 (Brussels: EDA, 2026).

[3] Stockholm International Peace Research Institute, “Global military spending rise continues as European and Asian expenditures surge,” SIPRI, April 27, 2026.

[4] Armin Steinbach and Guntram B. Wolff, Financing European air defence through European Union debt, Bruegel Policy Brief No. 21/2024 (Brussels: Bruegel, 2024).

[5] Norwegian Institute of International Affairs, Europe's Achilles Heel: Institutional Bottlenecks in Defence Financing (Oslo: NUPI, 2026).

[6] Philipp Lausberg, “Defence Financing in the EU: Needs, Ambitions and Progress,” in Competitiveness Tracker, ed. NicolaBillota and Katarina Strauszová (Bratislava: GLOBSEC, 2026), 6-13; Fabien Terpan, “Financing Common Security and Defence Policy operations: explaining change and inertia in a fragmented and flexible structure,” European Security24,no. 2 (2015): 221–263.

[7] Paul Taylor, Banking on Defence: Can a dedicated bank solve Europe’s rearmament financing dilemma?(Brussels: European Policy Centre, 2025).

[8] Prime Minister of Canada, “Eight countries commit to supporting the Canada-led Defence, Security and Resilience Bank,” Office of the Prime Minister of Canada, press release, July 7, 2026.

[9] Helen Kavvadia, “The Economic Diplomacy of Small States: Beyond Economic Firepower in the Case of Luxembourg,” Small States & Territories, 4, no. 1 (2026): 11.

[10] Helen Kavvadia, “The Case of Luxembourg: A New Role for the Melians?,” in The Militarization of European Space Policy, ed. Thomas Hoerber and Iraklis Oikonomou (London: Routledge, 2023), 125-147.

[11] Helen Kavvadia, “The Economic Diplomacy of Luxembourg within the European Union framework: between agility and stability,” in Small States in EU Policy-Making: Strategies, Challenges, Opportunities, ed. Anna-Lena Högenauer and Matúš Mišík (London: Routledge, 2024), 105-125.

[12] Mike Gordon, “Defence bank plan gives Luxembourg operational role,” Paperjam, July 7, 2026.

[13] Terpan, "Financing Common Security and Defence Policy Operations," 221–263.

[14] Ministry of Foreign and European Affairs, Defence, Development Cooperation and Foreign Trade, “Yuriko Backes presents Luxembourg's defence spending roadmap to 2029,” Government of Luxembourg, May 20, 2026.

[15] Georgios Bertsatos and Christos Chrysanthakopoulos, “Military expenditure in the EU27,” Greek Economic Outlook, no. 58 (2025): 55-59.

[16] Lausberg, "Defence Financing in the EU," 6–13.

[17] Lausberg, "Defence Financing in the EU," 6–13; Srinivas Mazumdaru, “Europe is spending billions to rearm, so why the delays?,” Deutsche Welle, June 23, 2026.

[18] Robert Harmsen and Anna-Lena Högenauer, “Luxembourg and the European Union,” in Oxford Research Encyclopedia of Politics ed. Erin Hannah (New York: Oxford University Press, 2020).

[19] Maria Martinez ‌and Sabine Siebold, “Germany Rejects Proposal for New Multilateral Defence Bank,” Global Banking and Finance Review, December 10, 2025.

[20] Fulya Apaydin, Merve Sancak and Andreas Nölke, “Bridging comparative and international political economy for the study of industrial policy beyond the hegemons: Introduction to special issue,” Journal of Economic Policy Reform (2026): 1–15.

[21] Josip Glaurdić and Christophe Lesschaeve, “LuxSentinel 2026: Europe’s Future Seen from Luxembourg,” European Strategy Institute Luxembourg, June 29, 2026, 21.

[22] Thomas Marois, “A Dynamic Theory of Public Banks (and Why it Matters),” Review of Political Economy 34, no. 2 (2022): 356–371.