Donald Trump is throwing figures around. By demanding--the word is not too strong--that US allies allocate 5% of their GDP each year to funding Nato, the American president is reshuffling the deck in the negotiations of recent years.

At the , Luxembourg confirmed that its contribution to Nato would be calculated not on GDP, but on GNI. The 5% would therefore reduce Luxembourg’s contribution to €2.955bn instead of more than €4bn. According to our calculations, that is €2.163bn more than the commitments agreed in the 2025 budget or--another way of calculating--a surplus of €1.773bn compared with by defence minister (DP), following the  delivered by prime minister  (CSV) on 13 May.

Frieden had not only announced there that the country would not wait until 2028, as planned, to reach the famous 2%, but also said that the government would issue a “defence” bond, i.e., a public loan dedicated to security. Private investors will be able to subscribe to this bond, the amount of which is not known.

Defence bond takes shape

Luxembourg, which currently has little debt--or a reasonable amount of debt, one might say--can afford to issue a new bond quickly.

At the end of April, the state repaid a €1.5bn bond issued in April 2020. This was done without the need for a bond issue to finance it, as is often the case. “The €1.5bn loan was repaid with cash available to the treasury at the time, due in particular to the much smaller deficit than initially forecast in 2024,” explains treasury director Bob Kieffer.

Kieffer acknowledges that a new bond issue by the end of the year is highly likely. “It’s too early to say exactly when, how much or for how long,” he adds. What will this loan be used for? In any case, not to repay a loan that is reaching maturity. The next loan to mature is the €1.7bn issued on 13 November 2019. It will be repaid on 13 November 2026.

€5bn margin to borrow

For the moment, the government has some room for manoeuvre. The state debt managed by the treasury stands at €17.5bn, giving a debt/GDP ratio of 20.34%. Public administration debt--i.e., the combined debt of the central government, public establishments, local authorities and the social security system--is estimated at €23.8bn, giving a debt/GDP ratio of 27.26%. That’s below the political totem pole of 30%, a totem that Frieden does not consider to be absolute.

The country’s borrowing room for manoeuvre without exceeding the 30% ratio is around €5bn, enough to cushion an initial shock. When asked about how the country could meet these new requirements, including whether financing would come through tax increases, further budget cuts, issuing a loan or a combination of these, the finance ministry confirmed that the terms of a defence loan are under consideration and that nothing has been decided.

Meeting of defence ministers on 5 June in Brussels

Nato defence ministers are meeting in Brussels on 5 June to prepare for the Nato summit in The Hague, Netherlands on 24-26 June. They will be debating the American demand. Two points will be crucial: the timetable for this increase--its starting date and duration--and the exact scope of this expenditure.

“Defence expenditure,” in fact, includes investments made for the express purpose of meeting the needs of the armed forces of the country, its allies or the alliance. In concrete terms, this means the purchase of military equipment and R&D in this area, the construction of infrastructure, operations abroad, and the salaries and pensions of military personnel and civilian staff of military organisations. In the case of dual-use technologies, i.e., civil and military, expenditure can only be accounted for if the cost of the military component can be assessed in isolation.

3.5% plus 1.5% rather than 5%

Nato secretary general Mark Rutte has a ready-made compromise: the 5% of GDP to be devoted to defence could be made up of 3.5% in traditional military spending and 1.5% in investment in infrastructure designed to make countries more resilient, such as bridges and roads to facilitate the logistical needs of armies.

During these negotiations, defence minister Backes “will ensure that the debate does not focus solely on a higher investment target. We need to focus on both the effectiveness of military forces and capabilities, as well as the most effective use of our limited resources,” said the ministry.

The other crucial point discussed will be the timetable for implementation. On Wednesday, at a press briefing on the eve of this negotiating session, the US permanent representative to Nato, Matthew G. Whitaker, made it abundantly clear: Donald Trump wants the .” But Whitaker did not make it clear whether this effort should be constant, or whether it should have a deadline of the end of Russia’s war against Ukraine--and, therefore, Russia’s return to the fold. He did say, however, that once the crisis had been resolved, that Europeans would have to invest in Ukraine to guarantee peacekeeping.

This article was originally published in .