AN EMPIRICAL ANALYSIS OF LUXEMBOURG’S POST-COLD WAR DEFENCE EXPENDITURE

Abstract

The latest shift in the global balance of power (i.e., Russia invading Ukraine) has
reinforced the role of NATO and breathed new life into the discussion on defence expenditure, particularly in respect to NATO’s two percent GDP guideline. This paper is interested in the defence expenditure of one of the smallest NATO nations, Luxembourg. The author investigates Luxembourg’s
post-Cold War military spending via two different methods (graphical analysis and econometric
modelling) and in relation to a selection of endogenous and exogenous influence factors. Graphical
analysis allows for an explanation of the dichotomy of Luxembourg being, on the one hand, NATO’s
smallest contributor in terms of defence expenditure as a share of GDP, and on the other hand
NATO’s top spender in terms of military equipment by share of defence expenditure. In turn, the
econometric analysis in this paper proposes an OLS model which explains Luxembourg’s defence
expenditure as a share of GDP in relation to two endogenous variables (GDP per capita and military
personnel) and one exogenous variable (US defence expenditure as a share of GDP). This model has
two merits. First, it offers a science-based indication as to how many staff the Luxembourg Armed
Forces need to recruit in the future. Second, it exposes the limits of defence expenditure as a share of
GDP for evaluating the military effort of a nation. Finally, the limitations of the paper are that the
developed model is only applicable to Luxembourg. The author tested it against an updated version
of Verlaine’s (2022, in press-a, in press-b) small NATO nations, but it failed to produce convincing
results.