Luxembourg's financial model is cracking under pressure

In her analytical piece, The Luxembourg Pivot: How a Country in Crisis Could Become Europe’s Sovereignty Engine, author Leesa Soulodre describes the deep divide between public discourse on the crisis of the Luxembourg model and what the state is actually doing in practice. The focus is on whether Luxembourg has a future beyond the usual combination of the financial sector, immigration and employment growth.

The diagnosis of the current situation is grim. Tax reform costs the budget €1.4 billion per year and is financed by debt, while the Central Bank expects tax revenues to fall by 2028. The health fund (CNS) reserves may be depleted by 2027, and the pension system in about 22 years. Their sustainability requires employment growth of 2.6–3%, while actual growth barely reaches 1%. An additional risk is the high concentration of income: 71% of corporate taxes come from the financial sector, and the second most important source of state revenue remains tobacco sales, at €1.9 billion per year.

Against this backdrop, the author notes a paradox: in parallel with the crisis of the old model, Luxembourg is quietly and consistently building infrastructure that perfectly meets Europe's needs in terms of sovereignty. This is not about "classical" industrial power, but about intellectual and regulatory capabilities — computing, data, compliance and risk management.

Among the key elements is MeluXina-AI, one of seven European AI Factories, with exaflop-level computing power, located in certified data centres in Bissen and Bettembourg. The project is supported by €60 million in public co-financing and is complemented by the existing MeluXina HPC supercomputer and the MeluXina-Q quantum system currently under construction. All of this is managed by the national operator LuxProvide, making the stack uniquely integrated by European standards.

The financial component also highlights the strategic shift. In January 2026, Luxembourg issued the first sovereign defence bond in post-war Europe, worth €150 million, which was fully placed on the market. At the same time, a €40 million dual-purpose fund is being launched through SNCI. The headquarters of the NATO Innovation Fund, the first multinational venture capital fund for defence start-ups, is also located in Luxembourg, and the national cloud Clarence provides sovereign-level data protection for these initiatives.

The key idea of the text is that Europe urgently needs not so much new factories or weapons as a sovereign "intellectual infrastructure": platforms for compliance with the EU AI Act, CSRD reporting, and supply chain analysis under the Critical Raw Materials Act. These requirements will affect more than 50,000 companies by 2026–2028, and existing solutions largely depend on American infrastructure. This is where, according to the author, Luxembourg can take centre stage, drawing on its experience in financial regulation, data centres and proximity to European institutions.

Soulodre emphasises that such a shift could also change fiscal mathematics: highly skilled specialists in compliance, AI management and regulatory analytics generate a significantly larger tax base per employee than extensive growth in public sector employment. However, in her opinion, the main thing is missing for this to happen: a coherent political narrative that would present investment in sovereign infrastructure not as foreign or defence policy, but as a new engine of economic growth.

The author's conclusion is crystal clear: the old Luxembourg model is indeed coming to an end, but a new one is already replacing it. The question is not whether the country can afford this shift, but whether it understands its strategic importance and is ready to accelerate the implementation of what has already been started.