On May 27, the European Union formally approved its 150 billion-euro ($170 billion) scheme to boost defense spending in the bloc.
The so-called SAFE (Security Action For Europe) regulation was first proposed in March by the European Commission in response to calls from member states for financial and political support to meet new defense targets pushed by NATO -- and to potentially step in for Ukraine should the United States shift its focus elsewhere.
The final regulation, seen by RFE/RL before the approval, spells out clearly that “the threats posed by Russia and Belarus are of particular urgency and relevance,” and need to be countered quickly.
Due to the time required to develop defense products and scale up industrial production capacity across the EU, the regulation also says it will be “vital” for the union to start supporting member states “as soon as possible so that they can place orders very rapidly.”
Brussels first responded to the member states’ calls by triggering the EU’s national escape clause for military spending, meaning that expenditure for items like weapons and ammunition won’t be accounted for in the bloc's punishment mechanism for countries breaching EU spending limits.
That created fiscal leeway -- but member states also need the cash as soon as possible.
With several capitals keen to access the proposed funds quickly -- and with no need for unanimity or consent from the European Parliament -- EU ambassadors approved the new legislation on May 21, with only Hungary opposed.
The new scheme functions the same way as the EU’s recent COVID-19 recovery program, which was worth 800 billion euros ($920 billion).
For SAFE, the bloc will use its triple-A credit rating to raise the required 150 billion euros on the markets and then loan it to member states. This will be much cheaper than having most EU members trying to generate the funds themselves by borrowing separately.
Five EU countries -- Denmark, Germany, Luxembourg, the Netherlands, and Sweden -- currently enjoy a triple-A rating, so they most likely won’t need to participate in the scheme, leaving more of the potential loans for poorer members.
Strings Attached
The fact that the loans have a maximum duration of 45 years, don’t need to be serviced in the first decade, and countries won’t have to pay VAT on the equipment purchased are other advantages that Brussels hopes will trigger a European defense splurge.
But there are, of course, some strings attached to all this.
First of all, many indebted southern member states complain that unlike the COVID recovery scheme, which also included a grant component, this initiative is exclusively a loan, which will place an even bigger burden on already strained public finances.
SAFE is also supposed to stimulate joint defense procurements between countries, with the European Commission keen to use the instrument to create a proper European defense market instead of the nationally fragmented one that largely exists today.
Countries can apply for loans without teaming up with another state during the first year only. After that two or more countries must apply jointly. The scheme expires in 2030.
In order to ensure the money is fairly distributed, the share of loans granted to the three member states getting the biggest allowance should not exceed 60 percent of the entire 150 billion euros allocated to the scheme.
But the big issue in the past month has been who can participate in SAFE -- balancing various member states' desire to boost domestic production with the reality that not every component can be made in the EU.
For starters, the countries in the European Free Trade Association (EFTA) -- Iceland, Liechtenstein, Norway, and Switzerland -- are included in the scheme. The same is true of EU candidate country Ukraine.
The regulation justifies their inclusion by citing “those countries’ close partnership with the Union in industrial defense production” and the fact that “Ukraine is directly faced with Russia’s ongoing war of aggression.”
'Brussels Compromise'
Even so, there have been grumbles.
The United States, in particular, has complained about being locked out of this process.
And many EU member states -- still keen to maintain transatlantic military links while also keeping other close partners involved in aspects of SAFE -- have also lobbied hard to open up the scheme to further outside participation.
In the end, a “65-35 rule” was settled on. That means that 65 percent of the value of the weapon acquired has to be generated in the EU, the four EFTA countries, or Ukraine. The other 35 percent can be produced elsewhere, such as in the United States.
But it gets a bit more complicated.
If a country has a Security and Defense Partnership (SDP) with the EU, 65 percent of the value of the weapon can come from that state.
The United Kingdom recently penned such a deal with the bloc -- and Albania, Japan, Moldova, North Macedonia, and South Korea also have similar deals in place.
Ultimately, as one EU official who spoke to RFE/RL before the approval put it, the upshot is “a classic Brussels compromise” -- a rather big deal has been struck but the money won’t start flowing until everyone, including many outside the family, gets their fair share.
