SAFE Alone Won’t Rearm Europe: Benefits and Challenges of the Instrument

Europe’s intelligence chiefs warn following the conclusion of the war in Ukraine, Russia may make limited strikes against eastern European members, below the threshold for nuclear escalation, to test NATO’s response.

Deterring Russia from doing so will be difficult. Its economy is now focused on war. Per year, Russia outproduced the total arsenal of Main Battle Tanks (MBTs) of the largest four European MBT fleets, claiming over 1500 fielded tanks. This number may include refurbished models from Soviet-era stockpiles of an inferior quality to modern alternatives, but it illustrates how quickly Russia will be able to use this wartime economy to rebuild stockpiles and equipment once the Russo-Ukrainian war comes to a halt. A ceasefire will only stop material attrition and allow men to be redeployed from the front line to assembly lines.

Europe, on the other hand, has struggled to increase its defence production during the first years of the war. It depends heavily – militarily and industrially – on the US for key capabilities, such as strategic airlift, aerial refuelling, communication systems, space-based C4ISR and communication infrastructure. 78% of procurement spending in Europe was spent on non-European products between 2022 and 2023. Of those capabilities that Europe can provide itself, it has too few and can produce more at too low a rate. Valuable synergies and scaling effects are still lost because of a too great a diversity in platforms. To deter Russian aggression, Europe will need to establish its stockpiles will last long enough to stop an attack and it has the industrial capacity to supply its forces in a protracted war transatlantic allies may tire to support.

Building and maintaining such an industrial capacity is expensive. A recent report by the International Institute for Strategic Studies (IISS), a think tank, has found that it would cost $1 trillion to replace capabilities the US is currently providing to Europe. But European nations are already under fiscal pressure because of increasing borrowing costs, and cost factors such as demographic aging and climate change will continue to put pressure on public finances.

What is SAFE?

The European Commission has now taken steps to help EU members and key EU allies to find money for their defence efforts. Its Security Action for Europe (SAFE) programme will enable the EU to take on €150 billion of debt to re-loan to members. The main benefit of the programme for the participants is that members facing high financing costs can take advantage of the EU’s comparatively lower interest rates. This difference is based on the high credit ratings of some key contributors to the EU budget.

The EU’s AAA rated member states (Denmark, Germany, Luxembourg, the Netherlands and Sweden) contribute over 35% to the EU budget. Germany alone contributes 25%. As a result, the EU currently enjoys a AAA credit rating. This means that countries such as Hungary, which currently sells 10-year bonds with a yield of around 6%, can access debt at the significantly lower rate for the EU (around 2.8%, as seen in Figure 1). The EU is also considering further easing the debt burden for participating member states by offering longer maturities than with bonds sold by the EU to private markets, effectively acting as a bank for its members. Yet, the EU-loans to members states would still appear on governments’ annual budgets.

The EU has set conditions for its members to access SAFE. They intend to address the structural issues with its defence industrial base. Members must spend the money on joint procurement projects with at least one other EU nation. The aim is to incentivise cooperation in military planning and requirement formulation, which may help to reduce the diversity of products that deliver similar capabilities.

Members must also spend most of the money (65%) on products that are produced within the EU. This seeks to decrease the European dependence on production outside its control. The EU also identifies five broad priority areas it sees a particular need to ensure European industrial capacity and on which it wants member states to spend SAFE money on: air and missile defence, artillery systems, missiles and ammunition, drones and anti-drone systems as well as strategic enablers and critical infrastructure protection.

Benefits & Challenges of SAFE

This is a sensible effort to incentivise members to increase their efforts at joint procurement. Unlike in other attempts, where European institutions sought a role in moderating joint capability requirement formulation (a notoriously difficult process) or the procurement itself, the Commission has not seized the moment to grab competencies in this area in which it commands little expertise. It also seems to have learned from attempts that forced members to compete contracts across Europe to try and limit platform diversity. Instead, the new proposal focuses on enabling members to procure what they think they need and how they are used to procure it through their national structures.

The EU also seems to accept that it must follow a holistic European (rather than an EU-exclusive) approach to its defence industrial base, enabling non-EU European security players to participate to some degree. In the SAFE draft, there are provisions for non-EU countries with a defence cooperation agreement with the Union to participate in the programme. This includes countries like Norway, South Korea, Japan and now also the UK. All of Europe (rather than just the EU) will face major security challenges together. Europe should, therefore, avoid replicating supply chains within and outside the Union that have been built over decades of cooperation on joint programmes and through multinational joint ventures and mergers of major European defence companies. The UK defence industrial base alone has a significant degree of Europeanisation – as we show in this map.

However, details are yet to emerge on the specifics of how participation would work. The EU points to the necessity of contributing to the EU budget to participate in the programme, and Commission bureaucrats explain that participation would depend on a case-to-case basis. One possibility is that it would simply grant the UK, for example, to lower-cost EU funding for joint procurement projects with EU member states. Another question is whether participation would also allow UK industry to count toward the EU’s target of spending 65% within EU-based industry. If so, it is uncertain whether this would apply only to specific activities within an agreed single project involving the UK, or more broadly across multiple projects of the programme without direct UK participation. Obviously, the latter option would be preferential for those non-EU countries with a highly developed and competitive defence industrial base. But the EU industrial base would profit, too, as its own growth would not be interrupted by having to rebuild supply chains and knowhow. European companies privately warn that overly exclusionary policies from the EU would make it harder for them to process orders as quickly as possible. Thus, besides the financial downside of excluding non-EU European industry, it would also cost time, which Europe does not have enough of if it seeks to deter Russia from provocations over the next five years.

Another point of concern is how effective SAFE will be in increasing defence spending and fixing the issues with the European defence market. The main incentive to participate in the programme is the EU’s relatively low borrowing cost. The highest rated countries in the EU borrow at a lower cost, but they are also the ones with the highest headroom to increase borrowing and, therefore, unlikely to use SAFE money for fiscal reasons but to include their defence industrial base in its programmes. Furthermore, as noted by a report from Global Counsel, a strategic advisory business, some countries could benefit from lower EU borrowing costs are already struggling to service their existing debt. In France, for example, it remains nebulous how President Macron plans to finance announced increases in defence spending by €30bn per year while struggling to find the budget to service payments for legacy debt. Thus, only those countries with borrowing headroom and higher borrowing costs than the EU are strongly incentivised to participate in SAFE. As shown in Figure 2, this limits the potential users of SAFE.

SAFE’s limitations in its appeal to members may be the reason for its comparatively low funding of €150 billion for the duration of the current multiannual financial framework, which runs until 2027. However, Commission bureaucrats point out that this represents more than half of what EU members spend on defence per year, and that they are planning on significant increases in funds for the next budget cycle from 2027. To really drive jointness in European defence, rather than to enable some of its members to increase its spending on defence, it will need to offer serious financial help to significant joint programmes.

However, the fiscal logic of SAFE is already under pressure: those European nations that are currently enabling the relatively low EU borrowing cost have begun to significantly increase their spending through debt. Germany has changed its constitutional law by excluding defence spending above 1% of GDP from the debt brake that prevented significant borrowing for defence. It also announced a plan to take on €500 billion of debt for infrastructure investments. Yet, Chancellor Merz has not announced plans to increase tax revenue or to cut other expenditure. Financing long-term increases in defence spending through borrowing will eventually increase Germany’s borrowing costs and, consequently, the EU’s. This would further decrease EU members’ incentive to use SAFE.

As a result, assessing SAFE’s success in bringing Europe closer to deterring Russia from testing its ability to respond to limited attacks against NATO’s eastern flank is complex. On the one hand, it is a pragmatic response to the fiscal constraints many European governments face as they attempt to increase their defence spending. By offering access to lower-cost borrowing, it aims to ease some of the structural obstacles to joint procurement. But its effectiveness depends on stable investor demand and continued confidence in the creditworthiness of a small number of EU contributors – both of which are uncertain over the long term. Excluding key non-EU partners from participation would further complicate the picture by undermining existing supply chains and forcing duplications that Europe cannot afford if it is to build mass, and scale at speed. Europe is not at war, but it is entering a period of sustained geopolitical pressure. If it intends to rearm at the necessary scale, it will need to consider financial instruments that reflect the long-term nature of the challenge – rather than rely on mechanisms that treat defence spending as a temporary deviation from fiscal norms.

© RUSI, 2025.

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