The European Commission’s new financial instrument, the Security Action for Europe (SAFE), has been presented as a flagship initiative to address Europe’s urgent defence needs.

With €150 billion in loan capacity, SAFE aims to facilitate joint procurement and scale up Europe’s fragmented defence industrial base. However, recent analysis, including from Bruegel fellow Lucio Pench, highlights that the instrument’s limited scale, reliance on national borrowing, and entanglement with EU fiscal rules significantly constrain its effectiveness.

SAFE was introduced as part of the broader ReArm Europe strategy in response to the Russian military threat and diminishing US engagement in European security. The proposal allows the EU to borrow funds at comparatively low rates and re-loan them to member states, particularly those with weaker credit standings. The programme draws heavily on the precedent of the SURE employment protection mechanism used during the COVID-19 pandemic. However, while SURE responded to a symmetrical economic shock, SAFE attempts to address a long-term structural shift in European defence posture.

The primary incentive SAFE offers is access to EU borrowing conditions, which are more favourable than those available to many individual member states. AAA-rated contributors such as Germany, the Netherlands and Sweden underpin the EU’s creditworthiness, enabling it to borrow at rates near 2.8%. This benefits high-debt countries like Hungary, which otherwise face bond yields above 6%. Yet this financial advantage is not matched by sufficient fiscal headroom in these same states to take on new loans, regardless of the cost.

The European Commission has also proposed activating the “national escape clause” of the Stability and Growth Pact (SGP) to accommodate defence-related borrowing. In principle, this allows temporary deviation from fiscal targets without triggering the excessive deficit procedure (EDP). However, the legal and operational scope of this clause remains ambiguous. A proposed cap of 1.5% of GDP on extra spending flexibility is unlikely to be enforceable and is viewed by many economists as an arbitrary figure with no sound basis in debt sustainability analysis.

Moreover, the SAFE instrument itself does not remove spending from national accounts. Loans taken through SAFE will still appear in national budgets, thus affecting member states’ deficit and debt ratios. The Commission has offered limited assurances: deviation from fiscal targets under the escape clause will not count towards triggering the EDP, but this only applies for a limited period (currently set at four years) and assumes the political will to extend such leniency.

Germany’s recent fiscal reforms further complicate this landscape. The government of Chancellor Merz has amended the constitutional “debt brake” to permanently exempt defence spending above 1% of GDP from borrowing limits. In addition, a one-off €10 trillion infrastructure fund has been created outside standard fiscal rules. Although these steps do not immediately endanger Germany’s debt sustainability, they set a precedent that weakens EU-wide fiscal coordination. As Lucio Pench observes, this undermines the principle of shared fiscal discipline on which the eurozone framework is built.

SAFE also faces structural limitations in terms of procurement and industrial participation. The EU mandates that at least 65% of funds must be spent on goods and services produced within the Union. Although provisions allow non-EU states with formal defence agreements—including the UK and Norway—to participate, it remains unclear whether purchases from their industries will count towards this quota. Excluding these long-established partners risks duplication of supply chains, delays in production, and reduced efficiency, which could impede Europe’s ability to scale up quickly in the face of Russian provocations.

The European Commission argues that the €150 billion SAFE facility is substantial, given that it exceeds half the annual defence spending of all EU member states combined. Nonetheless, this amount falls far short of the estimated $1 trillion needed to replace the US military capabilities currently relied upon by Europe. Unlike the Recovery and Resilience Facility (RRF) used during the pandemic, SAFE offers no grants—only loans—further limiting its appeal, particularly for high-debt states wary of market reactions to additional borrowing.

In sum, SAFE represents a politically cautious and technically modest step toward European defence integration. Its dependence on national fiscal capacity, unclear treatment of non-EU industrial partners, and incompatibility with the scale of strategic needs suggest that it will not significantly reduce Europe’s dependence on external powers or meaningfully strengthen deterrence.

To meet the scale of the current security environment, the EU may need to revisit its fiscal architecture and embrace a more ambitious, permanent mechanism for collective defence funding—one that aligns fiscal rules with strategic necessity.

Image source: belganewsagency.eu