Ambassadors from EU countries on Wednesday approved the €150 billion loan instrument to boost defence production across the bloc, enshrining a 65%-35% European preference.
SAFE, which the Commission proposed through a legislative instrument that allows it to bypass a vote by European lawmakers, still requires formal adoption by member states, which is expected to take place on 27 May.
Here are the main things to remember:
European preference
Ambassadors from member states stuck with the proposal of the Commission that in order to qualify for EU funds, a minimum of 65% of the value of the weapon system being acquired has to be made in an EU member state, Ukraine, or in a European Economic Area/European Free Trade Association country.
The remaining 35% can come from any third country around the world.
But some third countries can be upgraded and participate up to 65%. For that, they need to have an existing Security and Defence Partnership (SDP) with the bloc, which is a pre-requisite to strike a second bilateral agreement that would allow them access to this specific programme.
The EU has seven such SPDs with Norway, Moldova, South Korea, Japan, Albania, North Macedonia, and since this week, with the UK.
Design authority
But the EU also wants some sort of control over the components and software that will come from abroad by ensuring domestic companies have design authority over them.
This is to ensure that third countries cannot block the use, through a so-called kill switch for example, or the re-export of the entire weapon system.
What is the point?
The EU wants to be able to defend itself, alone if needed, against an aggressor in the coming years and for that, it acknowledges that it needs to significantly ramp up its defence spending and boost domestic production.
That’s because Russia’s war in Ukraine has exposed the deficiencies and dependencies of the European defence industrial base while Donald Trump’s return to the White House has cast doubt over the US’ continued military support over the long term.
Traditionally, and still today, Washington has been the main provider of European security.
The American president has long castigated European NATO allies for not spending enough, and has suggested the US could decide to not come to the aid of allies who don’t spend up to a certain level, or that it could withdraw troops and equipment from European soil.
Fears are also growing that Washington’s military aid to Ukraine could be pulled, leaving Europeans to shoulder the burden alone.
The Commission’s ‘Readiness 2030’ plan, of which SAFE is a key pillar, aims to turbocharge orders, secure supply chains, and fire up manufacturing lines by nudging member states to pool procurement in certain capabilities that are seen as priorities.
These include ammunition, drone and anti-drone systems, air defence, military mobility, and electronic warfare among others.
How SAFE payments will work
If ministers approve the deal backed by ambassadors at the General Affairs Council on 27 May, member states will then have two months to draw up the projects for which they would like EU funds. To qualify, each project must include at least two countries. The Commission will then take up to four months to analyse them.
If the Commission’s response is positive, member states will be allowed to request the disbursement of a first envelope of up to 15% of the total estimated cost.
They will then need to keep the Commission appraised of the development of the project every six months, which could also lead to further disbursements. The last approval for disbursements can take place until 31 December 2030.
Why go through SAFE
The Commission enjoys an AAA credit rating from most of the major rating agencies including Fitch Ratings, Moody’s, and Scope.
So being loaned money from the Commission that it raised on the market may well be less costly for some member states than raising the funds themselves. SAFE will also provide long-maturity loans with a maximum duration of 45 years and a 10-year grace period for principal repayments.
The loans will meanwhile be backed by the EU budget, meaning that member states will not have to cough up additional money should repayment costs balloon like they did for the post-COVID recovery programme due to rising interest rates fuelled by the pandemic hit to the global economy and Russia’s war in Ukraine.
An additional advantage of using SAFE is that member states will not have to pay Value Added Tax (VAT) on the purchases.
Who could use it
Five member states have AAA ratings including Denmark, Germany, Luxembourg, the Netherlands, and Sweden. Several don’t even have an A rating such as Bulgaria, Greece, Hungary, Italy. Most are in between.
Latvia, which is rated A, has already indicated that it wants to tap into SAFE to fund its defence ramp-up. The small Baltic country plans to allocate 3.65% of its Gross Domestic Product to defence spending this year, rising to 4% next year.
Neale Richmond, the defence minister for Ireland, a militarily neutral country that enjoys an AA rating, said on Tuesday that the country will “absolutely look at this as a way to potentially procure more equipment quicker” or the opportunities it offers “when it comes to derogations on VAT” but that it “probably wouldn’t need the SAFE process in terms of accessing funds”.
A possible indicator of appetite is the uptake for the activation of the national escape clause – the other financial pillar of the Commission’s ‘Readiness 2030’ plan for defence. Fourteen member states have requested to be allowed to deviate from the bloc’s fiscal rules to boost defence spending, which the Commission views as a success.
These include Belgium, Bulgaria, Denmark, Estonia, Finland, Germany, Greece, Hungary, Latvia, Lithuania, Poland, Portugal, Slovakia and Slovenia.
Additionally, the fact that countries could decide to take up SAFE loans not to bolster their own stockpiles but to send more military support to Ukraine, could boost uptake in member states where increasing defence production and re-armament might be politically sensitive.
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