About half of the 27 EU Member States have already notified the European Commission about their intentions to activate the national escape clause of the Stability and Growth Pact to increase their defence spending but there is still uncertainty about the funding and how it will be used.

A Commission spokesperson announced on Friday that the number had reached 13 countries:  Belgium, Denmark, Estonia, Finland, Germany, Greece, Hungary, Latvia, Lithuania, Poland, Portugal, Slovakia and Slovenia. The Commission described the interest in the activation of the clause as a success and expects that the number will continue to rise.

In total, the EU wants to boost €800 billion in the ReArm Europe Plan for defence spending. The activation of the emergency clause is the first pillar of the plan and aims at ramping up €650 billion in defence spending, leading to an increase by 1,5 % of GDP in defence spending in 2025 – 2028 from the baseline in 2021. The total figure for the first pillar is tentative and cannot be updated for the moment.

Four of the biggest Member States - France, Italy, Spain and The Netherlands - have not yet decided to activate the escape clause but they and other countries might increase their defence spending without activating the clause.

This is the first time the clause is activated and its use depends on three conditions: 1) exceptional circumstances outside the control of the Member States (the war in Ukraine and the threat to European security) that 2) will have an impact on their public finances but 3) will not endanger fiscal sustainability in the medium term.

European joint procurement

The second pillar is a new dedicated instrument called SAFE (Security Action for Europe). The Commission plans to raise up to €150 billion on the capital markets to increase investments in Europe's defence capabilities. The money will be offered in form of loans to the EU Member States for joint procurement of military equipment from dominantly the European defence industry.

This instrument has not yet been adopted by the Council. After its adoption, countries will have six months to apply for loans.

As previously reported, negotiations are still on-going behind the scenes about what counts as ‘European’ investments. Governments generally want flexibility while Europe’s defence industry wants the €150 billion to remain largely within Europe. The joint procurement is also open for third countries that have signed security and defence partnerships with the EU.

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Until now, six countries (Moldova, South Korea, Norway, Japan, Albania and North Macedonia) have signed such partnerships. The list consists of candidate countries, that are required to align with EU’s Common Security and Defence Policy (CSDP), and countries with military alliances with the US and located in geopolitical regions with growing tension.

According to the Commission’s proposal for the SAFE regulation, the cost of components originating in the Union, in EEA EFTA States or Ukraine shall not be lower than 65 % of the estimated cost of the end product. No component shall be sourced from another third country that contravenes the security and defence interests of the Union or its Member States.

In addition to the ReArm Europe Plan, the Commission announced last week that it is investing €910 million under the European Defence Fund (EDF) to create a strong and innovative defence industry in Europe.

These investments aim to close key capability gaps – like force mobility and drone defence – through innovation and collaboration across European science and industry. For the first time, Ukrainian defence industries can be associated to EDF projects. The investment round has attracted close to 300 proposals, bringing together 625 legal entities from 25 EU Member States or Norway.

According to an op-ed in The Brussels Times, defence spending is currently too fragmented. Member states maintain their own weapons systems, reward their own firms with defence orders and end up producing a mishmash of systems without interoperability.

EU’s dependence on imports

As regards SAFE, non-EU countries can contribute to the remaining 35 % if they have companies with headquarters or production sites in the EU, a Commission spokesperson explained. Asked if military equipment can be manufactured by third countries and then exported to those countries that ordered them, the Commission replied that companies based in Europe can participate in the procurement process.

The Commission referred to its proposal which states that contractors and subcontractors involved in the common procurement shall be established and have their executive management structures in the Union, EEA EFTA State or Ukraine. However, the proposal leaves also the door open for the use of resources outside those countries.

According to SIPRI’s recent report on international arms transfers, the US is the dominant global arms exporter and supplied 64 % of the arms to European NATO members. The other main suppliers were France and South Korea (6.5% each), Germany (4.7%) and Israel (3.9 %). Will the ReArm Europe Plan reduce the EU’s dependence on imports of arms?

Pieter Wezeman, senior researcher in SIPRI's Arms Transfer programme, is sceptical. “It’s still not clear what the plans will include and if the EU will set any conditions on Member States’ procurement related to defence spending,” he told The Brussels Times.

A large part of current military spending goes to personnel and operations instead of arms procurement. “Considering the close relations between the European arms industry and the industry in the rest of the world (including European subsidiaries and collaboration projects outside Europe), it would seem difficult to set rules for how to invest in the European defence industry.”

He noted that the demand for weapons from Israel has remained high, also in Europe, despite calls for an arms embargo by some EU Member States. A decrease in potential demand for Israeli weapons has been offset by European states trying to acquire new weapons in reaction to Russia’s war of aggression against Ukraine.

According to the Commission’s White Paper for European Defence Readiness 2030, the case for an EU-wide market for defence equipment has become much stronger. Member States are buying, compared to a decade ago, up to four times more equipment, often from non-EU suppliers. However, no European national defence market has the size required to sufficiently scale up the European defence industry.