The path to SAFE II: inside the struggle to revamp Europe's defence financing tool

EU policymakers are weighing a SAFE II defence financing tool, with Eastern-flank states pushing for grants over loans. But the final SAFE I uptake, the development of the European defence industry, Ukraine's battlefield-driven tech edge and shifting warfare scenarios are shaping what comes next. In 2025, Brussels launched its first-ever common borrowing programme for defence. One year on, EU policymakers are already planning a second edition of the flagship financing tool — with a push to shift from loans to grants — although several key questions about its future remain unresolved. The Security Action for Europe (SAFE) allows EU countries to borrow low-interest loans to finance defence spending outside the EU fiscal stability framework via the so-called national escape clause. The programme has been running for about a year. Recent hybrid threats on the eastern flank — notably drone incursions — are accelerating member states' uptake of the loans, while also forcing EU policymakers to consider what comes next. The most politically charged question for any revamp of SAFE is not whether reform is needed. Russia's war in Ukraine and the Trump administration's steady withdrawal from European security commitments make ramping up defence spending a geopolitical necessity. "SAFE II is a tricky situation. When we say SAFE II everyone thinks only about loans, but the countries that have already taken these loans, especially on the eastern flank, they are saying: We don't want loans anymore. We want grants," a Commission official told Euronews, asking not to be named given the sensitivity of the topic. The issue is that the member states most eager to increase defence spending have already hit the ceiling under current EU fiscal rules — even with the flexibility provided by the national escape clause. That is why Estonia and Latvia were unable to take additional loans under SAFE I. Several other hurdles remain before the European Commission can put forward a renewed version of the instrument. SAFE I, round two There is already significant appetite among European capitals for additional financing as defence spending soars. When the Commission first surveyed member states on their borrowing intentions under SAFE I, it asked governments to indicate a minimum and maximum. In total, member states expressed willingness to borrow up to €188 billion — almost €40 billion more than the €150 billion allocated. The immediate priority is to establish how much money will remain unspent from the first wave of SAFE loans, after countries including Italy and Romania scaled back their participation compared to initial allocations. Current estimates range between €8 billion and €18 billion, but the final figure will only be known once all participating member states have concluded their loan agreements — expected sometime this summer. Countries such as Poland and Lithuania are then expected to submit a second round of financing requests. The outcome of SAFE I will inevitably shape the prospects of a potential SAFE II. In recent weeks, several eastern European countries have been shaken by a series of drone incursions suspected to be of Ukrainian origin, pushed into European airspace by Russian GPS jamming — also known as spoofing. The disruption has been severe. Latvia's government fell following its delayed response to one incursion; a drone entering Lithuanian airspace forced the president and prime minister to take shelter. EU officials are wary that, politically, eastern flank member states will need to demonstrate that SAFE I funds have been spent effectively before any discussion of further joint borrowing, let alone grants. can advance. Defence industry SAFE's stated purpose is not to directly fill military capability gaps, but to support the European defence industry, which lacks a stable domestic demand and must therefore export to grow. "Member states do not want to be told how to spend their defence budget," a second Commission official said, pointing out that this is a jealously guarded national prerogative often aimed at bolstering domestic industrial players. That nation-first approach, however, risks producing a fragmented landscape that lacks scale — and particularly in drone and counter-drone technology, falls short of generating the integrated, interoperable capabilities that modern defence requires. "We will see the real impact of interoperability only in two years. Orders will start coming this year. Then we will see if there is enough coordination, but there is never enough," the first Commission official said. At the same time, the European defence industry faces a difficult position on new military technologies such as drones: not a shortage of production capacity, but an inability to keep pace with the battlefield innovations emerging from Ukraine. "At some point, Ukrainians will be able to produce everything that they need, including ballistic missiles. They're investing a lot. At the end, it will be Europeans buying from Ukraine's defence industry," the Commission official added. The role of Ukraine A telling example of how the war is reshaping European defence is the question of how much of the EU's latest €90 billion loan for Kyiv will be spent on EU-made equipment. Only around two thirds of that sum will go towards purchasing military materiel. While Ukraine is encouraged to buy European, EU officials acknowledge that Europe's production does not fully meet Kyiv's requirements. That is why senior Commission officials have been working to bring European producers together with Ukrainian procurement authorities, to ensure that supply matches demand. The EU still lacks capacity in critical areas — most notably anti-ballistic missiles. Ukraine relies primarily on the US-made Patriot air defence system; while it has expressed interest in the Franco-German SAMP/T, production remains far below what Kyiv needs. In practice, Ukraine is likely to spend the bulk of the EU-borrowed money on its own defence industry, especially in sectors where it holds a clear advantage — including its battle-tested drone technology. The risk of European industry falling behind is compounded by the fact that EU-based defence firms, particularly smaller ones, require long-term orders to justify investment in new production facilities. EU officials therefore see joint ventures with Ukrainian defence companies as a way to embed their expertise and technological edge into Europe's production lines — though some capitals fear this could allow Kyiv to absorb their national champions. Future scenarios As Commission officials contemplate a potential SAFE II, they must also weigh the strategic scenarios in which that spending would have to take place. The US government's growing disengagement with Europe, the shifting battlefield in Ukraine and the ongoing crisis in the Strait of Hormuz are all adding to uncertainty in the international order. For many European capitals, a central concern is the US government's stated intent to gradually reduce its commitment to European security, not just in terms of conventional forces, but also in terms of the so-called strategic enablers that form the logistical backbone of modern military operations. On Tuesday, Defence Commissioner Andrius Kubilius warned that replacing US military assets in Europe could cost the EU up to €500 billion, a gap so substantial it is unthinkable member states could fill it in on their own. "We need to start thinking about how to incentivise member states to develop their strategic enablers capabilities," the Commission official said, noting that designing the financial instrument accordingly is difficult given that demand for such capabilities remains unclear. "For what war are we preparing? How the front line looked in 2022 is very different from how it looks now. We don't know what it is going to look like in 2030," the official concluded.