The Big Bang? European Commission unveils proposals to support surge in defence spending, reduce reliance on third countries

On 19 March 2025, the European Commission unveiled new draft measures to help Member States ramp up defence spending by 2030 among mounting concerns about Europe's security. The proposals reflect a renewed push to coordinate spending, provide opportunities for the European defence industry and reduce reliance on non-EU foreign suppliers. We highlight the most important elements of this EU defence package and identify the next steps.

Background

At a recent emergency summit, EU leaders agreed that the EU must take more responsibility for its defence policy and endorsed proposals by the European Commission – outlined in its ReArm Europe Plan – to enable EU Member States to substantially increase defence spending. The EU's defence package of 19 March, jointly prepared by the EU's High Representative for Foreign Affairs and Security Policy and its first-ever Commissioner for Defence and space, delivers on those proposals amidst growing concerns about European security.

The package has three parts, which require further steps to be implemented. First, a proposal for an emergency EUR 150 billion loan facility to support the European defence industry through joint defence procurements, named Security Action for Europe ("SAFE").¹ Second, a communication to Member States inviting use of the National Escape Clause ("NEC") under EU budget discipline rules – allowing a deviation from agreed expenditure for up to a maximum of 1.5% of GDP on defence spending – from 2025 until 2029.² Third, a White Paper outlining a five-year roadmap for the EU's defence priorities to address growing external security threats, including by filling capability gaps, using joint EU defence procurement and considering further legislative proposals.³

The proposed measures mainly seek to ensure that increased EU defence spending leads to increased EU autonomy and reduces its reliance on third-country suppliers. This is expected to impact market access for important supplier countries, including the United States and the United Kingdom. Another key objective is to simplify rules impacting the defence industry with the aim of moving towards a single EU defence market.

Buy European conditions

The new EU package aims to ensure that increased defence spending strengthens the EU's defence industry and reduces dependencies. This is achieved by prioritizing European suppliers and equipment, thereby generally restricting market access for third country contractors.

The SAFE proposal would allow Member States to request loans from the European Commission to procure defence products addressing certain capability gaps, including with respect to air and missile defence, strategic enablers (such as airlift) and drones. Certain short-term measures for joint procurement⁴ and industrial ramp-up⁵ adopted in 2023 offered flexibility to use EU funding for projects involving third-country products. In contrast, projects using SAFE loans would have to meet more restrictive eligibility criteria:

• Contractors must be established and have their executive management structures in the EU/EEA or Ukraine; infrastructure, facilities, assets and resources of contractors or subcontractors must also be located within such countries, with limited exceptions. Contractors subject to third country (entity) control would be excluded unless security guarantees are provided to the relevant Member State, or the entity has undergone FDI screening.
• Defence products would be excluded from SAFE if the cost of components originating in the EU/EEA or Ukraine represent less than 65% of their value. Advanced systems, such as air and missile defence systems, must additionally meet a requirement that the supplying contractor holds the authority to decide on its definition, adaptation and design evolution without third country (entity) restrictions, which may be understood to refer to approval requirements under foreign export control regulations.

To strengthen these "Buy European" conditions for EU defence investment and procurement, the White Paper proposes adding an EU supplier preference to the EU Defence Procurement Directive as part of its 2026 revision.⁶ Member States are also invited to privilege EU industry and service providers when using the NEC for defence procurement.

Notably, under SAFE, acceding countries, candidate countries, and third countries with whom the EU has concluded Security and Defence Partnerships could participate through bilateral or multilateral agreements with similar eligibility conditions for their industries. The EU has concluded partnerships with Japan and South Korea. Third country contractors seeking access to EU joint procurement programs should therefore check the scope of the proposed eligibility rules and/if their governments are pursuing similar agreements.

Regulatory simplification

To improve the competitiveness of the EU defence industry and move towards a single EU defence market, the White Paper also proposes a set of regulatory simplifications. Whereas the precise contours of these changes are yet to be determined, the range of legislation the Commission proposes to review suggests they could significantly impact the defence industry.

The White Paper announces a Defence Omnibus proposal to amend various EU rules deemed to impede the EU defence industry's growth, including to:

• remove obstacles related to access to finance, including sustainability rules, with the aim to encourage financial sector investment in the defence industry;
• introduce priority environmental and construction permit-granting for defence industry projects, expected to draw on existing EU legislation for priory raw materials and semiconductor projects, etc.;
• reduce any legal impediments to sourcing of inputs for defence applications, as defence products are often impacted by EU product and chemical safety regulations; and
• simplify treatment of Member State funding for joint procurement under EU defence industry initiatives, which are subject to EU state aid rules but not always exempt from prior approval.

As part of a contemplated review of existing defence-related EU legislation, the White Paper also proposes to simplify and harmonize EU rules on both defence procurement and intra-EU transfers of defence equipment.⁷ The rules governing the EU Defence Fund,⁸ the importance of which is underscored by recent court cases,⁹ are also expected to be overhauled.

Financing the Big Bang

Public investment is indispensable to defence spending, but as indicated above, the White Paper recognizes that defence-related initiatives will also require private capital for defence projects. This would open new opportunities for the EU financial sector. The Commission proposes several measures to improve access to capital for the EU defence industry, including:

• opening investment policies for defence projects, including by limiting the European Investment Bank's exclusion policy for defence investments (guiding private financial institutions' internal policies);
• clarifying how the EU's Sustainable Finance Disclosures Regulation applies to defence companies,¹⁰ and amending sustainability rules impeding defence sector investment as part of the Defence Omnibus; and
• incentivising European pension funds and insurers to make defence investments, as detailed in the Commission's Savings and Investment Union strategy.¹¹

Next steps

Many details are still unclear, but the EU defence package reflects a broad consensus that Member States must spend more on defence and should do so jointly which will strengthen the EU defense sector. This will have an impact on EU defence market access for third countries. However, the proposed measures will first need to be adopted, and the next steps are:

• Member State use of the NEC for increased defence spending requires a Council recommendation based on a Commission recommendation.¹² Member States are expected to submit such requests by April, allowing the Commission to prepare its recommendation by June, and the Council to grant the authorisations in July.
• Making the SAFE proposal EU law requires adoption in the Council by a qualified majority vote. Whilst this procedure sidesteps the European Parliament, discussions within the Council might take time, given the political sensitivity of the eligibility rules included in the Commission proposal (as shown by previous related proposals).¹³
• The legislative proposals referenced in the White Paper must be prepared before they can be considered and adopted as EU law. For example, the target date to issue the Defence Omnibus proposal is currently June 2025. It will be preceded by a Strategic Dialogue with industry, and businesses can flag regulatory hurdles in a consultation which closes on 22 April 2025.

_{1 Proposal for a Council Regulation establishing the Security Action for Europe (SAFE) through the reinforcement of European defence industry Instrument, 19 March 2025, available here.
2 Communication from the Commission on accommodating increased defence expenditure within the Stability and Growth Pact (SGP), 19 March 2025, available here.
3 Joint White Paper of the Commission and the High Representative of the Union for Foreign Affairs and Security Policy for European Defence Readiness 2030, 19 March 2025, available here.
4 See Regulation 2023/2418 of 18 October 2023 on establishing an instrument for the reinforcement of the European defence industry through common procurement (EDIRPA), OJ L 2023/2418, available here.
5 See Regulation 2023/1525 of 20 July 2023 on supporting ammunition production (ASAP), OJ 2023 L 185, available here.
6 See Directive 2009/81/EC of 13 July 2009, OJ 2009 L 216, available here.
7 See Directive 2009/43/EC of 6 May 2009, OJ 2009 L146, available here.
8 See Regulation 2021/697 of 29 April 2021, OJ 2021 L170, available here.
9 See Cases T-617/22 (Safran Aircraft Engines v. Commission), T-134/23 (Institut Jožef Stefan v. Commission) and T-1191/23 (Fincantieri NexTech v Commission).
10 Regulation 2019/2088 of 27 November 2019, OJ 2019  L317, available here.
11 See Communication from the Commission on the Savings and Investments Union A Strategy to Foster Citizens' Wealth and Economic Competitiveness in the EU, 19 March, available here.
12 Article 26(1) of Regulation 2024/1263 of 29 April 2024 on the effective coordination of economic policies and on multilateral budgetary surveillance, OJ L, 2024/126, available here.
13 Council negotiations on similar rules under the proposal for a European Defence Industry Programme (EDIP) have been stalled for over a year due to disagreements on eligibility of non-EU products for joint procurement.}

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