In 2025, the European Union launched its first-ever common borrowing programme for defence, the Security Action for Europe (SAFE). One year on, Brussels is already sketching out a second edition, but the path forward is fraught with political and practical hurdles. The most contentious question: should the next round shift from loans to grants, especially for countries on the eastern flank that have already stretched their fiscal limits?
SAFE allows EU member states to borrow low-interest loans for defence spending outside the bloc's fiscal stability framework, thanks to the so-called national escape clause. But as hybrid threats intensify—particularly drone incursions along the eastern border—countries like Estonia and Latvia are calling for a different approach. '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, speaking on condition of anonymity.
The Fiscal Ceiling Problem
The issue is that the member states most eager to boost defence spending have already hit the ceiling under current EU fiscal rules, even with the flexibility provided by the national escape clause. Estonia and Latvia, for instance, were unable to take additional loans under SAFE I. This has fuelled the push for grants, which would not add to national debt burdens. However, the European Commission must first assess how much money remains unspent from the first wave of SAFE loans, after countries like Italy and Romania scaled back their participation. Current estimates range between €8 billion and €18 billion, but the final figure will only be known once all loan agreements are concluded—expected by summer 2026.
Countries such as Poland and Lithuania are expected to submit a second round of financing requests, and the outcome of SAFE I will inevitably shape the prospects of SAFE II. 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.
Drone Incursions and Shifting Threats
Recent drone incursions suspected to be of Ukrainian origin, pushed into European airspace by Russian GPS jamming—known as spoofing—have shaken several eastern European countries. The disruption has been severe: Latvia's government fell following its delayed response to one incursion, and a drone entering Lithuanian airspace forced the president and prime minister to take shelter. These incidents are accelerating member states' uptake of SAFE loans and forcing EU policymakers to consider what comes next.
SAFE's stated purpose is not to directly fill military capability gaps, but to support the European defence industry, which lacks stable domestic demand and must 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—particularly in drone and counter-drone technology, where integrated, interoperable capabilities are essential for modern defence.
'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.
Ukraine's Battlefield Edge
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.
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 in drone and counter-drone sectors, are struggling to match the rapid innovation cycles seen on the Ukrainian front. As the EU debates SAFE II, the continent's ability to adapt to these new realities will determine not only the success of the financing tool but also the future of European defence autonomy. For more on how the EU is streamlining defence procurement, see our analysis: EU Streamlines Defence Procurement to Counter Russian Threats and US Disengagement.
