Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
EU capitals have agreed to launch a €150bn loans-for-arms fund backed by the bloc’s shared budget, in a landmark shift for Brussels spurred by Russia’s war against Ukraine and US President Donald Trump’s demands for Europe to spend more on its own security.
The initiative, which will allow EU countries to borrow from Brussels and spend on weapons systems and platforms through joint procurement, was proposed by the European Commission earlier this year as a means to speed up the continent’s rearmament.
It also seeks to expand the EU’s defence-industrial sector after decades of decline by diverting the majority of the cash to EU-based arms companies and encouraging non-EU subcontractors to relocate to the continent, according to the terms of the agreement seen by the Financial Times.
The scale of non-EU participation, particularly of UK, US and Turkish defence companies, was the most controversial element of the initiative, with France leading calls to ensure the majority of the money was spent in the bloc.
EU capitals on Monday agreed the loans can be spent on products where at least 65 per cent of the value of the components are from arms companies in the EU, Ukraine, Iceland, Liechtenstein, Norway and Switzerland, three officials briefed on the deal told the FT. It took months of haggling to reach an agreement.
Turkish participation was particularly sensitive for Greece and Cyprus, due to their long-standing dispute with Ankara over northern Cyprus, which split from the Republic of Cyprus after Turkey invaded and occupied the region in 1974.
“We cannot fund a defence industry in a country that actively challenges EU member states,” said one official involved in the talks. Greece has pushed for any Turkish involvement to be gradual, reversible and accompanied by concrete political concessions, even though the final vote for the approval of each individual loan does not require unanimity.
Arms companies in third countries, such as Britain’s BAE Systems, can account for a maximum of 35 per cent of the purchase value unless their country signs a bilateral defence pact with the EU, and then a separate technical agreement outlining the specific details of that relationship.
The UK and EU are set to sign that initial defence pact on Monday at a bilateral summit in London.
In addition, the contribution of any single non-EU subcontractor in any funded project is capped at 15 per cent. That can rise to 35 per cent if they have either an existing relationship with the main EU contractor involved or the EU contractor “commits to studying, within two years, the feasibility of replacing” it with an EU alternative, the terms of the deal state.
This “allows for flexibility” on non-EU contractors, one of the officials said.
The scheme will cover purchases of key capabilities including artillery ammunition, missiles and drones, air defence systems, strategic aircraft for military mobility and cyber and artificial intelligence systems.
As the initiative was proposed under emergency powers in the EU’s treaties, it did not require separate endorsement from the European parliament, and so would come into force before the end of the month after formal approval, two of the officials said.
Additional reporting by Eleni Varvitsioti in Athens
