Executive Context
This ABT policy research piece draws on the December 2025 International Institute for Strategic Studies report, The SAFE Regulation and Its Implications for Non-EU Defence Suppliers, by Ester Sabatino and Tim Lawrenson, and reframes its findings for policy, investment, and strategic advisory audiences.
The report examines one of the most important recent shifts in Europe’s defense-industrial policy. The European Union’s Security Action for Europe through the Reinforcement of the European Defense Industry Instrument, known as SAFE, was launched in March 2025 under the broader ReArm Europe Plan/Readiness 2030 and adopted by member states in May 2025. With EUR150 billion in available funding over the 2025–2030 period, SAFE is not a marginal program. It is a major policy tool designed to accelerate common procurement, strengthen the European defense industrial base, and reduce external dependence in critical capability areas.
What makes the SAFE framework especially important is that it combines large-scale financing with strict eligibility rules. It is therefore not just a funding mechanism. It is a regulatory instrument for shaping the future structure of the European defense market. The IISS report shows that, while SAFE formally allows some third-country participation, its practical design may narrow that opening considerably.
For non-EU defense suppliers, including those from close partner countries, the implications are substantial. SAFE may create new opportunities in a limited set of cases, but it also introduces content restrictions, design-authority conditions, and negotiation hurdles that could make participation more difficult than many initially expected. From a policy standpoint, this raises deeper questions about how far Europe can push defense-industrial autonomy without sacrificing speed, interoperability, innovation, and access to trusted external capabilities.
Problem Framing
The central issue highlighted in the IISS report is that SAFE seeks to achieve two goals simultaneously. On the one hand, it seeks to strengthen the European Defense Technological and Industrial Base by directing funds toward products produced mainly within the EU. On the other hand, it operates in a defense market that has long depended on cooperation with non-EU suppliers, cross-border joint development, and complex multinational supply chains.
That tension matters because the European defense ecosystem is not self-contained. Many defense products used by European armed forces include non-EU components, involve international design relationships, or rely on longstanding industrial cooperation with countries outside the bloc. In that sense, third-country participation is not an exception to Europe’s defense reality. It is part of the market’s structure itself.
According to the IISS analysis, a major constraint is SAFE’s rule on product funding: items may have no more than 35 percent of their value from non-EU components. This appears to allow outside participation, but many systems with non-EU partners already exceed that threshold. SAFE may exclude a range of strategically relevant products that are available at scale and already integrated into procurement practices.
The second major challenge is the regulation’s requirement that, for certain category-two products, EU entities must have the effective ability to define, adapt, and evolve the system’s design without restrictions from third countries or third-country companies. The IISS report argues that this requirement may be even more consequential than the 35 percent threshold because it goes to the heart of technical control, intellectual property, legal authority, and lifecycle management.
The broader problem, then, is not simply whether SAFE allows third-country involvement in principle. It is whether the terms of that involvement are realistic in practice for advanced defense products, especially under compressed deadlines and politically sensitive negotiation processes.
Policy Analysis
The IISS report makes clear that SAFE is unprecedented in scale relative to earlier EU defense instruments. With EUR150 billion in loans over five years, SAFE is expected to inject funding into the European defense market at a level that could equal roughly a quarter or more of annual EU defense procurement spending. This alone makes the instrument strategically significant.
Unlike earlier grant-based mechanisms, SAFE relies on long-maturity EU loans to member states. This gives participating countries access to relatively attractive financing terms, including long repayment periods, possible pre-financing, and VAT exemptions on relevant procurements. Unsurprisingly, demand for the facility was strong. As the IISS report notes, preliminary requests submitted by member states exceeded the total SAFE budget, showing that governments see real value in the financing structure.
But the report also says that funding comes with strict compliance obligations. SAFE supports common procurement involving at least two member states and prioritizes products mostly made in the EU. The regulation uses financial measures to shape industrial behavior, not just to facilitate acquisitions.
The 35 Percent Threshold
Article 16.10 is one of the most important provisions affecting third-country suppliers. It allows a SAFE-funded product to contain up to 35 percent of its estimated component value from outside the EU, the EEA EFTA area, and Ukraine.
The IISS report suggests that while this provision may look generous in abstract terms, it is restrictive in the actual defense market. Products led by non-EU prime contractors often do not fit within that threshold unless final assembly and a substantial portion of supply-chain value have already been moved into Europe. Even where companies are willing to localize more activity, shifting suppliers, qualifying new production arrangements, and certifying changes can take time and money that do not align easily with SAFE’s timelines.
The problem becomes even more complex for collaborative programs. Products jointly developed with non-EU partners may involve third-country contributions that exceed the 35 percent rule, even where the system is closely tied to European capability needs. The regulation, therefore, does not just affect imports of finished products. It may also constrain cooperative industrial models that have evolved over many years.
The IISS report also points to an implementation challenge. Determining the exact component share by geography is not straightforward in defense manufacturing. Supply chains are layered, value is added across multiple stages, and commercial data can be sensitive. Even if authorities assess only the first level of the supply chain, as some officials indicated, the compliance burden remains substantial. Under these conditions, member states may prefer to avoid borderline cases and choose systems with clearly low non-EU content.
The Design-Authority Requirement
The IISS report treats Article 16.11 as a potentially more serious barrier than the 35 percent rule. For category-two products, SAFE requires EU-based contractors to be able to determine the definition, adaptation, and evolution of the design of the procured product without restrictions imposed by third countries or third-country entities. This includes the legal authority to substitute or remove restricted components.
The report’s interpretation is that this goes well beyond routine maintenance or localized support rights. It suggests that the rule effectively requires a significant, and in many cases nearly complete, transfer of design authority to the EU. That is a profound requirement in the defense sector. Design authority involves responsibility for the technical integrity, configuration, certification, safety case, and continuing evolution of a system. It is usually embedded in accumulated engineering data, software, testing records, tacit knowledge, and intellectual property owned by the original manufacturer.
The IISS report argues persuasively that full transfer of this authority is rare and often impractical, especially for complex systems or major subsystems such as radars, engines, naval platforms, or advanced electronic systems. Even in close defense partnerships, original manufacturers usually retain some core role because the legal, technical, and commercial burdens of transferring total control are too great.
This means the SAFE rule may be less a manageable condition and more a structural exclusion mechanism. It could block certain non-EU technologies from the market. That could affect whole systems and important subsystems. This reduces practical space for third-country participation, even if such participation might help with timely delivery and operational effectiveness.
Timelines, Incentives, and Policy Behavior
The IISS report highlights how SAFE’s deadlines shape behavior. Member states had to submit procurement plans by November 2025. Supported projects must finish by 2030. These are demanding deadlines, even for European-only industrial arrangements.
Once third-country content calculations, design-authority questions, eligibility guarantees, and political uncertainty are added, the compliance burden rises sharply. In such a setting, governments are likely to choose the simplest path to approval. That usually means selecting products that clearly meet EU-focused criteria rather than systems that raise more interpretive questions.
The effect is important. Even if the regulation does not explicitly ban non-EU suppliers, it may discourage their inclusion. Administrative and political barriers make their participation harder to justify.
Enhanced Participation for Selected Third Countries
One of the most notable features of SAFE is that it allows some third countries to seek enhanced participation terms. According to the IISS report, this applies to countries acceding to the EU, candidate countries, potential candidates, and countries with a Security and Defense Partnership with the EU.
This created a pathway for countries such as Canada, South Korea, Turkiye, and the United Kingdom. Yet the IISS findings show that the reality of enhanced participation was far more constrained than the formal opening suggested.
Only Canada and the United Kingdom entered negotiations. Canada eventually reached an agreement, but only on 1 December 2025, after member states had already submitted their procurement plans on 30 November 2025. The timing greatly limited Canada’s practical ability to shape that first wave of SAFE-supported procurements.
The UK did not secure an agreement. The IISS report highlights the political and financial complexity of the talks, particularly regarding participation fees. Given the depth of UK integration with European defense supply chains, that failure is especially significant. It suggests that even highly interconnected and strategically aligned partners may struggle to obtain workable terms under the EU framework.
South Korea and Turkiye were not invited into full negotiations. The report indicates that political considerations weighed heavily, suggesting that enhanced participation is not simply a technical or market-based process. It is also a political one, and not all partners appear to receive equal consideration.
Implications
The IISS report carries several important implications for policy, strategy, and defense-industry planning.
First, SAFE confirms that the EU is using industrial policy more aggressively in the defense sector. By attaching large-scale financing to rules on content, production location, and design authority, the Union is trying to reshape incentives across the market. This is a meaningful shift from funding cooperation to structuring the market itself.
Second, the regulation may narrow the real participation of non-EU suppliers more than public discussion initially suggested. Formal inclusion remains possible, but the combined effects of the 35 percent threshold, design-authority requirements, timing pressures, and the complexity of political negotiation make access difficult in practice.
Third, this could alter the pattern of European defense cooperation. If SAFE proves too restrictive for trusted external partners, more procurement and industrial collaboration may occur outside EU frameworks through bilateral arrangements, ad hoc deals, or other non-EU channels. That would weaken the EU’s ambition to make its own framework the main platform for European defense-industrial coordination.
Fourth, the regulation may have operational effects beyond industry policy. If important third-country systems or subsystems are excluded, Europe may face trade-offs involving speed of delivery, industrial capacity, and interoperability. The IISS report notes that where the European industrial base cannot deliver independently at the necessary pace, greater reliance on external partners may still be required to meet the 2030 readiness target.
Fifth, the treatment of the UK is especially revealing. The absence of an agreement with London may have longer-term consequences for UK-EU defense-industrial relations. Given the depth of existing industrial interconnections, exclusion from SAFE could complicate future involvement in EU-backed defense initiatives more broadly.
Strategic Recommendations
Credit industrial reality in policy design
EU policymakers should ensure that industrial autonomy goals are grounded in the actual structure of defense production. Europe’s defense market remains deeply interconnected with close external partners, and policy should reflect that reality rather than assume rapid substitution is always feasible.
Clarify the meaning of design authority.
The EU should provide more precise guidance on which design control is required under SAFE, and whether, in specific cases, delegated, shared, or limited-transfer models can satisfy the regulation.
Reassess the rigidity of the 35 percent rule.
A more flexible framework for trusted partners could help preserve access to strategically useful systems without abandoning the broader objective of strengthening the European industrial base.
Reduce uncertainty for member states.
Governments need clearer compliance standards on content calculations, contractor eligibility, and supply-security justifications. Without that clarity, procurement choices will naturally become more conservative and less innovative.
Make enhanced participation more transparent.
If the EU wants selected partners to remain meaningfully connected to its defense-industrial projects, the negotiation process for enhanced participation must become more predictable, less politically opaque, and better aligned with procurement timelines.
Balance autonomy with interoperability.
The pursuit of European industrial capacity should not come at the cost of operational compatibility with close allies. Strategic autonomy is stronger when it supports security effectiveness rather than unnecessarily narrowing cooperation.
Closing the Cooperation Gap
The IISS report by Ester Sabatino and Tim Lawrenson offers an important warning about the gap between regulatory intention and industrial reality. SAFE is ambitious, well-financed, and politically significant. It reflects the EU’s determination to strengthen its defense industrial base and to move faster in response to a deteriorating security environment.
But as the report shows, ambition alone does not eliminate structural complexity. The European defense market is built on layers of cooperation, licensing, component sourcing, and long-developed relationships with non-EU partners. Rules meant to increase autonomy may, if applied too rigidly, also reduce flexibility, slow delivery, complicate procurement, and weaken cooperation with trusted allies.
This is where ABT Investment and Consulting LLC can add value.
ABT Investment and Consulting LLC works at the intersection of policy analysis, strategic advisory, institutional assessment, and geopolitical risk. In sectors where regulation is reshaping markets and redefining cross-border participation, the firm helps decision-makers understand not just what a policy says, but what it is likely to do in practice.
Through its advisory work on policy, trade, strategic industries, and institutional design, ABT Investment and Consulting LLC is well-positioned to help governments, businesses, and stakeholders interpret the evolving European defense-industrial landscape. That includes assessing how SAFE may affect supplier access, market structure, partnership choices, compliance burdens, and long-term strategic positioning.
SAFE is not just a European funding program. It is a signal about the future direction of defense-industrial policy in Europe. The critical question now is whether that direction can strengthen European capacity without weakening the trusted partnerships that remain essential to capability delivery and collective security.
Source Note: This ABT policy research analysis is based on the International Institute for Strategic Studies report, The SAFE Regulation and Its Implications for Non-EU Defense Suppliers by Ester Sabatino and Tim Lawrenson, published in December 2025.
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