Defence: the EU is offering a second chance on Safe, and the government cannot afford to repeat the same mistake

The issue of defence has taken on a central role for the European Union and will also be significant for our country. Italy has activated two instruments, which are often conflated but are distinct: the SAFE and the NEC. The first, an acronym for Security Action for Europe, is the financial instrument that provides European loans to member states to invest in defence; the second, an acronym for National Escape Clause, is the national safeguard clause that allows member states to run a higher deficit outside the fiscal rules for defence (and energy).

In short, through the NEC, Europe is allowing member states to take on more debt to bolster security, and through the SAFE programme, it is offering them the chance to do so at preferential rates. Italy had submitted a SAFE plan for €14.9 billion, but in October – to appease discontent within the Lega – it requested only €8 billion. The agreement has been approved by the Commission and the Council, and all that remains is for it to be signed, which is expected to take place in November, after which Italy will receive 15 per cent pre-financing (1.2 billion) at the start of December.

Meanwhile, the European Commission has invited Member States to participate in the second round of applications for SAFE funds, amounting to €21.3 billion that remained unallocated in the first round, primarily by Italy and Hungary and, to a lesser extent, by France.

For this second tranche, the Commission ‘encourages’ member states, ‘in line with their national defence needs and priorities’, to use the funds to strengthen cooperation with Ukraine, including joint procurement with Kyiv in their investment plans. However, this is, in fact, merely a suggestion and not a binding requirement. Poland is also expected to take the lion’s share of this second round of funding, as it is already the largest beneficiary of the SAFE programme, having received 43.73 billion out of a total of 150 (30 per cent).

The Meloni government is not interested. It would be rather absurd if Italy, which just a couple of weeks ago had left around 7 billion on the table (a third of the total now available), were to participate in this second call. But, on reflection, it is even more absurd that it should not. At least from a strictly financial point of view. The starting point, in fact, is that the SAFE is a good deal: it is a loan on which repayments do not begin for ten years, with very long maturities of up to 45 years, and a better credit rating than Italy’s (and therefore a lower interest rate). It is the same logic by which the Next Generation EU loans – or the SURE loans during the Covid crisis – are more advantageous than issuing BTPs. “The [SAFE] instrument offers certain financial advantages over standard sovereign bond issues,” the government wrote in last April’s Draft Fiscal Plan.

But as well as being cost-effective, Safe loans are necessary. Because there is no obligation to use them for additional expenditure – quite the contrary. The original 14.9 billion plan presented by Italy and approved by the EU related entirely to expenditure programmes that had already been planned and included in the budget: “The SAFE loans,” the government explained in the DFP, “are consistent with the expenditure path for defence investments set out in current legislation.” This means that Italy could simply replace – for expenditure already planned in previous years – a more expensive source of funding such as BTPs with a more cost-effective one such as Eurobonds. This is precisely what the government has done in many cases, using PNRR loans for investments that were already planned. Indeed, this is the basic reasoning followed by all EU countries that have applied for the SAFE, with the exception of the eight – such as Germany and the Netherlands – that borrow on the market at lower rates than those of European debt.

In short, it would have been in Italy’s interests even before to request the full 14.9 billion in Safe funds, rather than just 8. And it is inexplicable that it did not do so. But now it is even more in its interests. Not only because BTP yields and the spread against the German Bund are rising, but because, in the meantime, through the activation of the NEC, Italy is planning – under this Budget Law – to spend a further 14.4 billion (0.6 per cent of GDP) over the next two years to strengthen its defence. This means that not only is there scope to reclaim the 7 billion of its SAFE allocation – which, inexplicably, the government waived a few months ago – but also to request a further slice of the 21.3 billion pie put on the table by the Commission to cover, via the SAFE, part of the increased expenditure under the NEC. This is exactly what countries such as Poland, Ireland and Greece are planning to do.

Amid a period of tension in the financial markets, particularly regarding government bonds (the yield on the 10-year BTP has risen from 3.4 per cent to 4.5 per cent in a year, whilst the spread has widened from 76 to 118 basis points), the Treasury finds itself having to issue 533 billion in debt by 2027: 13 billion more than this year, as the European loans under the NRRP will cease (they amounted to 24 billion in 2026). Replacing this source of funding with SAFE loans, the repayment of which will begin in ten years’ time, means removing issues from the market and easing the pressure on BTPs.

“We have decided to use less of it,” Deputy Prime Minister Antonio Tajani had said regarding the SAFE programme, “because we need to invest more in healthcare and social policies.” But the truth is exactly the opposite: rejecting SAFE funds reduces the scope for spending. The government still has time to rectify the situation: it can now request not only the 7 billion it turned down two months ago, but double that amount. If it has decided to invest in defence during times of economic hardship, the most ‘prudent’ choice – as Economy Minister Giancarlo Giorgetti would say – is to do so at the most favourable rates possible.