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To incentivise European Union governments to spend more on defence, the European Commission up to €150 billion of EU loans for joint procurement projects (known as SAFE, Security Action for Europe). The Commission also proposed the triggering of the so-called national escape clause (NEC) – a deviation from the EU’s fiscal rules – which can be seen as providing legal cover to access SAFE without being sanctioned for fiscal-rule breaches. 

Because of budgetary concerns or national preferences, not all EU countries are keen to spend more on defence. However, take-up of SAFE and NEC by a critical number of countries could be a first step in the construction of genuinely European instruments. Ensuring sufficient take up may turn on the positions of ‘pivotal countries’, whose decisions – for better or worse – will determine the choice of the other member states. Two examples help illustrate this point. 

First, between 1992 and 1993, the (ERM) – intended to ensure financial stability as part of the introduction of the euro – was hit by crises affecting the Italian lira and sterling, and then by the massive financial inflows into the Deutschmark resulting from the demand shock associated with German reunification. To protect the ERM, France in July 1993 proposed a unilateral floating of the mark against all other currencies in the European monetary system. 

The Dutch government immediately declared that its currency (the guilder) would follow the mark in its appreciation. This decision reportedly triggered a dramatic discussion in the Belgian government during a period of national mourning following the death of King Baudouin. The government’s Flemish component wanted to stick to the ‘franc fort’ policy that pegged the Belgian franc to the mark and the guilder, while the Francophone component leaned towards the French plan. 

Luxembourg influenced this discussion by allegedly threatening to rescind the that had been extended for ten years in 1992, thereby abandoning its peg to the Belgian franc. Ultimately, the Flemish position prevailed and on 2 August 1993 the old ERM collapsed. The currency bands were widened to plus and minus 15%. Belgium had played a pivotal role. 

Second, in spring 2020, the European Stability Mechanism (ESM) agreed to launch a pandemic facility in response to the COVID-19 crisis. The initiative allocated loans of up to 2% of the GDP of each potential beneficiary at very favourable interest rates, without introducing macroeconomic conditionality typical of classic ESM interventions. But this facility failed in its purpose. 

The pivotal country in this case was Italy. Fearing the stigma attached to the traditional financing of the ESM as a ‘bail-out’, Italy declined the advantages it would have derived from the utilisation of the pandemic facility. This choice influenced the decisions of the other euro-area countries and the facility remained unused, eventually to be buried by the adoption of the . Consequently, the ESM remained confined to its original role of bailing out countries affected by structural crises. It might be argued that the failure of the ESM pandemic initiative hindered more advanced use of the ESM down the line. 

So, for the success of SAFE and NEC, which countries are pivotal? For SAFE, the pivotal country could be France. Even with the current volatile international situation (and domestic difficulties), France’s financial burden would fall only marginally if European funding replaced part of national funding for new defence projects. Demand for SAFE from France would therefore provide a strong signal to other EU countries. It could even push Germany and other countries with lower rates of return on their bonds than on comparable European bonds to use SAFE, sacrificing short-term benefits in favour of a long-term European commitment. Such an outcome would bring European bonds closer to sovereign status, improving their market conditions and activating a virtuous circle.  

For the NEC, the pivotal country appears to be Spain, which is averse to defence spending and has a public deficit close to but below the EU fiscal rules threshold of 3%. A Spanish decision approving the triggering of the NEC would be a strong signal that this can be a first step towards the creation of more advanced EU instruments for both defence and competitiveness.  

The success of SAFE and NEC is neither a foregone conclusion nor the EU’s final answer to current geopolitical threats. A European Defence Mechanism that could be seen as an alternative and more ambitious option to SAFE has already been discussed by EU finance ministers. Meanwhile, the European Commission has urged EU countries to apply for the NEC by the end of April. To achieve a critical mass of participation and enhance the European value of the two initiatives, it is crucial that pivotal countries step in and embrace the two instruments.