At last week's European Council meeting, EU leaders agreed to fund the Security Action for Europe — known as SAFE. Under the plan, the European Commission will borrow €150 billion from capital markets, and a framework has been set for how EU member states can access and use the funds.

Foreign Minister Margus Tsahkna (Eesti 200) said Estonia would definitely try to obtain as much of this low-cost loan financing as possible.

"But we need to understand that we're not talking about €150 billion as a joint EU budget allocation. We're talking about a mechanism that allows member states to borrow on better and longer-term terms and then invest that money themselves," he said.

"This money can be used, for example, to support investments in Ukraine's defense industry and for general aid to Ukraine. And importantly, it's not limited to purchases from the European defense industry — we're also talking about the United Kingdom, under certain conditions the United States and potentially Turkey," Tsahkna added.

According to Member of the European Parliament Sven Mikser, one particular feature of the SAFE instrument is that while it offers more favorable loan terms, for countries like Germany — whose credit rating is already extremely high — the loans might not be cheaper at all.

"When it comes to loosening EU fiscal rules, there's also a trick here: we must avoid the illusion that countries which have already budgeted extra funds for defense investments simply reclassify those expenditures as loan-based in order to free up resources for other purposes. If that happens, the result is higher debt and a worsened financial position — without any real increase in defense funding," Mikser said.

Tsahkna noted that the Ministry of Finance is currently analyzing how much of the SAFE funding Estonia could take on and how much it will need to borrow independently. The final figures should become clear during negotiations for next year's state budget and the new medium-term fiscal strategy.

"But in any case, Estonia will need to borrow. There's no question about that," he said.

The loans are needed to raise Estonia's defense spending from the current 3.4 percent of GDP to 5.4 percent. That would mean an additional €800 million in annual state budget expenditures.

"Even with full access, SAFE alone won't cover it all. Estonia will need to use a blended financing model," Tsahkna noted.

NATO member states recently agreed to raise defense spending to 5 percent of GDP in the coming years. Of that, 3.5 percent must go toward military expenses, and 1.5 percent can be for other defense-related spending, such as infrastructure.

"When we talk about that 1.5 percent, yes, infrastructure investments can count toward it. For example, Rail Baltica clearly falls within those figures, along with cyber capabilities and so on," said Tsahkna.

Will big money fuel the economies of major powers?

Mikser pointed out that as European countries significantly ramp up their defense budgets, questions will arise about Estonia's economic competitiveness — especially if it starts purchasing weapons from countries like France and Germany.

"If we enthusiastically reallocate every other line item in the budget to build up defense capabilities, what we're really doing is creating jobs in Germany and France — stimulating their economies by buying their technologies. Meanwhile, if those countries take a more relaxed approach and use their own resources to maintain social cohesion or other priorities, then we actually lose out in terms of overall competitiveness," Mikser said.

According to Tsahkna, a large amount of money is indeed about to flow into the defense industry market. However, production capacity in the sector is not keeping pace, meaning demand currently exceeds supply.

"To give a simple example, Estonia would like to buy certain U.S. systems in larger quantities today — but we can't get them as quickly as we'd like. That's the concern: until the industrial machine gears up, we'll definitely see price increases. And we may also see large global defense companies unwilling to adopt the kinds of innovations that Ukrainians have developed — solutions that are cheaper, more effective and perhaps involve capabilities that NATO hasn't even factored into its conventional planning," he said.

"Our headache in Europe is figuring out how to invest this money quickly and efficiently — so that it actually results in increased defense capabilities. And that's no simple task," Tsahkna said.

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