Why Europe’s “buy EU” Principle Has More Opportunities For Third-country Businesses Than Might Appear

As the European Union accelerates efforts to strengthen its defense sector, new initiatives are reshaping procurement policies and supply chain strategies. Here we explore what this shift toward “Buy EU” requirements means for member states and private capital firms exploring opportunities in the EU defense market. 

Summary

The EU's “Buy EU” principle is being strengthened as part of broader efforts to enhance the region’s defense sector and supply chain autonomy.

New procurement policies allow member states more flexibility to exclude non-EU suppliers, tying the award of EU funds to compliance with these rules.

However, despite these measures, member states can still invoke national security exemptions to award contracts to local or certain third-country suppliers.

Amid the desire to rapidly upscale EU defense investment, and thereby promote the EU’s own defense industrial capabilities as well as boost collaboration between member states, the European Commission is pushing to establish a European defense supply chain. This is seen in Brussels as an essential step towards greater sovereignty, autonomy, and resilience in an increasingly complex geopolitical environment.

“Buy EU” incentives and requirements are the critical means to achieve this goal. Here, the EU’s approach is twofold. First, to provide greater flexibility for member states to exclude from procurement processes any suppliers, goods, components, and services that do not meet EU qualification criteria. And second, to tie the award of EU funds to strict conditions that require member states to cooperate and comply with Buy EU rules. The Security Action for Europe (SAFE) financial instrument is arguably the best-known example in this space.

“Buy EU” approach marks significant shift from historic neo-liberal procurement model

Allowing national governments the flexibility to pursue Buy EU policies is a significant shift away from Europe’s neo-liberal public procurement directives that were launched in the mid-1990s. These focused on awarding contracts to the most economically advantageous bid (typically the cheapest).

Since then, Europe’s procurement rules have been paying greater attention to environmental and social factors in the awarding of public contracts, with the question of whether member states were entitled or even obliged to exclude non-EU bidders from public tenders only really becoming a relevant concern when trade tensions with China grew in the 2020s.

Against this backdrop, the Court of Justice of the European Union (ECJ) clarified that national governments were principally allowed to exclude third-country bidders simply because they were from outside the EU. This approach is likely to be reinforced with the forthcoming recast of the EU’s public procurement directives.

Emerging law at member-state level is testing limits of local procurement focus

Defense procurement in the EU already operates under a separate directive that affords member states greater flexibility to exclude foreign bidders, and there is more legislation emerging at national level (such as Germany’s Armed Forces Planning and Procurement Acceleration Act) that is adding detail and testing the limits of the concept.

At the same time, member state governments are able to act independently of all EU rules (e.g., procurement, state aid, merger control, etc.) by invoking national security interests under Article 346 of the Treaty on the Functioning of the European Union (TFEU). This exemption enables them to award defense contracts to local champions or technologically leading third-country suppliers, such as those from the U.S.

The dilemma from an EU perspective has been that, while there has been de facto freedom for member states to exclude non-EU suppliers, goods, components or services from defense procurement processes, this has in fact led to a nationally fragmented rather than integrated EU defense market. Indeed, a number of member states are now more or less dependent on non-EU suppliers that may not be as reliable as they have been considered in the past.

What does the EU’s SAFE program mean for private capital providers?

SAFE provides EU funding to member state governments to boost military investment. The program is designed to support joint procurement of defense equipment and onshore the highest-value elements of the defense supply chain by promoting EU control over defense contractors and subcontractors. As outlined above, the Buy EU principle it supports is set to be a central feature of Europe’s reformed procurement framework and the proposed Industrial Accelerator Act, among other things.

The European Defense Fund (2021), the Act in Support of Ammunition Production (ASAP, 2023), the European Defence Industry Reinforcement Through Common Procurement Act (EDIRPA, also 2023), and the proposed European Defence Industry Program (EDIP, 2025) similarly include eligibility criteria that function as European preference requirements.

For financial sponsors, this “buy local” focus must be taken into account when considering investments in the EU defense sector. It will play a significant role in determining which companies can access procurement opportunities and where value will accrue across the European supply chain. But the EU’s regulatory frameworks must also be scrutinized closely, with more opportunities available for third-country businesses than might first be apparent, including under SAFE.

Important exemptions offer opportunities for non-EU suppliers

SAFE is the most significant EU funding instrument in the defense arena. It provides up to EUR150 billion in low-cost, long-term loans for military investment.

On its face, SAFE is designed to support joint procurement of defense equipment between EU member states; Ukraine; countries in the European Economic Area (EEA) and European Free Trade Area (EFTA); EU candidate and potential candidate nations; and states that have signed security and defense partnerships with the EU (e.g., Canada, India, Japan, South Korea, and the UK). Since its launch in May 2025, 18 countries have been approved to receive SAFE funds.

No more than 35% of the value of a contract funded under SAFE can originate from entities that are established or have their executive management outside the EU, EEA, EFTA, or Ukraine. In practice, however, the eligibility rules contain important exemptions that open the door wider.

• A foreign-located-or-controlled subcontractor that has a relationship with an in-territory contractor that predates SAFE can participate in defense contracts up to 35% of the contract value outside the joint procurement context.
• Subcontractors located within the defined territories but controlled from outside can also participate above the 35% limit if they have passed an FDI screening or have security guarantees in place with the government of an approved jurisdiction.
• As a result, there may be more SAFE-eligible companies for private capital firms to invest in than a first reading of SAFE would suggest.

However, governance structures are critical. If a foreign parent exercises board-level control over an in-territory subsidiary, that subsidiary may lose SAFE eligibility absent FDI screening approval. Investors must therefore either carefully structure the governance of their portfolio companies or opt for debt finance instruments, minority participations, or preferential non-voting shares, to preserve eligibility.

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