Negotiations aimed at securing an enhanced role for UK companies within the European Union's flagship €150 billion (£130-131 billion) Security Action for Europe (SAFE) defence loans scheme have collapsed due to an intractable dispute over an entry fee. This breakdown represents a significant blow to efforts to reset UK-EU relations and limits British defence firms to a smaller share of lucrative defence projects.

The central point of contention revolved around the financial contribution the UK would make to allow its defence industry greater access to the scheme's funding. The EU had reportedly demanded an entry fee running to billions of euros, with figures up to €6 billion or a rumored €6.5 billion cited by officials and analysts. Veteran former diplomat Peter Ricketts, who chairs the European affairs committee in the House of Lords, suggested that such a high fee indicated some EU members might not want the UK to participate in the scheme. While the UK had accepted in principle that a fee would be necessary, it firmly maintained that it would not agree to an arrangement that did not serve the national interest or provide value for money.

The failure to reach a separate, enhanced agreement before the Sunday deadline for EU countries to submit initial bids for loans means that UK-based firms will be restricted to contributing a maximum of 35% of the total value of any weapons, ammunition, or parts to projects funded under the SAFE scheme. This limitation is based on 'third-country terms', effectively reducing the potential involvement of British companies in a critical European rearmament initiative.

The SAFE scheme, initially announced in March, is a crucial component of the EU's broader strategy to boost defence spending and rearm the continent in the wake of Russia's full-scale invasion of Ukraine. It empowers the European Commission to borrow up to €150 billion to provide long-duration, low-interest loans to EU member states. The primary objective is to encourage these countries to jointly procure essential military equipment, including ammunition, artillery, and military drones, thereby strengthening European defence capabilities and reducing reliance on external powers, particularly in light of cooling relations between the US and the EU under certain political scenarios.

A defence pact signed between the UK and the EU in May, involving figures like Keir Starmer and European Commission president Ursula von der Leyen, had initially paved the way for UK-based defence companies to contribute to SAFE-funded projects. However, this pact alone was insufficient for enhanced access, necessitating the further agreement that ultimately failed. Nineteen of the 27 EU countries have already applied for loans, which are anticipated to be issued early next year. Significant allocations include Poland receiving the largest share at €43.7 billion, followed by Romania at €16.6 billion, and both Hungary and France allocated €16.2 billion each.

Nick Thomas-Symonds, the UK minister responsible for EU relations, expressed disappointment regarding the inability to conclude discussions on UK participation in the first round of bids. He reiterated the UK's stance that negotiations were conducted in good faith but that any agreement must align with national interests and offer value for money. He affirmed that despite the setback, the UK defence industry would still be able to participate on third-country terms and emphasized the UK's commitment to European security through other collaborations. A spokesperson for the European Commission acknowledged the constructive engagement but stated that an agreement could not be found 'at this time', suggesting the possibility of talks resuming at a later date.

The British defence industry lobby group, ADS, through its chief executive Kevin Craven, described the breakdown as a "frustrating setback" for UK-based firms, though expressing hope that "something can be salvaged as we move into next year." This failure of negotiations occurs amidst ongoing broader discussions for a "reset" in UK-EU relations post-Brexit. Other areas of negotiation include reducing border checks on food products, linking the UK to the EU’s carbon trading regime, and potential talks on electricity trading. Canada is also reportedly in discussions to allow its companies to participate in the SAFE scheme.