Italy is preparing to use a mechanism developed by the European Union (EU) that allows defense spending to be excluded from budget deficit calculations, in order to meet NATO’s increasing defense spending targets. According to Italian government sources, using this method—referred to as an accounting “loophole”—Italy could add 12 billion euros (approximately 14 billion dollars) to its defense budget over a three-year period beginning in 2026.
National Exception Clause (NEC) and EU Deficit Rules
The EU requires member states to keep their budget deficits below 3 percent of GDP. Exceeding this limit subjects member states to infringement procedures. However, following the need to increase military preparedness after Russia’s invasion of Ukraine, the EU developed a rule in March 2025 —as part of its Rearmament Plan —that provides fiscal flexibility.
This rule, known as the National Exception Clause (NEC), allows member states to exclude defense spending when calculating their annual budget deficits. The EU has stated that the flexibility under the NEC will be valid for four years starting in 2025, and that the annual surplus will not exceed 1.5 percent of GDP.
The Italian government has signaled its intention to increase defense spending by utilizing this provision. A budget document published this month by the Ministry of Finance noted that the decision to implement the NEC has been postponed until after the SAFE program loans—which are to be utilized first—have been fully disbursed.
NATO Targets and Priority for SAFE Loans
NATO stipulates that member states must spend 5 percent of their GDP on defense and security by 2035. To meet this target, Italy plans to first utilize low-cost SAFE loans provided by the EU.
- SAFE Loan Application: Italy has applied to the EU for a SAFE loan totaling 14.9 billion euros.
- Intended Use: Rome will submit a list by November 30 detailing which defense products these loans will be spent on. It was noted that the list will focus on “joint programs with third-country member states interested in developing defense strategies in cooperation with the European Union.”
Italy reserves the option to invoke the NEC rule should the SAFE loans prove insufficient.
Accelerated Defense Budget Increase Plan
In 2024, Italy spent 29.18 billion euros on defense, equivalent to 1.54% of its GDP. The government, which announced that this ratio will reach 2% this year, plans to use methods such as reclassifying Italian coast guard units as military units to close the gap (this has not yet been made official).
The Ministry of Finance’s 2026 report projects that, if spending increases gradually, Italy will allocate 2.5% of its GDP to defense by 2028. However, the document also warns that increasing budgets too rapidly could lead to a “rush to buy” and price increases in the market.
Italy’s decision to now consider the NEC option—which it had previously ruled out due to a budget deficit exceeding 3 percent—is closely linked to the projection that the budget deficit will fall to 2.8 percent next year.
The Debate Over Capability-Based Targets
The document also includes a discussion suggesting that Italy may not yet need to meet NATO’s 5% spending target. This reasoning is based on the premise that the 5% target was set to ensure countries achieve specific military capabilities. If Italy can achieve these capabilities by “rationalizing strategies and optimizing expenditures, ” it may be possible to provide the capabilities allocated to each country at a lower cost.
