Italy is delaying the execution of a €14.9 billion loan agreement under the European Union’s SAFE defense program, a hesitation that is preventing other member states from accessing unallocated funds.

The Italian government has failed to finalize the exact amount it intends to borrow due to an ongoing energy crisis and internal political debate, effectively holding other European nations “hostage” ahead of a year-end deadline for fund redistribution, according to a report by Euronews.

Rome had previously requested €14.9 billion in loans—an application that was swiftly approved by both the European Commission and the Council of the European Union. However, the administration has yet to issue a final decision regarding the exact amount it will draw down.

Italian Foreign Minister Antonio Tajani stated this week that his country has “reserved” the full €14.9 billion as a maximum threshold.

Tajani noted that the government will only determine the final loan volume toward the end of the year, adding that he expects the eventual figure to range between €6 billion and €9 billion.

Eastern bloc frustrates over indecision

Rome’s reluctance is causing growing irritation across Europe, Euronews reported. While 17 EU member states have completed their formal agreements with the European Commission, they remain unable to access unclaimed funds because of Italy’s position.

Eastern flank countries, including Poland and Lithuania, are facing particular constraints as they seek additional resources beyond their initial allocations.

Under SAFE framework regulations, all unspent resources must be redistributed by the end of the year. Euronews reported that if Italy continues to delay, the European Commission could formally restrict Rome’s application in September, opening the remaining pool of approximately €10 billion to applications from other member states.

The Security Action for Europe (SAFE) operates as an EU financing mechanism designed to provide low-interest loans to help member state governments bridge gaps in their military capabilities and maintain continued support for Ukraine.

Approved by EU ambassadors in May last year to support the bloc’s rearmament, the SAFE loan facility has a total capacity of €150 billion.

The program forms part of the broader €800 billion “ReArm Europe” initiative announced by the European Commission in March.

Energy crisis and domestic politics stall progress

Italy’s cautious approach stems from a combination of domestic political pressures and economic factors. The country is contending with the impact of rising energy costs linked to the closure of the Strait of Hormuz, leading the Italian government to request fiscal flexibility from the EU to handle energy expenditures.

Concurrently, Italy’s ruling coalition—comprising Fratelli d’Italia (Brothers of Italy), Lega (League), and Forza Italia—faces intensifying pressure from its far-right wing, which has criticized increased defense spending ahead of upcoming elections. Italy must hold its next parliamentary elections no later than Dec. 22, 2027.

Euronews previously reported in May that despite reserving €14.9 billion under the SAFE program, Rome subsequently decided to request only €4 billion to €5 billion to cover existing signed contracts.

Prime Minister Giorgia Meloni and Foreign Minister Tajani justified the move by emphasizing the need to prioritize the energy crisis. Rome missed the deadline to submit its SAFE projects after requesting budget flexibility from Brussels for energy spending.

“We cannot tell our citizens that there is only money for defense,” Meloni said regarding the situation.

Italian daily La Repubblica also reported persistent disagreements between Meloni and other EU leaders concerning Ukraine. At the end of June, Germany’s Frankfurter Allgemeine Zeitung (FAZ) reported that a draft text intended for consensus at the NATO Summit in Ankara envisioned maintaining annual support for Kyiv at €70 billion through 2027, matching the 2026 commitment level.

However, Italy withheld its approval for the draft, objecting to long-term financial commitments of that scale for Kyiv.

Germany is completely overhauling its world-renowned support program for wind and solar power as the federal government re-evaluates its two-decade-old energy transition policy.

Introduced under the Renewable Energy Sources Act (EEG) passed in the mid-2000s, feed-in tariffs guaranteed households and commercial operators 20-year contracts worth hundreds of euros per megawatt-hour of electricity generated, designed to kickstart the deployment of green energy capacity.

Although the generosity of these contracts has diminished since the late 2010s, a “lock-in effect” means the program still costs Berlin approximately €15 billion per year.

This financial burden is set to persist in the coming years, as solar panel owners are routinely paid prices significantly above market rates for their electricity, regardless of the time of day.

Following an agreement reached late Tuesday within the governing coalition, amendments to two key pieces of legislation—the EEG and separate statutory rules governing electricity grid access—are expected to fundamentally transform the sector.

Blow to rooftop solar installations

Speaking in Berlin on Wednesday, Energy Minister Katherina Reiche said: “We are embarking on a paradigm shift. We are putting an end to the EEG as an all-encompassing, seamless package.”

Fixed subsidies for rooftop solar panels will be phased out over the next 36 months and replaced by “contracts for difference,” the new European Union norm for renewable energy support.

Under this framework, minimum and maximum earnings will be capped. The new system will take effect for all new contracts beginning in January 2027.

To prevent overloads in the electricity system, smaller solar installations with a capacity of up to 100 kilowatts will be prohibited from feeding more than 50% of their output into the grid during peak hours. Failure to restrict generation would otherwise force grid operators to implement costly intervention measures.

Revisions to grid connection regulations will also penalize companies installing solar panels or wind turbines in areas where the grid is already congested.

“Costs previously borne by taxpayers will now have to be covered by grid operators,” Reiche stated.

Initially, a draft proposal put forward by the Christian Democratic energy minister would have exempted renewable energy operators from compensation if their wind turbines or solar panels were shut down for grid stability—for the first ten years following installation.

Following intense backlash from the renewable energy lobby, the rule will remain in effect but will apply to fewer regions, for a maximum duration of six years, and will not exceed 20% of annual production.

Green sector voices strong opposition

The renewable energy lobby swiftly criticized the reforms, arguing that they establish a subsidy framework hostile to the industry.

BEE, the umbrella organization representing wind, solar, and bioenergy companies, described the package as “disappointing for a progressive, resilient, and affordable energy system.”

Solar power association BSW, whose members stand to suffer the greatest financial impact, stated that the “proposed cuts jeopardize billions of euros in investment and put tens of thousands of jobs across the solar value chain at risk.”

The German automotive sector is facing an unprecedented level of restructuring pressure.

As Chinese manufacturers establish dominance in the domestic market for electric and hybrid vehicles, German automakers are rapidly losing market share.

In the first half of 2026, sales figures in China for BMW, Mercedes, and Volkswagen fell by more than a quarter.

Volkswagen is undergoing the largest restructuring process in its history. Chief Executive Officer Oliver Blume is planning to halve the company’s model lineup, reduce production capacity by approximately one million vehicles, and cut up to 100,000 jobs worldwide.

Volkswagen is not limiting its strategy to radical cost-cutting measures alone. For the first time, the company is considering the possibility of introducing models developed specifically for the Chinese market to Europe, with a view toward manufacturing them in European plants over the long term.

At the same time, other European manufacturers are relying increasingly on joint ventures established with Chinese companies.

This marks the beginning of a new era: the driving force behind the modernization of the Chinese market is no longer European manufacturers; rather, China is shaping the future of the European automotive industry.

Opel is planning an SUV project in which Chinese engineers will develop the powertrain and battery, while German engineers will handle only the design and seats.

German brands lose ground in the Chinese market

According to an analysis published by German Foreign Policy, the decline in sales for German automakers in the Chinese market is worsening.

In the first half of 2026, sales for BMW, Mercedes, and VW plummeted by over 25%. BMW recorded a drop of nearly one-fifth, while VW and Mercedes fell by 26% and 28%, respectively.

In the wake of the war in Iran, gasoline prices rose in China. This accelerated demand for electric and hybrid vehicles, dealing a negative blow to sales for German automakers, which continue to sell predominantly internal combustion engine vehicles in the country.

Changes in tax regulations governing luxury automobiles are compounding the problem. The tax threshold for new vehicles (excluding VAT) was lowered from the previous level of 1.3 million yuan to 900,000 yuan (approximately €116,000).

The German Association of the Automotive Industry (VDA) assesses that this situation will yield highly negative consequences for European manufacturers, particularly German producers.

According to forecasts by the China Passenger Car Association (CPCA), demand for internal combustion engine vehicles has dropped significantly, especially in the price segment between 900,000 and 1.3 million yuan.

Consumers purchasing luxury vehicles are increasingly turning instead to Chinese-origin electric or hybrid models.

BMW, Mercedes, and VW have already been forced to significantly scale back their plug-in hybrid operations.

Tax incentives targeting partially electrified powertrains now apply exclusively to vehicles capable of traveling at least 100 kilometers on electric power alone.

This state of affairs is forcing a restructuring of model portfolios across German automakers.

Fewer models, fewer plants

VW CEO Oliver Blume intends to counter this trend.

VW management plans to reduce its model lineup by up to 50%. Product and variant diversity will be cut by 75%.

Furthermore, annual production capacity will be scaled down from the current 10 million vehicles to approximately 9 million. The vehicle model count, which currently stands at around 150, will be halved.

This development primarily affects the internal combustion engine segment in China. In China, VW management has already closed or sold five plants, reducing local capacity by approximately one million vehicles.

Over the long term, the company aims to return to annual sales of 10 million vehicles. Of the 1 million vehicles that VW plans to withdraw temporarily from the market, half are situated in European plants, specifically in Germany.

The remaining half of the excess capacity remains in China, despite the closures executed to date.

To shrink production capacity, the VW Group plans to eliminate up to 50,000 jobs globally. In Germany, the future of four plants is currently under review.

These layoffs will take place in addition to the 50,000 job cuts already planned through 2030.

Oliver Blume characterizes this as the largest transformation in the history of the VW Group: “This is not merely a cost-cutting package; it is the most comprehensive and far-reaching transformation package we have ever implemented at the Volkswagen Group.”

Plunging operating profits spur workforce cuts

VW management is consequently taking radical action to trim model counts, production capacity, and headcounts.

At the same time, the Group is not abandoning its profit targets. In the first half of 2026, the group’s operating profit dropped 11.6% to €5.93 billion.

The operating margin fell to 3.8%, meaning VW generated only €3.80 in operating profit for every €100 in revenue.

Chief Financial Officer Arno Antlitz called the results “another wake-up call to act.”

The profit contribution from Chinese operations fell by one-third to €856 million.

However, Blume views this not as a “Volkswagen crisis,” but rather as an “industry crisis.”

Alternatives: Defense production and China-specific models

Oliver Blume views potential plant closures in Emden, Zwickau, Hanover, and at Audi’s Neckarsulm facility as a “last resort.”

He also noted that utilizing these plants for defense industry manufacturing represents a distinct possibility.

Another option involves producing China-specific VW models for the European market. This refers explicitly to VW models that have hitherto been sold exclusively in China, but it does not imply opening production to other manufacturers.

Additionally, VW plans to increase exports from its Chinese factories to other markets, such as Australia, India, and Central Asian nations, in the future.

The plan to bring its own China-specific models to Europe includes both the importation of finished vehicles and, at a later stage, the manufacturing of those vehicles or their components within Europe.

According to internal sources, the VW plant in Zwickau is being evaluated as a prospective production site.

VW already imports the Cupra Tavascan from China, a model belonging to Cupra, the Spanish brand owned by the VW Group.

In Germany, the Tavascan ranks among the top ten best-selling electric cars, currently holding ninth position.

Within the VW Group, it was decided that the motor for the planned €20,000 electric vehicle, the ID. EVERY1 model, will be imported from a VW component factory in China.

Olaf Lies, the SPD Prime Minister of Lower Saxony, expressed openness to producing Chinese models in German VW plants following a trade trip to China.

European auto giants deepen partnerships with China

Other European car manufacturers are also seeking to offset falling capacity utilization by establishing joint ventures with Chinese producers.

Stellantis plans to use four of its plants in Spain, France, and Italy to assemble models for the Chinese groups Leapmotor and Dongfeng.

Stellantis brands—including Opel, Jeep, Fiat, and Peugeot—are currently utilizing only about half of their assembly capacity within the EU.

In the future, Leapmotor models will be manufactured at Stellantis plants in Madrid and Zaragoza, Spain.

Together with Dongfeng, the production of an electric car in Rennes, France, is under consideration.

A small electric vehicle belonging to Leapmotor will be produced in Pomigliano, Italy.

An Opel SUV model featuring Chinese technology will also be manufactured in Madrid.

The powertrain, battery, and software will be sourced from Leapmotor. German engineers will remain responsible solely for design, seats, and the chassis.

EU sanctions against China risk worsening auto crisis

The VW Group’s strategy to import vehicles developed entirely in China carries inherent risks.

The EU imposes a baseline tariff of 10% on Chinese-made electric vehicles, alongside additional duties termed “countervailing” tariffs.

These countervailing tariffs stand at 35% for SAIC (VW’s Chinese joint-venture partner), 17% for BYD, and slightly under 8% for Tesla.

However, countervailing tariffs affect German manufacturers as well. The Cupra Tavascan was initially subjected to a 20.7% tariff.

Following extended negotiations, the European Commission dropped the additional duty for the VW Group model.

In the US, Mercedes faces the threat of market exclusion due to proposed legislation.

The proposed bill would ban the sale of connected vehicles if more than 15% of the manufacturer’s shares are owned by Chinese shareholders.

Just under 20% of Mercedes’ shares are currently held by Chinese investors.