The whole package aims to raise €800 billion through loans and debt to help EU countries buy defense equipment, prioritizing products made in the bloc
Arms manufacturers from the U.S. and U.K. are set to be largely excluded from new European Union defense procurement loans unless their countries sign defense and security agreements with the bloc.

Only defense companies headquartered in the EU and those from third countries with defense pacts in place, such as Norway or Ukraine, would be able to receive orders financed with EU loans under the bloc’s new mechanism, Security Action for Europe, European Commission officials said Wednesday.

In addition, the SAFE loans will only finance products with components for which at least 65% of the final cost comes from the EU or one of those countries.

Advanced weapons systems upon which a third country had “design authority,” namely control over how they are to be used, such as the U.S. Patriot air and missile defense systems, would also fall outside the scope of the loans.

EU countries would still be able to buy defense products produced by non-European companies, but they would need to fund those purchases with their own resources.

The announcement is a victory for French President Emmanuel Macron , who has long called on Brussels to prioritize the bloc’s defense industry, as well as EU defense manufacturers such as France’s Dassault Aviation , Germany’s Rheinmetall or Italy’s Leonardo, whose leaders have urged the EU to spend a higher share of their defense budgets on companies within the bloc. Norwegian manufacturers such as Kongsberg would also see their orders boosted by the loans.

The U.K., which is in talks with the EU for a security and defense pact, won’t be able to take part in the initiative until such a deal is signed. That means U.K.-based manufacturers such as BAE Systems and Babcock International would not be able to benefit from orders financed by the EU loans for the time being.

The whole package aims to raise 800 billion euros ($875.64 billion) through loans and debt to help EU countries buy defense equipment, prioritizing products made in the bloc.

The loans will support the purchase of air and missile defense systems, artillery systems, missiles and ammunition, drones and anti-drone technologies, defense products to protect critical infrastructure including space assets, military mobility platforms, cyber-security, artificial intelligence for defense and electronic warfare.

The rules for the use of the loans were detailed in a 2030 defense strategy, published Wednesday, detailing measures to boost the bloc’s military capabilities as EU officials warn Russia might test the EU’s military defenses within the next three to five years.

“This is a pivotal moment for European security, it is a pivotal moment for action, the need for additional funding is massive,” the EU’s High Representative for Foreign Affairs and Security, Kaja Kallas , told a press conference in Brussels.

The commission said it expects to issue the first financing via SAFE loans this year. The loans, backed by the EU budget, will have a maximum duration of 45 years and a 10-year grace period for repayments.

In parallel, the commission proposed loosening the EU’s strict public debt and deficit limits for four years, allowing member countries to increase their national deficits by up to 1.5% of their gross domestic product in order to boost their military spending. The Commission estimates this could unlock around 650 billion euros over four years, but it is still unknown how many countries would make use of this flexibility.

Write to Cristina Gallardo at cristina.gallardo@wsj.com