Nicolae Ciuca spent a lifetime on the battlefield before being elected Prime Minister of Romania four months ago. But even he couldn’t imagine spending millions of dollars on emergency production of iodine pills to prevent radiation poisoning in the event of a nuclear explosion, or increasing military spending by 25 percent in one year.
“We never thought we would have to go back to the Cold War and reconsider potassium iodine,” said Mr Ciuca, a retired general, through a translator at Victoria Palace, the government headquarters in Bucharest. “We never expected this kind of war in the 21st century.”
Across the European Union and Britain, Russia’s invasion of Ukraine is changing spending priorities and forcing governments to prepare for threats that are believed to be long buried – from a flood of European refugees to the possible use of chemical, biological and even nuclear weapons by a Russian leader who may be feeling cornered.
The result is a sudden realignment of budgets as military spending, essentials such as agriculture and energy and humanitarian aid are pushed forward, while other urgent needs such as education and social services are likely to be reduced.
The main shift is in military spending. The turnaround in Germany is the most dramatic, with Chancellor Olaf Scholz promising to increase spending to more than 2 percent of the country’s economic output, a level not reached in more than three decades. The pledge included an immediate injection of €100 billion — $113 billion — into the country’s notoriously worn-out armed forces. As Mr Scholz put it in his speech last month, “We need planes that fly, ships that sail and soldiers that are optimally equipped.”
The alliance is a turning point for a country that has attempted to abandon an aggressive military stance that contributed to two devastating world wars.
A war mentality has also spread to sectors other than defense. With oil, feed and fertilizer prices soaring, Ireland last week introduced a wartime tillage program to ramp up grain production, and created a National Fodder and Food Security Committee to deal with threats to food supplies.
Farmers are paid up to €400 for each additional 100 hectare block planted with a cereal crop such as barley, oats or wheat. Planting additional protein crops such as peas and beans provides a subsidy of 300 euros.
“The illegal invasion of Ukraine has put enormous pressure on our supply chains,” said Charlie McConalogue, the agriculture secretary, announcing the $13.2 million package. Russia is the world’s largest supplier of wheat, and Ukraine accounts for nearly a quarter of total global exports.
Spain has used up its stocks of maize, sunflower oil and some other products that also come from Russia and Ukraine. “We have stock available, but we have to make purchases in third countries,” Luis Planas, the agriculture minister, told a parliamentary committee.
Mr Planas has asked the European Commission to relax some rules on imports from Latin American farms, such as genetically modified maize for animal feed from Argentina, to make up for the lack of supply.
Extraordinarily high energy prices have also put great pressure on governments to cut excise taxes or approve subsidies to ease the burden on families who cannot afford to heat every room in their home or fill their car’s gas tank.
Ireland lowered the petrol tax and approved an energy credit and a lump sum payment for lower-income households. Germany announced tax breaks and an energy subsidy of $330 per person, which will eventually cost the treasury $17.5 billion.
In Spain, the government last week agreed to pay the cost of petrol in response to several days of strikes by truck drivers and fishermen, which left supermarkets without fresh supplies of some of their most basic items.
And in Britain, a fuel tax cut and aid for poorer households will cost $3.2 billion.
The outlook is a change from October, when Rishi Sunak, Britain’s Chancellor of the Exchequer, announced a budget for what he calls an ‘economy fit for a new era of optimism’, with large increases in education, health and vocational training.
In his latest update to Parliament, Mr Sunak warned that “we need to be prepared for a potentially significant deterioration in the economy and public finances” as the country faces the biggest drop in living standards it has ever seen.
The energy tax cut was welcomed by the public, but the lower revenues put even more pressure on governments already managing record-high debt levels.
“The problem is that some countries have quite a bit of the old debt — in Italy and France it’s over 100 percent of gross domestic product,” said Lucrezia Reichlin, an economics professor at London Business School, referring to the huge amounts spent to respond to the pandemic. “That is very new for the economic governance of the union.” The European Union’s rules, which were temporarily suspended in 2020 due to the coronavirus, limit government debt to 60 percent of a country’s economic output.
And the demands on budgets are only increasing. European Union leaders said this month the bill for new defense and energy spending could rise to $2.2 trillion.
The war between Russia and Ukraine and the world economy
For Germany, the largest economy in Europe, the costs are enormous. The coalition government has pledged $1.7 billion to buy more liquefied natural gas and is investing almost as much in building a permanent LNG terminal and renting several floating terminals to reduce dependence on Russian fuel. At the same time, it has agreed to keep coal-fired power plants in reserve, even as it has earmarked nearly $220 billion over the next four years to reinvigorate the country’s transition to renewables.
Germany’s energy supply is “at a historic turning point” as it moves away from Russian fuel, Deutsche Bank Research said in a market note last week. The energy ties that have lasted for decades — “even during the hottest times of the Cold War — will be loosened in the coming years.”
Then there is the cost of humanitarian aid to help settle the 3.7 million refugees from Ukraine who have crossed the border. Estimates for housing, transportation, feeding and processing the flow of people rose to $30 billion in the first year alone.
Some countries have gone further. Poland and Romania have provided the same education, health and social services to refugees as their own citizens.
After all, budgets are more than a mind-numbing collection of numbers. They are the most meaningful statement of a country’s priorities, a reflection of its values.
The Russian invasion of Ukraine has transformed and clarified it.
The European Union agreed this month to “significantly increase defense spending” and “continue to invest in the capabilities needed to carry out the full range of missions”.
The pledge includes countries that have fallen below NATO’s target of spending at least 2 percent of national production, as well as countries that have crossed the threshold. (The 27 members of the European Union and the 30 NATO members overlap, but are not identical.)
A French parliamentary report published in February, a week before the invasion, concluded that in the event of a large-scale conventional war, such as the one in Ukraine, an additional $44 billion to $66 billion over 12 years would be needed to to strengthen French military machinery. President Emmanuel Macron has promised a hefty increase in military spending — already $45 billion, more than 10 percent of the government’s total budget — if he wins the presidential election next month.
Estonia’s Prime Minister Kaja Kallas wrote in an essay published last week in The New York Times: “This year we will spend 2.3 percent of GDP; in the coming years that will increase to 2.5 percent.”
Belgium, Italy, Poland, Latvia, Lithuania, Norway and Sweden – a military neutral country not part of NATO – have also announced increases in their defense budgets.
“It is our responsibility to take measures to protect ourselves,” said Romanian Prime Minister Ciuca. No one knows how long the war in Ukraine will last, “but we need to reassess and adapt to what might happen in the future,” he added. “We have to be prepared for the unexpected.”
Raphael Minder contributed reporting from Madrid, Liz alderman from Paris and Melissa Eddie from Berlin.
