The war between Russia and Ukraine is changing the way Europe spends

Nicolae Ciuca spent a lifetime on the battlefield before being elected Romania’s prime minister four months ago. But even he couldn’t imagine spending millions of dollars producing emergency iodide pills to prevent radiation poisoning in the event of a nuclear blast, or increasing military spending by 25 percent in a single year.

“We never thought that we would have to go back to the Cold War and consider potassium iodide again,” Mr Ciuca, a retired general, said through an interpreter at Victoria Palace, the seat of government 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 shifting spending priorities and forcing governments to prepare for threats that have long been buried – from a flood of European refugees to the possible use of chemical, biological and even nuclear weapons by a Russian Leader who may feel cornered.

The result is a sudden shift in budgets, as military spending, essentials like agriculture and energy, and humanitarian aid are given first priority, while other urgent needs like education and social services are likely to be downgraded.

The most significant shift concerns military spending. Most dramatic is the about-face in Germany, with Chancellor Olaf Scholz pledging to increase spending to over 2 percent of the country’s economic output, a level not seen in more than three decades. The pledge included an immediate injection of 100 billion euros – $113 billion – into the country’s notoriously worn-out armed forces. “We need airplanes that fly, ships that sail and soldiers that are optimally equipped,” said Scholz in his speech last month.

The commitment is a turning point for a country that has sought to move beyond an aggressive military stance that contributed to two devastating world wars.

A martial mindset has spread to sectors other than defense. With oil, animal feed and fertilizer prices soaring, Ireland last week introduced a “wartime tillage scheme” to boost grain production and created a National Committee on Forage and Food Security to deal with threats to the food supply.

Farmers will receive up to €400 for each additional 100-acre block planted with crops such as barley, oats or wheat. The cultivation of additional protein crops such as peas and beans is subsidized with €300.

“The illegal invasion of Ukraine has put our supply chains under tremendous pressure,” said Agriculture Secretary Charlie McConalogue when announcing the $13.2 million package. Russia is the world’s largest exporter of wheat and, together with Ukraine, accounts for almost a quarter of total world exports.

Spain has depleted its stocks of corn, sunflower oil and some other products, which also come from Russia and Ukraine. “We have stocks available, but we have to buy from third countries,” Agriculture Minister Luis Planas told a parliamentary committee.

Mr Planas has asked the European Commission to relax some rules on Latin American agricultural imports, such as genetically modified maize for animal feed from Argentina, to make up for the lack of supplies.

Exceptionally high energy prices have also put governments under severe pressure to cut excise taxes or approve subsidies to relieve families who cannot afford to heat every room in their home or fill their car’s gas tank.

Ireland cut petrol taxes and approved an energy credit and lump sum payment for low-income households. Germany announced tax breaks and an energy subsidy of US$330 per person that will ultimately cost the state coffers US$17.5 billion.

In Spain, the government last week agreed to cover the cost of petrol in response to several days of strikes by truckers and fishermen, which have left supermarkets without restocks for some of their most basic items.

And in the UK cutting fuel taxes and helping 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 called an “economy fit for a new age of optimism” with big increases in education, health and jobs.

In his latest report to Parliament, Mr Sunak warned that “we should be prepared for the possibility of a 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 cuts have been welcomed by the public, but lower revenues are putting even more pressure on governments already struggling with record debt.

“The problem is that some countries have a fairly large chunk of legacy debt — in Italy and France it’s over 100 percent of gross domestic product,” said Lucrezia Reichlin, an economics professor at London Business School, citing the huge spending in response to the pandemic to react. “This is something completely new for the economic governance of the Union.” The rules of the European Union, which were temporarily suspended in 2020 due to the corona virus, limit national debt to 60 percent of a country’s economic output.

And budget requirements are getting bigger. European Union leaders said this month the bill for new defense and energy spending could be as high as $2.2 trillion.

For Germany, Europe’s largest economy, the costs are enormous. The coalition government has earmarked $1.7 billion to buy more liquefied natural gas and is investing almost as much in building a permanent LNG terminal and leasing several floating terminals to reduce dependence on Russian fuel. At the same time, it has agreed to hold coal-fired power plants in reserve even as it has earmarked nearly $220 billion over the next four years to revitalize the country’s transition to renewable energy sources.

Germany’s energy supply is “at an historic turning point” as it moves away from Russian fuel, Deutsche Bank Research said in a market note last week. Decades of energy ties – “even in the hottest times of the Cold War – are to be loosened in the coming years”.

And then there are the costs of humanitarian aid to accommodate the 3.7 million refugees from Ukraine who have poured across the border. Estimates of housing, transportation, feeding, and processing the flood of people total up to $30 billion in the first year alone.

Some countries have gone even further. Poland and Romania have offered refugees the same education, health and social services enjoyed by their own citizens.

Ultimately, budgets are more than a crippling set of numbers. They are the most telling statement of a nation’s priorities, a reflection of its values.

The Russian invasion of Ukraine changed and clarified this.

The European Union this month agreed 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 are below NATO’s target of spending at least 2 percent of national production, as well as countries that are above the threshold. (The 27 members of the European Union and the 30 members of NATO overlap but are not identical.)

A French parliamentary report released in February, a week before the invasion, concluded that in the event of a full-scale conventional war, like the one in Ukraine, an additional $44 billion to $66 billion would be needed over 12 years to combat To strengthen France’s military machine. President Emmanuel Macron has promised a large increase in military spending – already at $45 billion, more than 10 percent of the government’s total budget – if he wins next month’s presidential election.

Kaja Kallas, the Prime Minister of Estonia, wrote in an essay published in the New York Times last week: “This year we will spend 2.3 percent of GDP; in the coming years it will be 2.5 percent.”

Belgium, Italy, Poland, Latvia, Lithuania, Norway and Sweden – a militarily neutral non-NATO country – have also announced increases in their defense budgets.

“It is our responsibility to take measures to protect ourselves,” said Mr. Ciuca, the Romanian prime minister. No one knows how long the war in Ukraine will last, “but we need to reassess and prepare for what might happen in the future,” he added. “We must be prepared for the unexpected.”

Raphael Minder contributed reporting from Madrid, Liz Alderman from Paris and Melissa vortex from Berlin.

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