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The war is reshaping how Europe spends

NEW YORK — Mr Nicolae Ciuca spent a lifetime on the battlefield before being voted in as prime minister of Romania four months ago. Yet even he did not imagine the need to spend millions of dollars for emergency production of iodide pills to help block radiation poisoning in case of a nuclear blast, or to raise military spending 25 per cent in a single year.

German soldiers during a NATO training exercise in Rukla, Lithuania, on March 8, 2022. Chancellor Olaf Scholz has promised to increase Germany’s military spending.

German soldiers during a NATO training exercise in Rukla, Lithuania, on March 8, 2022. Chancellor Olaf Scholz has promised to increase Germany’s military spending.

NEW YORK — Mr Nicolae Ciuca spent a lifetime on the battlefield before being voted in as prime minister of Romania four months ago. Yet even he did not imagine the need to spend millions of dollars for emergency production of iodide pills to help block radiation poisoning in case of a nuclear blast, or to raise military spending 25 per cent in a single year.

“We never thought we’d need to go back to the Cold War and consider potassium iodide again,” Mr Ciuca, a retired general, said through a translator at Victoria Palace, the government’s 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 reshaping spending priorities and forcing governments to prepare for threats thought to have been 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 feel backed into a corner.

The result is a sudden reshuffling of budgets as military spending, essentials like agriculture and energy, and humanitarian assistance are shoved to the front of the line, with other pressing needs like education and social services likely to be downgraded.

The most significant shift is in military spending. Germany’s turnabout is the most dramatic, with Chancellor Olaf Scholz’s promise to raise spending above 2 per cent of the country’s economic output, a level not reached in more than three decades. The pledge included an immediate injection of 100 billion euros (S$150 billion) into the country’s notoriously threadbare armed forces. As Mr Scholz put it in his speech last month, “We need planes that fly, ships that sail and soldiers who are optimally equipped”.

The commitment is a watershed moment for a country that has sought to leave behind an aggressive military stance that contributed to two devastating world wars.

A wartime mindset has also spread to sectors aside from defence. With prices soaring for oil, animal feed and fertilizer, Ireland introduced a “wartime tillage” programme last week to amp up grain production, and created a National Fodder and Food Security Committee to manage threats to the food supply.

Farmers will be paid up to 400 euros for every additional 100-acre block that is planted with a cereal crop like barley, oats or wheat. Planting additional protein crops like peas and beans will earn a 300-euro subsidy.

“The illegal invasion in Ukraine has put our supply chains under enormous pressure,” Mr Charlie McConalogue, the agriculture minister, said in announcing the US$13.2 million (S$17.9 million) package. Russia is the world’s largest supplier of wheat and with Ukraine accounts for nearly a quarter of total global exports.

Spain has been running down its supplies of corn, sunflower oil and some other produce that also come from Russia and Ukraine.

“We’ve got stock available, but we need to make purchases in third countries,” Mr Luis Planas, the agriculture minister, told a parliamentary committee.

Mr Planas has asked the European Commission to ease some rules on Latin American farm imports, like genetically modified corn for animal feed from Argentina, to offset the lack of supply.

Extraordinarily high energy prices have also put intense pressure on governments to cut excise taxes or approve subsidies to ease the burden on families that cannot afford to heat every room in their home or fill their car’s gas tank.

Ireland reduced gasoline taxes, and approved an energy credit and a lump-sum payment for lower-income households. Germany announced tax breaks and a US$330-per-person energy subsidy, which will end up costing the treasury US$17.5 billion.

In Spain, the government agreed last week to defray the cost of gasoline in response to several days of strikes by truckers and fishermen, which left supermarkets without fresh supplies of some of their most basic items.

And in Britain, a cut in fuel taxes and support for poorer households will cost US$3.2 billion.

The outlook is a change from October, when Mr 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 large increases in education, health and job training.

In his latest update to Parliament, Mr Sunak warned that “we should be prepared for the economy and public finances to worsen potentially significantly”, as the country faces the biggest drop in living standards it has ever seen.

The energy tax relief was welcomed by the public, but the reduced revenues put even more pressure on governments that are already managing record high debt levels.

“The problem is that some countries have quite a big chunk of legacy debt — in Italy and France, it’s over 100 per cent of gross domestic product,” said Lucrezia Reichlin, an economics professor at the London Business School, referring to the huge amounts spent to respond to the pandemic. “That is something which is very much new for the economic governance of the union.” EU rules, which were temporarily suspended in 2020 because of the coronavirus, limit government debt to 60 per cent of a country’s economic output.

And the demands on budgets are only increasing. European Union leaders said this month that the bill for new defence and energy spending could run as high as US$2.2 trillion.

And then there is the cost of humanitarian aid to help settle the 3.7 million refugees from Ukraine who have streamed across the border. Estimates for housing, transporting, feeding and processing the flood of people have run as high as US$30 billion in the first year alone.

Some countries have gone further. Poland and Romania have extended the same educational, health and social services to refugees that their own citizens enjoy. The New York Times

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economy foreign affairs Europe Ukraine

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