Fiscal Council President Daniel Daianu says it is in Romania's interest, as well as that of other European countries, for the EU to become more cohesive and develop its own defense capabilities while ensuring that NATO remains strong.

'Last year, Romania allocated just over 2% of GDP to defense, while running a budget deficit of 8.64% of GDP - which, in reality, exceeds 9% when considering the annualized impact of pension recalculations. Romania's target is to bring the deficit below 3% within seven years. Under unchanged conditions, if defense spending were to increase (be it gradually), the required macroeconomic correction would not be around 6% of GDP, but over 8% of GDP. A compromise within NATO may be reached, setting the minimum defense spending target at between 3% and 4% of GDP. However, even this would represent a major shock to public budgets across the EU. Romania's weak public budget position, with very low tax revenues (including contributions) at 26-27% of GDP - compared to the EU average of over 40% - is a significant structural handicap,' Daniel Daianu points out in the article 'National defense and the public budget in times of great danger,' published on the Fiscal Council website.

He says this situation is the result of 'short-sightedness and economic policy mistakes.'

'Implementing a large-scale fiscal correction under highly unfavorable international conditions, while also being forced to allocate significantly more resources to defense, seems like an impossible mission. And yet, it must be accomplished in one way or another. Romania must increase tax revenues, cut unnecessary spending, and spend resources more efficiently while making the most of available EU fund,' Daniel Daianu says.

The Fiscal Council president says the way EU funds absorption has been handled, particularly in recent years, is 'incomprehensible, with much talk and little action.'

'The prospect of losing billions of euros from the Recovery and Resilience Facility (PNRR) is more than regrettable. Given that the PNRR program ends in 2026, absorbing EU funds should have been an absolute priority for successive governments, but there has been no real sense of urgency. The next Multiannual Financial Framework (MFF) will likely allocate fewer resources to Romania, given the EU's growing challenges related to competitiveness and defense/security. Political disputes, parliamentary and presidential elections are diverting attention and energy, but they must not paralyze effective governance. As is noted both domestically and internationally, Romania suffers from weak institutional capacity and ineffective public policies. While other countries are seeking additional EU funding, Romania risks losing a significant portion of its allocated resources for various reasons,' Daniel Daianu points out.

Daianu warns that a second PNRR will likely not happen, and the next MFF will be revised in response to evolving EU priorities.

'Romania must now do everything possible to recover lost time and prioritize investments that can be financed with EU funds. The visit of the European Commission delegation to Bucharest in February 2024 was a warning sign. Additionally, Fiscal Council reports (including its opinion on the 2025 public budget proposal) have highlighted the risk of losing substantial amounts from the PNRR. The absorption of EU funds is a key factor used by external investors and credit rating agencies to assess Romania's sovereign risk. The country must avoid worsening its credibility gap and increasing financial market nervousness regarding its economic outlook. Even if proposals from senior EU officials - including Ursula von der Leyen - to exclude defense spending increases from budget deficit calculations were approved, Romania's public budget situation would remain extremely challenging. It also remains to be seen whether the EU will approve the issuance of joint defense bonds, which could help countries with high budget deficits,' Daniel Daianu points out.

The Fiscal Council president says that in Romania, defense spending could also be increased through contributions from citizens and businesses.

' A similar mechanism could be considered for the EU budget as well. The alternative would be to cut spending in other areas, which would require difficult economic and social policy choices,' says Daianu.

The article author points out the increase in defense spending is necessary, as the world is becoming much more dangerous and 'seemingly devoid of rules.'

' The loss of the 'peace dividend' has been evident for some time. There is a historically validated expression relevant to our times: when 'elephants
wrestle,' woe to the grass, to the small beings. It is in Romania's interest, as well as that of other European countries, for the EU to become more cohesive and develop its own defense capabilities (including its arms industry) while ensuring that NATO remains strong. Romania's defense industry must grow, and offset agreements would support this goal. Romania must join forces with other countries to prevent a fatal erosion of the transatlantic relationship; a trade war between the U.S. and the EU must be averted as it would cause significant damage. The relationship with the United States must be carefully maintained,
just as Romania must ensure strong ties with France, the UK, Germany, Italy, and, importantly, Poland. Türkiye also deserves attention in this regard, as it is a regional power with growing influence. Naturally, neighboring countries are part of Romania's security equation. In this new geopolitical context, diplomacy will become increasingly complex, operating both through collective interests and bilateral relations. NATO must remain a relevant organization, providing security guarantees for its member states. The EU is fundamentally important for Romania, as the Union was primarily born as a peace project - not only as a vehicle for economic reconstruction after World War II. A more divided and fragile EU would be a bad omen for European security. The same holds true for NATO. Moreover, the EU must not be absent from major discussions and negotiations regarding global security,' Fiscal Council President Daniel Daianu pointed out in his article 'National defense and the public budget in times of great danger.' AGERPRES (RO - writing by: George Banciulea; EN - writing by: Adina Panaitescu)