Geopolitics takes control of the economy. Romania has no fiscal umbrella for the coming storm, says the first vice-governor of the BNR

Defense expenses will increase permanently, energy dictates prices and private investments freeze in uncertainty, writes the first vice-governor of the BNR Leonardo Badea in an opinion article sent to HotNews.

In a system where defense policy has dethroned monetary policy, Romania enters the storm with a sovereign rating one step away from junk and the lowest AI adoption score in the EU.

There are times when economic paradigms do not gradually erode, but collapse suddenly. We live one of them, says Badea. After three decades in which the logic of free markets and the efficiency of globalization dominated public decision-making, the economy has returned to what it was before 1989: an instrument in the service of geopolitics.

The succession of crises in recent years was not a series of independent accidents. The financial shock of 2008, the pandemic of 2020, the war in Ukraine in 2022 and the chronic instability in the Middle East have rebuilt, layer by layer, a new normality in which classic macroeconomic variables can no longer be analyzed in isolation, believes number 2 of the BNR. Military security, energy sovereignty and advances in artificial intelligence have ceased to be niche topics. They have become the pillars that determine the fiscal health of a state.

For Romania and the European Union, the challenge is no longer the management of an economic cycle. It is the adaptation to a development model where resilience matters more than cost optimization, the first vice-governor believes.

Defense: the permanent cost that the budget cannot avoid

The security that Romania enjoyed until 2022 is a thing of the past. Before the war in Ukraine, the defense budget was a national option, with systematic allocations below 2% of GDP. The new geopolitical configuration requires a minimum of 2.5% of GDP, on a permanent basis, not as an emergency measure.

Poland, with a similar geostrategic situation to ours, already allocates 4% of GDP to defense. The Baltic and Scandinavian countries propose over 3%. Security in this area of ​​Europe has become expensive. Very expensive indeed.

The structural risk of this imperative is what economists call geopolitical crowding-out: massive defense spending suffocates productive civilian investment. In such a paradigm, the efficiency of public spending becomes a critical variable. Only rigorous project selection and a focus on high value-added investments can accommodate the security imperative without compromising long-term economic growth potential.

Energy: the new mainstream politics

I will paraphrase a famous work in monetary policy—Some Unpleasant Monetarist Arithmetic, written in 1981 by Sargent and Wallace—which describes the dominance of fiscal over monetary policy. Today, in my opinion, we have a new dominance: defense policy has dethroned fiscal policy, and energy policy has become the link between geopolitical and macroeconomic decision-making.

The price of energy is determined globally by five factors: global supply and demand, trading hubs, electricity market structure, geopolitics and OPEC decisions, and the cost of carbon in financial markets. The mechanism is counterintuitive: in the European merit order system, the final energy price is not given by the average cost, but by the cost of the last unit needed to cover the demand — always the most expensive.

The paradox of the current market: although the installed capacities of green energy are increasing, the final price remains captive to the marginal cost of gas or coal, required to cover peak periods or absence of the renewable resource.

The situation in the Middle East amplifies this vulnerability. The Strait of Hormuz — vital to Gulf economies — remains closed as negotiations alternate with the resumption of military hostilities. The oil crises of the 1970s produced persistent inflation that Volcker-era disinflation combated at huge economic cost by aggressively raising interest rates. Even the most optimistic scenario for the current conflict in the Middle East remains disastrous for energy markets.

For Romania, the solution is not the hope that the global price will decrease. It is the decoupling of the consumer price from the dictates of fossil fuels in moments of imbalance, through massive investment in storage and flexibility of demand.

Artificial intelligence: the vulnerability that Romania ignores

Europe is not competitive in AI compared to the United States and China. And within this already lagging Europe, Romania ranks last: only 5.2% of enterprises used AI technologies in 2025. The European average is substantially higher, and Romania's growth rate — 2.1 percentage points per year — is three times lower than the European rate.

Delay in AI is not just an indicator of missed modernization. It is a multidimensional vulnerability. In energy, the lack of smart grid algorithms keeps Romania dependent on expensive production units and amplifies price shocks. In the economy, low labor productivity limits the fiscal resources needed for the defense budget. In security, technological superiority and the ability to rapidly process data are as important as raw budget allocation in a modern conflict. Digitization has ceased to be a business option. It has become a national security imperative.

The fiscal: the worn umbrella before the storm

Romania is facing an unprecedented fiscal picture in recent history. We are the first country in the European Union to manage a public debt of over 60% of GDP, with a BBB- (Fitch) sovereign rating — the last level before the junk category — at the same time as a high budget deficit, a significant current account deficit and an interest cost of approximately 3% of GDP. For perspective: the Maastricht treaty stipulates that the entire budget deficit should be no more than 3% of GDP.

With the current debt and rating metrics, our fiscal umbrella is largely worn out. In a non-Panglossian world, fiscal consolidation is not an exercise in austerity, but a necessity to restore reserves for times when geopolitical shocks may materialize into unsustainable financing costs.

I will paraphrase Paul Krugman's concept of the Panglossian decider—Voltaire's caricature who claims that we live in the best of all possible worlds, regardless of circumstances. In a world full of uncertainty, an approach contrary to this illusory optimism forces us to maintain fiscal leeway to use only when truly necessary.

This is essentially the logic of the theory of preventive saving — saving for a rainy day — promoted by Friedman, Modigliani and Campbell. Do not stockpile after the storm begins.

Triple adaptation as the only option

The context described above is not an academic exercise. It is the operative framework in which Romania must make public policy decisions in the coming years. Energy is becoming the main channel through which geopolitical tensions are transmitted into the economy, influencing inflation, economic growth and the macroeconomic policy mix.

The answer cannot be one-dimensional. The economy of the geopolitical age requires a threefold simultaneous adaptation: a robust defense policy that can absorb the permanent increase in spending without suffocating civilian investment; a smart energy policy, supported by investments in storage and AI, able to decouple the consumer price from the volatility of fossil fuels; and a responsible fiscal policy, the only one capable of providing real protection against shocks that financial markets can quickly amplify into unsustainable financing costs.

The three are interdependent. Without fiscal space, you cannot finance defense. Without cheap and reliable energy, you cannot sustain the productivity needed for fiscal consolidation. Without AI and digitization, you cannot optimize energy, defense, or budget revenue collection. The vicious circle can become a virtuous circle. But the time window is narrow.

Read the full version of the first vice-governor Leonardo Badea's article