F-35 vs. Disadvantaged Areas: How Will Romania Be Able to Spend 3,5% of GDP on Defense and Combine EU Cohesion Funds with Military Investment

Mihnea Lazăr

As the war in Ukraine continues, Putin has just received an unexpected boost of energy from the Trump administration, and Europe is arming itself. To be more precise, it is „rearming” itself, after Ursula von der Leyen, the European Commission President, gave the green light the other day and proposed a plan called „ReArm Europe”, which aims to mobilize about €800 billion.

„For example, if member states were to increase their defense spending by 1.5% of GDP, this would create fiscal leeway of almost €650 billion over the next four years,” Leyen said.

So Romania could, in theory, propose such an increase in military spending with 1.5% of GDP (bringing the total to around 3.5% of GDP), without this extra 1.5% being „added” to the deficit.

The priorities in terms of equipment take into account the lessons learned from three years of war in Ukraine: air and missile defenses, artillery systems, including smart munitions that can strike deep, missiles, drones and anti-drone systems.

Unspent money from NRRP (The National Recovery and Resilience Plans) and EU funds could go straight into EU defense

Last month, Ursula von der Leyen announced that the EU is considering redirecting €93 billion of unspent NRRP funds to its defense sector as part of efforts to increase military investment and spending.

The leftover €93 billion that can still be loaned from the Post-Pandemic Recovery and Resilience Facility (RRF) represents unused funds out of a total of €800 billion in grants and loans agreed by the EU to be jointly sourced to boost their economies after the pandemic.

Another option explored by the Commission is the repurposing of the so-called cohesion funds which are earmarked for the EU's least developed regions.

„Based on the new approach, in addition to dual-use investments, the cohesion policy can now support the defense sector, treating it largely like any other industry,” according to a note from the Commission's regional funds department, consulted by the Financial Times.

For the 2021-2027 period, Romania has only absorbed around 7-8% of these funds, which are mainly dedicated to bridging the gap between „advantaged” areas that benefit from well-funded and well-developed infrastructure (Bucharest-Ilfov, for example) and the „disadvantaged” areas.

To find out how important these cohesion funds are for Romania and how (and especially if) they could be used in the EU's big financial plan of rearmament, we talked to Tana Foarfă, executive director of Europuls - Center of European Expertise.

PressOne: First of all, where does Romania stand at the moment in terms of cohesion funds?

Tana Foarfă: What are cohesion funds, actually? Basically, at the European level, we have several categories of European programs, among which the largest (and from which Romania has benefited the most) is related to these cohesion funds, which are several financial instruments, brought together, which allow Romania to bridge certain gaps between its regions.

In the current financial framework (2021-2027), Romania has been allocated €45 billion in cohesion funds. We call these €45 billion cohesion funds, but in fact this budget is divided into several instruments: the European Regional Development Fund (aimed at bridging the gaps); the European Social Fund (aimed at development and social impact projects); the Cohesion Fund and the Just Transition Fund; there is also a Maritime Affairs Fund.

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These funds are allocated on the basis of operational programs created by the ministry (Ministry of Investment and European Funds). These programs must have a set of priorities, aligned with EU priorities, which also set how the funds will be implemented.

In 2021 (when the financial framework started) we were still working on the drafting of the NRRP and these operational programs were left behind. This also had an impact on the absorption rate.

Free to invest in defense, but not to spend

How much of this €45 billion has been absorbed so far?

We are at a little over 7% absorption rate. When we talk about 2021-2027, we think that 2027 is the cut-off date, but in some contexts it can be extended.

If in 2027, the Member State shows that it already has some major investments ready and has already allocated some of the money, the EC has goodwill to grant an extension. Given that we are in 2025, the 7% percentage is quite small. If you look also at previous years, we usually have a slow start and try to catch up at the last minute.

This way, in the previous period- 2014-2020 - we had 84% absorption rate, with extensions. Now, given the delays on the NRRP, I don't know how optimistic I can be, but I hope we can at least pass the 50% absorption rate.

At European Commission level, we now have this intention to be able to use these cohesion funds for defense spending. What impact would such a redirection of funds to defense have for Romania?

President von der Leyen has declared that all defense spending by Member States will not be taken into account in the deficit. It was a kind of free rein for investments. But that does not mean that this expenditure comes from cohesion funds.

We have to make that distinction. The European Commission has published a document on the future financial framework after 2027.

Thus, in the current context, with the emergencies we are facing, the EU budget will have to be redesigned. First of all, the portfolio allocated to the Member States - what we call the „cohesion funds” - remains, to which we add two major strategic directions. A fund aimed to keep us competitive, which will involve more targeted investment in research and innovation, and funding for action outside of the EU. Here, in fact, we are looking at defense investments.

It's not about transferring part of the cohesion funds to another direction. It doesn't mean that, from 2027, cohesion funds go to defense.

There is no point investing in an arms factory if you don't have skilled workers. For this, you can use European reskilling funds

Basically, are these funds in the 2021-2027 financial framework set in stone?

If the government wants to rethink something, it is far too late to rethink a restructuring of the program. But this idea can be implemented in the financial framework starting in 2028.

Or, if it wants to invest from the national budget, Romania (which is already in the excessive deficit procedure) can go to the EC and say that „starting next year we want to allocate defense investments”.

But, mind you, this is „investment”, not „expenditure”.

In this context, if Romania wants to invest in a strategic program, the expenditure it will make towards this investment will not be calculated on the budget deficit we already have.

Are we to understand that this defense spending will have no impact on cohesion and  projects aimed at bridging the gaps?

No, they won't, they will work very well hand in hand. And it should work that way. Normally, it should work. Because there is no point investing in the development of a (arms) factory if you don't have capable and qualified personnel.

You can't start a targeted investment with only one component. You need additional funds, such as cohesion funds, to help you invest properly. Thus, cohesion funds could be used in targeted programs for retraining (in areas where investments are being made in the development of arms factories).

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