Spain sets its hopes on the EU’s COVID-19 pandemic recovery fund

Spain will receive a tsunami of money from the European Union’s COVID-19 pandemic recovery fund if it meets the strict conditions. The magnitude of the amount can be judged from the fact that it is more than the $12 billion Marshall Plan (equivalent to €112 billion today), launched in 1948 by the US to help re-build non-communist war-torn Europe, and from which Spain was excluded because the Franco dictatorship took Hitler’s side.

The country, with the highest number of COVID cases in Western Europe and the sixth in the world (more than 1.1 million cases and over 35,000 deaths), sorely needs the money. The economy is the worst hit by the pandemic among EU countries, largely because of the disproportionate importance of tourism which generates up 12.3% of GDP and one in every seven jobs. There were only 15.7 million tourists in the first eight months of this year, 73% fewer than in the same period of 2019. The IMF expects the economy to shrink 12.8% this year and the fiscal deficit to rise to 14.1% of GDP.

The declaration of a six-month state of emergency as of 25 October, which gives Spain’s 17 regional governments powers to introduce tougher restrictions, and a nationwide overnight curfew (from 11pm to 6am) will aggravate the already dire economic impact.

Such a large amount of money from the Next Generation EU plan, roughly split between grants and loans, will sorely test Spain’s administrative capacity to adequately plan and execute the funds.

If the recent past is anything to go by, the outlook is not good. As of 23 September 2020, Spain had only absorbed 39% of the money it was due from the European Structural Investment Funds for the 2014-2020 period. Only 12% of the European Commission’s country-specific recommendations, issued every year under the Semester Framework, between 2011 and 2019 have so far been implemented. Spain also has a poor record in some cases of not spending funds it has budgeted. For example, in 2018 the public sector failed to execute almost half the money allocated for research and development (R&D).

“Now is the time to invest in human capital, long
neglected, and not physical infrastructure.”

Spain has been very successful in using EU cohesion funds for large infrastructure projects, such as the high-speed rail network, the world’s second longest after China. Now is the time to invest in human capital, long neglected, and not physical infrastructure (the construction sector is the source of much of Spain’s corruption) and emerge with an economy that is less dependent on tourism and more knowledge-based, digital, greener, and inclusive.

The European Commission wants countries to include in their investment plans and reforms the following areas:

• Power up: Frontload future-proof clean technologies and accelerate the development and use of renewables.
• Renovate: Improve the energy efficiency of public and private buildings.
• Recharge and Refuel: Promote future-proof clean technologies to accelerate the use of sustainable, accessible and smart transport, charging and refuelling stations and extension of public transport.
• Connect: Rollout rapid broadband services to all regions and households, including fiber and 5G networks.
• Modernise: The digitalisation of public administration and services, including judicial and healthcare systems.
• Scale-up: Increase European industrial data cloud capacities and develop the most powerful, cutting edge, and sustainable processors.
• Reskill and upskill: Adapt education systems to support digital skills and educational and vocational training for all ages.

The money will not be a panacea for Spain’s deep structural problems. Reforms are urgently needed, particularly in the unsustainable state pension system (Spain is forecast to have the world’s longest life expectancy by 2040) and the dysfunctional labour market (the unemployment rate was 14% before the pandemic, double the EU average, and is rising). Reforming these two areas could be a prerequisite for accessing the EU’s fund.

Not only has the pace of reforms slowed down in recent years, partly because there have been four inconclusive general elections in as many years (a record for an EU country), but successive governments have been particularly prone to overturning the reforms of their predecessors.

The minority coalition government, led by the Socialist Pedro Sánchez, has to send to Brussels by the end of the year its programme of reforms and how it plans to invest the money (70% of it in 2021 and 2022), and by next April the definitive programme. If one EU member state questions Spain’s flagging commitment to reforms, it can delay disbursements and take the issue to EU leaders for debate.

The European Commission has long taken issue with the direction of the Spanish economy, calling on governments to lower the very high level of temporary employment (more than 25% of total jobs), strengthen vocational training, reduce the 17.3% early school-leaving rate, and foster innovation. Long before the pandemic Spain was far from reaching the Europe 2020 targets, the EU’s agenda for growth and jobs, based on five goals for employment, R&D, climate change, education, and poverty and social exclusion.

Building a knowledge-based economy is being held back by the low educational attainment of 25 to 34-year-olds, one-third of whom in 2018 did not have any higher education qualifications after completing their compulsory secondary education. At the other end of the education spectrum, the recovery fund gives Spain an opportunity to attract back the legions of scientists, engineers, doctors, nurses, and other skilled workers who left the country during the 2008-2013 Great Recession, following the global financial crisis and the bursting of Spain’s massive property bubble.

Spain has a chance to make its economy more sustainable, innovative, productive, and resilient. Whether it does so remains to be seen.