Business and Finance

EU recovery fund: can Spain transform its economy?

It was as if occasions befell in reverse. In March, Spain’s prime minister Pedro Sánchez and King Felipe VI visited the carmaker Seat, close to Barcelona, to mark their assist for {the electrical} car mission the nation hopes will modernise and protect its important vehicle trade.

The mission is the showpiece of Spain’s plans to spend €70bn of grants from the EU’s coronavirus recovery fund. The go to felt like an inauguration. But it was solely 4 months later that the federal government issued its formal approval for the scheme. Even now the principles for the consortium behind it have but to be issued. The tender is not going to start till the tip of this 12 months and the funds will solely be disbursed in 2022.

Spain is in a rush to spend the cash. But the delays to the electric vehicle project — and the shortage of readability about its guidelines — are considered one of a number of query marks hanging over what Sánchez says is the “most ambitious” financial transformation programme within the nation’s fashionable historical past and the most important alternative because it joined the European Community 35 years in the past.

The Spanish plan can be a litmus check for the EU’s overall €800bn recovery programme — a bet to modernise the European financial system and deepen integration whose execution represents maybe the most important problem the bloc now faces.

The Spanish authorities says its nationwide plan, involving 110 investments and 102 reforms, will create 800,000 jobs in the course of the subsequent three years via spending on inexperienced expertise, digitalisation, schooling and coaching.

“It is essential that we receive these amounts at this moment,” says María Jesús Montero, Spain’s funds minister, including that the nation continues to be dealing with the “hangover” from the savage 11 per cent contraction in gross home product in 2020.

Spain’s King Felipe VI, centre, next to Spain’s Prime Minister Pedro Sanchez, left, and SEAT’s president Wayne Griffiths, right
In March, Spain’s prime minister Pedro Sánchez, left, and King Felipe VI, centre, visited carmaker Seat, close to Barcelona, to mark their assist for {the electrical} car mission. There to information them was Seat’s president Wayne Griffiths, proper © Quique Garcia/EPA-EFE

But she provides: “For us the European funds are a fundamental help not just to accelerate the economic recovery . . . but to achieve a programme of transformation. We have agreed with Europe that these resources will allow us to carry out change.”

In idea, the large advantages will come over the long term and so they hinge extra on financial reforms than funding. Reforms in areas resembling labour markets, taxation and pensions may enhance the financial system by 8-10 per cent over 20 years, in keeping with tough estimates by the Spanish authorities and European Commission.

There is far at stake for the EU too. Spain’s plan is the second greatest within the EU after Italy, amounting to €140bn, together with €70bn in loans which Madrid is anticipated to request sooner or later within the subsequent two years.

If the €800bn recovery fund — which is financed by frequent EU debt issuance — is seen as a hit, it may pave the way in which to a extra carefully built-in and steady eurozone, with a everlasting facility to borrow in occasions of disaster and a banking union. If it’s a failure, the ahead march of the EU may come to a definitive halt. Spain is an important check case.

Some critics are already warning that the nation could also be about to overlook its historic alternative due to politicised spending plans and halfhearted reforms. They cost that Spain is utilizing the cash to turbo-charge the recovery forward of elections due in 2023 relatively than finance lengthy overdue reforms to boost productiveness.

“We need a reform plan and instead we are seeing a counter-reform plan,” Mariano Rajoy, the nation’s former centre-right prime minister, stated final month.

Spain’s plan

Some of the 1,600 solar panels installed on Valencia’s judicial buildings this year
Some of the 1,600 photo voltaic panels put in on Valencia’s judicial buildings this 12 months.


Planned investments, together with €3bn for an electrical automotive initiative, €4.5bn on renewable power, and €7bn to extend the power effectivity of buildings


Planned reforms, together with modifications to taxation, pensions and coaching programmes


The variety of new jobs the federal government hopes to create, with an emphasis on inexperienced expertise, digitisation and schooling and coaching

‘We can’t wait’

Against the fee’s preliminary recommendation, Spain intends to front-load the funds, spending 77 per cent of its grants over the subsequent three years.

“We are trying to balance the long-term investment plans and transforming the economy with the bread and butter of today,” says Manuel de la Rocha, Sánchez’s major financial adviser, who oversaw the plan’s submission to Brussels. “We can’t wait so many years to spend the money, because people need jobs now.”

While a lot of the assets is not going to start to succeed in recipients till subsequent 12 months, the primary spending priorities have already been outlined. They embody €3bn in public funds for the electrical automotive initiative, a €7bn programme to extend the power effectivity of buildings, and €3.5bn on serving to as many as 1m small and medium sized companies go online.

Spanish finance minister Maria Jesús Montero
Spanish finance minister Maria Jesús Montero says the nation continues to be dealing with the ‘hangover’ from the savage 11 per cent contraction in gross home product in 2020 © Emilio Naranjo/EPA-EFE/Shutterstock

“The tenders are being launched and are on track,” says Nadia Calviño, deputy prime minister for the financial system. “My assessment is that we have made enormous progress when one thinks that it was [only] in July last year that the [EU] leaders agreed to create the plan . . . in terms of historical timelines this is really remarkable.”

She argues that the basic objective of the plan is to “undertake a transformative modernisation process” that reinforces progress and will increase its resilience over the medium and long run, including that the programme will “reach cruise speed next year”.

But, in distinction with Italy, the place the nationwide unity authorities has solid a consensus round its plans, Spain’s hyper-partisan political debate means there isn’t any nationwide settlement on the usage of the funds.

Pablo Casado, the chief of the primary centre proper People’s social gathering, has argued that the prime minister’s management over the assets may result in “clientelism . . . that ends in corruption”. In an interview with the FT this 12 months, he added: “Businesses are taking unprofitable projects out of the drawer — and the government is saying: ‘Give me projects so I can justify the European funds’ . . . It’s irresponsible.”

The nation’s areas will spend some €22bn of the €70bn in grants, however Javier Fernández Lasquetty, the PP politician who’s the chief economics official for the 6.6m sturdy Madrid area, complains that his arms are tied proper right down to the smallest of programmes.

The EU supply to Spain

Spain’s plan was among the first to receive official approval from Brussels. Ursula von der Leyen, commission president, right, pictured with Spanish PM Pedro Sánchez
Spain’s plan was among the many first to obtain official approval from Brussels. Ursula von der Leyen, fee president, proper, pictured with Spanish PM Pedro Sánchez


Amount of the €800bn EU recovery fund that may go to Spain, second solely to Italy


Grants that will probably be disbursed, to be adopted by €70bn in loans in 2024-26


Percentage of this that the federal government of Pedro Sanchez plans to spend within the subsequent three years

In Madrid’s case these embody €2m the central authorities has allotted for spending on turning into an “audiovisual hub” and €600,000 on the environmental and digital transformation of the agricultural and fishing system of the landlocked area.

But whereas critics complain that allocation of the fund has been positioned beneath the federal government’s direct management with little enter from the opposition events or Spain’s 17 regional administrations, the federal government and fee each keep it is going to be topic to powerful exterior controls.

Spanish officers are all too conscious of the resentment precipitated in Greece by the “men in black” — the EU and IMF officers who oversaw Athens’ austerity programme within the aftermath of the monetary disaster. They add that they’ve resisted stress from Brussels to micromanage the usage of the funds.

But they argue that the conditionality imposed by the EU is unprecedented all the identical — “stripping governments naked”, within the phrases of 1.

A participant carries a sign saying ‘Repeal the labour reform now!’ at a rally in Barcelona
A participant carries an indication saying ‘Repeal the labour reform now!’ at a rally in Barcelona. Spain faces excessive unemployment, notably among the many younger, and a two-tier system riddled with momentary contracts © Kike Rincon/Europa Press by way of Getty Images

Overall, the plan has 416 milestones and targets agreed with Brussels, three quarters of them within the interval as much as 2023. The key situation for the funds to maintain flowing is for Spain to maintain its phrase on finishing up reforms — notably in a number of the most delicate elements of the financial system.

The Spanish plan was among the many first to obtain official approval from Brussels. Ursula von der Leyen, fee president, has hailed it as “ambitious [and] far-sighted”. Sceptics fear that the conditionality of the EU programme — which can embody €70bn of loans in 2024-26 after the equal quantity of grants for the primary three years — will probably be weaker than anticipated.

The EU’s northern member states, which initially tried to scale down the dimensions of the recovery fund arguing grants can be wasted, are watching carefully.

Adriaan Schout, a senior researcher on the Netherlands Institute for International Relations and a former adviser to the Dutch authorities, says Spain’s plan compares unfavourably to Italy’s beneath prime minister Mario Draghi.

“Spain impressed a decade ago with the way its banks were restructured. However, that was a decade and a crisis ago. Italy has now picked up speed under Draghi and the national reform plan is more concrete when it comes to milestones.”

Zsolt Darvas, of the Bruegel think-tank in Brussels, says Spain will solely obtain disbursements of EU cash if it meets the milestones for labour, pensions and different reforms which have been set together with the fee.

“What will be really crucial will be to look into the details of reforms and investments to see whether they are doing what they are really supposed to do or whether they are just meeting the milestones,” Darvas says. “How transformative it is going to be is more difficult to assess than whether they meet the milestones.”

Spain may face the danger of upper borrowing prices subsequent 12 months if buyers understand that the federal government has made little progress with reforms and is struggling to scale back its public deficit simply in the intervening time when the ECB begins to pare again its purchases of eurozone authorities debt. Such a punishing state of affairs is his “worst nightmare”, one senior Spanish determine tells the FT.

“This is the big risk the country faces,” the individual says. “And if things go badly, the risk not just to Spain but to the European project could be considerable.” 

Italian Prime Minister Mario Draghi
Italian PM Mario Draghi. Spain’s plan is the second greatest within the EU after Italy’s © Angelo Carconi/EPA-EFE/Shutterstock

‘Sweeties before spinach’

One massive problem has already been deferred to subsequent 12 months. With authorities debt that jumped from 95 to 120 per cent of GDP in the course of the disaster, Spain will solely take measures to place public funds on a extra sustainable footing after a bunch of consultants has ready a report on the problem which isn’t due till February.

But the fee has demanded progress on the 2 different showpiece reforms — pensions and labour guidelines — by the tip of this 12 months, whereas noting that modifications the federal government has dedicated to to date, resembling indexing pensions, “would increase pension expenditure in the medium to long term unless their impact is sufficiently offset”.

“The government is giving out sweeties before serving up the spinach; they have got the order of the reforms wrong,” says Toni Roldán, a former centrist MP now on the Esade enterprise faculty.

The leftwing coalition responds that it’s searching for settlement with enterprise, unions and different political events on growing the efficient retirement age via incentives, in addition to alterations to how ultimate pensions are calculated.

“Pensions were a lifesaver for many families during the pandemic,” says Montero. “Any change has to be the result of a broad consensus; we cannot have a policy on pensions that changes with the political cycle, it has to last one or two decades to be credible.”

Still tougher is the most important structural flaw of Spain’s financial system: its dysfunctional labour market, which is affected by sky-high unemployment, notably among the many younger, and a two-tier system by which greater than a fifth of the workforce ekes out a precarious existence on momentary contracts.

The authorities is dedicated to rolling again 2012 reforms by the earlier conservative administration, which watered down some protections for folks on everlasting contracts. But critics who argue that the 2012 reforms helped Spain recuperate from the monetary disaster by conserving down wage prices say such a transfer will make the nation’s labour markets extra, not much less, rigid.

The problem is inflicting a deepening rift throughout the authorities: Sánchez’s coalition companions in the novel left Podemos grouping are stepping up requires the wholesale repeal of the 2012 laws — pitting them in opposition to the prime minister’s Socialists, who favour extra modest modifications.

European Commission President Ursula von der Leyen meets Dutch Prime Minister Mark Rutte in Brussels
European Commission President Ursula von der Leyen and Dutch PM Mark Rutte. Spain’s plan compares unfavourably to Italy’s in keeping with Adriaan Schout, a former adviser to the Dutch authorities © Johanna Geron/EPA-EFE

“We should achieve a balanced reform that encourages job creation but also improves the quality of those jobs,” says Calviño. “We need to Europeanise the Spanish labour market, to provide flexibility but also end abuses and precariousness of contracts, which have increased inequality in Spain since the financial crisis.” 

She, like different ministers, emphasises the potential for change in different elements of the recovery plan, resembling coaching the 43 per cent of the inhabitants that lack fundamental digital expertise, spending €4.5bn on renewable power and, maybe most essential of all, revamping schooling and coaching regimes which have underperformed for many years.

“The educational system is for us one of the big questions we have to push for the future, and so is everything connected to training,” says Montero.

The scope of the plan’s ambitions is momentous, though the timetable for each the spending and reforms have been contracted into a couple of brief years. The coming months will do a lot to resolve whether or not it is going to actually transform Spain, and bolster Europe, or as an alternative go down as a wasted alternative.

“The funds are going to be very significant,” Pablo Hernández de Cos, Spain’s central financial institution governor, has stated. “But the big challenge is for the programme to change the country.”

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