Spain’s 70 billion euro problem: how to spend EU pandemic aid fast enough

In the wake of the financial crisis a decade ago, Spain struggled with how to cut spending to meet Brussels’ needs. Today, Madrid faces the opposite dilemma: can it increase spending enough to use up the bulk of EU coronavirus aid?

With most of 70 billion euros in EU recovery fund Grants are planned for 2021-2023, these resources are unprecedented for Spain, the second largest beneficiary of the program after Italy.

“This is an absolute priority; This is an opportunity for the whole country,” said Gonzalo García Andrés, Minister of State Economy, in an interview. “Once money starts going into the economy, it doesn’t stop.”

This money is central to the economic and political strategy of the government of Pedro Sánchez, according to which the economy will shrink 10.8% in a brutal way in 2020 and will face elections in end of 2023.

Spain’s contribution is part of the bloc’s 800 billion euro coronavirus recovery fund, which aims to give a medium-term boost to the continent’s economy and transform it for longer, by finance the green energy transition, digitization and training as well as structural reform.

The huge numbers demonstrate a giant face of Europe. A decade ago, austerity was the response to the crisis. Spain claimed it was a mistake, and with the help of France, Italy and, importantly, Germany, triumphed over the EU thanks to a much more open approach.

Gonzalo García Andrés

“Once money starts entering the economy, it doesn’t stop,” said Gonzalo García Andrés, Secretary of State for Economic Affairs.

However, the total revenue of the Spanish economy this year has been much lower than expected. Experience shows that, while the EU may be more confident about the need to spend, many countries will struggle to attract capital of such scale and speed.

Problems with fund management range from complexity and number of projects to uncomfortable negotiations with Brussels over rules and fear of taking legal risks by rushing.

Spain originally budgeted 27 billion euros from EU funds for this year, forecast money will contribute 2.6 percentage points to growth in 2021. But such hopes have been dashed by bottlenecks and delays.

The EU advanced Spain 9 billion euros in August and this month the European Commission backing an additional payment of 10 billion euros based on the completion of 52 reforms and other criteria by the country.

However, María Jesús Fernández, at Spain’s savings bank association, estimates that up to 7 billion euros in recovery funds will be allocated this year – contributing up to 0.6 percentage points of growth. .

“The impact on GDP does not occur when funds are delivered but when [corresponding] Investments take place and money is spent efficiently,” she said. “That’s why I think the number will be very disappointing compared to the expectations we had.”

That’s a significant shortfall at a time when Spain’s GDP has lag after the pre-crisis level.

“A certain time has to pass before the money reaches the economy: you have to do the bidding, the companies have to be selected,” says García Andrés. “During this process, we were among the first: the first with Portugal to launch our plan, the first to request funds from the commission, and the first to receive a positive review. based on meeting goals.

“We are going very fast but we have to do everything well.”

Other capitals are lagging behind. Hungary, Poland, Sweden and Bulgaria have yet to receive committee approval for their plans. The Netherlands has yet to submit a plan.

Brussels requires funds from the program to be distributed by the end of 2026, to draw the boundaries of the pandemic. Madrid intends to pre-process disbursements, planning to spend 77% of its total €70 billion on grants between 2021-2023.

Analysts say this implies spending money faster than Spain used to manage with billions of EU aid in the past. According to commission data, almost half of Europe’s 60 billion euros in structural funds earmarked for Spain between 2014 and 2020 remains unspent.

Chus Escobar, partner responsible for the public sector at EY Spain, said: “The rate of absorption of these funds that European institutions expect does not seem very realistic.

She said the government has recognized in the budget law that about half of the planned amount will not be spent this year. Instead, she said, it would have to allocate a giant elephant 36 billion euros by 2022.

Workers install parts on an electric scooter S02 on the assembly line at the Silence Urban Emotion factory in Barcelona

Brussels last week approved the use of 3 billion euros in recovery funds to subsidize electric vehicle companies © Angel Garcia / Bloomberg

The government said the speed of disbursement is being accelerated and will be maintained for two years. On Tuesday, it said more than 15 billion euros – nearly two-thirds of the recoveries planned for this year – had either passed to beneficiaries or were being awarded through tender. However, this includes 11 billion euros transferred to regional governments, much of which is unlikely to have been spent.

An even bigger hurdle was removed last week when, after months of negotiations with Madrid, Brussels acceptance the use of 3 billion euros in recovery funds to subsidize companies that help produce electric vehicles, which manufacturers have speak very important to Spain.

García Andrés said it was not surprising that Spain encountered delays, as it was pioneering the use of funds with Brussels.

“We are the frontrunners because we are starting to discuss [on permissible state aid], “I said. “As the committee provides us with an answer, it must also apply to all others who come after us. This is a cost that we are assuming.”

The question, then, is which reforms are dependent on which aid. The bulk of the reforms unlocking Spain’s €10 billion payment was done by mid-2021, ahead of Madrid’s funding request. But the biggest reform promised this year – update labor regulations – consent is still required. And new reforms will be needed as Spain looks to the next stage.

“I know that the government is fully and strongly committed,” Paolo Gentiloni, the EU commissioner overseeing the program, recently told the FT. “This challenge can be successfully tackled, but. . . the second part will be more difficult than the first”.

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