Spain’s € 70 billion problem: How to spend EU pandemic aid fast enough


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In the aftermath of the financial crisis ten years ago, Spain wondered how to cut spending to meet Brussels’ demands. Today Madrid faces the opposite dilemma: Can it increase spending enough to use vast amounts of EU coronavirus aid?

With the vast majority of the € 70 billion in EU stimulus fund grants slated for 2021-2023, resources are unprecedented for Spain, the program’s second-largest beneficiary after Italy.

“This is the top priority; it is an opportunity for the whole country, ”said Gonzalo García Andrés, Minister of State for the Economy, in an interview. “When the money starts to flow into the economy, it won’t stop.”

Money is at the heart of the economic and political strategy of the government of Pedro Sánchez, under whose leadership the economy contracted sharply by 10.8% in 2020, and which must face elections by end of 2023.

Spain’s share is part of the bloc’s € 800 billion coronavirus stimulus fund, intended both to stimulate the continent’s economy in the medium term and to transform it in the longer term, by financing a transition green energy, digitization and training as well as structural reforms.

The colossal sums bear witness to a flip-flop in Europe. Ten years ago, austerity was the answer to the crisis. Spain calls this a mistake and, with the help of France, Italy and especially Germany, convinced the EU to take a much broader approach.

Gonzalo García Andrés, Minister of State for the Economy, said: “When the money starts flowing into the economy, it won’t stop.

But the amounts reaching the Spanish economy this year are well below expectations. Experience shows that while the EU may be more convinced of the need to spend, many countries will find it difficult to absorb funds on such a scale and at such a speed.

Fund management issues range from the complexity and number of projects to tense negotiations with Brussels over the rules, and fear of taking legal risks by rushing.

Spain had initially planned 27 billion euros in European funds for this year, forecast the money would contribute 2.6 percentage points to growth in 2021. But such hopes have been dashed by bottlenecks and delays.

The EU gave Spain an advance of 9 billion euros in August and this month the European Commission supported an additional payment of 10 billion euros based on the country’s achievement of 52 reforms and other criteria.

Still, María Jesús Fernández, of the Association of Spanish Savings Banks, estimated that at most € 7 billion in stimulus funds will be allocated this year, contributing to a maximum of 0.6 percentage point of growth. .

“The impact on GDP does not occur when funds are allocated but when the [corresponding] the investment takes place and the money is spent efficiently, ”she said. “That’s why I think the figure is going to be very disappointing given the expectations we had.”

This is a large deficit at a time when Spain’s GDP is lagging behind pre-crisis levels.

“A certain time must pass before the money arrives in the economy: you have to call for tenders, you have to select the companies,” said García Andrés. “Throughout the process, we were among the first: the first, along with Portugal, to propose our plan, the first to demand funds from the commission and the first to receive its positive evaluation based on the achievement of the objectives.

“We are going very fast but we have to do it right. “

Other capitals are lagging behind. Hungary, Poland, Sweden and Bulgaria have yet to receive commission approval for their plans. The Netherlands have not yet submitted a plan.

Brussels demands that program money be allocated by the end of 2026, to end the pandemic. Madrid intends to speed up disbursements, planning to spend 77% of its total of € 70 billion on grants from 2021 to 2023.

Analysts say it means spending the money faster than Spain never managed with billions of past aid from the EU. Almost half of the 60 billion euros of EU structural funds earmarked for Spain during the period 2014-2020 have not yet been spent, according to figures from the commission.

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

She said the government had recognized in budget legislation that about half of the planned funds would not be spent this year. Instead, she said, he will have to allocate a whopping 36 billion euros in 2022.

Workers install components on S02 electric motorcycles on the assembly line of the Silence urban eco-mobility plant in Barcelona

Brussels last week approved the use of € 3 billion in stimulus funds to subsidize companies helping to produce electric vehicles © Angel Garcia / Bloomberg

The government says that the pace of disbursements is accelerating and will be maintained over two years. On Tuesday, he said more than € 15 billion – nearly two-thirds of the stimulus funds slated for this year – had already been transferred to beneficiaries or were awarded through tenders. However, that figure includes 11 billion euros transferred to regional authorities, much of which has probably not yet been spent.

Another big hurdle was lifted last week when, after months of negotiations with Madrid, Brussels approved the use of € 3 billion in stimulus funds to subsidize companies helping to produce electric vehicles, which the manufacturers say is vital for Spain.

García Andrés said it was no surprise that Spain was experiencing delays, given that it was a pioneer in using funds with Brussels.

“We are pioneers because we start a discussion [on permissible state aid], “he said.” When the commission gives us an answer, it must also apply to all the others who come after us. It is a cost that we bear.

Then there is the question of the reforms on which the continuation of aid depends. Most of the reforms that released Spain’s 10 billion euro payment had already been completed in mid-2021, long before Madrid requested funding. But the biggest reform promised this year – an update to labor rules – has yet to be agreed. And further reforms will be needed when Spain seeks the next tranche.

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

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