Spain plans to use €750bn EU recovery fund to boost economy

Spain is seeking to use its share of the EU’s €750bn coronavirus recovery fund to revitalise its stalled economy, with the government likening it to the country’s 1986 entry into the bloc or the creation of the European single market. 

Madrid plans to borrow €27bn against future grants from the fund, long before they are formally approved by the EU. Prime minister Pedro Sánchez’s minority administration hopes to use the money to push through a 2021 budget and consolidate power, while boosting an economy hit hard by the coronavirus crisis.

“We are now in the second wave of this pandemic and we need to counter it with a clear sense of the EU working to ensure the recovery happens as soon as possible,” Arancha González, Spain’s foreign minister, said in an interview with the Financial Times. “Having a plan and a budget on the table is part of providing certainty to the uncertainty that surrounds us.”

But some analysts have raised doubts about the government’s ability to manage the recovery fund billions.

“The real key of the recovery plan is not the total amount but our ability to choose the right kind of projects,” said Rafael Doménech, head of economic analysis at BBVA, the Spanish bank. “It is not going to be much help if we get €140bn and then show ourselves incapable of spending it well.”

Spain, which hopes to qualify for €70bn of grants and €70bn in loans over the fund’s 2021-26 lifetime, is perhaps the EU country worst hit by the pandemic.

More than 3m people have been infected and Mr Sanchez has warned of difficult months ahead. The IMF expects Spain’s economy to shrink 12.8 per cent this year, and the budget deficit to rise to 14.1 per cent of gross domestic product.

At a time of such economic strain, the plan to take a €27bn “advance” from the fund would allow Spain to speed ahead even though the EU programme is still snarled up in the European parliament and will also need to be endorsed by member states’ legislatures.

By incorporating the €27bn into his government’s imminent budget, Mr Sánchez is also making it more difficult for opposition parties to vote down his spending plans. The prime minister has been unable to pass a budget since taking power in 2018. Doing so now would help secure his government in office for the current parliament’s three remaining years.

Ms González argued that advance spending of the kind Spain planned was “part and parcel” of EU leaders’ agreement in July to set up the fund. “The ultimate guarantee for all European stakeholders . . . is that there is going to be [EU] scrutiny,” she added.

But one EU diplomat cautioned that Spain’s plans to allocate such a large proportion of the funds ahead of authorisation would be keenly watched by northern European governments.

Member states have until the end of April to submit their plans. The European Commission will then have a further two months to assess them and EU finance ministers another month before projects can get the nod. 

Ms González fought back against suggestions that Mr Sánchez’s administration would not be able to manage the recovery fund effectively. She likened it to the large transfers that allowed Spain to invest heavily in infrastructure in the early decades of its EU membership, suggesting that other southern European countries had been less efficient.

“I see the plan that we are building now as a version on steroids of the cohesion funds that led to the big transformation of the Spain of the 1980s and 1990s,” she said.

“Compare how Spain used the cohesion funds to how Italy or Greece or Portugal used them and you can see the difference. We had a very clear plan to invest: we basically renewed the rail, road, airport and port infrastructure of this country, which is the basis on which we have built the competitiveness of our economy.”

Mr Sánchez’s government has already set out the 30 areas in which it plans to invest the fund, after EU guidance to focus on digitalisation and clean energy. Most would be spent on education and training, modernisation of business and the health system and rural development and infrastructure.

The prime minister has summoned the leaders of Spain’s 17 regions to discuss their plans for the recovery fund at a teleconference on Monday with Ursula von der Leyen, commission president.

But rather than accede to opposition demands to set up an agency to administer the resources — which the government says would take too long — he is set to retain tight control.

The Socialist-led coalition plans to allocate the €70bn of recovery fund grants during the 2021-23 period and would only seek to access the equivalent amount of loans after 2023.

“We should not be refusing to use any of the opportunities that the recovery fund is affording the country,” Ms González said. “But we should also be intelligent enough to use the grants part first.”

Spanish officials emphasise that reforms in areas ranging from pensions to spending reviews are also part of the plan. Ms González said the “digitalisation” of the justice system would help many companies by speeding up legal processes, and argued the fund would act as seed capital for private sector investment.

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