Spain’s €70bn problem: how to spend EU pandemic aid fast enough

In the wake of the financial crisis a decade ago Spain agonised over how to cut spending to meet Brussels’ demands. Today Madrid has the opposite dilemma: can it ramp up spending enough to use up vast quantities of EU coronavirus aid? With the vast majority of €70bn in EU recovery fund grants scheduled for 2021-2023, the resources are without precedent for Spain, the programme’s second-biggest beneficiary after Italy.

Gonzalo García Andrés, minister of state for the economy, said: ‘When the money starts coming into the economy, it is not going to stop’

“This is the absolute priority; this is an opportunity for the whole country,” Gonzalo García Andrés, minister of state for the economy, said in an interview. “When the money starts coming into the economy, it is not going to stop.” The money is at the heart of the economic and political strategy of the government of Pedro Sánchez, under whose watch the economy contracted by a savage 10.8 per cent in 2020, and which faces elections by the end of 2023.

Spain’s share is part of the bloc’s €800bn coronavirus recovery fund, intended both to deliver a medium-term boost to the continent’s economy and to transform it longer term, by funding a green energy transition, digitalisation and training as well as structural reforms. The vast sums testify to a volte face by Europe. A decade ago, austerity was the response to crisis. Spain labels that a mistake, and, with the aid of France, Italy and crucially, Germany, has won the EU around to a much more expansive approach.

But the sums reaching the Spanish economy this year have fallen far short of expectations. The experience shows that, while the EU might be more convinced of the need to spend, many countries will struggle to absorb funds at such a scale and speed. Problems with managing the funds range from the complexity and number of projects to vexed negotiations with Brussels about the rules, and fear of taking legal risks by hurrying. Spain had initially budgeted €27bn from EU funds for this year, forecasting the money would contribute 2.6 percentage points to 2021 growth. But such hopes have been dashed by bottlenecks and delays.

The EU gave Spain a €9bn advance in August and this month the European Commission backed a further payment of €10bn based on the country’s fulfilment of 52 reforms and other criteria. Yet María Jesús Fernández, at Spain’s savings bank association, estimated that, at most, €7bn of recovery funds will be allocated this year — contributing a maximum of 0.6 percentage points of growth. “The impact on GDP doesn’t occur when the funds are assigned but when the [corresponding] investment takes place and the money is spent effectively,” she said.

“That’s why I think the figure is going to be very disappointing given the expectations we had.” It is a significant shortfall at a time when Spanish GDP has trailed behind pre-crisis levels. “A certain time has to pass before the money arrives in the economy: you have to carry out the tenders, the companies have to be selected,” said García Andrés. “Throughout the process, we have been among the first: the first, together with Portugal, to come up with our plan, the first to require the funds from the commission and the first to receive its positive assessment based on meeting the objectives. “We are going very fast but we have to do things well.” Other countries are lagging behind. Hungary, Poland, Sweden and Bulgaria have still not received commission approval for their plans. The Netherlands has yet to submit a plan. Brussels requires money from the programme to be allocated by the end of 2026, to draw a line under the pandemic. Madrid intends to front-load the disbursements, planning to spend 77 per cent of its total €70bn in grants over 2021 to 2023. Analysts say this implies spending the money quicker than Spain ever managed with billions of past EU aid. Almost half of the €60bn of European structural funds for Spain during the 2014-2020 period have yet to be spent, according to commission figures.

“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 recognised in budget legislation that roughly half of the planned funds will not be spent this year. Instead, she said, it will have to allocate a mammoth €36bn in 2022.