Europe: Transformation During Pandemic Times

Europe: Transformation During Pandemic Times

Published on October 15, 2020 / Leer en español

Director, CNE Policy Bureau, Madrid

Spain will bet on the green economy and the digital transformation of its society after being particularly hard hit by the COVID-19 pandemic. With more than 860,000 cases and 33,000 deaths recorded by mid-October, the Bank of Spain estimates that the Spanish economy will decrease between 10.5% and 12.6% during 2020. The country is facing one of the most severe economic contractions among advanced economies.

The Recovery, Transformation, and Resilience Plan recently presented by President Pedro Sánchez (PSOE) seeks to turn-around this blow to the economy by setting the stage for an expansive spending policy that aims to shape state budgets for the next seven years. The Plan contemplates ten key policies, among which are the digitization and decarbonization of the economy, the renewal of its technological capital, the increased internationalization of Spanish companies, a greater integration of Spain into European transport corridors, the development of deeper energy interconnections with neighboring countries (France and Portugal), and the implementation of social policies that ensure the integration of women and precarious groups into the transformation process.

A Two-Pronged Approach

Spain’s Transformation Plan is anchored in a broader and pan-regional scheme: the European Recovery Plan (also known as Next Generation EU), an ambitious investment and financing program that seeks not only to stabilize the economies of the 27 member countries of the European Union (EU) after the pandemic but also aims at stimulating its transformation and strengthening its future competitiveness. In the medium-term, Next Generation EU will suspend the structural adjustments contemplated in the Stability and Growth Pact of the EU, a fiscal discipline mechanism agreed to by member countries. It will also inject € 1,290 trillion euros (about $ 1,500 trillion dollars) to EU member countries in order to promote investments in cutting-edge technologies (for example, 5G infrastructure, artificial intelligence, clean hydrogen, and maritime sources of renewable energy), promote the digitization of their societies, develop sustainable infrastructures, ensure the resilience of their agricultural and fishing resources, and strengthen their national health systems.

For Spain, the European Plan is a blessing. In first instance, it will allow the suspension of structural reforms that were demanded by the European Commission (the executive body of the Union), particularly those pertaining to fiscal matters. As recently as last May, the Commission had observed that Spain had “deviated significantly” from fiscal targets, as it had not limited the nominal growth rate of its government spending to .6% during 2019. Now, with the European Reconstruction Plan, the Spanish government will have green light to expand spending deficit from 2.8% to 10.3% of Gross Domestic Product and to increase the level of public indebtedness from 95.5% to 115.5% of Gross Domestic Product.

Second, the European Plan will inject into Spain €140-billion euros from EU funds (about $165 billion dollars) in direct grants and loans between 2021 and 2026. These funds will allow Spain to increase its public investment from 2% to 6% of its Gross Domestic Product, bringing it at par to those countries that have the highest public investment in the world. The Sánchez government envisions this massive injection of funds producing a colossal transformation of the Spanish economy, one similar to the one registered during the 1980s and 1990s, when Spain joined the European Union and accessed its Cohesion Fund. This is certainly an ambitious and encouraging statement, as during those decades the Spanish economy experienced robust sustained growth, notably diversified, and multiplied its per capita income.

The Caveats

Certain voices, however, have tempered the official optimism. The political opposition of the Popular Party (PP) — which controls a significant block of votes in the Spanish Congress, where budgets must be approved — has raised doubts about the ability of the Sánchez administration to successfully implement this massive program. Similarly, some experts linked to the governing bodies of the European Union have questioned the vagueness and lack of specificity of the Spanish Plan. It is striking, for example, that the Plan lacks measures to address important vulnerabilities in the manufacturing sector, which for the past years has been affected by the relocation of industries to other areas of the world. It is enough to remember the acute shortage of masks, respirators, and personal protection equipment at the beginning of the pandemic to understand the importance of addressing this issue.

Finally, structural reforms (now postponed) may, after all, be unavoidable in order to ensure the success of the program. A study published by FEDEA, a leading think tank in Madrid, has warned that the bonanza of European funds will have transformative results only if it is accompanied by “good practices” in public governance: basing the selection of projects on cost-benefit analysis and minimizing the creation of new public structures to manage the infusion of funds, for example. FEDEA’s call for strengthening Spain’s institutional framework does not occur in a vacuum: as recently as February 2020 — a month before the pandemic hit the country and the government decreed one of the hardest and longest lockdowns in Europe — the European Commission had determined that Spain had made little or limited progress on the requirement that it strengthen the management of its public finances and the governance of public procurement of products and services. This, then, could well be the Achilles heel of the Spanish Plan: it could be as well the key to Spain’s expected economic transformation.