IMPACT OF CORONAVIRUS CRISIS

Spain’s economy shrank 34% in the first two weeks of the coronavirus lockdown

The government is counting on EU funds to help with the economic recovery, but faces political disputes at home over the use of the money

The food services sector suffered particularly from the strict confinement measures in Spain.
The food services sector suffered particularly from the strict confinement measures in Spain.Enric Fontcuberta / EFE

Spain experienced a sharp decline in economic activity during the first two weeks of the coronavirus lockdown, according to figures released by the Bank of Spain. As a result of the strict lockdown measures implemented to contain the spread of Covid-19, there was a 34% fall in output between March 16 and 31, compared with the eurozone average of 21%. Among other large European economies, only Italy and France were similarly impacted. Germany, which adopted less stringent measures, saw a 13% decline in economic activity.

The Bank of Spain also noted that “the adverse impact on activity has been most asymmetrical across sectors.” The market services sector, which includes retail, accommodation and food services, took the biggest hit across the euro zone (26%) as a result of restrictions on movement and the closure of many businesses. But the impact on services activity was notably higher than average in Spain, around 50%, reflecting its large relative weight in the economy.

Artistic activities, leisure and other personal services, which also carry more weight in Spain than in other euro zone economies, declined by 73% during the last two weeks of March.

The Spanish government is expecting gross domestic product to retreat by 9.2% for the year 2020 as a whole

“Although the health crisis is a shock with a common source, its short-term effects have differed in each of the euro area members,“ said the banking supervisor in a release. “These asymmetries reflect not only the differing intensity with which the pandemic has struck each territory, but also the particularities of the lockdown measures, the differences in productive structure, the export orientation of the different economies and their share in global value chains against the backdrop of a global crisis.”

“It’s true that the intensity with which the economy was shut down played a role, but I would venture to say that the main thing is the structure of the economy, each country’s productive specialization,” added Raymond Torres, an economist at the Funcas institution.

In Spain’s case, Torres said that some of its weak points are the numerous workers on seasonal contracts who did not all benefit from the ERTE furloughing scheme, and the fact that 95% of Spanish businesses are small and medium enterprises (SMEs), who had a harder time surviving the lockdown than larger ones.

The Spanish government is expecting gross domestic product (GDP) to retreat by 9.2% for the year 2020 as a whole (it declined 5.2% in the first quarter, according to the National Statistics Institute), while the Bank of Spain is expecting an annual contraction of between 9% and 11.6%. If there is a new wave of coronavirus transmission, the impact could rise to 15%, according to the supervisor. But 2021 is expected to bring a sustained recovery of more than 6.5% of GDP.

EU funds

Spain’s two largest political parties are clashing over the European Union’s €750-billion coronavirus recovery fund, which is pending backing from member states. Spain is expected to receive €140 billion to help shore up its economy, and around €61 billion could be in the form of grants rather than loans. On the basis of this aid, the Spanish government has drafted a plan to mobilize €150 billion in public spending within two years.

The governing Socialist Party (PSOE) and the main opposition Popular Party (PP) on Wednesday accused each other of lacking patriotism, both in the national Congress of Deputies and inside the EU Parliament. The European People’s Party (EPP) wants the funds for Spain to be released only on condition that they not be used “for ideological projects,” in a clear reference to the PSOE’s governing alliance with the leftist Unidas Podemos group.

Podemos leader Pablo Iglesias, who is a deputy prime minister of Spain, said in Congress that “conspiring in Europe so that there will be cuts [in Spain] can only be termed as one thing: treason.”

“Defending Spaniards and being a patriot means digitalizing and reindustrializing Spain
Dolors Montserrat, MEP for the PP

And in the EU Parliament, the Socialist delegation’s president, Javier Moreno, accused the Spanish PP of siding with “the strategy of the Frugal Four,” alluding to the four member states – the Netherlands, Austria, Denmark and Sweden – who want the EU funding to come with strict conditions. “You should learn to be patriots when you’re in the opposition as well.”

The remarks were met with assertions that “defending Spaniards and being a patriot means digitalizing and reindustrializing Spain,” in the words of Dolors Montserrat, a Member of the European Parliament (MEP) for the PP. “It means reactivating the tourism sector, and in conclusion creating jobs, which is the best social policy of all.”

Shortly before that, the leader of Spain’s PP, Pablo Casado, had told Prime Minister Pedro Sánchez that “the only ‘anti-patriots’ around here are the partners who made you the prime minister,” alluding to the separatist Catalan Republican Left (ERC) and its abstention at the vote to confirm Sánchez as head of government following the repeat election of November 2019.

The Spanish government knows that it needs congressional support to get the 2021 budget passed and avoid another repeat election. At the same time, the economic impact of the coronavirus crisis requires expansive policies that will help get the economy back on track, and this makes the EU funds all the more crucial.

As for the conditions to access these funds, the executive is prepared to enact reforms, but it does not want these reforms to take the shape of cuts, the way they did during the financial crisis a decade ago. In theory, the PP does not want cuts either, but it is keen to ensure that the money is used on “promoting structural reforms and innovation,” not on projects it defines as “ideological.”

English version by Susana Urra.

More information