EU recovery fund conditions could hinder labor law changes in Spain

As European leaders continued to argue through the weekend over the amount and conditions of a coronavirus recovery fund, the impact on Spain could go beyond money and also affect planned policy reforms.

As one of the countries most affected by the Covid-19 pandemic, Spain has been pushing for a stimulus plan with a focus on grants and minimum controls on spending. But a group of northern countries dubbed “the frugal five” – the Netherlands, Austria, Sweden, Finland and Denmark – has been negotiating hard for a loans-based approach and strict monitoring.

After what was going to be a two-day summit on the EU budget and recovery fund extended into Sunday night without a deal, EU sources said they expect EU Council President Charles Michel to make a new proposal on Monday for €390 billion in grants, a position backed by France but above the €350 billion accepted on Sunday night by the “frugal five.”

Even if the 27 leaders finally reach a compromise, the effects on Spain could extend beyond the amount of money at its disposal to counter a pandemic that has killed over 28,400 people and sent the economy into a tailspin, with gross domestic product (GDP) expected to contract by around 10% this year.

Spanish Prime Minister Pedro Sánchez is in Brussels in a bid to secure the most advantageous conditions for Spain, which hopes to be a major recipient of EU funds along with Italy, another country hit hard by the coronavirus.

The southern countries’ position is coming up against a group led by the Netherlands, which wants strings attached to the funds and a veto option against recipients who fail to comply. So far, Sánchez has not announced any upcoming economic sacrifices for Spain, but government sources said that these will certainly come.

Europe’s northern countries want the recovery funds to come with conditions regarding labor market and pension reforms. If these demands are adopted, they could put the brakes on the Spanish government’s promise to repeal labor legislation introduced in 2012 by the previous conservative administration of Mariano Rajoy, at a time when Spain was seeking a financial bailout at the height of the economic crisis.

Back home, the main opposition Popular Party, which produced the 2012 landmark legislation, continues to defend it in Spanish Congress and in European institutions

Spain is currently governed by a center-left coalition of the Socialist Party (PSOE) and the Unidas Podemos group, and the partners signed a governing deal in December 2019 that explicitly said: “We will repeal the [2012] labor reform. We will restore labor rights that were taken away.”

But the present scenario could make this issue less of a priority, said government sources. In addition, both coalition members have a somewhat different view on the issue. “We are not giving up on repealing the labor reform,” said sources in Unidas Podemos. “We will not give up on eliminating the most harmful aspects of it,” said Socialist sources.

Even government ministers have made contradictory statements on the matter. Pablo Iglesias, a deputy PM and head of Podemos, once said that there would be an “integral” repeal of Rajoy’s reform. But Economy Minister Nadia Calviño called this “absurd.”

Unknown date

Although both parties insist that they have not given up on their pledge, made shortly before Spain’s first coalition government took office in January of this year, the move has been postponed to an unspecified date.

Repealing Rajoy’s reforms, which introduced greater flexibility in the job market by making it cheaper to fire workers, could run counter to the EU’s conditions for releasing funds if the frugal countries’ views are ultimately adopted. And Spain’s current pensions system could be targeted as well.

Spanish government sources said they had originally planned to start analyzing labor reform in September, although the Covid-19 crisis has changed the parameters.

“With 300,000 companies on an ERTE [furlough scheme] it is not possible to completely address reform. We’re in the middle of a pandemic,” said a government source.

The executive recently struck a jobs deal with employer associations and unions, but the former say that repealing labor legislation is a red line for them, while the latter are pushing for swift action.

Sánchez faces the added problem of heading a minority government that needs backing from other parties to push legislation through Congress. On May 21, the government signed a deal with the Basque hard-left Bildu party to repeal Rajoy’s laws, but the deal was short-lived.

And it’s not just the Dutch leader, Mark Rutte, who opposes softening labor legislation. Back home, the main opposition Popular Party (PP), which produced the 2012 landmark legislation, continues to defend it in Spanish Congress and in European institutions. The PP has also been quick to exploit divisions among the coalition partners.

English version by Susana Urra.