Brussels urges Spain to reform pensions and jobs in return for EU funds

The European Commission wants Spain to address its unresolved structural problems on three fronts – pensions, jobs and market unity – and it is demanding to see a credible and coherent plan setting out Madrid’s reform agenda as part of the deal to release a recently approved package of European stimulus aid.

“Reform” is a loaded word, because in recent years it has been used as a euphemism to avoid the term “cuts,” and because it is associated with the austerity imposed during the 2008 financial crisis by the so-called Troika made up of the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF).

Brussels has since changed its approach: instead of seeking to impose reforms, it is asking countries to approve structural changes in exchange for a flood of money included in Next Generation EU, a European recovery fund aimed at addressing the fallout of the coronavirus crisis that will allocate €750 million in total, half of it in grants. Spain has secured €140 billion of that amount, making it one of the biggest beneficiaries.

We are not in 2012: we are not asking for fiscal adjustments that could have negative short-term effects, nor are we imposing a solution. But Spain must specify measures

Anonymous EU source

The European Commission wants to use this massive injection of funds to ensure that countries complete reforms that have only been partially addressed. In the case of Spain, Brussels wants the government to make commitments on three major issues: guaranteeing the sustainability of the pension system, producing new rules to reduce temporary contracts, and drafting a law that will unify market criteria and avoid the fragmentation of regional regulation.

The EU’s executive branch would also like to make some of the recovery funds conditional to the actual implementation of those reforms, although Brussels and the IMF maintain that this could be an incentive if the aid is used to compensate for the short-term costs of any in-depth reform.

“Spain has a problem with the sustainability of its pensions and its job market. We are not in 2012: we are not asking for fiscal adjustments that could have negative short-term effects, nor are we imposing a solution. But Spain must specify measures,” said a European source.

Spain is now negotiating a package of measures with Brussels that it wants to present in January, coinciding with the announcement of the projects that the EU aid will fund. Brussels wants to approve the national recovery plans setting out member states’ reform and investment agendas by April, so it can issue European bonds before the summer.

According to the government’s plans, there will be some changes to the 2013 economic market unity law that was passed to reduce bureaucracy and bottlenecks derived from the various central and regional administrations involved in the process. But addressing this market fragmentation will require finding a balance that will not upset the regional parties who play a prominent role in propping up the government of the Socialist Party (PSOE) and Unidas Podemos. Last week, some of these parties helped the government approve its 2021 budget plan, providing much-needed stability to the minority coalition and extending its political horizon.

Meanwhile, Social Security Minister José Luis Escrivá has already drafted a pension reform plan, although the EU Commission is wary of the numbers. And on the jobs front, Economy Minister Nadia Calviño and Labor Minister Yolanda Díaz are battling to impose their respective views of what labor reform should look like: the former would like to leave things essentially the way they are, while the latter wants to partially repeal the 2012 labor law introduced by the conservative Popular Party (PP), which made firing cheaper.

We should consider why the impact of a crisis on employment is always greater in Spain

Carlos Martínez Mongay, a former economic official with the EU Commission

The executive is working on all three areas, but declining to provide details about commitments that could potentially lead to confrontation with the unions and employer groups, with the political opposition, and even among coalition partners.

EU sources said that Spain is one of the countries requiring the most attention. European forecasts are predicting a 12.4% contraction of gross domestic product (GDP) this year and soaring debt levels. And the job market is largely stable thanks to a government retention scheme known as ERTE which is due to expire early next year.

The Commission is unhappy with the fact that Spanish pensions are tied to the consumer price index, and wants measures to guarantee that this expense will be covered without pushing up debt levels. Brussels is also expecting moves on the labor front, but does not want to see the 2012 law repealed. The Commission is mostly interested in reducing Spain’s over-reliance on temporary contracts, and some sources said it also wants to see training programs for workers who will lose their jobs next year when the ERTE furlough scheme ends.

Carlos Martínez Mongay, a former economic official with the EU Commission, said that this moment should be viewed as an opportunity to transform the Spanish economy in the mid-term. “Without getting blinded by the ERTEs, we should consider why the impact of a crisis on employment is always greater in Spain. Without getting blinded by the European funds, we should wonder why the structural deficit is so high and consider measures that will provide a consistent social protection without burdening future generations.”

English version by Susana Urra.