In July of this year, Spain proudly announced that it would receive a significant chunk of a €750 billion coronavirus recovery fund that the 27 members of the European Union agreed on following a marathon summit in Brussels.
“This is a great agreement: we have secured €140 billion for Spain, of which €72.7 billion are in grants,” said Prime Minister Pedro Sánchez, of the Socialist Party (PSOE), after leaders clinched a landmark deal aimed at pulling the European economy out of its Covid-induced coma.
Spain is counting on the EU funds to power an ultra-expansive budget in one of the countries most affected by the coronavirus pandemic, both in health and economic terms. The International Monetary Fund (IMF) has forecast that the Spanish economy will shrink more than most in 2020, and that the country is headed for record deficit and debt levels.
The minority government, which is headed by a center-left coalition of the PSOE and junior partner Unidas Podemos, is also hoping that a new budget will extend its own political horizon. Spain has been functioning since 2018 under the budget approved by the previous conservative administration of Mariano Rajoy, and Sánchez’s inability to secure backing for a new spending blueprint already triggered one early election in April 2019.
It is not even clear whether governments have the administrative ability to spend that kind of money
And yet it is very likely that Spain will never receive the full €140 billion. The Spanish executive itself is giving up on half of that amount, at least for the moment, according to sources at the Economy Ministry and at La Moncloa, the seat of government.
For now, Spain will request the portion of the funds that take the form of grants for the 2021-2023 period, but it is not interested in the nearly €70 billion in loans, which would ultimately result in higher debt. “The European Commission allows members to request the loans until July 2023. What would be the sense of requesting them now? We will, if we need to, for the period 2024-2026,” said government sources.
Spain is not the only country standing at this juncture: so are Portugal and Italy, and even France might consider giving up some of the loans it has been allocated by the fund.
There are a few powerful reasons for this. For one, the European Central Bank (ECB)'s emergency asset purchasing spree has reduced the interest rates paid by countries for borrowing to the bare minimum: just this week, the Spanish and Italian treasuries issued bonds with negative yield, meaning that they are actually charging to get indebted. As a result, there are fewer incentives to ask the EU for loans, no matter how cheap these might be.
Secondly, the conditionality that might come with the funds, and which has yet to be well defined, continues to act as a deterrent. So does the suspicion that, sooner or later, Brussels will request adjustments from the countries with soaring public debt levels – and all the southern European nations are already above 100% of gross domestic product (GDP). Thirdly, it is not even clear whether governments have the administrative ability to spend that kind of money.
So Spain and other countries would rather focus on the grant aid that does not have to be returned, and ignore the rest of the available funds. But following the Newtonian principle of action-reaction, this in turn poses the risk that the European stimulus package could end up smaller in scope than expected, leading to a less vigorous recovery than desired.
Portugal’s prime minister, António Costa, has already publicly stated that he will request the direct grants but only apply for the loans if strictly necessary. Spain’s Sánchez has not been quite as explicit, but in the preliminary version of the Recovery Plan that Madrid sent Brussels last week, it is clear that Spain is also planning to request all the direct aid and none of the loans, at least for now.
The Economy Ministry says that its current plans only go as far as the 2021-2023 period, and that the grants will be enough to cover funding needs during that time. And La Moncloa underscores that there will be time enough to apply for up to €67.3 billion in loans if necessary.
The total amount allocated to Spain from the EU recovery fund, €140 billion, would have provided an economic stimulus equivalent to 11.2% of GDP. If Spain really does give up on the loan part of the package, estimated GDP growth would be a more modest 5.8% over six years.
Playing with fire
Sources consulted by this newspaper avoided giving explanations for the reasons behind the decision. But it seems obvious that the European funding program, known pompously as Next Generation EU, could end up a victim of its own success.
“Interest rates across the periphery have dropped due to the combined action of the ECB’s purchasing program and the recovery perspectives provided by the strong fiscal stimulus agreed to by the 27: there are fewer incentives to ask for loans if countries are issuing debt at rock-bottom interest rates,” notes Lorenzo Codogno, a former treasury secretary in Italy. “The real risk is that the European macro-stimulus will end up being far smaller than what was agreed to in July, and for this to darken the economic outlook.”
This risk comes at the worst possible time, with coronavirus outbreaks occurring across Europe – and Spain again leads these statistics – that could create further scarring in the form of higher unemployment, greater GDP contraction and higher public debt.
In the meantime, the European plan itself is experiencing delays. There is no agreement yet among the EU Commission, the EU Parliament and the German EU presidency on the details of the package, and this could push back the first money transfers until the second half of 2021.
It also bears noting that the ECB’s pandemic emergency purchasing program will not always be there, and that the EU’s fiscal rules setting out debt and deficit targets will not be on hold forever – in fact, that debate will return to the top of the agenda as soon as Germany begins to experience a recovery, and it is a given that this will happen long before southern Europe sees any green shoots.
The French economist Jean Pisani-Ferry used to say that “Europe’s mistakes in economic policy will be studied in the history books,” alluding to the disastrous management of the 2008 recession. Brussels and national governments have learned their lesson this time around, or so the story goes. But there is still time for Europe to shoot itself in the foot.
English version by Susana Urra.