Next Generation EU and the Spanish economy

With the NGEU programme, Spain has a chance to make its economy more sustainable, inclusive and resilient. Whether it does so remains to be seen

Spain, the euro zone’s fourth largest economy, has been given the green light to spend €69.5bn in grants from the European Commission’s NextGenerationEU (NGEU) COVID-19 recovery fund, with the first €9bn arriving in July. The funds are desperately needed in a country hard hit by the global pandemic.

The human and economic cost of COVID-19 for Spain thus far is among the highest in Europe, with more than 80,700 deaths, the 11th highest count in the world, and with one of the harshest pandemic-induced recession in the EU, as the economy shrank 11% in 2020.

The NGEU grants will be used to make the economy greener and more digitalized, to improve the dysfunctional labour market (the unemployment rate sits above 15%, almost double the EU average, and over 30% for those under 25 are out of work) and to make improvements to the education system, in which the early school-leaving rate is 17% (above the EU average of 9.9%) and more than 30% of 15-year olds repeat a year of school (above the OECD average of 13%).

The total funds from NGEU for Spain amount to €140bn (11% of the country’s GDP in 2019), which is the second largest sum after Italy. The funds are split between grants and loans with (the latter yet to be taken up). Forty percent of the grants will support climate objectives, 28% digital ones and the rest will go towards measures designed to strengthen ‘economic and social resilience’.

The unprecedented influx of funds may seem like manna from heaven, but they come with strings attached and are not a panacea for Spain’s deep structural problems. The funds, to be released in tranches, are contingent on the government making reforms in politically sensitive areas including as regards: taxation, pensions pensions (a system that is widely regarded as unsustainable in its current form) and the labour market, particularly regarding the abusive use of temporary contracts (which currently amount to more than 24% of all employment contracts).

It is magical thinking to believe that this will fundamentally change Spain’s economic model, which is disproportionately based on tourism and construction, but some important changes can still be achieved under the auspices of the NGEU programme. Notably, the minority Socialist-led government, whose junior partner is the hard-left Unidas Podemos, hopes to create a public-private consortium with automaker SEAT (part of the Volkswagen Group) and power company Iberdrola to build Spain’s first electric-car factory which will require the development of a plant to make batteries. As Europe’s second-largest car manufacturer, Spain has the potential to become an electric car hub. Its automotive sector, including the manufacturing of components, generates 10% of GDP and 18% of total exports.

Realistically speaking, the labour-intensive and seasonal tourism sector (in a country whose jobless rate has rarely been below 10% over the last 40 years) will always be a cornerstone of the economy. But, as COVID-19 has exposed, tourism proved to be an Achilles heel for many of the southern European economies, including Spain’s. The deep recession was largely fuelled by the evaporation of trade in the tourism sector, which generated 14.1% of the country’s GDP in 2019, some 10 points above the EU average. Spain has the most licensed premises and restaurants per capita in the EU, with one bar for every 169 people. However, fewer than  international tourists visited Spain in 2020, down from 83.5 million in 2019, the second largest number in the world, and in the first four months of this year the number was 83% lower than in the same period of 2019.

Notably, more than €3bn of the NGEU grants will be spent on increasing the digitalization and sustainability of the tourism sector, but as Josep Borrell, the EU Commission’s foreign policy chief, said: ‘Our only message to an unemployed waiter on the Costa del Sol cannot be that their future will be green and digital. He will say “fine, but what about now?”’. 

The government’s Plan 2050, released almost at the same time as its recovery plan and which sets out goals for the country for the next 30 years, is right to recognize that education is the key challenge facing the country. This has, however, been an endless mantra of successive governments. Yet the many education reforms (with eight packages in 40 years) have done little to resolve the main problems, as the figures above show. The public debate has become bogged down in ideological issues such as how much importance should be given to the teaching of religion (note that the Roman Catholic Church still runs many schools in the country).

‘Spain’s system prepares students for a world that no longer exists’, Andreas Schleicher, the education chief at the Paris-based OECD think tank, told the El País newspaper this month. ‘Remembering all of history’s names and dates does not help you.’ The government wants to move education from a system based on rote learning to one based more on critical thinking. This will be a monumental task.

The failures of the education system feed into the labour market. At one end of the spectrum, large number of students who leave school at 16 and who do not go on to any form of training are qualified for only the most basic jobs. At the other end of the spectrum are graduates coming out of universities and who are often overqualified for the sorts of jobs they can find because of the nature of Spain’s economic model.

The EU recovery funds will sorely test Spain’s administrative capacity. In the 1990s and early 2000s, Spain was very successful in using EU funds for large infrastructure projects, such as the country’s 3,086km high-speed rail network (AVE), the world’s second largest after China’s, but since then it has slipped, as the country only drew down 43% of the funds allocated to it under the EU’s 2014-20 budget by the end of 2020, below the EU average of 56%. 

Successive Spanish governments have also been painfully slow to put into force the EU’s single market directives, taking almost 50% longer than the bloc’s average to do so, and only 12%  of the European Commission’s country-specific recommendations issued every year under the Semester Framework between 2011 and 2019 were fully implemented (although 40% reported ‘some progress’, which is close to the EU average); while these are non-binding in nature, they carry important political weight.

With the NGEU programme, Spain has a chance to make its economy more sustainable, inclusive and resilient. Whether it does so remains to be seen.