Newsletter: how can Spain take full advantage of the recovery plan?

How can Spain take full advantage of the recovery plan?

Monday, 13 October 2020

Funcas Europe

How can Spain take full advantage of the recovery plan?
Pazos Vidal has given us an assessment of what we know so far about Spain's recovery plan. Don't miss the video-interview where he covers the challenge of successfully absorbing EU funds, involving coordination between regional and central governments and reforming the public administration.

“Although GDP is forecast to grow by 7.9% in 2021, the economy will not fully recover to pre-Covid levels until at least 2023”, Maria Jesús Fernández Sánchez

The contraction of the Spanish economy in the second quarter – a stunning -17.8% – was among the deepest in Europe. The strictness of lockdown measures in response to the pandemic, the high incidence of tourism and perceived limits in the fiscal space needed to tackle the crisis are the key factors which explain this result.

Looking forward, the economic recovery will be both unequal and plagued with uncertainties. Assuming that a new lockdown is avoided, GDP is expected to contract by 13% in 2020. This figure is 3.2 percentage points below the last set of forecasts, because the proliferation of COVID-19 clusters during the summer has taken a toll on the recovery, provoking a collapse in the tourist sector and undermining confidence among Spanish consumers and investors.

Although GDP is forecast to grow by 7.9% in 2021, the economy will not fully recover to pre-Covid levels until at least 2023. The ongoing crisis will adversely impact the number of hours worked, but the furlough scheme will cushion the blow in terms of jobs.

Significantly, Spain could receive almost 140 billion euros from the European recovery fund. However, the impact of these funds will depend largely on reforms in areas such as the labour market, education, the digital and energy transition, and in general measures that help close Spain’s productivity gap with the EU. If these reforms, along with improved management of European funds, were carried out, the recovery would be significantly faster.

There are also downside risks, such as a rise in non-performing loans, thus reducing banks’ lending capacity and opening a new front in the crisis. This, however, can be counteracted to the extent that new measures to tackle the risk of cascading enterprise insolvencies are enacted.

“Youth job creation must be among the top policy measures to be considered in response to the crisis”, Joaquín Maudos

The high percentage of population at risk of poverty (25.3%), as well as those unable to face unexpected financial expenses of as low as 700 euros (33.9%) before the COVID-19 crisis, places a large number of population groups in a position of extreme vulnerability, especially those who are unemployed. In fact, poverty or social exclusion is 3.7 times higher among unemployed people than those who are employed.

Given that unemployment is the main determinant of poverty, it is especially important in the face of the COVID-19 crisis to extend the Government’s furlough scheme (ERTE, for its acronym in Spanish) in sectors in which the crisis will have a deeper impact. This extension is extremely important considering the fact that these Government transfers have reduced the increase in income inequality among the population.

Young people are another group that require special attention, since they present the highest percentage of inability to cope with unexpected expenses and a poverty rate 6.4 percentage points above the average. Furthermore, the rate of youth unemployment has increased by 9.1 points since the end of 2019. Thus, youth job creation must be among the top policy measures to be considered in response to the crisis, as it would be very unfair for young people to have to shoulder the brunt of the debt burden required to deal with the crisis.

What we are reading

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The European Climate Law needs a strong just transition fund
To deliver on the goals of the European climate law, the EU needs finally to get coal out of its energy mix: the EU should quicken the pace of decarbonization whilst delivering on its goal of social inclusion.

EU struggles to coordinate pandemic response
Weeks of debate on guidelines for travelers illustrates continuing failure to coordinate national health policies.

CER podcast: Brexit, the internal market bill and the prospects for a deal
What impact does the controversial Internal Market Bill have on the UK and what is the likelihood of a UK-EU trade deal? Interesting conversation between CER Director Charles Grant and Catherine Barnard, professor of EU law at Cambridge University.

Talk to you next Monday. Have a nice week!

Raymond Torres
Funcas Europe Director


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