The agreement of the European Council on the Recovery Fund is historic. It is so due to its volume, which will mean massive transfers to Italy and Spain in the short term, and due to its nature. For the first time, the European Commission, on behalf of the Union, is going to issue debt in the market for a significant amount, and it will redirect those resources to countries, whose economic growth prospects are most beaten, this time, because of the containment measures of the Covid-19 pandemic. Thus, an embryo of a central stabilisation capacity funded with eurobonds (though not with that name) is created. This was one of the missing pieces needed to complete the monetary union. It is created on a temporary and extraordinary basis, but it constitutes a far reaching precedent on which to build a permanent common stabilisation capacity.
Transfers will reach 390 billion euros and loans 360 billion. The lion’s share of the fund is the Recovery and Resilience Facility. Spain will be the second net recipient of the funds in absolute value, after Italy. It will receive around 72 billion in transfers, spread over three years (including the amounts under the Recovery and Resilience Facility and other programmes). It is not a certain figure, considering that the allocation for the last year (30% of the maximum individual quota) depends on the accumulated evolution of the GDP in 2020 and 2021. Loans, on their part, could be available for around 75 billion euros, also depending on the GDP evolution. The total will reach 15% of the 2020 GDP.
In order to access the funds, Governments must present a national Recovery Plan for 2021-2023. The plan should contain reforms and investments planned, targets and milestones. Compliance with them will unblock payment commitments. The first draft of the plan should be presented in October, together with the draft budgetary plan, which is a regular document of European economic surveillance, which summarises of the public administration budgets. The final draft will be presented in April with the Stability Programme, another regular document, which includes planned fiscal targets.
If Spain obtains the best assessment, the Commission (in the name of the Union) will commit transfers to Spain for around 43,5 billion euros in the first two years. The remaining amount up a maximum of 62 billion will depend on the previous economic performance.
Reflections on the content of the Spanish Recovery Plan
First, there are two possible concepts to formulate the plan. The first refers to the identification of investment projects, which would be frontloaded to the first years. Green investments to achieve the European aim of climate-neutrality by 2050 would go undoubtedly towards building the plan under this concept. Nevertheless, it would be difficult and dangerous to pretend to exhaust the available funds financing exclusively such investment projects in such a short time. Under this concept investment projects are understood in a very strict way.
The second concept means broadening the concept of investments to understand it as all kind of expenditure, reforms and modernization initiatives which end up improving prospects for economic growth. Direct budget support programmes of the kind offered by the World Bank illustrate this concept. Instead of funding specific projects, the World Bank asks the government for a national strategy. This strategy includes legislative initiatives, a fiscal path, and consultation with social and political groups to build consensus for the national strategy. After agreement is reached, the World Bank finances a percentage of the national budget destined to several big items. This recovery plan can be conceived likewise.
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Secondly, uncertainty around national fiscal targets needs to be unclouded. As soon as economic growth picks up, public finances need to foster long-term sustainability. In the future, recessions and economic crises will appear again; public finances must count with fiscal space in order to issue large amounts of debt again. For that purpose, first, growth has to recover aided by public deficit, but not forgetting that transfers will stop in 2024. The fiscal path associated with the plan should present budget balances with and without EU transfers in order to facilitate planning to achieve a primary surplus by the end of the period. With this strategy, we may avoid a cliff effect in 2024, where net debt issuance increases again.
Thirdly, the labour market, the public pensions scheme and the tax system are the three reforms that the consensus identifies in order to guarantee sustainability in public finances. They are also the most controversial and difficult to agree upon. It is still unknown how some or several initiatives around these reforms will be added to the plan.
Lastly, governance. Parliamentary approval of the plan is not legally required. However, the challenge is so far reaching, the risk of not achieving the targets and milestones so dangerous, that it would be better having as much support as possible.
The agreement is historic, the funds are sizeable; the challenge is also major: recovering growth and restoring sustainability to public finances. A huge responsibility rests on the recipient countries (Government, opposition, autonomous communities, interest groups and citizens in general) in order to approve and implement successful national strategies. Not only promoting short-term growth, but also launching national modernisation plans which increase opportunities and economic resilience, sustainable and inclusive growth, and place public finances in the path to long-term sustainability. The success of Spain, its image (together with its power and influence) in Europe and the rest of the world in this decade depend on the good policies of next two years.
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