Today, Pedro Sánchez will set out the foundations of the “España Puede [“Spain Can”] Recovery, Transformation and Resilience Plan”. The document, already approved by the European Commission, broadly outlines the management of the Next Generation EU funds by the Spanish government. The funds, created by the European Union to repair the economic damage caused by the pandemic, contain €750 billion destined to transform member states through subsidies and loans over the next 7 years.
This injection of public resources into the economy is unprecedented in recent European history. The Spanish state, which was one of the countries most affected by the first wave of the virus, will receive a significant portion: 20% of the European total, according to the information which has trickled down so far. The objective is not only to tackle the Covid-19 emergency but also, according to the narrative accompanying the plan, to “modernise the economy”, making it “green and digital”.
However, where will this money come from? Will states have to make changes to guarantee they will receive the funds? Are they grants as is implied, or do they need to be paid back? Is it possible we are on the brink of a new debt crisis which will lead to more cuts and austerity? CRÍTIC, in collaboration with the Debt Observatory in Globalisation (Observatori del Deute en la Globalització, ODG), has analysed the “España Puede” plan to explain the key principles of an initiative which could shape the future of an entire generation.
Grants, or loans to be paid back?
States which ask for Next Generation EU funds, as explained in the “Doing more harm than good” guide compiled by the ODG, can receive both grants (which do not have to be paid back) and loans (which have to be paid back). The Spanish state, as things stand, has only applied for grants: Pedro Sánchez’s government could be in charge of €69.5 billion, to arrive between 2021 and 2026. The first €9 billion tranche will arrive in mid-July, once ECOFIN (a body formed by the 27 Economy and Finance Ministers of the EU states) has approved the Spanish national plan. Before the end of the year, the Sánchez government is expecting another €10 billion transfer.
Although this package calls itself a grant, it does not come without costs to the receiving country. In exchange for this large injection of resources, Brussels has asked receiving states to scrutinise public spending and increase taxes, to keep debt levels under control. What is more, the allocation of funds is conditional on implementing a series of reforms which the Spanish administration has begun to outline in the ‘España Puede’ plan. However, the document does not make clear quite how far-reaching the changes could be.
Some of Sánchez’s star reforms involve employment, pensions and taxation, but the plan (over 2,500 pages long) does not detail how these will be carried out. In fact, the lack of specification on the costs and benefits of the measures is one of the few complaints which Brussels has made to the Spanish government. The EU has decided to ignore this for the moment, but it is still unknown what these reforms will involve and who they will affect. The plan, which was supposed to clarify the details of the management of the funds, still provides more questions than answers. In any case, it is clear that one of the key measures will possibly be a pensions reform.
Pensions reform and the “Austrian backpack”
To protect the health of public coffers, the Spanish plan emphasises making the public pensions system more sustainable and outlines some changes which are already being made in this direction, such as increasing the retirement age and promoting so-called “senior retirement”. It also opens the door to financing pensions using other means in addition to social security payments. Just this week, the government and the large trade unions and employers’ organisations have agreed a first package of pension reforms. The changes include the partial repeal of the PP’s 2013 reform, which means that pensions will once again increase in line with inflation by law, but leaves the prickliest questions for the future.
What is more, the lack of specification in the plan, according to some analysts, could open the door to applying the so-called “Austrian backpack”, a recipe widely recommended by the European Central Bank. This measure involves the employer depositing a monthly payment into a bank account in the name of each employee which will serve to finance their retirement or severance payment. According to critics, this amounts to reducing the cost of dismissal to employers, leaving a key pillar of welfare policies in the hands of the banks and privatising pensions and severance pay. The system, although it would reduce the pressure on public funds, would also increase the precariousness of those who are most vulnerable and have most difficulty in accessing the job market.
The conditions tied to the European funds demand that the state’s economy be “healthy” and capable of facing future emergencies. This does not appear problematic, given that a country with a healthy public purse can invest more easily in public services, but it seems that the Spanish state is not aiming in this direction. Carlos Sánchez Mato, economist and professor at the Complutense University of Madrid, agrees: “conditions are not necessarily bad: making the pensions system sustainable is something any government would want to do, but this is not being thought through. This plan could have been used to improve the situation, but the elements in it could have grave consequences”. Sánchez Mato also points out that although Brussels sets the conditions, it does not stipulate how they should be implemented. “There have been enough claims that the EU is obliging us to raise the retirement age – it is all a question of political will”, he says.
However, the main issue is vagueness. “We are not being given the details of how these changes will be made, which conditions will apply to them and which actors will take centre stage. The most socially vulnerable sectors are mentioned, for example women, who are very affected by gender gap in pensions, but no concrete measures are listed to support them”, notes Joana Bregolat, a researcher from the ODG who has studied the plan. In the Spanish State almost 27% of the population are at risk of social exclusion, according to pre-pandemic government data, but the plan does not consider any concrete measures to improve the situation of these groups. The only reforms which benefit the general public involve modifications to the fiscal system which include extending the list of debtors to the Treasury, expanding the definition of a tax haven and increasing tax on the highest incomes. However, again, no detail is given. The substance of the plan, therefore, “falls short, because it is focusses on financing strategic sectors such as construction or energy but does not propose any sort of paradigm shift or even aim to provide stability for small and medium enterprises (SMEs), which generate the most employment. Saving large companies will not save the country”, denounces Nicola Scherer, a researcher at the ODG.
The private sector, the main beneficiary
One of the main conclusions of the “España Puede” document, according to analysts, is that the principal beneficiaries of the mechanism will be large companies. To take an example, we can look at the healthcare investments in the plan. In the middle of a pandemic which has shown that public health is crucial, the Spanish government is planning to invest just €1.069 billion in healthcare. An amount which represents just 1.54% of the total spend. And that is without reading the small print: 74% of this money will be allocated not to hiring or training staff, but to renovating equipment. “When you break the investments down, it is clear: they are designed for private enterprise”, asserts Scherer.
This prioritisation of the private sector is visible in other areas, as we can see in the section on care. This is a long text which encompassing children, migrants, refugees, unemployed people and women. “It is a hotchpotch. In the third sector we have been working in these areas for years in a differentiated way and the government throws it all together”, notes Maria Palomares Arena, executive director of the Calala Fondo de Mujeres foundation [Calala Women’s Fund]. The “emergency plan for the care economy” is allocated €3.5 billion euros, of which 60% are reserved for “deinstitutionalisation, improving equipment and technology”. This will be done by digitalising services, training public workers and renovating buildings used for social services. Therefore, a large part of the funds will be dedicated to “constructing and remodelling innovative residential and day centres”, as stated in the text.
This decision to invest in the construction sector, according to Palomares, shows “a clear will to invest in private enterprise – what is more, in sectors which are highly masculinised. In this way, the generation of quality employment will be largely reserved for men”. What is more, the director of Calala considers that it is never considered that the majority of people working in care will not benefit from the plan because they either work in the informal economy or with private companies. “We see, therefore, that women, the most vulnerable groups and SMEs do not stand at the heart of these measures. And the same goes for the third sector, which is extremely important in care”, she asserts.
What is more, the government is reserving €100 million for three pilot projects to improve the care system. “Do you think that a small organisation could manage a 33 million euro project? We are being left in the cold. This budget is designed for large companies like CLECE, which are able to work with that amount of money”, say those at Calala. In this way, neither the people who care nor the people who cure are directly benefited by the plan, despite being considered essential workers during the hardest part of the pandemic. “The crisis has had a phenomenal impact in terms of people looking out for number one”, asserts the economist Carlos Sánchez Mato. “Today, the public health and care system is much more important than construction, but in the name of economic recovery, investments will be made in those sectors which generate short-term profits, ignoring the fact that this situation of generalised poverty is unsustainable, even by capitalism”.
Where does the money come from and who must it be returned to?
Since the support package was announced, the millions and millions of euros have been talked about as if they will fall from the sky. However, money is never for free and it must be borne in mind that these funds do not come from the EU community budget but from the issuance of debt by the European Union itself.
This fact is an important development: beginning with the 2008 crisis, the EU began to debate the possibility of issuing pooled debt, but the richest countries (such as Germany) opposed it, leaving the poorer EU countries such as Greece, Italy or the Spanish State itself to face the debt crisis alone. It was not until the pandemic that the European Commission decided to create the Eurobonds. The main change since the 2008 crisis is that the bondholder is the European Union and the responsibility for repaying the debt is shared amongst the 27 EU countries. This qualifies the debt as maximum quality and minimum risk and is the reason that the bonds are so attractive to the financial markets, which would otherwise never have bought debt issued by countries with very damaged economies like Spain or Italy.
It is the issuance of debt through these bonds which has funded a large part of the €750 billion euros feeding Next Generation EU. So far, €20 billion euros have been issued and this is expected to rise to €900 billion in 2026. In this way, the EU is indebting itself to the so-called “financial markets”, but it is difficult to know which natural or legal persons are hiding within these markets. “There is no transparency regarding the bonds market and it cannot be determined who buys the debt”, explains Carlos Sánchez Mato.
The danger of these Eurobonds is, according to Nicola Scherer, that “the European Union, and therefore the Member States, are indebting themselves to financial actors which have no moral criteria and only want to reclaim the funds, regardless of what happens within the States and the price they have to pay”. In addition, it is not to be forgotten that, despite the fact that Member States will receive support funds as non-repayable grants, the Next Generation EU budget has to be paid back by the EU itself. This is why it is so important for Brussels and for Sánchez’s government to implement measures which will increase revenue, to keep this situation under control.
Could a new wave of cuts be coming?
So, what will happen if the debt is not repaid? What will happen when the Stability Pact is reactivated, which controls the spending of every EU country? For Nicola Scherer, from the ODG, the answer is that we will go through a repeat of what happened in 2008. “Ten years ago, the State had to intervene, demolishing the neoliberal idea that the market will solve all problems, and it had to be the main saviour of the banks, rescuing them with public money. Today the situation is different, but the same logic applies, and we could end up rescuing the productive sector”.
For Scherer, if a series of social conditions are not imposed on the companies which receive Next Generation EU funds – and it does not seem that they will be – the situation will be resolved with cuts and austerity. “It does not serve the EU’s interests if States go bankrupt, and so they will invent a way to make the debt sustainable. The countries which have active economies will be able to refinance it and those which don’t, like Spain, will have to get the money from wherever they can”, says the ODG. That means from public funds and public services.
It is worth remembering that in 2011, in the worst part of the last crisis with the EU scrutinising debt and spending, the Spanish State decided to open a constitutional can of worms by reforming article 135 and adding the concept of “budgetary stability”. The new text determines that, in a situation of debt, the State will prioritise the repayment of external creditors above the execution of the General State Budget and public investments. In this way, the poisoned chalice of the European funds means that healthcare, education, benefits and social services could be cut in order to guarantee debt repayments. However, all is not yet lost and so far, just a very small part (€140 billion) of the money which the Spanish State could receive from the EU has been transferred.
This money is called Next Generation EU and it will be the next generation which has to live with unprecedented levels of debt. The only way to avoid this, and all the experts consulted agree on this, is to invest in sectors which, while not delivering immediate profits, will sustain the economy and guarantee real economic transformation. Focusing on the third sector, public services and care, SMEs and the self-employed will diversify resources and, instead of putting all our eggs in the Ibex-35 basket, share out both wealth and risks. The next few months will determine the decades to come. Because, as summarised by Nicola Scherer, now more than ever we find ourselves facing the dichotomy of “debt or life”.
