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YOU are the Next Generation: Spanish Recovery and Resilience Plan

Article written by: Martino Da Col and Andrea Graziano

European countries have been among the most hit by the health, economic and social crisis brought about by the COVID-19 pandemic. The European Union, through the Multiannual Financial Framework (MFF), the Recovery and Resilience Facility (RRF), and other complementary initiatives, commits a total of €1.8 trillion to sustain the post-pandemic recovery and to improve the long-term prospects of Europe and its citizens. NextGenerationEU (also branded Recovery Fund), which adds €750 billion to the MFF, was agreed upon on 21 July 2020, becoming the largest stimulus package ever financed through the EU budget. By submitting a comprehensive national plan, every Member State is eligible to obtain funds to enhance resilience, mitigate impacts of the crisis, as well as support the green and digital transitions.

European Generation believes in the historical significance of this project, and realizes how big of an opportunity this is. Hence, we believe it is crucial, for all European citizens, to understand what national and European leaders are doing to seize such an opportunity. This is the final aim of this series of articles, which we have entitled “YOU are the Next Generation” as to underline the direct impact the decisions taken in the Recovery and Resilience Plans will have especially on younger generations, as well as the responsibility each and every one of us has in shaping the present and the future of Europe.

España Puede

Source: Pixabay

Spain is the 4th biggest economy of the Eurozone and second biggest recipient of the Next Generation EU funds. The Iberian country decided, for the first three years, to take solely advantage of the subsidies granted by the European Union without requesting any long-term loan, the reason being the postponement of three pivotal reforms to at least 2022. These necessary steps, namely the reforms of pensions, labor market and the national fiscal balance will take up a considerable amount of future European flows and represent a political challenge that the current government of Sanchez is willing to postpone. €69.50 billion thus will be coming into the form of subsidies (meaning funds that do not have to be paid back), 20 of which theoretically within 2021. Moreover, it plans on borrowing an almost equivalent amount for the 2024-2026 period. Spain has therefore achieved the highest subsidy surplus of the Eurozone (€43.1 billion): some may argue that this advantageous surplus is justifiable, being Spain arguably one of the harshest hit country by the social distancing measures and closures, with a 11% drop in production in 2020, the worst since the civil war.

With this in mind, the recovery plan, for Spain as well as for other economically weak countries like Italy and Greece, can be seen as of utmost importance to stir the countries towards the bridging of social gaps and the modernisation and recovery of their economies.

Spain has drawn inspiration from UN Sustainable Development Goals to draft their plan, while following the European Commission directives. As a result, the transformation and resilience plan, duly presented to the Commission on the 30th of April, presents the investment plan for the 2021-2023 period, along with the 100+ reforms that are going to keep Spain busy in the near future.

The Plan

The plan has four “transversal axes”, namely principles on which the Recovery, Transformation and Resilience Plan is drafted and which will guide Spain in the implementation of the reforms in the years up to 2026, when all of the projects will have to be up and running.

The first, a Green Spain, emphasizes the importance of increasing sustainability of the productive sectors, of stopping ecological deterioration in the country and promoting less impactful infrastructure; all while promoting a legal framework that encourages these steps.

Secondly, a Digital Spain, aims at increasing the digitalization of businesses (especially SMEs and start-ups) and the industry while training the entire population to the digital world.

The third axe is Spain, a Country Without Gender Gaps. Following the first she-cession in the records, the Iberian country emphasizes strongly on the bridging of the gender gap and the generational divide, which increased in the 2009 financial crisis and were cemented during this last pandemic crisis. Spain focuses on reducing barriers to an equal labor market, starting from education. This is a fundamental step for a country with the highest youth employment in the continent and a gender gap index of 0.778.

Finally, we find the last axiom, namely a Cohesive and Inclusive Spain. This last principle encourages a mixture of employment and social policies and budgetary stability as recipes for reducing inequalities within the country (young-old, urban-rural, male-female) and achieving sustainable growth.

A major emphasis was put on the necessity to mobilize private investment starting from 2021, says the vice president of Spain and minister of the economy Nadia Calviño. With this regard, the government has already borrowed €27 billion in advance, so as to enable strategic sectors to beat the European competition.

The structure of the plan consists of a list of ten priority policies, called structural reform levers which, for organizational and comparability reasons, we will divide in 3 macro areas.

Sustainability and green transition

Three priority policies distinguish themselves as recipes to promote sustainability and green transition, on which 39% of the Next Generation Eu funds will be allocated. This is close to the minimum share of 37% that each country had to allocate to green investments.

The first structural reform is the drawing up of an urban and rural agenda. Spain suffers two major problems in the countryside, namely rural depopulation and desertification. España Vaciada refers to the long-standing issue of isolated areas which, in the last decades, have lost about 50% of their economic and demographic value. Spain plans to improve access to basic services to citizens living outside of cities, while subsidizing private homes’ interventions on energy efficiency and urban renewal plans to recover historical centres. In cities, the government plans to increase electric mobility and establish low emission zones in city-centres. This energy transition for rural areas and reduction of emissions will go hand in hand with the transformation and digitalization of the supply chain of the agri-foods and fisheries system. Spain has emphasized and exploited its historical and cultural expertise for food and has drawn great advantages, especially in terms of export and tourism from it. However, the threat of desertification, land inefficiency and scarce digitalization of the sector have made it necessary to make reforms in order to decrease food waste, creating values and jobs around the business and contrasting once again depopulation. A total of €10 billion will be allocated to this policy area.

The second structural reform includes the creation of resilient infrastructures and ecosystems. As mentioned above, global rising temperatures are posing a threat on the resilience of Spanish ecosystems. The interventions will be divided into conservation and restoration of biodiversity (a fight against land erosion, desertification and the support of policies of climate mitigation and adaptation), preservation of the cost and water resources (reducing the fragility of one of the most important natural resources of Spain) and sustainable and connected mobility. This latter point aims at increasing carbon-neutral and sustainable transportation, as Spain can’t forego the possibility, like other European states, to increase mass transit capillarity and intermodal infrastructures to reduce the impact of movements of citizens and goods.

The final policy priority in this field includes the energy transition. Spain has reached 33% of renewable energy production, but a leap forward is required to achieve carbon neutrality in the medium-term. For this reason the country has projects of mobilizing private and public investment into developing production of renewable electric power. Moreover, it plans on electrifying mobility and the construction sector, so as to reduce carbon emissions in these sectors. Finally, it plans to invest in R&D for hydrogen technologies that are able to replace the consumption of fossil fuels where possible.

This, as suggested by the plan, must be all carried out in a way that includes all the stakeholders of society, even the groups at risk, to prevent depopulation by creating new job opportunities in those areas of the country most hit by the fleeing of their inhabitants.

Innovation and digitalization

Digitalization is the second pillar of the transition demanded by the Commission. 30% of the total budget will be used into fostering the digital transition.

The country of Spain scores relatively well in the European DESI index (the Digital Economy and Society Index), being 11th in the Union and above the average. Nonetheless a digitalization reform of the public administration is important to keep up with the recent socio-economic changes derived from the pandemic and from the overall advancement and influence of technology in our lives. An administration for the 21th century comprises in fact the digitalisation of the PA in the five strategic areas. They include innovations in the justice administration, public employment services, public health data, consular management and territorial administration of the State. The reforms will be accompanied by an increase in cybersecurity. The newly digitalized PA, says the plan, will be made more flexible and cooperation between the agencies and among different administrative levels will be fostered.

Small and Medium Enterprises (SMEs), the tourism sector, and in general the whole private entrepreneurial sector is in dire need of modernisation. Spain, just like Italy, has a big and vibrant ecosystem of SMEs which is sometimes slow at adapting to change and can be less responsive to state reforms. A digitalization of the key value chain will be of utmost importance for Spain to regain competitiveness in the industrial sector. The 2030 Spanish Industrial Policy is focused specifically in the strategic sector of healthcare, automotive, tourism and trade and agri-food which, in the government’s opinion, are those fields that need an increase of productivity through technology. Moreover, the policy includes the green and digital transition of many industries by the exploitation of the circular economy. In addition to a new industry policy, the government plans on investing more into INCIBE, Spain’s institute for Cybersecurity to deploy 5G and digital connectivity in general, helping SMEs to gain access to online instruments for business.

Spain has one of the most efficient healthcare systems. Nonetheless, it accounts only for around 8% of national expenses, with 33% of the total budget comprising private healthcare expenditures. Furthermore the pandemic put the system under a lot of stress as the country experienced an early boom of covid cases. It thus became necessary to renew and widen the capabilities of the national health system, with advanced prevention campaigns, equipment renovations and technological modernisation. As to what regards R&D, Spain plans on reinforcing national research projects and establishing a national strategic alliance for artificial intelligence.

The last step (and most expensive of all, capturing 17.6% of the funds) will be the one to strengthen the human capital of Spain in all of its stages, from kindergarten to the upper education. Spain has prepared a digital education plan that diffuses the use of digital media in school to integrate new models and educational techniques.

Spain has moreover prepared a national plan for Digital Skills that includes not only young students but also professional upskilling and reskilling, with the aim of closing the gender gap and targeting workers in depopulated areas.

Cohesion, resilience and values

Only after one full year of lockdowns and economic crisis we are starting to acknowledge the social and psychological effects of the Covid-19 pandemic. The structural reforms written below have the aim of bridging social gaps and reducing inequalities which have increased substantially across income, gender and age.

Spain includes an emergency plan for the care economy and the strengthening of gender equality and social inclusion policies. Tele-assistance, modern dependency care systems and new residential infrastructure will be planned and built for elders, which will guarantee more suitable places of residence and more protection.

Spain also promises to reform the system of reception and protection of asylum seekers, quite fundamental for a country that receives an important number of migrants yearly and shares the only European border with Africa.

Finally, the country will tackle the long-lasting issue of unemployment in the country by making new labor market policies to introduce internal adjustment mechanisms from external shocks for businesses (given their recent experience of dealing with the pandemic) and reform the active employment policies. Now that the minimum national income has been implemented, it will be of paramount importance for the government to be able to provide jobs so as to not fall in additional indebtment.

Moreover, a revolutionary law was passed in 2020, which consists in extending paternity leave to 16 weeks, matching exactly the maternity leave duration: an incredible victory and a big step towards gender equality, but nonetheless an additional expense in the Spanish budget.

1.2% of the plan will be directed towards the promotion of culture and sport industries. Culture and sports are big drivers of employment and value creation in Spain, but the undergoing crisis has highlighted the “ticket dependency” of the sector and its vulnerability with respect to the lack of public/spectators.

The Iberian country provides a reform of the cultural sectors, with the creation of the “statute of the artist” and the protection of the cultural heritage, as well as a reform of the sport sector, by organizing major events and letting the sport tourism grow.

Impact of the Plan

Since the creation of the Economic Monetary Union in Europe and until the 2008 crisis, Spain had experienced a higher than Europe-average amount of annual public investment in percentage to GDP, exceeding 4% of GDP on average. After the 2008 crisis, the percentage of public investment fell to 2% of GDP in Spain, while remaining relatively stable at 3% in Europe-average. The funds provided by the Recovery and Resilience Facility will be fundamental in changing this last tendency.

Evolution of public investment in Spain, UE and Eurozone” by Eurostat is licenced under CC BY 4.0.

Given the economic context of the country, it is estimated that the investments and reforms proposed in the Plan will potentially lead to a 2% GDP annual increase in the short term, and a 4% annual growth in the medium-long term. More than 50% of this increase will be linked to the digital sphere.

Furthermore, it is estimated that the implementation of the Plan will generate more than 800,000 new jobs by the end of the execution period, particularly on the touristic, digital, and entrepreneurial domains.

Source: INE: Instituto Nacional de Estadística

It is important to underline the expected impact of the Plan on other aspects related to the social sphere, such as gender gap, income distribution, regional convergence, and other fundamental socio-economic points. In this regard, the implementation of the relative investments and reforms is expected to be highly beneficial in achieving the desired results.

A challenge for Spain

The Iberian country has raised many internal concerns due to the uncertainty around two of the fundamental reforms. It looks as if growth and reduction of unemployment are the top priorities on Sanchez’s list, while the reform of pensions and of the labor market will have to wait. The former has a good chance of causing a political suicide if it was to be implemented during the first year out of the recession: tougher benefit reductions for early retirement and increasing real retirement age so as to match legal full retirement age will certainly raise some eyebrows within the elder population. The latter, in the meantime, will have to undergo tough negotiations with the unions before being drafted and passed.

The omission of the pivotal reforms, combined with the postponement of the employment of long-term loans to 2023, have already lowered 2021 growth forecasts from 9.8% to 6.5%. Some officials from the Bank of Spain are skeptical the country will be even able to respect that level.

Moreover, the fragility of the tax system will be a relevant obstacle in the medium-long term, once the flexibility mechanisms of the Stability and Growth pact will shrink. The challenges of collecting taxes, the high percentages of tax evasion, together with the high burden of labor taxation have made it necessary for Spain to modernise the national tax system. Soon we will expect important news on this topic, but for the moment many details are still to be defined.

Spain has an ambitious plan, spanning from a renewed Public Administration to increased social cohesion and a tax system reform. The real challenge and concern remains the implementation phase. The country has historically experienced social divisions and internal competition for funds, which pose a threat on the success of the Next Generation EU. A good governance model and precise and reliant temporary planning are fundamental to make sure that all projects are completed within 2026 so as to not lose any funds. The match for Spain has already started and it is not one the country can lose.

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