On Monday, the European Commission gave the go-ahead for the arrival of another 12,000 million euros from the Next Generation program in Spain after verifying that our country has implemented the 40 milestones and reforms necessary to complete this phase, despite the fact that in Brussels there is concern about the reform of the public pension system and its sustainability, according to sources familiar with the procedure.
The “positive preliminary assessment” is not the final step, as the ball now passes to the so-called Economic and Financial Committee (EFC) before returning to Ursula von der Leyen’s team, but in practice it should be. The EFC, which includes representatives from all countries, now has a maximum of four weeks to make a statement, but since these are deeply technical issues and have the approval of the experts, it should not be more than a formality. It is therefore expected that by the end of July the Commission will be able to execute the payment.
With these additional 12,000 million, Spain will have already received 31,000 million, 45% of all that corresponds to it for now in transfers, which do not count for deficit or public debt. Although technically it is the Second Disbursement, in practice it is the third, since Spain received the first in August of last year, of 9,000 million and known as pre-financing, almost automatically to compensate for the expenses already made against the pandemic since 2020. The second, of 10,000 million, was claimed in December 2021. Spain is the only country that has already requested two disbursements. Most have ordered one or none. And there are even two countries, the Netherlands and Hungary, that have not yet submitted their recovery plans or have not been approved. 21 countries have received pre-financing, 10 have requested a disbursement and only five have materialized. Spain is far ahead of all the others, in theory and practice, and is entrusting a large part of the recovery to these funds.
Brussels is satisfied with the Spanish rhythm. To receive this second tranche of community funds, it was necessary to meet 40 milestones and reforms, including environmental issues, university reform, the labor market and pensions, and the sustainability of public finances, and it has been done, through new laws, investments, etc. The technicians do not see problems with what has been done, but they point to the end of the year for the most delicate moment: the sustainability of pensions.
Spain has informed the community authorities that the indexation of pensions according to the CPI will mean an increase in public spending of around 2.7% of GDP in 2050 and the Commission believes that the calculations are possible. On the other hand, they believe that the increase in tax collection that measures such as incentives to extend working life will entail will be between 1.1% and 1.6% of GDP. In this case, the Commission believes that Spain has been optimistic and they point out that it is more likely that savings will remain in the lower part of the range.
In any case, given that the Government has decided to approve the pension reform in phases, it will not be until the end of the year when Brussels evaluates the joint impact of all the measures: including the reform of the self-employed regime and the calculation period for pension -requirements for requesting the third disbursement- and the measures associated with the fourth disbursement, such as the already approved Intergenerational Equity Mechanism (MEI) that was only agreed with the unions.
The last few months have been very complicated negotiations, tense at times, because the revaluation with a CPI that accumulates an average rise of 8.1% so far this year is going to trigger pension expenses in 2023 above 13,000 million euros, putting the sustainability of public accounts at risk. The hard part comes now.
With regard to the MEI, which consists of increasing Social Security income through an increase in the social contributions paid by companies, postponing a future review in case an adjustment is necessary, there is a division in Brussels on whether it will be enough or not to cushion the increase in spending. The authorities trust that this measure will be complemented by others that guarantee the sustainability of the system, but if at the time there is no agreement on its effectiveness, the Commission could understand that Spain has not fully complied with the objectives and only one disbursement could be approved part of the funds. Spain would stop receiving part of the promised money.
Community sources maintain that the third disbursement should not be very complicated, but the fourth seems, right now, impossible. At least in its entirety. It is not only the issue of pensions, where there are far-reaching differences, but also in the tax reform, which is long overdue and should be fully operational in April 2023, the electoral year in principle. So the bets are tilted right now for a delay or a partial disbursement, something contemplated but that would leave a very bittersweet taste in a country that is entrusting everything to the funds and that presumes to be the most advantaged student in the class.
Although Brussels is looking day by day, for the final evaluation it needs all the laws, all the changes, to be approved. They know that there will be friction, but they do not want to anticipate events while pressing for all the reforms to take into account sustainability in the medium and long term, which is a clear part of the Spanish Plan and a mandatory condition for the rest of the payments. In the next six months, Moncloa will have to carry out what is pending and also make its own evaluation of fiscal sustainability, a process that seems complicated in the face of a hot autumn of economic hangover.
“The Spanish authorities have provided estimates indicating that replacing the sustainability factor with the intergenerational equity mechanism will be a fiscally neutral exercise, but the Commission services consider instead that it will lead to a significant increase in public spending as time goes by. “, says the text of the evaluation published today, and that is harsher than the messages (political and technical) that Brussels is sending in public. “In order to respect the total sustainability objective of the reform package, the risk of a significant difference must be addressed to ensure adequate compliance with milestones 409 and 410,” the Brussels document reiterates.
On the other hand, throughout this week, Eurostat must publish its final calculations on the real impact of the pandemic on the GDP of the 27, something that will be key to retouching the distribution of community funds. Spain had about 70,000 million in transfers, but now, with those estimates revised, it will be able to receive much more. Community sources do not want to anticipate a figure but they anticipate that it will receive at least 5,000 million more.
Given this increase in the allocation, the Commission will ask the Government to submit a modification to the Plan in which an allocation is proposed for the new item.
In addition, it seems that the Government has also decided to make use of the item of loans in advantageous conditions, another 70,000 million approximately available. Until now they had not been requested because market conditions were good, but with interest rates rising and risk premiums waking up, it may be a good way to face the next 12 months of turbulence, as this media reported today.
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