MAPFRE Economics expects 2021 to be the year of crisis recovery for Spain. However, it is a recovery that must be viewed with some caution in light of the wide margin of uncertainty that still remains. In that regard, although the emergence of vaccines reduces the long-term risks, issues related to their deployment, as well as recovery management and other risks that are yet to come to light suggest a downward bias to short-term forecasting.
In Spain, the crisis caused by the pandemic has left significant scars on business activity, employment and production systems (especially in the case of SMEs) which, moreover, impact an economy that was still feeling the effects of the previous crisis and was continuing to show vulnerabilities in the labor market, public welfare system, education, sectoral structure and savings.
These vulnerabilities have exposed the Spanish economy, in a distinctive way, to the effect of the restrictive measures implemented to deal with the COVID-19 pandemic, causing a sharp fall in activity levels in 2020. This will limit the country’s ability to recover (it will not return to output levels seen at the end of 2019 until the end of 2022), and may lead the economy down a very limited long-term growth path, with implications both at the societal level and for the sustainability of public accounts.
Among the factors that will contribute positively to the recovery is the fact that national and supranational institutions have risen to the challenge of safeguarding the demand conditions necessary to prevent a temporary liquidity problem from becoming a permanent solvency problem, especially among small and medium-sized enterprises and households. As a result, the provision of liquidity and public guarantees, together with the strengthening of the healthcare system and the temporary replacement of employment income, have been decisive in mitigating against the crisis and initiating cycle reversal.
Nevertheless, the future sustainability of the Spanish economy’s recovery will depend to a large extent on supply factors. The strengthening of these factors should be at the center of long-term strategies and should be based on three pillars: (i) promoting nominal growth, (ii) increasing the economy’s flexibility and (iii) strengthening fiscal sustainability.
First, nominal growth requires the reinvigoration of productivity, which itself requires an updating of the skills and capabilities of human capital, especially in the digital sphere. This will entail an increase in capital contributions, particularly intangible contributions, and in labor contributions, by reducing structural unemployment and promoting the participation of women and senior employees. This growth must also be accompanied by a recovery in confidence so as to “unlock” precautionary saving, reflate the economy and prevent awkward debt relations.
Secondly, increasing the economy’s flexibility goes hand in hand with designing and implementing structural reforms in the Spanish economy that aim to reduce structural unemployment, accommodate the production structure arising from the pandemic (as was done in the wake of the housing crisis) and create the input environment needed to ensure more competitive growth. This process necessarily involves the digitization and (supervised) liberalization of markets.
And thirdly, future fiscal sustainability, as well as the necessary and credible rationalization of spending that must go beyond 2022, should be supported by the promotion of intermediate financial savings and the sustained growth of fiscal resources that will necessarily come from the highest nominal growth mentioned above.
A transformation instigated from outside
As in many of the episodes of transformation that Spain’s economy has undergone in its recent history, the change has been instigated from outside — fortunately from Europe on this occasion.
NextGenerationEU was born from the catharsis and reinvigoration of the European Union project. This component is additional to the multi-year financial framework and puts Spain in a common project that is more robust, cohesive and better aligned with the founding values of the European Union, to which inclusion, sustainability and digital competitiveness have now been added. This 750-billion-euro investment plan comprises two very positive dimensions for Spain to address its strategy of long-term revival and transformation. On the one hand, “what it gives to the Spanish economy” and, on the other, “what it demands of it.”
What the investment plan “gives to the Spanish economy” is 40 billion euros (10% of GDP) in transfers and loans, evenly weighted, to be used primarily during the 2020–2024 period.
And “what it demands of it” is that it finally prioritizes what is most important to it. First, it is a major step in the right direction that Spain has decided that its priorities are education, innovation, digitization, energy transition and internal articulation, with a view to restoring the economy to a path of sustained and vigorous growth.
Secondly, it requires better public and private governance, in the sense that this makes it necessary to provide clear details of the plan for the use of these funds (Spain has traditionally had problems in making coherent use of European funds), it avoids the perverse effects of the temptation to convert an investment plan into income transfers, to establish weights and balances and to create projects that survive the political cycle.
And, thirdly, it requires sharing responsibility with the private sector. The pursuit of publicprivate participation means risks are shared, not just income, which is the only guarantee that public investment decisions will be economically sustainable over time.
Ultimately, once the recovery has begun, long-term challenges and strategies must be considered. These challenges require a profound productive and institutional transformation for which, fortunately, Spain has been given a golden opportunity thanks to the European Union — not so much because of what it provides to the country through this plan, but mainly because of what it demands in return.