Spain post-COVID: challenges and opportunities

by William Chislett, Senior Research Fellow, Elcano Royal Institute 

This summary of my much longer document focuses on those aspects related to the EU’s pandemic recovery fund. The full document also covers the current political situation, the independence conflict in Catalonia, the debate on monarchy or republic and foreign policy, and can be downloaded at:

Spain is one of the eurozone countries worst affected by COVID-19. More than 3.6 million people have been infected and over 80,000 have died. The economy has also been hard hit. Economic output (GDP) shrank 10.8% in 2020, the deepest recession in 80 years and the harshest in Europe, mainly because of the weight of the tourism and hospitality sectors (26% of GDP – five points more than the EU average), which have been decimated.  

The number of international tourists plummeted from 83.7 million in 2019 to below 20 million last year, the lowest figure since the late 1960s and generating just 4% of GDP compared with the usual 12%. Spain has the most bars and restaurants per capita in the world (one for every 175 people, according to a 2019 report by the National Statistics Institute). The tourism prospects this year depend on the success of the vaccination campaign and the restrictions on travel imposed by countries, particularly the UK, around 19 million of whose citizens holiday in Spain in a normal year. 

At the end of April the government submitted its recovery plan to the European Commission (EC) in Brussels, detailing how it intends to spend almost €70 billion of grants from Next Generation EU (NGEU) in order to make the economy greener, more digitalised and inclusive. The EC is expected to approve the plan in July. 

Spain’s total of €155 billion from NGEU, the second-largest amount after Italy, entails the 2021-23 grants, €71.6 billion in loans (2024-26) and other funds. The total amount is more than the $12 billion Marshall Plan (equivalent to €112 billion today) launched in 1948 by the US after World War II to help re-build 16 non-communist countries in Europe, and from which Spain was excluded because of the pariah status of the Franco dictatorship. 

The tsunami of funds is a golden opportunity to modernise the Spanish economy and make it more sustainable. The government will have to accompany this with long-overdue structural reforms, particularly in the ailing pensions system and the labour market, and improve the education system. The funds will test Spain’s administrative capacity to execute them at a time when politics is absurdly polarised, particularly in Catalonia, whose government continues to push for independence. 

The unemployment rate, which stood at 14% when the pandemic started, close to double the EU average, is now around 16% (three times higher than the UK), but less than predicted by some forecasters because of the success of the job retention scheme known as ERTEs, which has been extended until September. The jobless increase is a far cry from what happened during Spain’s last recession when unemployment soared from 8.2% in 2007 to 26% in 2013, as a result of the bursting of a massive property bubble and the impact of the global financial crisis. More than 700,000 workers are still furloughed.  

High unemployment, before the pandemic, was not the only weak macroeconomic fundamental. The fiscal deficit was 2.8% of GDP in 2019 (it took a decade to get below 3%, the EU’s threshold discarded in 2020 because of the pandemic) and public debt stood at 95.5% of GDP, a worse starting position than most other EU countries. While unemployment has not risen significantly during the pandemic, albeit from an already very high level, the fiscal deficit ballooned to 11% in 2020 and public debt to 120%.   

The largest slice of the grants will go towards modernising and digitalising industry, including the key tourism sector (Figure 1). 

Figure 1. Components of the Spanish plan 

Policy area Amount (€ bn) % distribution Contribution to the green transition Contribution to the digital transition 
1. Urban and rural agenda, fight against depopulation and development of agriculture 14.41 21 Over 40% Under 10% 
2. Infrastructure and resilient ecosystems 10.4 15 Over 40% Under 10% 
3. Just and inclusive energy transition 6.39 Over 40% Under 10% 
4. A public administration for the 21st century 4.32 10%-40% Over 40% 
5. Modernising and digitalising industrial and SME tissue, help the recovery of the tourism industry and boost entrepreneurship 16.08 23 Under 10% 10%-40% 
6. Science and innovation, strengthening the national health system 4.95 Under 10% Under 10% 
7. Education and knowledge, continuous learning and capacity development 7.32 11 Under 10% 10%-40% 
8. New urban economy, employment policies 4.86 10%-40% 10%-40% 
9. Boosting culture and sport 0.83 10%-40% 10%-40% 
10. Fiscal reform, for sustainable and inclusive growth Under 10% Under 10% 
Total 69.53 100   
Source: Bruegel

Note: the plan presents the contribution to green and digital transitions for the sub-components of these main headings, but not for the main headings themselves. The categorisation is not always the same for all sub-components of a particular main heading. The categorisation of the main headings reflects our evaluation based on the amounts and the categorisation of sub-components. 

The idea that the unprecedented influx of funds is going to change Spain’s economic model significantly is magical thinking, but some things can be done. Notably, the government hopes to create a public-private consortium with automaker SEAT (part of the Volkswagen Group) and power-company Iberdrola to build Spain’s first electric-car factory. This will require a factory for batteries. As Europe’s second-largest car manufacturer, Spain could become an electric-car hub. Spain’s automotive sector (including components) generates 8.5% of GDP in a normal year and almost 20% of merchandise exports, and employs around two million people. 

In the 1990s and early 2000s Spain was very successful in using EU funds for large infrastructure projects, such as the 3,086km high-speed rail network (AVE), the world’s second-largest after China. Now is the time to invest in human capital. 

Education: a political football still kicked around 

The education system is not providing the skills that Spain needs, and this in a country where skill demands are more polarised than in many other developed (OECD) countries, with a big share of jobs requiring either very low levels of education or very high levels. The share of all jobs requiring only a primary education is higher in Spain (25%) than in any other OECD country; however, the supply of low-educated workers exceeds demand. At the other end, Spain faces high over-qualification and field-of-study mismatch among university graduates. 

The country’s eighth education law in 40 years was approved at the end of 2020, yet again without a political consensus. The focus of attention, as far as newspaper headlines were concerned, was the elimination in a previous law of the reference to Spanish as the language of instruction (lengua vehicular) in classrooms, a reform greeted jubilantly by Catalan secessionists who want the region, with its own language, to break away from Spain. Castilian Spanish, however, ceased to be the language of instruction years ago under the Catalan government’s policy of linguistic immersion, in violation of Article 3 of the 1978 Constitution. The change just legalised what was already happening. Little attention was paid to the much more pressing and shockingly high rates of grade repetition and early-school leavers, although the government introduced measures to try to alleviate these serious problems.  

In 2017-18 (latest figures) more than 30% of 15-year-olds repeated a year compared with virtually no one in the UK (around 2%). The high repeat levels demotivate students and is one of the causes of the equally high early school-leaving rate (16% in 2020, down from a whacking 32% in 2007). In 2019, 30.2% of Spaniards between the ages of 25 and 34 had dropped out of school after completing their basic education and were not pursuing any other form of education, double the EU level. These early school-leavers were qualified for only the most basic jobs. Language skills also leave a lot to be desired, particularly English. Spain was ranked 34th out of 100 countries in the latest EF English Proficiency Index. 

Labour market: living with high unemployment 

Spain’s governments in the last 40 years have passed more than 50 labour market reforms of one sort or another, apparently a world record, and yet unemployment has never been lower than 7% during that period (a crisis level for most other developed countries, particularly the US and UK).  High unemployment has become the norm.  

The labour market is exhausted with so many reforms, which cannot be said to have had much success in lowering unemployment, particularly among workers under the age of 25 whose jobless rate today is more than 40%. That rate was still double the EU average before the pandemic at 30%. 

Some of the unemployment reflects the failures of the education system, as we have seen above.  It is an axiom that higher educational attainment increases employment prospects: 23.4% of Spaniards aged between 25 and 34 in 2019, whose education ended at 16, were unemployed compared with 11.8% of the same age group with a university degree or advanced vocational training. The latter level, however, is still high by the standards of most EU countries and again can be attributed, to some extent, to Spain’s economic model. Surveys repeatedly show the dissatisfaction of many university graduates with the jobs they attain, for which they are overqualified.  

Some of the unemployment is overstated because workers have off-the-book jobs in the informal economy, which cushions the impact of the high unemployment. More importantly the wide use (and abuse) of temporary contracts, introduced in 1984 before Spain joined the EU, created a two-tier system of ‘insiders’ (on permanent contracts) and ‘outsiders’.  The degree to which temporary employment can be reduced is a moot point, particularly in a seasonal sector like tourism. There is no doubt, however, that many employers are abusing the system, if not breaking the rules, by not converting endless temporary contracts into permanent ones when they should do, particularly in public administrations. One way to create a level playing field between temporary and permanent workers would be to introduce a single employment contract. 

Pension reform 

The government must also get to grips with an ailing pensions system. Spain’s population is ageing fast and will give rise to one of the highest old-age to working-age ratios among OECD countries, exerting strong pressure on financial sustainability. A Spaniard’s average life expectancy has risen 10 years since 1978 to more than 83 years, one of the highest in the world. The United Nations forecasts that in 2050 there will be 78 people in Spain over the age of 65 per 100 people aged 20-64 (the current figure is 33). People are going to have to retire later and contribute more to the pay-as-you-go pensions system. 

Rural development: the fight against depopulation 

The government’s agenda includes measures to try to readjust the balance between densely populated urban areas and what has become known as la España vací(‘empty Spain’).  

Spain’s population density of 93 inhabitants per square kilometre is far lower than the UK’s 279, Germany’s 240, Italy’s 206 and France’s 119. The least populated provinces, excluding regional capitals and towns of more than 50,000 inhabitants, have a population density of less than 12.5 inhabitants per square kilometre. They are: Soria, Teruel, Cuenca, Palencia, Zamora, Huesca and Burgos. Some villages have become virtually abandoned (more than 3,500 in Galicia) and are being marketed for sale. 

The deserted rural interior is becoming a political issue. The inhabitants of Teruel felt so abandoned by successive governments that in 1999 they founded a movement, Teruel Existe (‘Teruel Exists’), which in the November 2019 general election won more seats in the province than any other party, capturing one seat in Congress and two in the Senate.  

In conclusion 

The EU’s recovery fund gives Spain a chance to make its economy more sustainable, innovative, productive and resilient. Whether it does so remains to be seen.