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COVID-19 impact is severe, but EU offers hope

COVID-19 impact is severe, but EU offers hope

The coronavirus pandemic came early to Spain and the virus took a terrible toll in terms of both loss of life and damage to the economy.

The first COVID-19 cases began to emerge at the end of January, and by March the virus had spread throughout the country. A state of emergency and a national lockdown was ordered on March 14. No one was allowed to leave their home other than to go to work, or carry out essential tasks. By the end of the month, the country’s economy all but ground to a halt as the government declared a full lockdown: everyone, other than essential workers, was ordered to stay at home.

The country’s economy contracted by 5.2 percent in the first quarter of the year and by 18.5 percent in the second, the steepest decline in GDP in almost a century.

By the end of June, infections had slowed to a trickle and lockdown measures were eased.

Visitors from overseas were back in huge numbers by mid-July offering the hope of desperately needed revenue in the vital tourist sector. The result: cases of coronavirus started to rise. By late July the infection rate had shot up to 27 per 100,000 people, compared to just eight per 100,000 at the end of the lockdown.

It was clear from the start of the crisis that the economic impact of the virus would be severe, and the Spanish government fought, as did governments elsewhere, to contain the damage to the job market, supporting the incomes of some 6 million members of the 19 million-strong workforce. Measures included temporary lay-off schemes for workers, delaying the payment of taxes and increasing welfare benefits.

The problem was that in Spain, unemployment had already hit 14 percent before the pandemic hit.

The structure of Spain’s economy meant it represented something of a perfect storm when the virus struck. It has more workers on temporary contracts than any other country in the European Union – around 25 percent of the workforce. And, at times of economic contraction, the simplest course for a company to take is to cut its workforce, with those on temporary contracts the easiest to shed.

In addition, some 12 percent of Spain’s GDP is generated by tourism, supporting around 13 percent of all jobs; and this sector simply stopped during the country’s lockdown, along with many other services.

Around 70 percent of employment in Spain is provided by SMEs, which are often in the weakest position to make savings and protect jobs when challenging times arrive.

The Central Government developed support measures for companies, such as a government-backed loan guarantee plan of 100,000 million euros, which, in the words of Prime Minister Pedro Sánchez, was "the largest mobilization of resources in democratic history from the country".

In spite of these measures, by July, the structural weakness of the Spanish economy was increasingly apparent and long-term challenges became clear. 

Not least was the problem of tax receipts. Spain’s tax revenue amounts to 39 percent of GDP – six percentage points below the European average, equivalent to €80 billion annually. Prime Minister Sánchez made it clear that reform of the country’s fiscal system was inevitable. The richest would have to pay more to maintain the country’s welfare system, including public healthcare.

The EU’s 2020 summer Economic Forecast offered grim prospects for Spain’s economy, calculating it would contract by almost 11 percent over the full year.

But there was also hope, with the prospect of a rapid bounce back. Brussels analysts expected the Spanish economy to rebound by 7.1 percent in 2021. But this was dependent on a second wave of widespread coronavirus infections being contained.

There is hope, too in the way that the scale of the difficulties facing Spain’s economy has brought about cooperation between government, unions and business on an unprecedented scale. All these parties have agreed to cooperate with a government package to reinvigorate the economy, and crucially protect jobs, via a series of measures, including financing the digital transformation of business, help for the country’s critical tourism sector, and support for the automobile market.

Perhaps most importantly in the fight to get the country’s economy back on its feet is the agreement among the EU’s 27 members states to establish a €750 billion coronavirus recovery fund. This is the first time the bloc has agreed to borrow collectively on the international markets, and then use the funds raised to aid those states most in need of financial help. The agreement allows the EU to take advantage of its high credit rating, passing on the lower borrowing terms it can achieve to countries who individually would not get such advantageous rates.

It quickly emerged that Spain would be the second-biggest recipient of the fund after Italy, receiving as much as €140 billion in total over the next six years, made up of €72.2 billion in non-repayable grants, and the rest in the form of loans.

This huge financial largesse will not come without strings, especially concerned with economic reforms, and recipients will be required to detail exactly how they will spend the money they receive.

Even so, Economy Minister Nadia Calviño said the new resources would be “mobilized to foment recovery and to reorient our economy towards a more inclusive and sustainable kind of growth.”