Spain warns EU of impact of high inflation on recovery plan

 Spain has raised concerns with the European Commission about the impact of surging inflation on its 70-billion-euro EU-funded recovery plan and expects “guidance” on limiting its effects on projects, two sources with knowledge of the matter told Reuters.After Italy, Spain is the biggest recipient of funds from an EU recovery fund agreed in 2020 to help member countries rebuild economies plunged into recession by the coronavirus pandemic.Annual inflation in Spain, a net energy importer, stood at 7.6% last month and is expected to approach 9% this month, eroding the value of its recovery fund grants and guarantees.”We had 70 billion to spend on the plan but now this is going to cost 5% points more because of inflation, and the money is the same,” one of the sources said.”Other projects also depended on investor appetite, which has now been reduced,” the source added. “The European Commission will have to give guidance on how to act.”The European Commission was not immediately available to comment. Spain’s Economy Ministry declined to comment. UKRAINE CRISIS WEIGHSA European diplomatic source said Spain was among a group of countries that had asked the Commission how to deal with prices that have been driven higher as a result of the Ukraine crisis, which is also exacerbating shortages of some goods.”Before the (Russian) invasion started, it was thought that each project and situation would be dealt with on an individual basis. But now the response is expected to be broader as it affects many countries,” said the diplomatic source.The answer will probably come in mid-year, when the recovery plan will be revised and countries will request new disbursements, the source said.Spain’s economy contracted by 10.8% in 2020, one of the biggest falls in the world. It then grew by 5% in 2021, not enough to recover its pre-crisis level, something the government hoped to achieve with a 7% growth forecast for 2022 thanks to the deployment of the funds.But most analysts have already downgraded their forecasts for this year to 4-5% and the government itself will revise its forecasts in the coming weeks to include the impact of the Ukraine crisis.”Higher inflation will reduce the multiplier effect of EU funds on the Spanish economy, because any spending will be partly eaten up by price increases”, said Raymond Torres, chief economist at the think tank Funcas.Torres points to the projects that rely on infrastructure and construction as particularly hit, cause they were facing bottlenecks already before the conflict.The Spanish plan aims, among other things, to boost green energy and hydrogen, to produce chips for electric vehicles and to make homes more energy efficient.