The European Commission is sending clear signals to Spain: despite a robust economy, Brussels sees an urgent need for action. The country’s pension system faces structural challenges in the medium term, and the implementation of post-pandemic recovery funds must be significantly accelerated, as only one year remains until the deadline. These warnings are part of the latest spring recommendations presented in the EU capital on Wednesday.
In contrast, no excessive deficit procedure will be initiated against Spain in 2024. The deficit stood at 3.2%, only two tenths above the threshold, which Brussels considers temporary and mainly attributable to aid from the DANA.
Tax Policy in Focus: Brussels Demands Far-Reaching Reforms
Regarding tax policy, Brussels is once again urging the Spanish government to reduce the number of products benefiting from reduced VAT rates and to increase environmental taxes. This aims to strengthen the sustainability of public finances through a review and simplification of the tax system. The goal is to partially shift the tax burden from labor to environmental, consumption, and property taxes to foster economic growth and employment, strengthen social cohesion, and promote ecological and digital transformation.
The report highlights that while Spain remains able to service its debt and short-term fiscal sustainability is considered secure, medium-term risks exist, particularly concerning the development of the pension system – a warning that has recurred in recent years. Despite geopolitical volatility, the Commission views the Spanish economy as well-prepared. Overall inflation continues to decline and is expected to reach 2.2% in 2025, due to the easing of energy and food prices.
Accelerating Recovery Plans: Spain in the Second Group
Member States have been categorized into three groups based on their progress in recovery plans. Spain is in the second group, alongside countries like Italy, Croatia, and Poland. These states have large plans with partial progress and, according to EU sources, need to increase the pace of implementation. Twelve other countries form the third group with smaller plans, whose macroeconomic relevance is lower. Brussels is also pushing for faster implementation of cohesion policy programs and the use of instruments like InvestEU and STEP.
“With just over a year until the August 2026 deadline, time is running out. That is why we have recommended to some Member States to step up their implementation efforts. We must not lose time,” emphasized Economy Commissioner Valdis Dombrovskis at a press conference.
So far, Spain has received 48 billion euros in grants from the recovery fund, out of a total of almost 80 billion euros available this way. The planned 83 billion euros in loans have not yet been disbursed. In December 2024, the country applied for the fifth tranche worth 23.9 billion euros (8 billion in grants and 15.9 billion in loans). This application is currently being reviewed by the European Commission’s economic services, also because it includes measures such as the diesel tax, which has not been advanced in Congress. Although the plan foresees two annual disbursements, the last one took place in July 2024, when 9.9 billion euros were received.
New Components and Defense Investments
The Brussels recommendations also take into account new components in the current global context, such as the possibility of activating the escape clause of fiscal rules for defense investments. Sixteen Member States, including (for now) Spain, have already used this option. This can lead to a change in the calculation of national deficit and public debt.
The Commission has assessed the medium-term budgetary plans of 26 Member States (Germany will submit its in July) and compared the growth of real net expenditure with the set ceilings. A certain margin of deviation (0.3% per year or 0.6% cumulatively over two years) is allowed before non-compliance is considered – a scenario that has occurred in Spain. Since the figures are projections for 2025, this is a preliminary assessment. Twelve countries are considered compliant, with compliance in five of them (Bulgaria, Denmark, Greece, Croatia, and Lithuania) partly due to the activation of the flexibility clause for higher defense spending.
Two other countries, Spain and Portugal, are considered “broadly compliant” according to Brussels definitions, while four (Cyprus, Ireland, Luxembourg, and the Netherlands) show a risk of deviation. Furthermore, Brussels proposes activating the defense clause to allow additional spending of 1.5% of GDP until 2028 in the mentioned Member States in response to the current geopolitical and security context. This point has been incorporated into the “Rearm Europe” plan, presented by European Commission President Ursula von der Leyen months ago.
“This year’s priorities can be summarized in two words: competitiveness and security. This brings us back to the foundations of the European project: peace and prosperity. The main objective of the European Semester remains the sustainability of public finances and macroeconomic stability, but it is also an important mechanism for coordinating our common efforts for competitiveness, security, resilience, and sustainable prosperity. I look forward to working with Member States to advance our common priorities on the basis set out,” Dombrovskis concluded.
