Brussels is set to sign off the first of the national recovery plans it hopes will revive Europe’s pandemic-battered economy, with officials poised to give the green light on Wednesday to historic spending proposals by Spain and Portugal.

The €800bn Next Generation EU fund, agreed last year, is a bet that large-scale spending on priorities such as energy transition and digitalisation can prevent the bloc from repeating the aftermath of the 2008 global financial crisis, when its recovery lagged behind that of the US.

The programme’s fate will be decided largely by the performance of big beneficiaries such as Spain, which last year suffered the steepest slump because of the Covid-19 crisis. Spain’s economy contracted 10.8 per cent in 2020 and it is slated to receive about €70bn in grants and €70bn in loans over the 2021-2026 lifetime of the plan. Portugal anticipates gaining access to €14bn in grants and €2.6bn in loans.

Italy will be the biggest beneficiary of the Next Generation fund, with €191.5bn of loans and grants expected to be signed off by the European Commission in the coming days.

As a condition of taking the money, all national plans had to set out how the EU funds would be used to further bloc-wide goals such as digitalisation and cutting carbon emissions, while also committing members to far-reaching reform. Observers warn that pushing the plans through will test member states.

“Implementation is key,” said Guntram Wolff, director of the Bruegel think-tank. Many of the recovery plans set out by EU states were impressive, he said, but he warned: “At the end of the day, you have to put them into place, and that means overcoming some domestic resistance. That is the challenge.”

Ursula von der Leyen, the commission president, will travel to Lisbon and Madrid on Wednesday to mark their plans’ approval in what is scheduled to be a series of visits to EU capitals as Brussels signs off proposals in the coming weeks. Final backing will be given by EU member states this summer.

The commission predicts that all eurozone members will regain their pre-crisis output levels by the end of next year, helped by the recovery spending, following a 6.6 per cent output slump in the single currency area in 2020.

But Madrid’s recovery plan is deeply contentious in Spain. Pedro Sánchez, prime minister in the Socialist-led minority government, which has been falling in the polls, hopes a mix of the funds and reform will create 800,000 jobs and add an annual average of 2 percentage points to gross domestic product during the plan’s lifetime. He compares the transformational impact to Spain’s entry into the then European Community and the creation of the EU single market.

Carmen Calvo, Spain’s deputy prime minister, left, says the EU funds will turn Spain into ‘a super-modern country’ © Juan Carlos Hidalgo/EPA-EFE/Shutterstock

“We are going to be able to position our country, which is already the EU’s fourth-biggest economy, where it deserves to be in terms of development and competitiveness . . . a super-modern country,” Carmen Calvo, the deputy prime minister, told the Financial Times in a recent interview.

Among Madrid’s goals are giving 75 per cent of Spaniards access to 5G internet coverage by 2025 and putting 250,000 electric vehicles on the road by 2023, leading to 5m in total by 2030.

The government is also seeking permission from EU state aid regulators to invest in a €3bn-€4bn new battery cell factory to boost the car industry.

However, opponents accuse the government of excessive centralised control over the EU funds and of a reform agenda that is too cautious on some of Spain’s biggest structural challenges, including its pensions system, fiscal deficit and dysfunctional labour market.

Pablo Casado, leader of the People’s party, the main centre-right opposition, told the FT recently that the plan could lead to immense waste.

“Any project that has not been financed by a bank up to now cannot be financed by the European taxpayer,” he said. “Businesses are pulling unprofitable projects out of the drawer.”

Spain’s economic future rested not on giving funds to projects such as a battery factory but rather was “a question of restructuring the national economy”, he said.

The government says it has outlined 102 reforms in its recovery plan but that breakthroughs on pensions and the labour market depend on negotiations with business and unions, while fiscal reforms must await an experts’ report due next February.

While Sánchez will head the committee overseeing development and execution of the recovery plan, his government insists many of the resources will be spent by regional administrations and others.

Under Madrid’s proposals for the €70bn in grants it is slated to receive, 40 per cent will be spent on energy transition and other green projects, 30 per cent on digitalisation, 10 per cent on education and training and 7 per cent on research and development.

Fabian Zuleeg, chief executive at the European Policy Centre think-tank, questioned whether the EU’s response to the crisis would ultimately prove sufficient. But he said the bloc deserved credit for marshalling a collective answer to the pandemic and not repeating its grudging response to the economic crisis of a decade ago.

“There was from the beginning a feeling that we need to address this together,” he added.

Additional reporting by Peter Wise in Lisbon

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