The invasion of Ukraine in Spain: impacts and policies

The short- and medium-term effect of the economic decoupling between Russia and Europe resulting from the invasion of Ukraine is a double blow to Spaniards’ purchasing power, combining rising inflation and slowing GDP growth.

We expect the crisis to reduce Spain’s expected growth for 2022 by more than 1%, with upside risks. Inflation, for its part, will hit the most vulnerable families much harder, mainly because they spend a larger share of their income on energy and fuel.

To address these effects, the Government has presented a series of measures. Our overall assessment is that these measures could be better targeted at supporting vulnerable groups, which would make them more efficient, less costly and more consistent with decarbonisation and green transition goals. However, their urgent nature and the need to curb the impact of the rising CPI on indexed transfers (such as pensions) bias and condition the measures.

Assessed one by one:

• Fuel discount of €0.20/l.

→ We anticipate that this measure will prove excessively costly for the little efficiency it promises:

– It has regressive effects: it will benefit higher-income households, which consume more fuel, the most.

– The monitoring and penalty mechanisms do not seem sufficient to ensure compliance with the measure.

– Compliance will also be difficult and costly for small businesses.

– It undermines the central aim of the energy transition of incorporating negative externalities into the prices of energy sources.

– For all these reasons, it creates incentives for unintended or side uses, or for the benefit to be captured on the supply side in a sector characterised by low competition.

→ In its favour, the measure could directly avoid losses of €1,250M/year in Spanish GDP and, indirectly, through its moderating effect on the CPI, generate savings of up to €4,800M/year. Curbing the rise in the CPI, to which such important spending items as pensions are indexed, is realistically one of the central objectives of this measure, if not the main one, although its effect is estimated at no more than one point of inflation.

→ To avoid or at least reduce both the core cost and the associated problems, aid and transfer mechanisms such as those also envisaged by the Government would be a better option: they do less damage to the price signal, can be designed progressively, work equally well for companies of all sizes and have lower monitoring requirements. However, these measures would not produce the desired effect on the CPI, which is probably why they were not the first option chosen.

→ Alternatively, this opportunity could have been used to start designing and piloting the compensation that will be needed for the ecological transition to be fair and viable in the short term.

• Aid for electricity consumers. The continuation of the tax cut (VAT and Special Electricity Tax) and the extension of the social bonus are more progressive (especially the latter) and do less damage to the price signal. However, since price rises already seem to have outstripped these discounts, and access to the bonus faces significant barriers, their effect will be limited.
• Increase in the IMV. Given the burden that these and other goods most affected by the invasion place on the poorest households, the inflation they face is and will be much higher than for everyone else. This alone justifies an increase in benefits, such as the temporary rise in the Minimum Living Income. However, the low coverage of the IMV may leave out most low-income households. The Government should therefore step up the design and implementation of measures to improve IMV coverage in the short term, and continue evaluating how this benefit has been implemented.
• Rent cap. Following the logic of stopping inflation from feeding into the revaluation of goods and services indexed to the CPI, the Government has set a 2% cap on rent increases, at least until June 2022. The nature and design of this measure (which allows agreed renegotiation for small landlords) is progressive, but if maintained over time it could discourage homes from entering the market in the medium term and would harm small landlords (who would face the effects of inflation on other goods but could not cushion them through their rental income).
• Loan guarantees and business aid. For businesses, in order to short-circuit vicious circles of illiquidity turning into solvency problems, the line of guarantees of up to €10,000M opened by the Government is a necessary minimum, though not optimal. Heavily constrained by the lack of sufficient fiscal space to provide direct aid, this aid has focused on specific sectors, such as transport or agricultural production, and amounts to barely a tenth of the guarantee line.
• Restrictions on objective dismissals. Companies receiving aid or using furlough schemes (ERTEs) will only be able to opt for unfair dismissals (with higher severance pay). While we understand and share the aim of discouraging job destruction, having to repay the aid received if this happens introduces excessive rigidity in a context in which companies, especially those receiving aid or using labour flexibility measures, may find themselves in a critical situation in the medium term and be forced into dismissals.