Why Next Generation EU could be a poisoned chalice for reforms in Spain (and how to avoid it)

• Spain has been diverging for years in terms of productivity from the advanced economies of central and northern Europe. On top of this divergence comes the asymmetric impact of the economic crisis caused by the pandemic, which has hit southern European countries much harder.
• Correcting these differences in competitiveness requires not only investment but also structural reforms. However, the current incentives to carry out this type of reform could not be less favourable.
• A look at the theory and recent history of structural reforms in the EU shows that countries tend to reform more when their governments have strong majorities or when they face external constraints that force them to (pressure from financial markets or bailout programmes, for example).
• The ECB’s ultra-loose monetary policy, combined with a massive influx of funds and weak governance of Next Generation EU (NGEU) in the area of reforms, is very likely to result in a missed opportunity to boost productivity in southern Europe.
• To avoid this scenario, NGEU should abandon the strategy of endless lists of reforms that has repeatedly failed in the EU’s recent past and focus on an approach similar to that put forward by Ricardo Hausmann and co-authors, which urges governments to focus on bottlenecks, channelling limited political capital into unlocking the three or four reforms that are most binding for economic growth.
• The lack of ambition on structural reforms in Spain and southern Europe could result not only in a huge missed opportunity for Spain, but also in a serious risk for the EU: in the current delicate political conditions, the failure of NGEU could be very damaging for the renewed momentum of European integration.

An earlier version of this report was published in English for the Euro Yearbook, by Bruegel and ICO, edited by Fernando Fernández.