Spain Likely to Get Partial EU Recovery Payment as Reform Stalls

(Bloomberg) -- Spain faces a setback in its efforts to unlock European Union post-pandemic recovery funds as the government is increasingly unlikely to complete an overhaul of unemployment benefits that is needed to trigger full disbursement.

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The EU executive’s arm and the Spanish government have come to the conclusion that a partial payment is the most likely scenario during ongoing technical talks, as a two-month extension given by Brussels in March for the overhaul won’t be sufficient, people familiar with the matter said.

The amendment of the unemployment benefits is part of the fourth payment request submitted by Spain in December totaling €10 billion ($10.7 billion). The parliament didn’t back the reform after it failed to gather the support of Podemos, a left-wing, anti-establishment group that is among several parties Socialist leader Pedro Sanchez needs to rely on to pass legislation.

Spain was the poster child for the €800 billion recovery fund as the country, the second largest beneficiary with €163 billion in grants and loans, led reforms effort among the 27 member states. But the fragile majority in its parliament is complicating implementation of the plan.

Failure to complete the agreed reforms in time would lead the European Commission to trigger a suspension of the corresponding financial aid linked to the unmet reform. The commission will determine the amount to be suspended once the assessment of the payment request is finalized.

According to the rules, Spain could still obtain the full amount of the fourth payment request if the government completes the reform within six months after the suspension decision, while it continues with the implementation of the rest of its recovery plan. Otherwise, it would lose the suspended portion.

The government is currently discussing the review of unemployment benefits with employers and the unions, but will still need to win the support of allies for parliamentary approval.

A Spanish government official said that a partial payment is one of the possibilities but they’re still working toward a full completion of the milestones.

Other countries have been subject to the suspension procedure, including Lithuania. The commission found that two milestones from its first payment request weren’t fulfilled.

A commission spokesperson declined to comment before the institution adopts its preliminary assessment of the payment request.

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