EUROPEAN COMMISSION Brussels, 23.5.2022 SWD(2022) 610 final COMMISSION STAFF WORKING DOCUMENT 2022 Country Report - Spain Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on the 2022 National Reform Programme of Spain and delivering a Council opinion on the 2022 Stability Programme of Spain {COM(2022) 610 final} - {SWD(2022) 640 final}



Economic and employment snapshot Spain’s economic recovery is on track, but vulnerabilities remain The COVID-19 pandemic halted six years of strong economic growth and dynamic job creation. Between 2013 and 2019, Spain’s GDP grew by 17% and 2.7 million jobs were created. This cycle came to an abrupt end in 2020, when Spain experienced the largest GDP contraction (‑10.8%) in the EU. The economic impact of the lockdown measures was amplified by some features of the Spanish economy, such as its reliance on tourism and other contact-intensive services, a business fabric with a predominance of small and medium-sized enterprises (SMEs) and structural labour market weaknesses. As a result, more than 1.1 million workers (largely temporary employees) lost their jobs and the employment rate decreased by 4.5 percentage points in the first three months of the crisis. At the same time, after the initial shock of the pandemic, labour market resilience is underpinning the recovery. After a modest expansion in the first half of 2021, the recovery gained traction during the second half due to a strong labour market and the recovery of tourism. Real GDP grew by 5.1% in 2021, although it was still 3.8% below the pre-pandemic levels in Q4-2021. By contrast, headcount employment almost matched pre-crisis levels in Q4-2021 (Graph 1.1) although at a lower level for hours worked. Despite decreasing over 2021, unemployment rate remains well above the EU average, especially among the young. Employment resilience suggests a change in pattern compared to previous crises, when job destruction outpaced the fall in GDP. The effective deployment of short-time work schemes since the initial stages of the pandemic, benefitted from the support of the EU instrument for temporary Support to mitigate Unemployment Risks in an Emergency (SURE, see Annex 3) and was complemented by other internal adjustment mechanisms. These schemes have cushioned the impact of the COVID-19 crisis on the labour market and paved the way for a quick recovery. In contrast, during the 2008-2013 crisis the fall in the number of jobs (-15.8%) was almost twice as high as the fall in GDP (-8.5%). Graph 1.1: GDP and number of jobs Source: Eurostat, own calculations. Regional disparities persist in Spain, including between urban and rural areas. The pandemic has had asymmetric consequences among the Spanish regions, having a greater impact in those regions whose economy depends more on tourism. Some socio-economic indicators show significant territorial disparities, such as unemployment, poverty and competitiveness (see Annex 15). Full recovery from the COVID-19 crisis is expected to be delayed due to the economic impact of the Russian military aggression against Ukraine. Despite the limited direct economic exposure of the Spanish economy, activity may be affected through different channels (see details below). According to the Commission’s Spring Economic Forecast (see Annex 19 for details), GDP growth is expected to slow down in the first half of 2022, and gain again traction in the second half of the year, when energy price increases and supply bottlenecks are expected to start easing. However, both are set to remain high over the forecast period. Hence, full recovery of the pre-pandemic level of GDP is expected to be delayed until mid-2023. Domestic and external demand are set to sustain GDP growth over 2022 and 2023. Overall, GDP is expected to expand by 4.0% in 2022 and by 3.4% in 2023. The revived tourism activity has been the main driver of economic growth since the summer of 2021 and is expected to keep momentum in 2022. This will provide a large contribution of net exports to GDP growth. Moreover, economic growth is set to accelerate from 2022-Q3 thanks to faster implementation of investments under the RRP and some reactivation of private consumption, despite the deterioration of households’ purchasing power due to high inflation and a reduction in real wages. The savings accumulated during the pandemic and a strong labour market are set to partially mitigate this effect. The unemployment rate is expected to decrease from 14.8% in 2021 to 13.4% in 2022 and 13.0% in 2023. High energy prices and their spread to other products will keep inflation high in 2022. Energy prices have been the main driver of the steep increase in the HICP inflation rate over the last year (7.9% y-o-y in Q1-2022), but the transmission to the prices of other goods and services has recently become more evident. Inflation is expected to moderate slowly during the rest of the year, helped by recent governmental measures such as fuel discounts and the cap on wholesale gas prices, although remaining high. Thus annual HICP inflation is expected to reach 6.3% in 2022, increasing from 3.0% in 2021. In 2023, further moderation of energy prices is projected to reduce annual inflation to 1.8%. Core inflation is set to remain relatively high over the forecast period, although wage moderation is expected to help contain second round effects. The extraordinary measures in the face of the COVID-19 crisis have led to a significant deterioration in public finances, which is gradually being reversed. Before the pandemic, government debt in relation to GDP had decreased from 100.7% in 2014 to 95.5% in 2019. Due to favourable financing conditions, borrowing costs also fell sharply, helping bring the government deficit down to below 3% of GDP before the COVID-19 crisis. However, the combination of the fall in economic activity and the decisive policy response to support businesses and households brought the deficit to 10.3% of GDP in 2020. As crisis-related measures were progressively phased out and the economic recovery consolidates, the deficit, which decreased to 6.9% in 2021, is set to narrow further to 4.9% in 2022 and 4.4% in 2023, and public debt to decrease to 115.1% of GDP in 2023 from 113.7% in 2021. At the same time, the impact of the phasing out of the remaining COVID-19 support measures is uncertain, although no significant cliff-edge effects have emerged so far. Borrower relief measures and public guarantee schemes introduced in response to the COVID-19 crisis have so far averted broad-based liquidity problems. In addition, the authorities have recently extended the maturity of the public guaranteed loans and their grace period for six additional months, applicable in those sectors most affected by the increase in energy costs (see below). However, uncertainty remains on the impact their phasing out could have on the financial situation of the private sector. Moreover, excessive debt may weigh on firms productivity by reducing their capacity to invest in capital, innovation or skills. Sustained growth is expected to support a gradual correction of macroeconomic imbalances. The long-standing imbalances of the Spanish economy were following a steady declining trend before the pandemic. However, those imbalances have worsened as a result of the economic fallout from the COVID-19 crisis. Spain is still characterised by a combination of a large stock of external and internal debt, both public and private, in a context of high unemployment and relatively low productivity. A gradual improvement is expected (see Annex 17), due to sustained GDP growth and supported by the successful implementation of the RRP.

The implementation of the RRP is expected to increase Spain’s resilience. By providing funding for strategic investments, the RRF can support economic growth while fiscal consolidation takes place. Targeted and efficient expenditure – focused on the twin green and digital transition – is expected to have a positive impact on productivity and support the recovery through inclusive growth. While a law has been passed to facilitate implementation, increasing the absorption capacity and securing a timely implementation of mutually reinforcing measures in the RRP would increase their positive impact. All these factors together are expected to decisively contribute to increasing the country’s social, economic and environmental resilience. The economy is expected to regain cost competitiveness during the recovery despite high inflation pressures. Real unit labour costs increased substantially in 2020 due to the fall in labour productivity resulting from confinement measures and the extended use of short-time work schemes during the pandemic. The declining path started in 2021 is expected to be sustained over the forecast period, under the assumption of a slower increase of wages than prices. The minimum wage increased steeply since 2019 (36% in nominal terms), with the aim of addressing wage inequalities in a context of high in-work poverty and job precariousness (). Further increases are planned as part of a political objective to reach 60% of the average wage by 2023. As on previous occasions, they are expected to be based on an ex-ante assessment, and taking into account the multiple effects on net employment, social cohesion, competitiveness and internal demand, amongst other aspects. Despite limited exposure to Russia

and Ukraine, high energy prices

and trade spill-overs have hit the

economy Direct economic exposure to Russia and Ukraine is limited and lower than for other Member States. Trade dependencies and value chain interlinkages with Russia and Ukraine are small overall and restricted to a number of sectors. In particular, as compared with other products, both the traded values and the shares in total Spanish goods imports are significant for Russian oil and gas (although lower than for the EU average), and for Ukrainian cereals and sunflower oil. On aggregate, a mere 0.3% of the Spanish economy’s value added depends on Russian final demand (compared to 0.6% for the EU27). The share of Russian value added is also limited in Spanish final demand, although it is relevant for fuel products. The number of Russian tourists had increased significantly before the pandemic, particularly in certain parts of the Mediterranean coast, but they still represent a small share overall. The stock of foreign direct investment by Russia is negligible, while the presence of Spanish corporates in those countries is limited to a few exceptions in infrastructure and retail trade activities. The exposure of Spanish financial institutions, which is already low compared to other EU countries, is now very limited due to the declining trend since sanctions were adopted in 2014 after Russia’s annexation of Crimea. This also explains the limited house purchases by Russian citizens since then. Despite low reliance on Russian energy supply, further price increases from already high levels exert considerable pressure on consumer prices and production costs. The share of energy imports from Russia is relatively low compared with other EU countries, especially for gas and oil. However, despite having a highly diversified basket of oil and gas suppliers, overall dependence on foreign energy supply is high for Spain, making the economy particularly sensitive to price developments in global markets. The main demand of imported oil products in Spain comes from transport activities (mostly by road) and non-energy industrial use (mostly chemicals and non-metallic mineral products), while natural gas is either transformed for electricity generation or used for energy purposes by industries, commercial activities and households. Developments in the natural gas market have had a substantial impact on electricity prices since mid-2021, and further since the Russian invasion of Ukraine. This has dented consumers’ purchasing power (low-income households in particular) and stressed firms’ positions, particularly firms in electro-intensive activities such as the iron and steel industries. Government measures prioritise the containment of retail prices for energy and the support to vulnerable households, but may not be sufficient to contain negative second round risks. The government has reacted swiftly to contain the rise in energy retail prices (which to a large extent extend previous packages adopted last year) and provide income support to those most affected by negative economic effects, including low-income households and electro-intensive industries. The Spanish economy is particularly sensitive to the balance of risks given its strong reliance on EU demand and supply, the legacy of the COVID-19 crisis (among the deepest in the EU) and persistent macroeconomic imbalances. In this context, the negative effects on employment and the deterioration of the business financial situation could be partly mitigated by the likely activation of the new employment flexibility and stability mechanism – the so-called Mecanismo RED – in specific sectors. Also by a delay in the phasing out of the public guarantee schemes introduced during the pandemic and which have been recently reinforced by the National Response Plan to the war in Ukraine (including EUR 10 billion of additional guarantees and the extension of the maturity and the grace period of existing ones). Regarding commitments at EU level, the Spanish government has already allocated EUR 1.2 billion to provide protection and build hosting centres for displaced people from Ukraine, while on the expected increase of military expenditure, Spain is currently far below the NATO reference of 2% of GDP (0.9% in 2020 compared with 1.3% for the EU27 average). Addressing the remaining socio-

economic and environmental

challenges will underpin sustained

growth Spain has made progress towards the UN’s Sustainable Development Goals (SDGs), but lags behind the EU in several areas. Improvements have been made in recent years, particularly on poverty, health and education within the fairness dimension, and on clean energy and climate action contributing to environmental sustainability. Nevertheless, several of the underlying indicators remain well below the EU average, such as those on support for the circular economy and higher productivity, while other socio-economic indicators have deteriorated due the COVID-19 pandemic (see Annex 1). The green transition requires large-scale interventions. The transformation of the economy under the European Green Deal is particularly demanding in terms of energy efficiency and decarbonisation, clean and sustainable mobility, and the circular economy. Spain aims to lower greenhouse gas (GHG) emissions by 23% by 2030 (compared to 1990), and achieve climate neutrality by 2050 (Annexes 5 and 6). Significant investment is needed in order to renovate public and private buildings, cut transport emissions, generate and distribute renewable energy, for water and waste management, and support the reskilling and upskilling of the workforce. Structural factors continue to hamper productivity growth. Innovation and digital gaps, skill shortages and mismatches, labour market inefficiencies, and regulatory barriers are among the most significant (Annexes 7 to 11). The persistence of the effects of the pandemic on productivity remains to be seen in the Spanish economy, particularly in relation to existing skills shortages and mismatches, and the need for reorganization of business activity. The pandemic exacerbated the challenges for employment, fairness and inclusion. The Social Scoreboard supporting the European Pillar of Social Rights pointed to moderate progress before the COVID-19 outbreak, but the pandemic has had a very significant socioeconomic impact, aggravating existing challenges for vulnerable groups (Annexes 12 to 15). Many indicators still point to critical situations, particularly in relation to equal opportunities for young people, structural deficiencies in the labour market and the limited impact of social transfers on poverty reduction, including child poverty. Fiscal consolidation and higher economic growth will contribute to economic stability in the medium term. The impact of the pandemic crisis was cushioned by decisive policy action. Nevertheless, it halted the correction of macroeconomic imbalances, and the strength of the economic recovery would be challenged if productivity, employment and macroeconomic and financial conditions are not supportive (Annexes 16 to 20). Accelerating population ageing puts additional pressure on government spending making the correction of the structural fiscal deficit in the medium to long term more demanding, while growth-enhancing policies appear necessary to facilitate the reduction of high private debt levels. The recovery and resilience plan is underway Progress on the Recovery and Resilience Plan in 2021 The Spanish Recovery and Resilience Plan (RRP) comprises 30 components along four main axes: green and digital transitions, social and territorial cohesion, and gender equality. It includes 110 investments (for a total estimated cost of EUR 69.5 billion) and 102 reforms, articulated in 416 milestones and targets to be met during the period 2021-2026 (see Annex 2). It provides a balanced response to the six policy pillars of the RRF, with a significant focus on social and territorial cohesion and on the green transition (Graph A2.1). The implementation of the RRP is underway. The Commission disbursed EUR 10bn on 27 December 2021 based on the satisfactory fulfilment of the first 52 milestones of the RRP. Additional measures of the RRP adopted since December 2021 include the establishment of the National Evaluation Office for public procurement, legal acts to support building renovation, and the reform of the labour market including the streamlining of labour contracts and establishing a permanent short-time work scheme. On investments, the central government has transferred approximately EUR 11 billion to regions to implement measures under the RRP. Box 1 contains a summary of key deliverables in 2022 and 2023. Supporting the green transition Meeting Spain’s renewable and decarbonisation targets represents a significant challenge. The RRP aims to make a significant contribution to meeting this challenge by promoting renewable energy generation and complementary investments in storage, networks and renewable hydrogen. Its target is for 42% of gross final energy consumption to come from renewable energy by 2030 (from 21% in 2020; see also Annex 5, Table A5.1). Considerable reform efforts have already been made to achieve the first set of milestones, which included the Law on Climate Change and Energy Transition, promoting long-term contracting of renewable generation, reducing administrative barriers while ensuring the protection of the environment, facilitating investment in energy storage, and developing renewable fuels and gases. Looking forward, the RRP includes significant investments in infrastructure and clean technologies (innovative renewable capacity, and electricity storage and grids), building renovation (energy efficiency), as well measures for reskilling for the green transition. Greenhouse gas (GHG) emissions continue to grow most in transport. Measures to encourage a modal shift remain key to achieve Spain’s GHG emission reduction targets. The RRP allocates significant investments to sustainable mobility, including the shift from road to rail and electric mobility, and it seeks to modernise the railway infrastructure (including in Trans-European Transport Network (TEN‑T) corridors). It also promotes the sustainable and digital transformation of transport, with aims that include reducing private vehicle use in urban areas. In addition, a significant number of measures for the deployment of the charging infrastructure and the promotion of the electric vehicles are also envisaged. Spain will have to renovate a significant number of buildings in order to meet its energy consumption targets by 2030. The RRP aims to ensure that at least 355 000 residential dwellings, 690 000 m2 of non-residential buildings, and 1 230 000 m2 of public buildings are renovated by 2026. These investments will result in an average reduction in primary energy demand of at least 30%. However, while these will make a significant contribution to achieve National Energy and Climate Plan (NECP) targets, greater efforts, including to quickly modernise a larger part of the building stock, are needed (see next section).

The RRP also includes relevant measures to promote the circular economy and improve waste management. The Law on Waste and Contaminated Soils for a Circular Economy (Ley 7/2022 of 8 April 2022) represents a significant step towards improving coordination and reducing fragmentation of waste management. It introduces a harmonised taxation scheme for waste disposal (landfill and incineration) across regions, and compulsory separate collection of bio-waste in national legislation. It also reviews the general framework for the application of extended producer responsibility, it provides for authorisations granted by regions for collective waste management systems for producers to have national validity, and seeks to improve data collection. However, waste management remains a significant challenge for Spain with 52% of waste still going to landfills, and recycling rates for municipal waste below EU targets. Further measures are needed to address this issue (see next section). Despite progress, challenges for water management remain. The RRP aims to improve hydrological planning, and reform the legal framework and investments in infrastructure. Investments aim to improve wastewater collection and treatment and promote further water reuse. Additional resources will also be awarded to improve water supply and reduce water leakages in small and medium-sized municipalities. The new strategic project for the digitalisation of urban water cycle promotes the use of new technologies to improve governance and transparency. Spain is highly vulnerable to the adverse effects of climate change. Spain’s geographical location and topography make it particularly prone to floods, droughts, coastal erosion, water shortages and biodiversity losses. The RRP includes a number of measures and policies to protect the coastline and the marine environment, promote river restoration and aquifer recovery, and mitigate the risk of floods. There are also measures to integrate climate risks in water management, prevent forest fires, and protect and restore marine and terrestrial ecosystems and their biodiversity. The National Strategy for Green Infrastructure, Connectivity and Ecological Restoration adopted in 2021 was one of the milestones fulfilled under the first payment request. Reinforcing economic and social

resilience Equal opportunities and access to the labour market are a particular challenge for young people. Early school leaving, NEETs, and unemployment rates remain among the EU’s highest. The RRP aims to address these challenges, contributing to the implementation of the European Pillar of Social Rights, with measures to improve digital skills, and the vocational and education training (VET) system. For instance, the 2021 National Digital Competences Plan supports the digital transformation of education. New curricula were introduced in 2020 to modernise the VET system and laws are planned to improve the relevance of VET skills to business. The new Organic Law on education entered into force in 2021 and aims to reduce early school leaving and improve educational inclusion. A new curriculum model for key competences, fundamental learning and inclusive academic planning seeks to improve educational outcomes. The Youth Guarantee Plus Plan 2021-2027 is expected to increase equal opportunities and improve employability for young people. The labour market faces a number of structural challenges hampering progress on fair working conditions. The reforms of labour markets included in the RRP seek to reduce labour market segmentation by limiting the use of temporary contracts, and improve the functioning of collective bargaining. Reforms of active labour market policies and the public employment services seek to improve their effectiveness and boost workers’ reskilling capacities and employability. The reinforcement of short-time work schemes by creating a permanent mechanism for flexibility and stability (Mecanismo RED) is expected to provide further income support and training opportunities for workers facing negative economic shocks and reduce unemployment volatility and its associated socioeconomic costs. Legislation that contributes to close the gender pay gap, protect workers in distribution activities on behalf of third parties using technological means, and provide adequate protection to those in subcontracted activities, aim to support fair working conditions. The share of people at risk of poverty or social exclusion is high, with significant regional disparities, and it worsened during the pandemic. Close to one in three children was at risk of poverty or social exclusion in Spain in 2020 (well above the 24% EU average). The pandemic is likely to have increased the risk of poverty (see Annex 12). In this regard, the entry into force of a national minimum income scheme (part of the RRP’s first set of milestones) has boosted support to poor families. The RRP also includes a reform to reorganise and simplify non-contributory benefits in 2022. Tax benefits will also be reviewed in order to improve support to low and middle income families. A new law seeks to encourage the availability of affordable and social housing, which remains a significant challenge, especially for young people and low-income households. The RRP aims to strengthen the public health system’s resilience and capacity. The action plan for primary and community care was approved in 2021. The forthcoming Public Health Strategy and reforms related to the health workforce, digitalisation and prevention measures seek to modernise the health system and adapt it to current and future challenges. The law on the equity, universality and cohesion of the National Health System aims to improve its accessibility. Investments aim to address existing shortcomings in hospital infrastructure. Long-term care is also to be strengthened, in view of ageing and longer life expectancy. Investments in the RRP also have to support the deinstitutionalisation of long-term care. Moreover, primary care requires further funding support. The RRP includes reforms and sizeable investments to promote territorial cohesion in many components. Key examples include the Urban Agenda, the Just Transition Strategy, the Strategy for Science, Technology and Innovation, the Digital Strategy, the National Strategy for Artificial Intelligence, the National Health Strategy, the review of active labour market policies and the reform of the tax system. Reforms also aim to strengthen local autonomy and co-governance. In particular, the reform of local government aims to digitalise local public services to guarantee their provision, and local entities will also manage digitalisation funds. Closing the productivity gap and

supporting the digital transition Insufficient linkages with businesses and underinvestment continue to weigh on Spain’s science and innovation system. The RRP aims to strengthen the educational, science and innovation system and crowd-in private investment. To this end, two Royal Decrees have been adopted on the re-organisation and quality of university courses, and establishing a scheme to create, recognise, authorise and accredit universities and their centres. The RRP also envisages amending the Science, Technology and Innovation law in order to improve coordination between different levels of government, establish longer contracts for entry to a scientific career and improve knowledge transfer. Furthermore, it allocates significant resources to R&D, public-private collaboration, proof of concept, and interdisciplinary projects linked to the green and digital transitions. However, further efforts are needed (see next section). Labour market segmentation resulted in underinvestment in human capital and low productivity. Due to their limited duration, short-term labour contracts limit incentives to invest in human capital against expected long-term returns. The reforms under the RRP to improve skills and the effectiveness of labour market policies (including by addressing segmentation) have the potential to bring long-lasting increases in productivity and potential growth. Reinforcing skills, including digital skills, is expected to improve productivity. Several reforms and investments in the RRP focus on upskilling people and reskilling workers. This includes future-proofing skills by training individuals for the green and digital transitions (e.g. through the National Digital Competences Plan and new VET curricula on digital areas), and efforts to address skill gaps in the event of structural shocks (including via the RED mechanism and the modernisation of active labour market policies). Strategic projects to boost the competitiveness and productivity of key sectors are being deployed. Known as PERTEs (), these aim to transform value chains, support firms of all sizes and strengthen the productivity and competitiveness of value chains, with associated investments. PERTEs already approved by the Spanish government include: electric and connected vehicles, health, energy storage, renewable energy and hydrogen, agro-business, Spanish language, the circular economy, naval industry, aerospace industry, and the digitalisation of the water cycle. Further PERTEs and other measures to strengthen innovation and SME performance are being considered. SMEs and the self-employed will benefit in particular from a programme to promote scalable, public-private collaboration with a view to accelerating their digitalisation (e.g. through the Digital Toolkit Programme). Also, financial instruments helping SMEs to invest and favouring their growth are reinforced. The RRP also includes specific measures to support connectivity (e.g. fixed very high capacity networks and 5G). Regulatory fragmentation and low innovation across firms and regions hamper growth and productivity and prevent firms from scaling up. Increasing both productivity growth and their size is particularly relevant for SMEs, given their larger share in the economy compared to other large EU Member States. To this end, the RRP includes several legislative initiatives to facilitate the setting up and growth of firms (laws for Business Creation and Growth, Start-ups). Other relevant reforms concern the financing of innovative firms and insolvency proceedings, and the fostering of entrepreneurship. The RRP includes measures to improve the efficient use of resources. Spain’s circular use of materials is below the EU average, while its overall resource productivity is above it. Spain plans to increase the resource efficiency by improving separate waste collection and the efficiency and sustainability of irrigation, and investing in building renovation. However, its performance on waste management remains a challenge (see next section). Reinforcing fiscal sustainability

and reducing macroeconomic

imbalances The RRP aims to bring the government revenue-to-GDP ratio closer to the EU average. Spain’s structural deficits were large prior to the COVID-19 outbreak and its fiscal position has worsened further as a result of the pandemic. Under the RRP, Spain has already taken measures to bring government revenues closer to the EU average as a percentage of GDP (e.g. by modifying corporate and personal income taxes, introducing financial transaction taxes, etc.). Further measures envisage developing green taxation (e.g. taxes on single-use plastics and on landfilling and incineration of waste as introduced by the Law on Waste and Contaminated Soils for a Circular Economy; and the reform of the tax on fluorinated gases) and adopting a broad tax reform. The RRP also seeks to improve the effectiveness of public expenditures. In particular, it promotes further spending reviews via a new 2022-2026 cycle, it reinforces their governance, including the interaction between the Ministry of Finance and the Independent Fiscal Institution AIReF, and aims to follow-up effectively on their previous and forthcoming recommendations (in the spirit of ‘comply or explain’). A reform of the pension system seeks to improve its adequacy, while limiting the impact of demographics on fiscal sustainability. By linking pensions to consumer prices, the reform is expected to support purchasing power. Other measures are in the process of being implemented or adopted as part of a package to support the overall fiscal sustainability of the pension system. These include: measures to increase the effective retirement age, further link contributions and entitlements, reduce the pension gender gap, change tax incentives, modify the contribution system for self-employed workers, the extension of the reference period for calculating pensions, and an intergenerational equity mechanism.

Investments and reforms in public administration are needed in order to implement the RRP and reinforce its institutional capacity and resilience. As part of the first set of milestones already fulfilled, Spain adopted a law with measures to reduce temporary employment in public administration and ensure sufficiently effective provisions to prevent and penalise abuse. Further measures are foreseen to help stabilise public sector employment and to improve public administrations’ recruitment procedures and human resources. The reform also aims to complete the implementation of the public procurement reform and further develop ex-ante policy evaluation. Coordination and cooperation between the different levels of government is also foreseen to be reinforced. Furthermore, the provision of public digital services is to be improved. The RRP can also help reduce high private and external debt by increasing competitiveness and reducing the reliance on energy import. Measures to increase the competitiveness of Spain’s business fabric include the upskilling of the labour force, reducing labour market segmentation, and supporting companies, including SMEs, for business growth and to innovate, adopt new technologies and reach new markets. Reforms and investments favouring renewable energy and energy efficiency can reduce energy imports and contribute to reduce external debt. The RRP also includes reforms to improve the effectiveness of pre-insolvency and insolvency instruments, including a special procedure for microenterprises and a reform of second chance for natural persons, with the goal of preventing insolvencies and facilitate resource reallocation.

Box 1: Key deliverables expected under the Recovery and Resilience Plan in 2022-23 ·Tenders for investment support to innovative or value added renewable capacity. ·Regulation establishing guarantees of origin for renewable gases. ·Introduction of taxes on single-use plastics and waste incineration and landfill. ·Entry into force of the Law on 5G cybersecurity. ·Assignment of the 26GHz band (remaining 5G bands to be assigned). ·Entry into force of the reform of Insolvency Law. ·Support to R&D&I projects in sustainable automotive. ·Reform of public recharging services. ·Award of TEN-T core network projects. ·Reform of the reception system for migrants and applicants for international protection. ·Reform of the pension system. ·Action plan for primary and community care. ·Civil Service Act to reinforce public administrations’ human resources policies. ·Law on the single integrated Vocational Training System modernising the system. ·Legislative reforms to establish a scheme to address cyclical and structural shocks. Source: CID Annex. Further priorities ahead Beyond the challenges addressed by the RRP, as outlined above, Spain faces additional challenges not sufficiently covered in the RRP. In the current geopolitical context, accelerating the green transition, increasing cross-border energy interconnections with the rest of Europe, and containing energy consumption including by enhancing energy efficiency are key. In addition, further progress is required on fiscal sustainability, the correction of macroeconomic imbalances, the circular economy and to improve productivity. Addressing these challenges will also help make further progress in achieving SDG indicators relating to affordable energy and housing (7 and 11), macroeconomic stability (8), circular material use and waste generation (12), and productivity (8 and 9). EU funds could make an important contribution to addressing these challenges. A gradual correction of macroeconomic imbalances is expected to take place during the lifetime of the RRF. Accelerating the green transition Despite the low dependence on Russian fossil fuels, energy prices have substantially surged since summer 2021, underlining the need to accelerate the green transition. Russia is the fourth supplier of natural gas to Spain (via liquefied natural gas (LNG)), but Russian imports only represented 10% of the total imports in 2020 (well below the EU average of 44%). Spain’s dependence on Russian oil (2%) is also well below the EU average (26%), and relatively small (). Nonetheless, the current energy market tension resulting from Russia’s invasion of Ukraine has led to a large increase in the energy prices, faced by Spanish businesses and consumers. This has added to the energy price increases since the summer of 2021. Stepping up efforts to meet current renewable energy targets laid down in the NECP, and the even more ambitious targets proposed under the Fit for 55 package, becomes even more important in the current energy market context. Renewable electricity sources reached 68.3 GW of capacity in mainland Spain by end 2021 (equivalent to 63.5% of total installed capacity). Renewable electricity covered 48.4% of mainland demand. Renewable deployment will need to increase considerably over the next decade to the meet the targets of the Fit-for-55 package. These require 122GW of renewables by 2030, including 67GW of wind power and 35GW of solar power. Building on the RRP, additional measures to support renewable deployment (with a focus on decentralised installations and self-consumption, including by streamlining permitting procedures and improving access to the grid) and complementary investments (in storage, network infrastructure, electrification of buildings and of mobility, and renewable hydrogen) can help further decarbonise the economy, including industry, transport and housing, and reduce reliance on fossil fuels and exposure to international prices. Progress in decentralised renewable energy production and deep renovations in both residential and non-residential buildings, particularly in mid-size cities, could be achieved by putting in place appropriate financing schemes, upskilling and training of workers in the construction sector, awareness raising campaigns and technical assistance to support the use of grants and financial instruments for renovations. In addition, and in line with the REPowerEU initiative, integrating Spain effectively into the single energy market would play an important role in terms of the security of the EU’s energy supply. The effective integration of Spain in the single energy market requires increasing its energy interconnections. The NECP aims for 15% of electricity interconnection capacity by 2030, against 5% in 2021. In particular, further electricity interconnections with neighbouring countries could support greater integration of renewable capacity of the Iberian Peninsula in the single energy market. Spain could also support additional cross-border gas interconnections, to contribute to the EU’s security of supply. New infrastructure and network investments related to gas are recommended to be future-proof where possible, in order to facilitate their long-term sustainability through future repurposing for sustainable fuels. Further investing in energy efficient housing would also make the economy more resilient and alleviate affordability challenges. The rise in energy prices is expected to have a significant impact on households’ real incomes, especially low-income households, hamper consumption; and, in turn, affect economic growth. Deteriorating living conditions will hit especially vulnerable groups, particularly young people and families with children at risk of poverty or exclusion. In this context, building on the RRP, deploying additional energy efficient social and affordable housing, particularly in areas with pronounced shortages and stressed markets, could help contain energy consumption and address the green transition more decisively, while at the same time supporting vulnerable households, as they are more exposed to energy poverty (Annex 6). Focus on renovation of the existing less energy-efficient stock would contribute to these objectives without resulting in further consumption of land, and could lead to more immediate results. Furthermore, well-targeted social and affordable rental housing, provided by both the private and the public sectors, also through forms of cooperation to purchase and renovate a significantly larger social housing stock (currently only a small fraction of the EU average), and a regular re-evaluation of both social rents and the existing legislation, could be considered. Such measures could help alleviate housing affordability challenges (Annex 1) while limiting the fiscal impact of public support for investment in enhancing the energy efficiency of the housing stock. Decoupling economic growth from

resource use EU circular economy targets are increasingly ambitious, representing an additional challenge for Spain. The Fit-for-55 package is due to further increase ambitions in waste management. In this regard, the country’s recycling rate of municipal waste and its use rate of circular materials fall below the EU average, while the share of waste being landfilled is well above it. Enhanced coordination across different levels of government and additional investments can support Spain in meeting separate collection and recycling obligations (). Achieving recycling targets has been cascaded downwards to lower levels of government. However, instruments to enforce them may not be sufficiently effective. Additional reforms could therefore strengthen coordination between the different levels of government, including continuing with the work for a common interpretation of provisions and for the planning and use of waste treatment infrastructure (). Further support from the Technical Support Instrument can help spread best practices (Annex 3 and 7). Additional investments to strengthen Spain’s recycling capacity may be warranted, including to promote the circular economy in specific sectors. Furthermore, innovation and investment to promote the circular economy are key to ensuring greater resource efficiency. Spain also suffers from water scarcity and there is a need and potential to further develop water reuse, including from a circular economy perspective Ensuring the sustainability of

public finances Establishing a credible consolidation path can help Spain reduce its structural deficit in the medium term and anchor expectations in the long term. Fiscal sustainability is underpinned in the short term, by favourable financing conditions related to the supportive monetary policy stance and the average maturity of government debt (above 8 years). However, in the medium and long-term perspective a budgetary strategy is needed to establish a credible consolidation path and anchor expectations. Fiscal sustainability in the medium to long-term will be impacted by the high level of debt and an unfavourable initial budgetary position. Costs due to Spain’s ageing population are to impact fiscal sustainability. In particular, health care and, to a lesser extent, long-term care costs are expected to increase sustainability gaps over the medium and long-term. This will take place at a time where it is also necessary to address deficits in primary care and regional disparities in access and quality of healthcare. For pensions, expenditure was projected to decrease under the previous legislation. In this regard, the pension reforms included in the RRP need to be carefully designed and implemented as a consistent package to ensure they positively contribute to mitigate medium- and long-term risks. With regard to the tax system, this is set to undergo a broad reform. As a result, there appears to be scope to improve by emphasising taxes considered more conducive to economic growth and which can reduce the large share that labour tax revenues represent in total revenues (see annex 18). Moreover, Spain has been carrying out spending reviews and intends to continue to do so in 2022 and beyond with a view to improve the quality of public spending. However, the allocation of public spending to boost productivity appears to be low (see next section). This limits the ability to crowd-in positive effects on private investment. The Spanish economy has resumed the trend of reducing its long-standing macroeconomic imbalances. Prior to the outbreak of the pandemic, Spain was following a steady trend of reducing its high levels of external, public and private debt. This was put on hold and partly reversed during the pandemic mainly due to the sizeable fall in GDP in 2020. Following the easing of restrictions and gradual economic expansion, the level of imbalances has now returned to a path of moderate improvement. Sustained GDP growth and high current account surpluses over the coming years will prove fundamental to deleveraging and reducing external liabilities (annex 17). In this regard, the RRP has the potential to help bring down imbalances. However, further investments and reforms, such as in R&D and innovation, skills and improving labour market outcomes, could provide further support. Maximising the overall impact of

EU funds Spain needs to maximise the potential of the RRF funds and other available EU funds. Spain has expressed its intention to benefit from the loan allocation under the RRF and is soon to receive further support through the allocation of the 2021-27 cohesion policy funds, the 2023-2027 Spanish CAP Strategic Plan (annex 3) and a higher grant allocation under the RRF. Maximising the absorption and impact of all these funds will require a strong administrative capacity, effective mechanisms to coordinate the actors involved in planning, implementation and control, and the ability to exploit synergies and complementarities across EU funding. Reducing the gap between regions, including between urban and rural areas, would stimulate long-term sustainable and inclusive growth boosting their economic potential. Boosting productivity-enhancing

investment

Further investment in R&D and stronger links with the scientific ecosystem can boost firms’ productivity. Spain is one of the EU countries with the lowest investment in R&D (1.4% of GDP in 2020, compared to 2.2% in the EU). Insufficient funding concerns both the public and private sector, hindering productivity growth and the economy’s capacity for innovation. The RRP will provide much needed financial support to the sector. However, the situation requires the scale-up of public research and support for private investment to continue. An effort to streamline the efficiency of R&D support, incentives and governance, and to improve the quality of innovation output would be highly beneficial (see Annex 9). Actions to further strengthen the collaboration between the public and private sector are key to spur knowledge transfer. Support for innovation among SMEs would be particularly beneficial, including collaboration with research institutes in innovative projects and talent acquisition among new graduates. There is scope for further investment in reskilling and upskilling the workforce for the twin transition. Public employment services, and their coordination at regional level, as well as the modernisation of Active Labour Market Policies, play a key role in this by providing continuing vocational training for the workforce and facilitating transitions (job-to-job and from unemployment to employment). In this context, further strengthening of the capacities of public employment services as envisaged in the RRP – if matched with the allocation of adequate resources – is expected to support a broader and more effective use for those searching for a work. This will also require strong cooperation with the educational system and the private sector to better identify current and future needs for skills in the labour market. Existing gaps include Science, Technological, Engineering and Mathematics (STEM) graduates and Information and Communications Technology (ICT) specialists (see Annex 13), while a regular evaluation of reskilling measures supporting the green transition seems warranted. Tackling these challenges is key to Spain contributing to the achievement of the 2030 EU headline targets on employment and skills. Enhanced cooperation on the transition towards sustainable and productive models can boost competitiveness. Economic complexity and global interlinkages require a holistic approach, integrating private-public cooperation on different fronts, such as those mentioned above on R&D and skills. For instance, if properly developed and implemented, integrated strategic projects such as PERTEs can provide a coordinated approach that can enhance firms’ competitiveness. Key findings Spain’s Recovery and Resilience Plan includes measures to address a series of structural challenges through: ·Furthering the decarbonisation of the energy sector and promoting sustainable mobility. ·Helping to mitigate the adverse effects of climate change. ·Supporting the digital transition in public administration, industry and SMEs. ·Investing in digital skills and inclusion, artificial intelligence, cyber security and connectivity, and the digitalisation of tourism and culture systems. ·Adopting labour market reforms to reduce the high share of workers on temporary contracts. ·Supporting the upskilling and reskilling of workers. ·Reinforcing economic and social resilience by fostering a reduction of early school leaving, and improving employability. Beyond the reforms and investments in the Recovery and Resilience Plan, Spain would benefit from: ·Accelerating the deployment of renewable energy, focusing on decentralised installations and self-consumption, including by further streamlining permitting procedures and improving access to the grid. ·Supporting complementary investments in storage, network infrastructure, electrification of buildings and transport and renewable hydrogen. ·Effectively integrating Spain into the single energy market by expanding energy interconnection capacity. ·Promoting deep renovation, and adequate availability of social, affordable and energy-efficient housing, and combating energy poverty. ·Increasing the recycling of municipal waste and use of circular materials by introducing reforms to enhance coordination among all levels of government. ·Investing to meet separate collection of waste and recycling obligations, as well as to further develop the potential for water reuse. ·Reducing the structural budget deficit of the general government and anchoring fiscal expectations in the face of demographic challenges.

·Boosting investment in productivity-enhancing areas, such as innovation, skills and strategic competitiveness. ·Reducing the gap between regions, including between urban and rural areas, building on the effective use of funding provided by the RRF and other EU funds. ·Further strengthening administrative capacity to ensure the effective absorption and higher impact of the RRF and other EU and national available funds. Annexes List of Annexes Cross-cutting progress indicators Annex 1: Sustainable Development Goals Annex 2: Recovery and Resilience Plan — implementation Annex 3: Other EU instruments for recovery and growth Annex 4: Progress in the implementation of country-specific recommendations Environmental sustainability Annex 5: Green Deal Annex 6: Employment and social impact of the green transition Productivity Annex 7: Resource efficiency and productivity Annex 8: Digital transition Annex 9: Innovation Annex 10: Industry and single market Annex 11: Public administration Fairness

Annex 12: Employment, skills and social policy challenges in light of the European Pillar of Social Rights Annex 13: Education and skills Annex 14: Health and health systems Annex 15: Economic and social performance at regional level Macroeconomic stability Annex 16: Key financial sector developments Annex 17: Macroeconomic Imbalance Procedure assessment matrix Annex 18: Taxation Annex 19: Key economic and financial indicators Annex 20: Debt sustainability analysis



LIST OF Tables Table A2.1:Key elements of the Spanish RRP Table A4.1:Summary table on 2019, 2020 and 2021 CSRs Table A5.1:Indicators underpinning the progress on EU Green Deal from macroeconomic perspective Table A7.1:Selected resource efficiency indicators Table A8.1:Key digital economy and society index indicators Table A9.1:Key research, development and innovation indicators Table A10.1:Key Single Market and Industry Indicators Table A11.1:Public administration indicators

Table A12.1:Social scoreboard Table A13.1:EU-level targets and other contextual indicators under the European Education Area strategic framework Table A14.1:Key health indicators Table A15.1:Spain, selected indicators at regional level Table A16.1:Financial soundness indicators Table A17.1: Assessment of Macroeconomic Imbalances matrix Table A18.1:Indicators on taxation Table A19.1:Key economic and financial indicators Table A20.1:Debt sustainability analysis for Spain Table A20.2:Heat map of fiscal sustainability risks for Spain LIST OF Graphs Graph A1.1: Progress towards SDGs in Spain in the last five years Graph A2.1: Share of RRF funds contributing to each policy pillar Graph A2.2: Total grants disbursed under the RRF Graph A2.3: Fulfilment status of milestones and targets Graph A3.1: ESIF 2014-2020 total budget by fund Graph A3.2: Cohesion policy contribution to the SDGs Graph A4.1: Spain’s progress on the 2019-2020 CSRs (2022 European Semester cycle) Graph A5.1: Fiscal aspects of the green transition

Graph A5.2: Thematic – energy Share in energy mix (solids, oil, gas, nuclear, renewables Graph A5.3: Thematic – biodiversity Terrestrial protected areas and organic farming Graph A5.4: Thematic – mobility Share of zero-emission vehicles (% of new registrations) Graph A6.1: Fair green transition challenges Graph A6.2: Energy poverty by income decile Graph A7.1: Municipal waste treatment Graph A11.1: Performance on evidence-based policymaking indicators Graph A11.2: Performance on the single market public procurement indicator Graph A14.1: Life expectancy at birth, years Graph A14.2: Projected increase in public expenditure on health care over 2019-2070 Graph A15.1: GDP per head (2010) and GDP growth (2010-2019) in Spain Graph A15.2: Territories most affected by the climate transition in Spain Graph A15.3: Innovation performance in Spain Graph A15.4: CO2 emissions from fossil fuels, 2018 Graph A16.1: Issuance of green bonds Graph A16.2: Evolution of credit activity Graph A18.1: Indicators on tax wedge Cross-cutting progress indicators

Annex 1: Sustainable Development Goals This Annex assesses Spain’s progress on the Sustainable Development Goals (SDGs) along the four dimensions of competitive sustainability. The 17 SDGs and their related indicators provide a policy framework under the UN’s 2030 Agenda for Sustainable Development. The aim is to end all forms of poverty, fight inequalities and tackle climate change, while ensuring that no one is left behind. The EU and its Member States are committed to this historic global framework agreement and to playing an active role in maximising progress on the SDGs. The graph below is based on the EU SDG indicator set developed to monitor progress on SDGs in an EU context. Graph A1.1: Progress towards SDGs in Spain in the last five years Source: Eurostat, latest update of 28 April 2022. Data mainly refer to 2015-2020 and 2016-2021. While Spain performs well on some SDG indicators related to environmental sustainability and is improving on others, it deteriorated on sustainable cities and communities (SDG 11). Spain has made some progress on energy consumption indicators including the ‘share of renewable energy in gross final energy consumption’ (SDG 7) (from 16.2% in 2015 to 21.2% in 2020; EU average 22.1%) and ‘circular material use rate’ (SDG 12) (from 7.5% in 2015 to 11.2% in 2020; EU average 12.8%). Nevertheless, it remains below the EU average. As for ‘affordable energy’ (SDG 7), the percentage of the Spanish population unable to keep their homes adequately warm is higher (10.9% in 2020) than the EU average (8.2%). The Spanish RRP includes measures to address some of the energy-related challenges, namely on the energy renovation of buildings, the decarbonisation of energy production, and the circular economy (including implementing the Spanish Strategy for the Circular Economy). On SDG 11 Spain is moving away from the goal in particular due to a higher share of the ‘population living in households suffering from noise’ (from 15.7% in 2015 to 21.9% in 2020; EU average was 17.3% in 2019), and a lower ‘share of buses and trains in total passenger transport’ (15.4% compared to EU 17.2% in 2020). The Spanish RRP’s largest investments therefore aim to foster sustainable mobility (Component 1). While Spain is improving on some SDG indicators related to fairness (1, 5, 8, 10), it still needs to catch up on poverty (SDG 1). Spain performs well on the ‘healthy life years at birth’ indicator (SDG 3) (69.9 years in 2019 compared to 65 years in 2014 and the EU average of 64.6 years in 2019) and on the percentage of the population aged 16 and above ‘with good or very good self-perceived health’ (SDG 2) (73% in 2020 compared to the EU average of 69.5%). In addition, Spain has improved on several fairness-related indicators such as ‘people at risk of poverty or social exclusion’ (SDG 1) (27% in 2020 compared to 28.7% in 2015), ‘in-work at-risk-of-poverty rate’ (SDG 1) (11.8% in 2020 compared to 13.1% in 2015) or ‘long-term unemployment rate’ (SDG 8) (6.2% in 2021 compared to 9.5% in 2016), and ‘early leavers from education and training’ (SDG 4) (13.3% in 2021 in Spain, compared to 19% in 2016). However, Spain still underperforms compared to the EU average on all these indicators and problems with poverty, social exclusion, long-term unemployment and early school leaving persist. The Spanish RRP includes measures aiming at addressing challenges in all these areas. On the negative side, the severe housing deprivation rate (SDG 1) has deteriorated (from 1.5% in 2015 to 3.4% in 2020), which is an indication of deteriorating living conditions, adding to housing affordability problems among certain groups in the Spanish population, including young people, low-income households and families with children. Social and affordable housing is partially addressed by the Spanish RRP (the introduction of a new Housing Law encouraging an increase in the availability of affordable and social housing, and funding for the construction of 20 000 new social rental dwellings in energy efficient buildings). Spain performs below other large Member States on productivity. Spain has a high ‘share of households with high-speed internet connection’ (SDG 9) (93.8% of households in 2021 compared to the EU average of 70.2%). In addition, the percentage of ‘adults with at least basic digital skills’ (SDG 4) (64% in 2021) is above the EU average (54%), though that means that 36% of the population aged between 16 and 74 years lacks basic digital skills. In spite of some improvements on the productivity indicators, the country ranks below the EU average on most of them. For SDG 8 “decent work and economic growth” the percentage of ‘young people neither in employment nor in education and training (NEET)’ aged between 15 and 29 (SDG 8) remains high (15.2% in 2021) and above the EU average (13.2% in 2021). Also, for SDG 9 (“innovation”), the Spanish research and innovation system suffers from underinvestment as shown by the ‘gross domestic expenditure on R&D’ indicator (SDG9) (1.41% of GDP in 2020 compared to the EU average of 2.32%) and the number of R&D personnel (SDG 9) (1.03% of active population in 2020 compared to the EU average of 1.43%, see Annex 8). The Spanish RRP includes important reforms and investments aiming at boosting innovation and digital skills notably in components 17, 19, 20, and 21 but there remains room for improvement when it comes to addressing the remaining challenges. Spain is improving on SDG indicators related to macroeconomic stability (8, 16) but faces medium-term challenges. Spain has improved on “decent work and economic growth (SDG 8) and “peace, justice and strong institutions” in the years before the pandemic. Due to the COVID-19 pandemic Spain suffered from a fall in ‘real GDP per capita’ (SDG 8) from EUR 23 760 in 2016 to EUR 23 510 in 2021 (EU average: EUR 27 810). Spain also showed a lower ‘investment share of GDP’ (SDG 8) than the EU average (20.3% of GDP compared to 22.3% for the EU in 2020). Spain faces challenges particularly in relation to the sustainability of public finances. The Spanish RRP includes a number of measures related to taxation and the effectiveness of public spending which are expected to improve the sustainability of public finances and support substantial additional investments, which will increase the “investment share of GDP. Annex 2: Recovery and Resilience Plan — implementation The Recovery and Resilience Facility (RRF) is the centrepiece of the EU’s efforts to support its recovery from the COVID-19 pandemic, fast forward the twin transition and strengthen resilience against future shocks. Spain submitted its recovery and resilience plan (RRP) on 30 April 2021. The Commission’s positive assessment on 16 June 2021 and Council’s approval on 13 July 2021 paved the way for disbursing €69.5 billion in grants under the Recovery and Resilience Facility over the period 2021-2026. The key elements of the Spanish RRP are set out in Table A2.1. Graph A2.1: Share of RRF funds contributing to each policy pillar Source: RRF Scoreboard https://ec.europa.eu/economy_finance/recovery-and-resilience-scoreboard/country_overview.html. Table A2.1: Key elements of the Spanish RRP Source: European Commission The implementation of the Spanish plan is well underway. The Commission disbursed EUR 9 billion to Spain in pre-financing in August 2021, equivalent to 13% of the financial allocation. Spain’s first payment request was positively assessed by the Commission, taking into account the opinion of the Economic and Financial Committee, leading to a disbursement of EUR 10 billion in financial support (net of pre-financing) on 27 December 2021. The related 52 milestones cover reforms in the areas of sustainable mobility, energy efficiency, decarbonisation, connectivity, skills, education, social protection, labour market, taxation and public administration. Their satisfactory fulfilment helps to address the related Country Specific Recommendations in 2019 and 2020 (see Annex 4). In April 2022, Spain submitted its second payment request, for which the Commission’s assessment is ongoing. Overall, Spain reports a timely implementation of the milestones and targets due by the end of Q1-2022, which does not however prejudge the timing of the submission of subsequent payment requests or the Commission’s formal assessment of the fulfilment of the relevant milestones and targets.

The progress made by Spain in implementing its plan is published in the Recovery and Resilience Scoreboard (). The Scoreboard also gives an overview of the progress made in implementing the RRF as a whole, in a transparent manner. The graphs below show the current state of play of the fulfilled milestones and targets, as completed by Spain and subsequently assessed as satisfactorily fulfilled by the Commission. Graph A2.2: Total grants disbursed under the RRF Source: RRF Scoreboard https://ec.europa.eu/economy_finance/recovery-and-resilience-scoreboard/country_overview.html Graph A2.3: Fulfilment status of milestones and targets Source: RRF Scoreboard https://ec.europa.eu/economy_finance/recovery-and-resilience-scoreboard/country_overview.html

Annex 3: Other EU instruments for recovery and growth The EU’s budget of more than EUR 1.2 trillion for 2021-2027 is the investment lever to help implement EU priorities. Underpinned by an additional amount of about EUR 800 billion through NextGenerationEU and its largest instrument, the Recovery and Resilience Facility, it represents significant firepower to support the recovery and sustainable growth. Graph A3.1: ESIF 2014-2020 total budget by fund Source: European Commission, Cohesion Open Data In 2021-2027, EU Cohesion policy funds () will support long-term development objectives in Spain by investing EUR 36.26 billion () including EUR 868.7 million from the Just Transition Fund directed to alleviating the socio-economic impacts of the green transition in the most vulnerable regions. The 2021-2027 Cohesion policy funds Partnership agreements and programmes take account of the 2019-2020 Country Specific Recommendations and investment guidance provided as part of the European Semester, ensuring synergies and complementarities with other EU funding. In addition, Spain will benefit from EUR 30.9 billion support for the 2023-27 period from the Common Agricultural Policy, which supports social, environmental, and economic sustainability and innovation in agriculture and rural areas, contributing to the European Green Deal, and ensuring long-term food security. For the period 2014-2020, the European Structural and Investment Funds (ESIF) for Spain are set to invest a total of EUR 53.86 billion () from the EU budget. The total investment including national financing amounts to EUR 71.60 billion (Graph A3.1), representing around 0.88% of GDP for 2014-2020 and 29% of public investment (). By 31 December 2021, 91% of the total was allocated to specific projects and 43% was reported as spent, leaving EUR 40.74 billion to be spent by the end of 2023 (). Competitiveness of SMEs, research and innovation, sustainable and quality employment, social inclusion and environmental protection and resource efficiency (totalling EUR 24.4 billion) feature prominently among the eleven objectives for the Cohesion policy funds. By the end of 2020, Cohesion policy funds had supported more than 90 000 enterprises, including more than 7.3 million participants in funded projects, of whom more than 2.4 million gained a qualification and more than 340 000 received a job after taking part in a Youth guarantee project. The investment contributed to improving the energy efficiency of more than 30 000 households. Cohesion policy funds are already making a substantial contribution to the Sustainable Development Goals (SDGs) objectives. In Spain, Cohesion policy funds supported 11 of the 17 SDGs with up to 93% of expenditure contributing to the achievement of the goals in the 2014-2020 period (Graph A3.1). The REACT-EU instrument (Recovery Assistance for Cohesion and the Territories of Europe) under NextGenerationEU provided EUR 14 484.9 million in additional funding to the 2014-2020 cohesion policy allocations for Spain. This will help to ensure a balanced recovery, foster convergence and provide vital support to regions following the coronavirus outbreak. REACT-EU provided support in Spain to purchase vaccines, contribute to the short-time work schemes, reinforce the healthcare system, strengthen education, training and skills development, promote energy efficiency and reduce material deprivation with direct food delivery. The Coronavirus Response Investment Initiative () provided the first EU emergency support to Spain in relation to the COVID-19 pandemic. It introduced extraordinary flexibility enabling Spain to re-allocate resources for immediate public health needs (EUR 2 707 million). For instance, Spain shifted resources to purchase protective equipment and healthcare material, reinforcement of healthcare staff, working capital for SMEs, and support to digitalise the education system and the public administration. Spain also benefited from the temporary 100% EU financing of incurred measures in Cohesion policy, with approximately EUR 2 726 million in 2021. Graph A3.2: Cohesion policy contribution to the SDGs Source: European Commission, DG REGIO Spain received support under the European instrument for temporary support to mitigate unemployment risks in an emergency (SURE) to finance short-time work schemes, similar measures and as an ancillary, health-related measures. The Council granted financial assistance under SURE to Spain in September 2020 for a maximum of EUR 21.324 billion, which was disbursed by 25 May 2021. SURE is estimated to have supported approximately 30% of workers and 15% of firms for at least one month in 2020, primarily in accommodation and food services, wholesale and retail trade, and transportation and storage. Spain is estimated to have saved a total of EUR 1.59 billion on interest payments as a result of SURE’s lower interest rates. The Commission provides tailor-made expertise via the Technical Support Instrument to support Spain in designing and implementing growth-enhancing reforms, including for implementing its RRP. Since 2018, Spain has received assistance through 52 technical support projects. Projects delivered in 2021 included supporting the authorities in evaluating the effectiveness of Spanish pre-insolvency procedures and public spending in the autonomous communities. The Commission is also assisting Spain in implementing specific reforms and investments in their RRP, for instance, for the monitoring and implementation of the green RRP components, or the implementation of the National Artificial Intelligence Strategy. In 2022, new projects will start to support, among others, the development of a governance system for the implementation of the national plan for digital skills. Spain also benefits also from other EU programmes. Notably, the Connecting Europe Facility, which allocated EU funding of EUR 909.9 million to specific projects on strategic transport networks, and Horizon 2020, which allocated EU funding of EUR 6.340 billion to R&D and innovation. Annex 4: Progress in the implementation of country-specific recommendations The Commission assessed the 2019-2021 country-specific recommendations (CSRs) () addressed to Spain in the context of the European Semester. The assessment takes into account the policy action taken by Spain to date (), as well as the commitments in the Recovery and Resilience Plan (RRP) (). At this early stage of the RRP implementation, overall 72% of the CSRs focusing on structural issues in 2019 and 2020 have recorded at least “some progress”, while 28% recorded “limited” (see Graph A4.1). With the further implementation of the RRP, considerable additional progress in addressing structural CSRs is expected in the years to come. Graph A4.1: Spain’s progress on the 2019-2020 CSRs (2022 European Semester cycle) Source: European Commission.





Table A4.1: Summary table on 2019, 2020 and 2021 CSRs (Continued on the next page) Table (continued) Source: European Commission. Environmental sustainability Annex 5: Green Deal The European Green Deal intends to transform the EU into a fair and prosperous society, with a modern, resource-efficient and competitive economy where there are no net emissions of greenhouse gases in 2050 and where economic growth is decoupled from resource use. This annex offers a snapshot of the most significant and economically relevant developments in Spain in the respective building blocks of the European Green Deal. It is complemented by Annex 6 on the employment and social impact of the green transition and Annex 7 for circular economy aspects of the Green Deal. With additional measures, Spain is set to overachieve its 2030 targets for the non-Emissions Trading System (ETS) sectors. Spain has overachieved its 2020 target of reducing greenhouse gases (GHG) emissions by 10% in non-ETS sectors (compared to 2005) by 13 percentage points (pps). However, with the existing measures Spain is set to miss its current emission reduction target for the non-ETS sectors (-26%), but the target could be overachieved and the proposed Effort Sharing Regulation (ESR) target of -37.7% could be achieved, if additional measures are implemented. Spain’s Climate Law aims at reducing GHG emissions by 23% by 2030 (compared to 1990). The achievement of this target assumes an effort sharing reduction of 39% for non-ETS and 61% for ETS sectors (both compared to 2005) according to Spain’s National Energy and Climate Plan (NECP). In its Recovery and Resilience Plan (RRP), Spain allocates 40% of the grants to climate objectives through crucial reforms and investments to accelerate the transition to a more sustainable, low-carbon and climate-resilient economy (). Among those measures, the RRP includes investments in sustainable mobility aimed at reducing emissions from transport, the sector where GHG emissions are still showing the greatest increase. Furthermore, over EUR 10 billion of ERDF support will be allocated to actions contributing to a greener, net zero carbon economy and resilient Europe during the period 2021-2027. The main driver for decarbonising the mobility and transport sector is a modal shift as well as the promotion of alternative fuels transport systems and in particular zero emissions transport systems. It is estimated that 35% of passenger-kilometres that are currently travelled in conventional vehicles in urban environments will shift to non-emitting forms of transport by 2030, according to Spain’s National Energy and Climate Plan. Spain’s performance with respect to fiscal indicators supporting the European Green Deal is mixed. While environmental taxation revenues are lower than the EU average, the share of expenditure on environmental protection in total government expenditure is higher. In terms of the share of total tax revenues as well as GDP percentage, Spain’s energy and transport tax revenues are lower than the EU average and continue to decrease. Moreover, taxation of pollution and resources is very low (). At the same time, the climate risk to public finances due to uninsured assets is relatively low. Graph A5.1: Fiscal aspects of the green transition Source: Eurostat Spain’s energy mix is still highly reliant on oil and petroleum products. In 2020, the share of final consumption of energy from natural gas stood at 25%, while oil amounted to 41%. With a very ambitious NECP, Spain has decided to put renewable energy at the forefront of its energy transition and decarbonisation strategy, standing at 17% of final consumption of energy in 2020. By 2030, renewables would see a substantial increase in the energy mix (42% of gross final energy consumption), and the NECP confirms the intention of phasing out coal and decommissioning the remaining coal power plants by 2030. Spain electricity mix is highly decarbonized, with 68.2% of total demand from carbon-free sources in 2021. Coal registered in 2021 the lowest historical production and the lowest participation in the national generation structure (1.9% of the total). Graph A5.2: Thematic – energy

Share in energy mix (solids, oil, gas, nuclear, renewables Source: Eurostat Spain has a very rich biodiversity, but further progress needs to be achieved. 27.3% of the Spanish territory is covered by the EU Natura 2000 network (EU average is 18.5%). This poses important challenges in terms of conservation, management and resources, but also provides important opportunities to preserve biodiversity, support ecosystem services and achieve positive outcomes from a socio-economic perspective. The designation of Natura 2000 sites is nearly completed, although some further progress is needed in its marine component. The main challenges are to establish the necessary conservation objectives and measures to protect and manage the Natura 2000 network and to implement properly the species protection requirements under the Birds and Habitats Directives, also providing sufficient technical, human and financial resources. For this purpose, site-specific procedural tools as environmental impact assessments could be considered to respect the maintenance of their conservation objectives. Only around 9% of protected habitats and 19% of protected species have a favourable conservation status, though there are many deteriorating trends for species. Spain needs to prioritise the restoration of terrestrial, marine and freshwater ecosystems in order to ensure good conservation status. Moreover, Spain is one of the Member States with the highest number of invasive alien species of Union concern established in its territory. Spain could also further capitalise on its rich natural capital to promote green growth and job creation, for instance, through more environmentally sustainable forms of tourism. Graph A5.3: Thematic – biodiversity

Terrestrial protected areas and organic farming Source: EEA (terrestrial protected areas) and Eurostat (organic farming). Air quality in Spain remains cause for concern. While the emission of several air pollutants has decreased in Spain over recent decades, air quality could be further improved. In particular, personal transport and traffic congestion in the major metropolitan areas in Spain (Madrid and Barcelona), exacerbates problems with air quality leading to health and economic costs. Moreover, around 800 agglomerations in Spain do not fully comply with the Urban Waste Water Treatment Directive. The status of water under the Water Framework Directive shows that for surface water approximately 46% of agglomerations are failing to achieve good ecological status and 6% are failing to achieve good chemical status. For groundwater 25% were failing to achieve good quantitative status and 35% were failing to achieve good chemical status. Despite the progress that Spain has made in recent years, challenges remain in water management, especially in the areas of water governance, water body rehabilitation and water efficiency. Further infrastructure investment are needed to improve water management, such as in wastewater collection and treatment, reduction of leaks in the networks and general water supply, improving monitoring, as well as nature based solutions, floods prevention and river restoration. Moreover, Spain should take further advantage of the potential of water reuse. Further measures are also needed to face water scarcity and droughts. Spain shows a positive development in terms of transport infrastructure. The transport policy implemented in Spain since the mid-1980s has led to a significant improvement in its infrastructure. However, today Spain needs to tackle new challenges facing the road transport system, to urgently reduce its greenhouse gas emissions and to become more sustainable and efficient. A specific challenge over the coming years will be the implementation of the Spanish Strategy for Safe, Sustainable and Connected Mobility 2030, adopted in 2021. Moreover, Spain has been successfully opening the rail market for domestic rail services. The entire sector has benefitted from the liberalisation of passenger rail traffic and the incorporation of new railway companies. Graph A5.4: Thematic – mobility

Share of zero-emission vehicles (% of new registrations) Source: European Alternative Fuels Observatory. The implementation of reforms and investments under the Spanish RRP are expected to reduce emissions from transport. Notably, the actions under the RRP will boost zero- and low-emission vehicles and the transformation of urban and metropolitan transport as well as the completion of the TEN-T network supported by connected and digitalised mobility. The decarbonisation of maritime and aviation transport will require further measures. Spain shall carry out reforms and investments to promote the development and consistent use of Sustainable Alternative Fuels (SAFs) for these transport modes, in line with the FuelEU Maritime and the ReFuel EU Aviation initiatives.

Table A5.1: Indicators underpinning the progress on EU Green Deal from macroeconomic perspective Source: Eurostat, JRC, European Commission, EEA, EAFO Annex 6: Employment and social impact of the green transition The green transition not only encompasses improvements to environmental sustainability, but also includes a significant social dimension. While measures in this regard include the opportunity for sustainable growth and job creation, it must also be ensured that no one is left behind and all groups in society benefit from the transition. Spain’s green economy is still limited and its development, supported by investments and reforms included in the Recovery and Resilience Plan (RRP), can foster sustainable growth and quality job creation; at the same time, the green transition is expected to affect low to middle-income groups to a larger extent. Spain’s Recovery and Resilience Plan (RRP) outlines crucial reforms and investments for a fair green transition. The renovation of residential dwellings under the Energy Rehabilitation of Buildings Programme will contribute to achieving significant energy savings, resource efficiency gains and reductions in greenhouse gas (GHG) emissions. These investments are expected to generate employment in order to complete the required works and aim to support low-income households. Furthermore, the Just Transition component of the RRP includes reforms and investments accompanying the 12 Just Transition Protocols, covering areas affected by the closure of coal mines and coal-fired power plants. Investments in these areas will ensure the reskilling of workers and people affected by the green transition, allocating aid to training programmes, personalised job search assistance and reskilling pathways. In addition to the RRP, the Just Transition Fund (EUR 890 million), along with the European Social Fund Plus (ESF+) can altogether help unlocking the potential for ‘green jobs’ in Spain, contributing to the adaptation of workers and businesses, while at the same time mitigating the social impact of the transition in the regions concerned. Spain’s integrated national energy and climate plan (NECP) of 20 January 2020 analyses the impacts on energy poverty and vulnerable households, although with limited details on the skills needed for a just transition. It includes clear targets to tackle energy poverty, notably by reducing the level of four indicators by at least 25% by 2025 (and possibly by 50%): share of households unable to keep their homes adequately warm; high share of income spent in energy; low absolute energy expenditure; and arrears on utility bills. Although the economy has significantly reduced its carbon footprint, energy-intensive industries remain sizeable. Developing the green economy and its strong potential can contribute to quality job creation. The Spanish economy’s greenhouse gas (GHG) emissions intensity decreased significantly between 2015 and 2020 (in terms of gross value added) and stands 10% below the EU average, with the average carbon footprint per worker at 11.12 tonnes of GHG emissions (against 13.61 tonnes in the EU) (see Graph A6.1). Two declining sectors have been identified: coal/lignite and fossil fuel based energy production (). Total job losses since 2008 in coal regions linked to coalmines closures are estimated at 11 300 direct and 10 000 indirect jobs (), with further regional challenges related to weak economic activity, remoteness and demographic decline. The automotive industry provides jobs for 9% of the total employed workforce for whom up- and reskilling opportunities will be particularly important (see Annex 15). The environmental goods and services sector provides jobs to a relatively small share of the employed population (1.6% versus 2.1% in the EU) (), while wind and solar energy potential and energy efficiency improvements offer important further opportunities for green jobs (). Labour shortages linked to the transition to a climate-neutral economy are identified in the education sector (Eurofound, 2021). Graph A6.1: Fair green transition challenges Source: Eurostat, World inequality database. As for the social dimension of the green transition, Spain faces substantial challenges, especially in terms of energy poverty. Although improving since 2015, the share of the population in rural areas at risk of poverty remains relatively high (23.8% versus 18.7% in the EU) (). The share of the population unable to keep their homes adequately warm remained stable from 2015 to 2020, at 10.9% which is above the EU average (8.2%). Low- to middle-income groups are significantly more affected compared to the EU average, while the situation of high-income groups is closer to the EU average (see Graph A6.2). Consumption patterns vary across the population: the average carbon footprint of the top 10% of emitters is about 4.5 times higher than for the bottom 50% of the population (against 5.3 times in the EU). Graph A6.2: Energy poverty by income decile Source: Eurostat EU-SILC survey (2020, 2019 for IT and DE). Tax systems are key to ensuring a fair transition towards climate neutrality (). Spain’s revenues from total environmental taxes slightly decreased from 1.93% of GDP in 2015 to 1.75% in 2020 (against 2.24% in the EU). The labour tax wedge for low-income earners () decreased from 30.6% in 2015 to 27.9% in 2020 (the EU average is 31.6%, see Annex 18). Redistributive measures accompanying environmental taxation can have the potential to foster progressivity and to have a positive impact on the disposable income of households in the lowest segments of income distribution (). Productivity Annex 7: Resource efficiency and productivity The efficient use of resources is key to ensuring competitiveness and open strategic autonomy, while minimizing the environmental impact. The green transition presents a major opportunity for European industry by creating markets for clean technologies and products. It will have an impact across the entire value chains in sectors such as energy and transport, construction and renovation, food and electronics, helping create sustainable, local and well-paid jobs across Europe. The circular (secondary) use of material in Spain stood at 11.2% in 2020, compared to the EU average of 12.8% although it is following a positive trend. The circular material use rate measures the share of material recovered and fed back into the economy, thus saving on the extraction of primary raw materials, in overall material use. Improving resource productivity can help to minimise negative impacts on the environment and reduce dependency on volatile raw material markets. Resource productivity indicates how efficiently the economy uses material resources to produce wealth, dividing gross domestic product (GDP) by domestic material consumption (DMC). DMC measures the total amount of materials directly used by an economy. With 2.8 purchasing power standard (pps) generated per kg of material consumed in 2020, resource productivity in Spain is well above the EU average of 2.2 pps. per kg. (). This positive performance is further supported by an upward trend in resource productivity in Spain over the last decade from 2.1 pps. per kg in 2011 (). A successful transition to a circular economy requires social and technological innovation, as its full potential can only be achieved if and when it is implemented across all value chains. Eco-Innovation is therefore an important enabling factor for the circular economy. Product design approaches and new business models can help to produce systemic circularity in innovations, creating new business opportunities. In all five components of the Eco-innovation index of 2021, Spain performs above the EU average. The recently approved Circular Economy PERTE will encourage eco-design to ensure a more efficient use of resources. The amount of municipal waste generated has decreased overall in Spain over the last decade. With a slight increase in the past few years, the average amount in Spain in 2020 (455 kg per capita) remains below the EU average (505 kg per capita) (). Graph A7.1: Municipal waste treatment Source: Eurostat Despite progress on the transition towards the circular economy, waste management remains a significant challenge for Spain, but with substantial differences between regions. Spain is one of the countries which has missed the EU target of recycling 50% of municipal waste by 2020 (the overall recycling rate was of 36.4%). The EU has set up even more ambitious targets for the next decade, including achieving 55% recycling of municipal waste by 2025. The amount of landfilled waste, which remains considerable, is preventing faster progress towards the circular economy. For the pre-treatment of municipal solid waste not collected separately, Spain makes extensive use of mechanical biological treatment (MBT) plants. As regards municipal waste treatment in Spain, the only clear trend observed between 2014 and 2019 is a slight increase of municipal waste generation, as well as a moderate increase in the share and tonnage of the volume of organic waste that is composted or digested. Of the 143 biological treatment plants in Spain in 2019, 88 received residual municipal solid waste, whereas only 55 plants are equipped to treat separately collected biowaste. 74% of the municipal solid waste that is landfilled in Spain consists of reject from mechanical biological treatment, packaging sorting, and biowaste treatment; and the remaining 26 % is residual municipal solid waste that is directly landfilled without any pre-treatment (Ministry for the Ecological Transition and the Demographic Challenge, 2021). In summary, significant efforts are needed to increase the prevention, minimisation, sorting, reuse and recycling of waste, thereby diverting waste away from landfills or incinerators. Table A7.1: Selected resource efficiency indicators Source: Eurostat.

The Recovery and Resilience Plan (RRP) includes measures to promote the circular economy and improve waste management. The forthcoming Law on Waste and Contaminated Soils for a Circular Economy (Ley 7/2022 of 8 April 2022) envisaged in the RRP represents a significant effort to address the fragmentation challenges identified in waste management. It introduces a harmonised taxation scheme for waste disposal (landfill and incineration) across regions; compulsory separate collection of bio-waste in national legislation. It also reviews the general framework for the application of extended producer responsibility. Furthermore, it also provides for authorisations granted by regions for collective waste management systems to producers, to have national validity; and seeks to improve data collection setting up a national register to keep track of the production and management of waste. Waste management policies require cooperation between different levels of government. Waste management is a regional competence, but waste collection and treatment is carried out at local level (either by a single municipality or by groups of them jointly). The State Waste Management Framework Plan 2016-2022 (PEMAR) lays down the structure and contents of the regional waste management plans, and extends the responsibility for achieving the recycling targets to regions, which has been also included in the new law on Waste and Contaminated Soils for a Circular Economy. There is a body for technical cooperation between public authorities, the Committee for Coordination in the field of Waste. The aim of this Committee is to make recommendations, conduct studies, reports and guidelines, as a body for inter-administrative coordination and technical cooperation and collaboration. Moreover, existing mechanisms to avoid regulatory fragmentation should help prevent different interpretations from resulting in different outcomes in Spain. Under the EU Technical Support Instrument, Spain will fund an initiative to support the implementation of improved recycling collection and treatment systems at municipal level (Annex 3). Annex 8: Digital transition The Digital Economy and Society Index (DESI) monitors EU Member States’ digital progress. The areas of human capital, digital connectivity, the integration of digital technologies by businesses and digital public services reflect the Digital Decade’s four cardinal points (). This Annex describes Spain’s DESI performance. Spain’s Recovery and Resilience Plan (RRP) is devoting 28.2% of the total investment to digital (EUR 19.6 billion) (). The RRP puts a particular focus on promoting the digitalisation of businesses, including SMEs (25% of the total digital budget), strengthening the digital skills of the Spanish population (22%), improving digital connectivity in the whole country (15%), improving the digitalisation of public services (28%), and supporting digital-related R&D and the deployment of digital technologies (10%). The lack of ICT specialists is the main challenge for Spain in the DESI dimension of human capital. Spain shows a good performance on basic digital skills and a medium performance on female ICT specialists, but performs below the EU average on the ICT specialists indicator. The shortage of ICT specialists is a productivity-constraining factor, especially for SMEs and micro-enterprises, and a key challenge for Spain. The RRP includes significant investments in digital skills that will help to improve Spain’s performance in this area. Spain is one of the EU’s best performers on digital connectivity. Spain performs particularly well in Fixed Very High Capacity Network (VHCN) coverage, but, until now, was only a mid-performer on 5G coverage, mainly due to some delays in auctioning all 5G pioneer bands. In turn, a rapid increase in 5G coverage is now expected following the auction of the 700MHz band ended in July 2021 and the 26GHz band to be auctioned by the end of 2022, as well as all the measures envisaged in Spain’s RRP. The low degree of digitalisation of SMEs is also a key challenge for Spain. Even though the rate of SMEs having at least a basic level of digital intensity is above the EU average, Spanish enterprises lag behind in the integration of advanced technologies such as cloud or big data. This gap, combined with a lack of ICT specialists, make it difficult for SMEs – micro-enterprises in particular – to attract talent and to benefit from the digital economy. The investments included in the RRP are expected to increase the share of firms with a basic level of digital intensity and to foster the adoption of advanced digital technologies. Spain shows a satisfactory performance on digital public services. Spain is at the forefront in digital public services within the EU and continues to update its services and infrastructure, including through the RRP, to respond to the rapid evolution of technology and citizens’ needs. Table A8.1: Key digital economy and society index indicators Source: Digital Economy and Society Index Annex 9: Innovation This Annex provides a general overview on the performance of Spain’s research and innovation system. Spain is a moderate innovation performer according to the 2021 edition of the European Innovation Scoreboard (), and its performance remains below the EU average. Innovation suffers from underinvestment in R&D. Total R&D intensity reached 1.41% in 2020, still far below the EU average. Low and stagnant public, and notably also private, R&D investment, have prevented Spain from improving its research and innovation (R&I) performance, which remains subdued, despite some pockets of research excellence. The country’s share of scientific publications among the top 10% most cited scientific publications worldwide is below the EU average and has remained stagnant since 2010 (9.24% in 2018 compared to 9.3% in 2010). Private R&D intensity remains comparatively low, at a value close to half of the EU average, and as a result, overall performance of the research and innovation system as measured by patents, has also remained well below the EU average, preventing any increase in the pace of Spain’s technological transformation. The Spanish National Recovery and Resilience Plan (RRP) will greatly increase R&D and innovation investments and help address the persistent gaps in both private and public R&D investment.



Spain’s future competitiveness and green and digital transitions depend on its ability to translate sustained investment efforts into economic growth through business innovation and improved knowledge circulation. Despite certain measures to support private R&D investment, the policy mix does not seem not to yield the expected results as business R&D remains poor. This, coupled with a lack of sufficient incentives and effective governance structures, has resulted in weak business-science links and a modest share of employment in innovative enterprises, hindering Spain’s economic transformation towards higher productivity sectors. Spain plans to address this challenge by means of punctual reforms in its Law of Science and Innovation and with targeted investments. However, Spain could further improve and foster the cooperation between universities, research organizations and businesses by implementing the recent recommendations of the OECD-EC Roadmap on Knowledge Transfer. The Roadmap points to particular measures to promote and sustain business innovation such as increasing the institutional funding linked to knowledge transfer activities, creating effective intermediary bodies, and introducing more effective initiatives at the base of the innovation ladder ().



Table A9.1: Key research, development and innovation indicators Source: DG Research and Innovation - Common R&I Strategy and Foresight Service - Chief Economist Unit Annex 10: Industry and single market Productivity growth is a critical driver of economic prosperity, well-being and convergence over the long run (). A major source of productivity for the EU economy is a well-functioning single market, where fair and effective competition and a business friendly environment are ensured, in which small and medium enterprises (SMEs) can operate and innovate without difficulty. Businesses and industry rely heavily on robust supply chains and are facing bottlenecks that bear a negative impact on firms’ productivity levels, employment, turnover and entry/exit rates. This may impact the Member States’ capacity to deliver on Europe’s green and digital transformation. Spanish’s labour productivity has been decreasing steadily since 2010 (), and currently stands at 90% of the EU average. Labour productivity in Spain is counter-cyclical (), unlike in the majority of developed economies, mainly due to structural deficiencies in the functioning of the labour market. Spanish SMEs productivity, measured as the ratio of value added to employment, was EUR 31 100, below the EU average of EUR 40 000 (). Spain’