Coronavirus economic impact update

Sign up for myFT Daily Digest and be the first to understand the news about the economic impact of the coronavirus.

As EU funds begin to pour in and the economy recovers, the socialist governments of Spain and Portugal are raising wages and increasing social spending to ensure a “fair recovery” from the recession triggered by Covid-19.

Spanish Prime Minister Pedro Sánchez (Pedro Sánchez) announced on Wednesday that the minimum wage will be raised, stating that “if more employment opportunities, higher wages and more decent pensions cannot enter the pockets of all Spaniards, the economy will fail. Will recover”.

Earlier this week, his Portuguese colleague Antonio Costa promised a package of reforms, from measures to tackle youth unemployment to increased child tax benefits and investments in health and social security. “The best way to deal with a crisis is to unite, not to austerity,” he said.

These announcements reflect the increasing pressure from the entire political arena, demanding how to use the EU pandemic recovery funds that have begun to reach the Iberian Peninsula.

Both prime ministers lead the minority socialist government and are in late-stage negotiations with radical left-wing parties on next year’s budget. They rely on their support to pass legislation.

Spain is expected to receive 70 billion euros in EU grants and similar loans during the period 2021-2026 of the pandemic recovery plan. Portugal is expected to receive 14 billion euros in grants, but plans to accept only about 2.6 billion euros in loans to help control public debt that exceeds 130% of the country’s output.

Sanchez promised to “immediately increase” the minimum wage of 950 euros per month, which affects approximately 1.5 million workers, although negotiations between the government and trade unions continue. The focus of the negotiations is to increase from 12 euros to 19 euros.

Podemos, a radical left-wing coalition partner of the Madrid government, has urged salary increases after the sharp rise in energy prices pushed up inflation. Consumer prices rose by 3.3% in August, Biggest increase since 2012.

With the increase in employment levels this summer, Economy Minister Nadia Calvinho seems to have eased resistance to this move.

Sanchez is advancing two other reforms that are vital to Podemos: labor legislation reform led by his Communist Party Labor Minister Yolanda Díaz, and a new housing plan, the subject of difficult negotiations between alliance partners on rent caps.

The Prime Minister stated that he will announce his 2022 budget plan within a few weeks and that the economy is expected to return to pre-pandemic levels by the end of next year.

In Portugal, Costa is negotiating with the anti-capitalist left-wing group (BE) and the old-school Communist Party (PCP) to finalize his budget. Although not a formal alliance, since 2015, these two groups have helped Costa’s socialist government to remain in power in exchange for legislative concessions.

The government has been negotiating a package of 48 social measures with labor unions and employers. But BE leader Catarina Martins stated that Costa has provided “many measures but few solutions.”