The novel coronavirus (COVID-19) pandemic that has swept the globe has come down particularly hard in Spain. The number of confirmed infections continues to grow day by day, placing the European nation third worldwide in terms of official per-country figures behind only neighboring Italy and the United States.
The tragedy unfolding in Spain is – as it has been in China, Italy, the greater New York City area, and elsewhere – frightening and depressing. The country’s notoriously strong healthcare system is straining under the avalanche of infections.
The fallout from the pandemic threatens to tip Spain’s economic outlook for the year from a fairly positive initial growth prediction by the government of 1.8 percent of GDP for 2020 into an outright recession that could result in a contraction of between 2.5 percent and 4.5 percent or worse.
The country’s minority coalition government led by Prime Minister Pedro Sanchez imposed a two-week work ban for all non-essential employees on March 28 in the hopes of mitigating the growth rate of infections. Whether that ban is extended – and if so, for how long – remains to be seen, but such a step would appear likely.
During the ban, the government is leaning on the Spanish Army to conduct humanitarian and disaster relief missions such as disinfecting nursing homes, outpatient clinics, etc.
On the industrial side, the Spanish sector of European aerospace giant Airbus has suspended production for more than a week, though it intends to maintain some manufacturing lines deemed essential. Such production lines involve the A400M airlifter; the C-212, CN-235 and C-295 airlifters; and the NH90 and Super Puma military helicopters, plus others.
Meanwhile, Spanish naval shipbuilding giant Navantia suspended activity from the moment the government declared the initial “state of alarm” related to the virus back on March 14. While some lingering projects were wound down in the first few days, most work aside from some maintenance was halted, with only a third of the workforce remaining on the job to ensure minimum servicing of workloads and upkeep of machinery.
The worry is that the company that manages Navantia finished with a loss of over EUR228 million in 2018 and has required cash infusions from the state totaling some EUR1 billion ($1.1 billion) since 2015 in order to avoid bankruptcy. With 2020 expected to be a strong rebound year for the company, the timing of the pandemic could not be worse. Navantia is considered a crucial element of Spain’s strategic industrial sector, and therefore negotiations with the workers union are underway to ensure workloads and work hours are made up once conditions improve.
Some elements of the Spanish economy – particularly its large tourism industry – are highly vulnerable to such a crisis and face an inevitably harsh downturn.
How much cash infusions and state support for industry is required from the government remains to be seen, but the work slowdown and disruption of normal economic activity is bound to take a toll on Spain’s short-term economic health and its already high unemployment rate, not to mention its structural deficit and government debt level.
The next-order effect on Spain’s defense environment now comes into question.
The last such recessionary wave that began in late 2008 and lasted to 2014 resulted in deep and prolonged cuts to Spanish defense funding levels. Despite efforts by the Socialist-led government to handle the onset of the economic crisis by injecting stimulus measure after stimulus measure into the economic bloodstream in 2009, the Ministry of Defense was charged with making fiscal sacrifices.
By the time that government reversed course in the face of skyrocketing deficits and sovereign debt concerns, the bottom had fallen out on the defense budget and a nominal year-on-year increase would not occur for eight years , or more specifically, not until 2016.
Between 2008 – the last year the budget had grown – and 2014, the result of the prolonged period of defense austerity was a combined 30 percent drop from the 2008 budget allocation of EUR8.149 billion. Put in starker terms, by 2014, the cumulative year-on-year reduction from the baseline level of 2008 totaled EUR8.223 billion, or 101 percent of the 2008 defense budget figure.
This stunning decline left the armed forces bereft of capitalization and modernization funds, as some 76 percent of annual Spanish military outlays are absorbed by personnel costs.
Capitalization programs – under the so-called Special Armaments Program involving 19 major defense procurement projects dating back to 1996-1997 and the government of Prime Minister José María Aznar and his center-right People’s Party – remain on the books.
As of 2018, Spain owed EUR20 billion toward the legacy Special Armaments Program, with payments extended from the original 2025 end date out to 2030.
As Spain’s economy continued picking up steam and the defense budget returned to a multiyear growth trajectory, the Socialist government signed off on an investment package worth EUR7.331 billion ($8.306 billion) on December 14, 2018. This covered defense and security programs within a multiyear period extending to 2032.
The investment package provides funding for three major Ministry of Defense projects that affect each branch of the Spanish armed forces: an upgrade and modernization of the Air Force’s fleet of 73 Eurofighter Typhoons, the procurement of five F-110 multimission frigates for the Spanish Navy, and the procurement of new 8×8 wheeled armored vehicles for the Spanish Army.
Despite the government’s commitment to these new capitalization projects, the current environment throws a wrench into the bigger picture. Years of fiscal cutbacks and efficiencies did little to aid military preparedness, capacity or capability in tackling intense combat operations should conflict arise.
Though the Spanish armed forces still feature some exceptional frontline capabilities, another round of sharp cuts and force restructuring would leave them further weakened at a time when NATO solidarity and members-wide capabilities expansion is in the spotlight. A one-off downturn would be understandable, but another prolonged period of downward budgetary pressures would be another matter altogether.
Predicting the future is always difficult. During a health crisis such as this, it becomes all the more so.
But if the picture of Spanish defense investment over the past two decades provides a window into the future, it would reflect a whipsaw driven by economic realities. When Spain’s economy – and that of the larger eurozone – has experienced healthy stretches, the nominal topline defense budget has undergone a parallel track. During periods of slow growth or outright recession, the defense budget has suffered.
Our earliest and best guess is that Spain’s defense budget will take a cumulative 7 percent hit over the coming two fiscal years (2022-2023) before flat-lining and then slowly beginning to rebound. But with the central government in the hands of a minority coalition plus the likely need for massive state support for a range of ailing industries, a deeper or more prolonged period of cuts would not be surprising.