How Spain is using billions of euros in EU funds to reform its pension system, and how Germany is unintentionally financing Spanish pensions

At the taxpayers' expense: Spain's secret raid on the European Corona fund

How Madrid misappropriated reconstruction funds – and why the EU looked the other way

In the summer of 2020, Europe was in a state of emergency. The coronavirus pandemic had paralyzed economies, disrupted supply chains, and destroyed millions of jobs. In this extreme situation, then-German Chancellor Angela Merkel initiated a historic policy shift: She yielded to years of pressure from southern EU member states and, for the first time, agreed to the issuance of joint EU debt. Together with French President Emmanuel Macron and Spanish Prime Minister Pedro Sánchez, she forged the construct that would go down in history as "NextGenerationEU.".

The program, at the heart of which lies the so-called Recovery and Resilience Facility (ARF), comprises a total of €577 billion. Of this sum, €672.5 billion was earmarked as a maximum ceiling, with grants and low-interest loans distributed differently. The political compromise was clear: the money was to be invested – in the green transition, digitalization, infrastructure, and structural economic reforms. At least 37 percent of all funds were reserved for climate protection goals, and 20 percent for digital transformation. It was not an old-school economic stimulus program, nor was it a transfer to finance current government spending. The explicit earmarking of funds was considered essential legitimacy for the politically sensitive instrument of joint debt – because anyone who takes on EU debt to pay pensions can hardly speak of investments in the future.

Spain was among the biggest beneficiaries from the outset. The country was entitled to around €160 billion, divided into almost €80 billion in non-repayable grants and up to €83 billion in loans. This corresponded to approximately 13 percent of Spain's 2019 gross domestic product – a sum that can hardly be overestimated given the country's economic strength. That a portion of these funds would not flow into photovoltaic systems, gigafactories, or broadband networks, but rather into Spain's chronically deficit-ridden social security system, was something Brussels apparently either could not or would not foresee at the time.

The funds were explicitly earmarked for the green and digital transition as well as for structural economic reforms – not for ongoing social spending such as pension payments. The European Court of Auditors, in its special report of May 2026, found that in many cases it was simply impossible to trace where the money ultimately ended up – and according to the Court of Auditors, the Spanish pension loophole is therefore possibly just one of many across the EU.

From the reconstruction fund to the pension fund: The anatomy of a financial trick

The mechanism by which the Sánchez government diverted EU funds into the Spanish pension system appears bureaucratically inconspicuous at first glance – but on closer inspection, it is highly sensitive from a legal perspective. The Spanish Ministry of Finance in Madrid used internal budget reallocation procedures to transfer funds from the ARF (Spanish Pension Fund) to current social spending. The technical process: Planned expenditures, originally intended to be financed with EU recovery funds, were put on hold and classified as "not immediately needed." The budget lines thus freed up were then used to cover deficits in the pension fund. Since Spain has not passed a regular budget since 2023 and is operating under a continuation of the old budget, the government lacks the proper legal basis for many spending decisions anyway.

The first publicly known case concerned the year 2024: The Spanish Court of Auditors, the Tribunal de Cuentas, determined in its 754-page audit report that €2.389 billion from ARF funds had been diverted in two tranches. A first tranche of €1.722 billion flowed into the civil servants' pension fund in November 2024, and a second tranche of €667 million into the minimum pension supplements of the social security system. The Ministry of Finance in Madrid officially confirmed these transactions—while simultaneously attempting to portray them as routine treasury management. The pandemic, the actual reason for the fund's creation, had been officially declared over a year and a half earlier.

But that was just the beginning. The renowned Spanish daily newspaper El Mundo reported at the end of April 2026 that at least another €8.5 billion in EU recovery funds had been diverted into the Spanish social security system in 2025. This was based on budget documents submitted by the Ministry of Finance to the Congress of Deputies. Specifically, for example, on July 8, 2025, a cabinet decision approved a transfer of €2.984 billion to the social security system – financed by the cancellation of EU-funded programs of the Institute for Energy Diversification and Energy Saving (IDAE). This included the elimination of funding programs for electric vehicle charging points, photovoltaic projects, and energy storage technologies. Another cabinet decision on the same day transferred €1.328 billion to minimum pension supplements from funds originally earmarked for "Strategic Industrial Transformation Projects.".

The Minimum Vital Income (MVI) was also affected: €1.3 billion was diverted from industrial transformation funds, and a further €928 million was siphoned off from the same source. Even small-scale projects, such as an air quality forecasting system at the Barcelona Supercomputing Centre with a budget of €4.25 million, were plundered. The total amount confirmed so far exceeds €10 billion. In addition, there are approximately €3 billion earmarked for civil servant pensions in 2025, the financing of which the Ministry of Finance has not yet definitively clarified. Should these additional funds also prove to be diverted EU funds, the total would rise to over €13 billion.

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European debt without control: The structural problem of the ARF

The Spanish case is not an isolated incident involving an unscrupulous head of government. It is symptomatic of a fundamental design flaw in the Recovery and Resilience Facility (ARF). On May 6, 2026 – precisely as the Spanish revelations gained momentum – the European Court of Auditors published a special report on the transparency and traceability of ARF expenditures. The auditors' verdict was damning: in many cases, it was simply impossible to trace where the money ultimately ended up. Citizens have the right to know who receives the funds and how much is actually spent. These transparency gaps must be avoided at all costs in future EU budget programs.

The structural problem lies in the specific design of the ARF as a performance-based instrument: payments are not linked to concrete expenditure receipts, but rather to the achievement of predefined milestones and targets – reforms that are adopted, laws that come into force. Whether the corresponding funds actually flow into the reformed areas is therefore not automatically guaranteed. The Court of Auditors had previously pointed out in several reports that it is paradoxical to use a performance-based instrument whose actual performance cannot be comprehensively measured. Spain and France were explicitly criticized for not reclaiming erroneously received amounts and for neither returning reclaimed funds to the EU budget nor deducting them from subsequent ARF payments.

In its special report 09/2025, the Court of Auditors examined five Member States – Croatia, Spain, France, Italy, and the Czech Republic – and identified serious weaknesses in their control systems. The European Commission could not ensure compliance with public procurement and state aid rules for ARF expenditure in any of these countries. The lack of detailed instructions from the Commission to the Member States was identified as the main cause of these control gaps. A further special report from 2025 found that the recovery fund remained vulnerable to fraud: data on suspected fraud was incomplete, misused funds were not fully recovered, and the EU budget was inadequately protected.

The figures from the European Public Prosecutor's Office (EPPO) underscore the scale of the problem: In 2025, the agency was conducting 3,602 active investigations with estimated total damages exceeding €67 billion. This represents an almost threefold increase compared to the previous year. While not all cases involve the ARF (Anti-Fraud Fund), these figures demonstrate the extent to which EU funds are vulnerable to misuse. Between 2022 and 2024 alone, the EU's anti-fraud office, OLAF, and the EPPO received a total of 27,000 reports.

Spain's pension system on borrowed time: The structural causes of the budget crisis

To fully understand Spain's raid on EU funding, one must grasp the profound structural crisis of the Spanish pension system. Spain's social security system has a negative net asset value of €106 billion – a figure that, in corporate accounting terms, would be equivalent to technical insolvency. The pension fund's deficit amounted to over €50 billion in 2023 alone, according to calculations by the Foundation for Applied Economic Studies (FEDEA). Pension expenditures have risen sharply since 2018: the average pension increased from €1,107 in 2018 to €1,450 in 2024, representing a rise of approximately 31 percent – ​​significantly faster than wage growth during the same period.

The causes of this imbalance are multifaceted and long-term. Spain is among the EU countries with the highest pension replacement rate – the ratio between final salary and pension payments – which makes the system particularly costly. The 2023 pension reform, passed under Sánchez, which linked pensions to inflation while simultaneously increasing low pensions, significantly exacerbated the financial situation. The European Commission calculated that these reforms will increase pension expenditure by 3.3 percentage points of GDP by 2050 compared to a scenario without reform. An increase of 5 percentage points of GDP is projected by 2070. The independent Spanish fiscal authority, AIReF, warned that due to population aging, public debt could rise to 186 percent of GDP by 2070, and the deficit could reach 7 percent of GDP. She expects pensions to reach their peak in 2049, when expenditures will reach 16.3 percent of GDP.

Paradoxically, Spain is also one of Europe's economic leaders. With GDP growth of 3.1 percent in 2024, the Iberian economy even outperformed the United States. In 2025, the economy grew again by 2.8 percent – ​​almost twice the Eurozone average. The Spanish stock index Ibex 35 rose by almost 50 percent in 2025, the strongest increase of any European stock exchange. In the spring of 2026, a new labor market record was reported with over 22 million people employed, and the unemployment rate fell to 9.8 percent, the lowest level in 18 years. This economic strength would theoretically have allowed the government to take advantage of favorable refinancing conditions and finance the pension deficits through conventional means. Economy Minister Carlos Cuerpo publicly stated that Spain, given its strong economic position, did not need EU loans, as the country could borrow more cheaply on its own.

Nevertheless, the government opted to access EU funds. The reason likely lay not in a lack of refinancing capacity, but in political arithmetic: Spain has been governing without a regular budget since 2023. The minority Sánchez government, which relied on the support of regionalist and separatist micro-parties, had no room for unpopular austerity measures. Instead, it used a mechanism that was politically almost invisible and disguised as bureaucratic legality: the quiet reallocation of funds within the state budget. The Ministry of Finance formally justified the transfers with "insufficient budgetary resources for unavoidable liabilities"—a formulation that sounds legally dubious but was apparently considered sufficient internally.

Germany is footing the bill: The position of the largest net contributor

The outrage in Germany over the Spanish pension scheme has very real financial reasons. Germany is by far the largest net contributor to the European Union. In 2024, the Federal Republic paid a net 13.1 billion euros more into the EU coffers than it received back. This corresponds to a negative net contribution of 0.3 percent of its gross domestic product – the highest figure of all EU member states. By comparison, France, the second-largest net contributor, contributed only 4.8 billion euros. Converted to a per capita figure of 157 euros per year for every German citizen, the NextGenerationEU program adds debt servicing to the regular net payment: Since Germany shares the burden of the EU's debt while receiving relatively little in direct funding – Germany was allocated 30.3 billion euros, while Spain received around 90 billion euros – the Federal Republic is the program's main financier.

In its October 2025 monthly report, the Bundesbank pointed out that while Germany remains a net contributor, its net payment in 2024 was lower than in previous years because the country itself received more NGEU transfers than before. Nevertheless, the imbalance remains structural. Not a single cent of the EU's NGEU debt has been repaid. Repayment is stretched until 2058, and the annual interest payments place a permanent burden on the EU budget.

Andreas Schwab, a CDU MEP and, since the beginning of 2026, chairman of the Committee on Budgetary Control (CONT) in the European Parliament, has publicly addressed the issue. He described it as absolutely unacceptable to use European funds from the ARF to cover up budgetary problems in national pension systems and emphasized that the European Parliament is obligated to protect the interests of European taxpayers. Schwab was elected to his post in February 2026, having served continuously in the European Parliament since 2004. The Committee on Budgetary Control (CONT) monitors not only the regular EU budget but also, explicitly, special programs such as the ARF and European Defence Funds.

The European Taxpayers Federation put it even more bluntly: Its chairman, Michael Jäger, demanded clarification, full disclosure, the recovery of the funds, and criminal prosecution. Germany, as the largest net contributor, bears the lion's share of the costs, and taxpayers' money should not be handled so carelessly. Commission President Ursula von der Leyen was urged to make the incident a top priority. The tension is obvious: Von der Leyen, as the newly appointed Commission President in the summer of 2020, was politically responsible for the NextGenerationEU program – and now she would have to enforce a recovery of funds from an EU member state, which is politically sensitive.

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The EU Commission's reaction: Hesitation between the right to control and political considerations

The European Commission initially reacted to the revelations with conspicuous restraint. In its first statement, it merely declared that it was examining the case and had contacted the Spanish authorities. Such transactions might possibly fall under normal cash management and not automatically violate EU law. This assessment sounds mild given the scale of the diverted funds.

The legal assessment is indeed not straightforward. The ARF's structure as a performance-based bonus system, where payments are tied to milestones, leaves room for interpretation regarding how the funds are to be used after their transfer to national accounts. The Spanish Ministry of Finance argued that national rules for budget extensions in no way prevented the use of funds from the recovery fund for other state budget items. This, they maintained, was simply internal budget reallocation, not a violation of the rules. The Spanish auditors of the Tribunal de Cuentas (Tax Court of Auditors) disagreed and, in a rare internal dissent, expressed significant concerns. Some members attempted to block the approval of the 2024 state budget, viewing the reallocations as a clear misappropriation of funds.

The Commission is under time pressure: all funds must be committed by August 2026, otherwise they will be forfeited. Spain risks losing €27 billion in unallocated funds if it fails to meet the necessary milestones. In this context, Brussels has little interest in further complicating the already tense political situation with aggressive recovery procedures. At the same time, any hesitation undermines the credibility of the entire program and creates perverse incentives for other member states that are observing the Spanish approach.

Should the Commission conclude that there has indeed been a breach of the rules governing the use of funds, it has several instruments at its disposal: it can issue repayment orders, make financial corrections, or suspend future payments. However, it has been reluctant to use these instruments in the past. Auditors from the Court of Auditors have noted in several reports that funds reclaimed from Member States are frequently neither returned to the EU budget nor deducted from subsequent ARF payments. This leaves the EU budget exposed to significant safeguards.

Milestones without investment: Spain's implementation record in the ARF program

The irony of Spain's situation lies in the fact that the country is simultaneously seen as a model of reform and a rule-breaker. By the end of 2024, Spain had successfully implemented around 70 percent of its planned reforms – including key structural changes such as the 2023 pension reform, the labor market reform aimed at reducing temporary contracts, and tax reform measures. However, the investment record is significantly worse: only 15 percent of the planned investments were actually made. By the end of 2024, €47.6 billion had been spent, representing just 60 percent of the available grants. By 2025, Spain had only drawn down around 70 percent of the grants and a mere 20 percent of the available loans.

The implementation gap in investments is no accident. It is the structural cause of the reallocation problem: Because concrete investment projects progressed more slowly than planned, accounting leeway arose, which the government used for its reallocations. Projects for renewable energy, charging infrastructure, and industrial transformation were not implemented – and the funds earmarked for them were instead used for social policy operating expenses. The strategic attempt to advance the PERTE projects (Strategic Projects for Economic Recovery and Transformation) yielded mixed results: While €16 billion out of a total of €43.6 billion was allocated to PERTE, including the electric vehicle project and the renewable energy project, the shortfall remains substantial.

The August 2026 deadline is creating immense pressure for implementation. A further €36.5 billion in subsidies must be committed by then. This is a challenging requirement for investment projects in infrastructure, industry, and the energy transition. The Court of Auditors' Special Report 21/2025 found that many ARF measures aimed at improving the business environment only partially addressed the identified structural challenges, that many reforms had experienced delays, and that significant results had been achieved in only one-third of cases. At the same time, the Real Instituto Elcano emphasized in an analysis that the impact of the NGEU funds on Spain is nevertheless beginning to be noticeable: significant regional differences in investment and initial measurable effects on industry and the energy transition are becoming apparent.

The systemic problem: When budget cuts and future investments collide

The Spanish case highlights a fundamental dilemma of all EU transfer programs: the political economy of national governments is structurally at odds with the investment objectives of supranational funding programs. Governments under constant spending pressure will always be tempted to use flexible sources of financing for immediate, pressing political priorities. Pension spending is particularly difficult to compress in the political arena—it affects a large, influential electorate, and any cuts have a significant public impact. Investment programs, on the other hand, are less politically visible; their effects only unfold in the medium and long term.

The inherent weakness of the ARF – the lack of direct verification between EU transfer payments and the actual use of funds – systematically creates this gap. The system rewards the adoption of reforms, not the spending of money for the right purpose. Whoever achieves the milestone – for example, by passing a pension reform law – receives the payment, regardless of whether the freed-up budgetary leeway is actually used for supplementary investments or quietly flows into other channels. This architecture was already criticized by economists during the 2020 program design, but was retained for political reasons because stricter documentation of expenditure would have jeopardized political acceptance in recipient countries.

Added to this is the problem of a lack of political continuity. Spain has been operating without a regular budget since 2023 because Sánchez cannot secure a parliamentary majority for one. In this institutional vacuum, a crucial level of oversight is missing: the budgetary process itself—with its parliamentary debates, amendments, and public hearings—is the natural forum where the use of funds is legitimized and scrutinized. Those who manage the budget through mere updates evade this transparency process. It is no coincidence that billions of euros have changed their original purpose precisely in this regulatory vacuum.

The lack of fiscal discipline has further repercussions. Spain's budget deficit amounted to €53.2 billion in 2023, and forecasts predict a persistent deficit in the long term. Government spending in 2024 increased by €77.3 billion compared to the original plan, 95 percent of which had to be financed through new debt. A country that simultaneously receives EU funding, partially fulfills its reform commitments, and yet structurally underfunds its pension system, while presenting itself to the outside world as an economic model, sends contradictory signals to its European partners.

Refunds and consequences: What's at stake now

The political and legal response to the Spanish ARF seizure will set a precedent. For the first time since the NextGenerationEU program was established, there is a massive, publicly documented case of potential misuse of funds involving a major EU member state – not a small, easily isolated country, but the fourth-largest economy in the Eurozone. This significantly complicates a strong response.

If the European Commission does indeed enforce the repayment demands, Spain must first repay the €2.389 billion from the 2024 budget year. Whether the further €8.5 billion and the unresolved €3 billion will also be reclaimed depends on the legal assessment of whether the budgetary mechanisms used actually violated EU rules on the use of funds. The Commission has emphasized that only clearly justified exceptions to the earmarking of investment funds are permissible – and precisely this justification is lacking in the Spanish case.

In parallel, the European Parliament is working to strengthen control mechanisms. Andreas Schwab, Chair of the Committee on Budgetary Control, has announced plans to intensify cooperation with national audit authorities and the Commission, emphasizing that every euro from the EU budget must create measurable European added value. Parliament is also using the debate to call for a fundamental reform of the ARF control architecture for any future crisis programs. The transparency gaps identified by the Court of Auditors must be closed structurally.

This case is of considerable importance for the credibility of the EU as a transfer union. The NextGenerationEU program was accepted in Germany with significant political reservations – with the explicit assurance that it was a one-off crisis management instrument with strict earmarking. If it turns out that this earmarking was neither technically nor politically feasible, it strengthens the position of the skeptics who warned from the outset against a creeping mutualization of current government spending. The debate about whether future EU crisis programs should even be launched under the umbrella of joint debt will be further fueled by the Spanish precedent.

Systemic risks: Is Spain just the tip of the iceberg?

The European Court of Auditors has indicated in several reports that the Spanish pension fraud may be just one of many across the EU. The shortcomings of the ARF's oversight affect all member states. The special transparency report from May 2026 examined not only Spain but also Germany, France, the Netherlands, Austria, and Romania. In Austria, deficiencies were also found in the reporting of actual costs. France has already been criticized for shortcomings in the recovery of misused funds.

The EPPO is investigating over 3,600 cases with a potential damage exceeding €67 billion, with a significant portion involving expenditure fraud and a smaller portion involving VAT fraud. Non-procurement fraud – cases without a direct link to public contracts, which could also include budgetary misappropriations – accounted for over 50 percent of all EPPO investigations in 2025. Although the Spanish case formally falls into different categories, the pattern is clear: EU funds are being used across Europe in ways that deviate from the original program objectives.

The real systemic risk, however, lies not in the individual case of abuse, but in the structural question it raises: Can the EU meaningfully take on joint debt for investment purposes in the future if the control over its use is so inadequate? And if not: How can the transfer union be further developed without becoming a self-service shop for national budget problems? The answer to these questions will depend, not least, on the resolve with which Brussels addresses the Spanish case.

Not an isolated scandal, but a system test for the EU

Repayment claims, politics and credibility: The stress test for the EU transfer architecture

Spain's diversion of funds from the EU recovery fund to finance pensions is more than a bureaucratic irregularity. It is a stress test for the institutional architecture of the European Union. More than €10 billion – potentially up to €13 billion if the unresolved civil servant pensions are included – were siphoned from a fund intended to finance Europe's future into current social spending. This occurred in a booming economy, in a political climate where there was no parliamentary budget majority, and under the watchful eye of a control system that systematically fails to look closely enough.

The consequences drawn now will significantly shape the nature of future EU transfer programs. A consistent recovery of funds, coupled with a fundamental overhaul of the ARF control architecture, would send the signal the EU budget needs to defend its credibility. Conversely, a lack of consequences would confirm what Eurosceptics have been claiming for years: that shared debt undermines the fiscal discipline of recipient countries in the long run, leaving the burden to fall on net contributors. The EU is at a crossroads – between a union that enforces its own rules and one that ignores them for political reasons.