The Spanish government is seeking to contain a scandal linked to EU pandemic funds, categorically denying that it used European money to pay pensions, as member states prepare for tough budget talks amid deep divisions over how funding should be allocated.

An official in Madrid with direct knowledge of how EU funds are structured told EU News that a technical matter is being instrumentalised in a way that is “simply false”, accusing the opposition of playing politics over what it describes as an accounting issue.

A Spanish budget watchdog reported earlier this month that the government led by Pedro Sánchez used budget credits linked to the EU’s Recovery and Resilience Facility (RRF), an economic plan largely funded through common debt to revitalise the bloc’s economy after Covid, to partly finance Spanish pensions in November 2024.

Madrid insists it did not breach the rules.

The European Commission asked Madrid for clarification after initial newspaper reports, according to a person familiar with the matter. It did not issue a follow-up request once Madrid provided an explanation and Spanish authorities consider the issue closed.

However, the political scandal lingers, even as Madrid insists that “not a single euro” of EU money has been misused amid backlash in the so-called frugal countries. Spain and Italy were the biggest beneficiaries of the €750 billion recovery fund approved in summer 2020 after difficult talks.

In Madrid, the opposition People’s Party has demanded that Sánchez appears before Congress to explain the matter. The issue is also making waves in the European Parliament, with strong reactions from conservative lawmakers.

“If these allegations are confirmed, we are facing a serious abuse of European taxpayers’ money,” wrote Tomáš Zdechovský (Czechia/EPP), an influential centre-right member of the European Parliament‘s budgetary committee, on X. “Europe cannot tolerate any misuse of recovery funds.”

“Is €10 billion in EU funds, intended for recovery after the pandemic, quietly being used to help pay Spanish pensions? It would confirm our worst fears about these funds,” said Dirk Gotink (The Netherlands/EPP).

Madrid sources insist the issue is orchestrated for political purposes.

A government official pointed to the country’s economic performance and pushed back against the frugal-versus-south narrative, which often presents the wealthier north subsidising the weaker south. “Spain is the fastest growing economy in Europe, Germany is not paying our pensions,” said a second Madrid official.

The incident does, however, underscore the additional complications the country is facing due to its inability to approve a budget in a fragmented parliament. After failing to deliver a fresh budget for 2025, Madrid was forced to roll over a plan last approved in 2023.

A fight over the EU’s financial future

The timing of the controversy is particularly sensitive.

Brussels is preparing to launch negotiations on the next Multiannual Financial Framework (MFF), the EU’s seven-year budget for 2028–2034, and a central question will be what to do with the roughly €750 billion in joint debt accumulated by the recovery plan.

That programme was the largest and most politically consequential collective borrowing exercise in EU history. Whether it is ultimately seen as a success or a cautionary tale will inevitably shape how member states approach future proposals for shared financing.

Spain, the second-largest recipient of the initiative’s funding with a total of around €60 billion cashed in, has been among the most vocal advocates for an ambitious European budget and a permanent mechanism to pool financing needs.

Spanish Finance Minister Carlos Cuerpo has argued that pooling national debt at the EU level could generate annual savings of up to €25 billion.

Cuerpo, who is now Sánchez’s number two in government, echoed remarks made by France, Mario Draghi and a number of European intellectuals calling for a “more efficient” borrowing mechanism that allows the EU to tap into the European Commission’s triple-A rating and lower financing costs for all 27 member states.

While the European Commission’s current budget proposal does not include new borrowing, a contentious debate lies ahead over how to finance the repayment of existing recovery debt. Frugal northern countries like the Netherlands and Germany favour strict repayment schedules, even if that means cuts to other spending programmes.

On Thursday, German Chancellor Friedrich Merz reiterated his country’s opposition, even if the German central bank has been more nuanced about both the benefits and risks of pooling debt.

Southern member states, including France and Greece, are pushing to roll over debt accumulated during the pandemic, with President Emmanuel Macron describing calls for early repayments as “idiotic”. Paris advocates for a European safe-asset mechanism.

A European official supportive of the plan said the Spanish controversy is being weaponised not so much against Madrid, but against proposals put forward by southern countries ahead of budget talks.

“I wouldn’t be surprised if this is used to kill the rollover proposal,” the diplomat said.

European leaders will discuss the MFF when they meet in Brussels next month for a scheduled summit.