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.

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An official in Madrid with direct knowledge of how EU funds are structured told Euronews 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 of Pedro Sánchez used budget credits linked to the EU’s Recovery and Resilience Facility (RRF), an economic plan partly funded through common debt designed 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 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 appear 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 being overblown 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 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 through 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 already received, 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 would allow 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, 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 the benefits and risks of pooling debt.

Southern member states, including France and Greece, are pushing to roll over the debt accumulated during the pandemic, with President Emmanuel Macron describing calls for early repayments as “idiotic”. Paris is an advocate of 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 the budget talks.

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

The issue of the next European budget will feature in an EU summit scheduled in June.

A ship was seized off the coast of the United Arab Emirates (UAE) near the Strait of Hormuz on Thursday morning, the British military reported.

The ship was boarded and “taken by unauthorized personnel” while it was roughly 38 nautical miles northeast of the United Arab Emirates’ oil export terminal Fujairah, the United Kingdom Maritime Trade Operations (UKMTO) reported Thursday.

UKMTO spotted the ship heading toward Iranian territorial waters after the seizure, it reported Thursday.

British authorities did not release information on who the ship belonged to or who seized it. Despite the lack of official corroboration, the BBC reported that the Honduras-flagged Hui Chuan was seized in the Strait on Thursday.

CARGO SHIP ATTACKED BY SMALL CRAFT NEAR STRAIT OF HORMUZ, UK MARITIME AGENCY SAYS

Citing the risk-management company Vanguard, the BBC reported that the ship’s operators told Vanguard that the Hui Chuan was operating as a “floating armory” for ships in the Strait to defend themselves from pirates.

At least two other ships have already been seized in the Strait of Hormuz since February.

IRAN SAYS ITS SMALL SUBS DEPLOYED TO STRAIT OF HORMUZ AS EXPERT EXPLAINS THREAT: ‘VULNERABLE TO DETECTION’

In April, Iran’s Islamic Revolutionary Guard Corps (IRGC) seized the Panamanian-flagged MSC Francesca and the Epaminondes ships in the Strait.

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Fox News Digital contacted UKMTO and Vanguard for further information but did not immediately receive a response.