Spain, Rescued but Not Saved (THE WALL STREET JOURNAL, 31-10-2012)

While Mariano Rajoy ponders another bailout, deeper political dysfunction remains. This is the rot Europe's bailouts won't fix. In Spain's recent attempts to right its economy, a pattern emerges: There is intervention layered upon intervention, dithering as the problem deepens, "reform" resulting in higher taxes—and, sometimes, the suggestion of cronyism. Last month La Moncloa announced "perhaps one of the most necessary reforms" to address the "debt hole left by previous governments." Since 1998, Spain has subsidized the production of green power via feed-in tariffs, which require electrical companies to pay renewables producers a fixed, above-market price for their output. It worked. In 2008, Spain accounted for half of the world's new solar-power installations in wattage terms. But to keep household electricity bills from rising too quickly, the government covered the utilities' extra costs out of the public purse. The accumulated "tariff deficit" had grown to €24 billion by this year, and was set to grow an additional €5 billion annually. (Spain's entire 2011 budget deficit was €100 billion.) September's solution is a 6% tax on all energy production, renewable and otherwise. The Spanish treasury will also assume €2.1 billion of next year's cost of servicing outstanding obligations. New levies on nuclear waste and hydro power round out the measures, which are expected to eliminate new tariff deficits starting in 2013. Announcing the reform, Deputy Premier Soraya Sáenz de Santamaría said she was confident it wouldn't affect households. Citi, however, estimates that €1.1 billion of the new revenue next year will come from consumers, as the utilities pass through their higher costs. Enlarge Image image image Associated Press Spanish Prime Minister Mariano Rajoy. This isn't quite the reform observers expected a few months ago. In July, Industry Minister José Manuel Soria had proposed taxing wind, solar and thermal generation at a higher rate than fossil-fuel production to pay down the deficits—which had, after all, been rung up to pay renewables producers. But Finance Minister Cristóbal Montoro insisted that the new tax be technology-agnostic. We have some idea of why. Mr. Montoro's brother and the brother of his chief of staff run a lobbying group that advises solar firms. "This conflict [of interest] you're analyzing doesn't exist because there isn't an energy tax policy that we have changed," Mr. Montoro told Bloomberg in August. "We've talked about it, but a policy hasn't been decided." The policy was decided in the Cabinet a few weeks later. *** Pessimism stalks Spain four months after the EU rescued Spanish banks and nearly two months after Mario Draghi committed the European Central Bank to lowering Madrid's borrowing costs. With this month's elections in Galicia and the Basque Country safely behind him, Mariano Rajoy is poised to ask Europe for a full sovereign rescue—or so it is believed. Some hold that the prime minister will delay the request even further, to avoid making the decision appear transparently set by the electoral calendar. There's also doubt about whether Chancellor Merkel will assent to another aid request, even if Madrid only asks for a precautionary credit line instead of immediate loans. The predicament for Mr. Rajoy is that of every teenage boy: If you're not sure to get a "yes," then it's better not to ask at all. Sending up trial balloons is a strategy for reform with which Spaniards are intimately familiar. With the People's Party (PP) enjoying its largest-ever majority in Congress and holding power in 11 of Spain's 17 regional governments, Mr. Rajoy is the country's most powerful leader in decades. Yet since entering office last December, the PP government has taken timidly to the tasks of crisis management. One Madrid banker unflatteringly calls this the "Japanese-style approach." The caution seems to be working abroad for Mr. Rajoy, whose bland, obeisant political style has its closest kin in China's Communist Party apparatchiks. Like Greek Premier Antonis Samaras, Mr. Rajoy sustains Mrs. Merkel's favor by following orders, producing a limp trickle of economic adjustments, and keeping the peace back home. A Berlusconi- or Papandreou-style decapitation seems unlikely. Just as unlikely, however: a pensions overhaul, serious labor-market reform, or a cleaning-out of the town halls and civil service. Keeping one foot in default lets Mr. Rajoy avoid having to do anything so drastic: Just the promise of an ECB cushion has caused Madrid's cost of funds to tumble. It also frees Mr. Rajoy to tackle other national priorities. In his first appearance at the U.N. General Assembly last month, Mr. Rajoy asked Britain to reopen bilateral talks on Gibraltar's sovereignty. David Cameron declined. Why such dysfunction in the political class? César Molinas, formerly of the economy ministry and then of Merrill Lynch, published a brave essay in El País last month blaming the electoral system. Because Spanish voters choose their legislators from closed lists drawn up by party barons, politicians answer to party leaders, not to voters. A first-past-the-post system, Mr. Molinas argues, would dissolve the influence of the party machines. The thesis has a lot to recommend it. The structure of the parties—at once top-down and highly decentralized—embroils the capital in constant soap opera with the regional governments. To Europe's horror, Mr. Rajoy put off releasing his first budget until after Andalusian voters picked their new government in March—three months into the prime minister's term. This was not because Mr. Rajoy absolutely needed a majority for his party in a 12th regional government. Rather, Andalusia's PP chief at the time, Javier Arenas, is a close confidant of Mr. Rajoy's. Mr. Arenas has for years jostled with Dolores de Cospedal, the PP's ambitious baroness in Castile-La Mancha, for influence within the party. But the dysfunction has a simpler explanation, too: the importance in Spain of enchufismo, of being plugged in. No job—not at the central bank, the constitutional court or the diplomatic corps—is above handing out by the party chiefs. Spain's real-estate bubble started when regional savings banks became vehicles for politically directed lending. Hence the parties are peopled at all levels by mediocrities: from José Bono, the Socialists' erstwhile defense minister and a folksy populist in the Central American fashion; to Education Minister José Ignacio Wert, who vowed to "Hispanicize" Catalan children to resolve the secession crisis; to the Socialist Party's former deputy general José Blanco, who received the Grand Cross of the Order of Carlos III last December just two days after the Supreme Court opened a probe into bribery allegations. And in Spain as elsewhere, clientelistic privilege is its own best PR. A 2010 survey by Monster found that 72% of Spaniards wanted to work in the civil service. "There are no entrepreneurs in Spain," one investment manager tells me gloomily. Like Spain's mess, Argentina's crisis of a decade ago—this is the comparison no one likes to bring up—had clear economic underpinnings. But deep damage was also done to the reputation of Argentine governance. Much is arbitrary and vicious about how Spain is ruled, too. The description in W.H. Auden's 1937 poem "Spain" comes to mind: "that arid square, that fragment nipped off from hot / Africa, soldered so crudely to inventive Europe." Mr. Zhong is an editorial page writer for The Wall Street Journal Europe.