With Spain as the current hotspot in the European financial crisis, it is easy to lose sight of the broader features of the Spanish predicament, which, I submit, was political and cultural before it emerged as financial. One reason for the dramatic escalation of the risk premium on Spanish bonds is the government’s low credibility - itself the consequence of a heady mix of self-contradiction, lack of transparency, and downright lying. On November 20, 2011, after years of corrosive opposition, Mariano Rajoy rose to the presidency of the government on assurances that he understood the crisis and knew how to handle it.  He now feels trapped in a situation he cannot control, not least because much of the damage is of his own party’s making. To be sure, the socialists contributed mightily to the public debt, exacerbated it by denying the crisis when it was already in evidence, and worst of all, did not act to control the housing bubble, which left in its wake banks filled with toxic assets and a severe credit crunch. But at the root of the housing and mortgage bubble were the dangerous liaisons between the banking system and regional governments such as those in  Madrid and Valencia, that have long been steeped in the Partido Popular’s reckless politics and corrupt practices (epitomized by Bankia’s lurid ambitions and costly rescue.)

The banking crisis is dragging down the Spanish economy and bringing the country’s financial structure into uncharted territory. This is a seemingly paradoxical outcome for a country that a few years back boasted a positive balance and a higher growth rate than its neighbors. What happened to upend the triumphant rhetoric of presidents Aznar and Zapatero? To a certain extent the markets appear to have overreacted, and their knee-jerk response to rising debt caused in part by investors’ demand for higher interest on Spanish bonds threatens to bring about a self-fulfilling prophecy. Before the market developed these jitters however, Spain’s public debt was in fact lower than Germany’s, even as the latter functions as the basis against which the financial risk of other countries is measured. In the last week of June 2012, the distance between Spain's and Germany's debt risk was 504 basis points, while that between the US and Germany was only 13. In relation to GDP however, Spain’s public debt remains significantly lower than that of the U.S. At the end of 2011, Spain’s public debt was 68.5% of its GDP, while the US’s was 110.2%.  In spite of this, the US continues to have no trouble financing its debt, and the American dollar has been rising in recent months and continues to be regarded as a safe haven, while the euro is at risk.

Why all the fuss about Spain? The answer lies in a combination of causes.  In the first place, there is the big hole punched into Spanish banks by the large-scale default on loans irresponsibly pushed on overly optimistic borrowers; and then there is the unlikelihood of an economic recovery vigorous enough to guarantee the debt’s financing. Saddled with debt, subjected to salary cuts, and adrift in a dwindling job market, Spanish consumers will hardly be able to fuel a meaningful recovery for some time.  At present, the combined debt ofSaish families is nearly 100% of national GDP. Corporate debt is even larger. And it is not the private sector alone that is stuck. The loss of confidence also affects the Bank of Spain. For a long time the country’s central banking authority turned a blind eye to the bad lending practices of private institutions, and so it shares the blame for the illusion of an ever-expanding and ever-appreciating housing sector. When the fantasy receded, thousands of families, as well as the owners of small and middle-sized companies, were left stranded in a financial desert; and once the economy actually began to shrink, the government increasingly lost its ability to finance the debt.

Is Spain at risk of leaving the Eurozone? While this cannot be ruled out, it is unlikely. The possibility of going back to the peseta is precluded by the fact that foreign, mostly German and Chinese, investors, whose money helped pump up the housing bubble, now make up the bulk of Spain’s creditors. They will hardly sit by and allow Spain to devalue its way out of the mess. Although he dragged his feet, Rajoy has finally applied to Brussels for rescue funds and will submit to European oversight.  The proposed solution will undoubtedly involve further dismantling of services, salary cuts, and higher unemployment.  This is a bitter pill that will test Spain’s already shaky social cohesion. Rajoy will dispense it because he has no alternative, or rather because the alternative—letting the sick banks fail instead of nationalizing their losses—is not acceptable to the financial markets. Adding to the markets’ nervousness is the fact that Rajoy has proven to be singularly maladroit at administering the medicine.  This is where politics and culture come into the picture.

Spain’s troubles go back to the origin of its current regime in the late 1970s. They are rooted in a faulty transition that was expected to convert a country without democratic traditions into a full-fledged western democracy. But today all of Spain’s core institutions have fallen into disrepute: after years of covering its scandals, the monarchy has finally disgraced itself irreparably; the Supreme Court is affected by corruption at its core; the president of Madrid's regional government (a militant and vocal member of the extreme right wing of the Partido Popular) is calling for the dissolution of the Constitutional Court (i.e. for a return to undisguised authoritarian rule); and the tone of the debates in Congress could hardly fall to a lower level. Spanish democracy is ailing, but for anyone who has observed it with attention since its inception, the confirmation of what was once merely an inkling can hardly be cause for surprise.

In the 1970s, Spain’s bid for democratic legitimacy and admission to the European Community required the restoration of Basque and Catalan self-government, which Franco had suppressed. At the time, the provision of institutional guarantees for these nationalities was seen as a requirement of justice meant to correct decades of persecution. The Basque Country and the semi-Basque region of Navarre emerged from the transition with an important privilege. They collect their own taxes. From this revenue they transfer an amount to Madrid and use the rest as they see fit. Fiscal independence in the hands of a responsible government led to a clear improvement in the Basque standard of living and, and, not incidentally, to a certain insulation from the current crisis. Catalonia, with a larger economy, was denied that privilege. In fact the opposite occurred: its economy was made hostage to a state that, under the pretext of redistribution, severely impaired its growth and development.  Since Franco’s death, Catalonia’s leading position within Spain and its capacity to compete globally (it still accounts for 25% of all Spanish exports) have been eroded through an unfair fiscal burden and hostile decisions in matters of territorial development. Year after year, Spain’s government has defaulted on the execution of public works approved for Catalonia in the former's budget, thus retarding the latter's modernization and straining its finances to the breaking point.  Rajoy’s government will not even honor the state’s appropriations for Catalonia mandated by current fiscal law. In a display of cynical reason, the central Spanish government now blames regional governments for Spain’s public debt, obscuring the fact that the combined debt of the 17 autonomous communities is only 16% of the total, while that of the central government accounts for 76%. The remaining 8% is municipal debt. By shifting the responsibility for the crisis to the regional governments, Rajoy is patently using the current emergency as an opportunity to dismantle the structure of regional autonomy enshrined in Spain's current constitution.  The result of course would be to abrogate the limited degree of self-government that Spain only grudgingly conceded to Catalonia in the former's hour of democratic need.

As usual, propaganda is based on plausibility. It is true that Spain’s system of regional governments is costly, and a revision is long overdue. Most autonomous communities were invented ad hoc by the central government for the purpose of generalizing the autonomy principle and dissolving Catalonia’s historic claim to autonomy within a so-called “autonomous common regime” that as popularized at the time as “coffee for all.”  While history required the articulation of a state with two or three autonomous regions based on tangible cultural differences, Madrid’s politicians created 17 “autonomous communities” by administrative fiat. And since Madrid was unwilling to slim down the state’s bureaucracy, parallel administrations were created, adding to the cost of government. Since the beginning, the unwieldy system of “autonomous governments” was financed through the transfer of funds from the most productive to the least productive regions with a regularity and volume that ended up crippling the donors. These have been, with predictable monotony, the regions on the Mediterranean seaboard that possess a distinct culture and language: Catalonia, Valencia, and the Balearic Islands. So striking is the fiscal imbalance that for decades Spanish governments have refused to publicize the figures, even though this refusal constitutes the violation of a standing congressional order to make them available. But how the cookie crumbles is made evident by the president of Extremadura’s admission that a new fiscal deal for Catalonia would be catastrophic for his region. Catalonia suffers from a political paradox. As a “wealthy region” in a “poor country,” it never benefited from the European structural and cohesion funds of which Spain was the largest recipient, but instead became a net contributor on a level higher than France. Economists calculate that the Catalan fiscal deficit, that is, the percentage by which taxation exceeds allocations, rests anywhere between 8 and 10% of Catalonia’s GDP (roughly $20 billion annually for a region of 7,000,000 people.) Over time, the magnitude of such siphoning of resources impacts an economy, leading to obsolescent infrastructure, the impoverishment of the service sector, the deterioration of the educational system, and the inevitable loss of competitiveness. Catalonia’s public debt in 2011 was $52 billion, approximately 20.7% of the Catalan GDP. Two and a half years of a balanced fiscal relation with the rest of Spain would have sufficed to mop up all Catalan public debt.

Spain’s troubles were political before they became financial, but politicians will not resolve them. The country needs to be further integrated into the European structure through a common fiscal policy and a commonly regulated banking system; more importantly however, Spain needs to be politically accountable to Brussels and meet European standards of justice and democratic procedure.  This would do much to bring about economic rationality. A country on the brink of default cannot afford to build unprofitable fast-speed trains to provincial destinations, boondoggle expressways in a radial system stemming from Madrid, or airports without air traffic.  Nor should it insist on an extravagant freight train route that requires drilling through the thick of the Pyrenees instead of building a cheaper and commercially sensible coastal itinerary, a plan that, without Brussels' better judgement, the Spanish government would have rejected for the ostensible purpose of isolating Barcelona’s harbor, the busiest in Spain.  The senseless megalomania and castigation of specific territories cannot be explained along traditional ideological lines — such projects have been developed by socialists and conservatives alike — but by long-term cultural continuities. The recent bout of megalomania was buoyed by billions in structural funds, while the territorial grievances, notorious to anyone who is conversant with Spanish history, went on as before, shielded by Spain’s membership in the core Western institutions.

Spain would gain much from trading sovereignty for rationality, and from being forced to invest for economic rather than merely symbolic payoff. A dishonored monarchy, a politicized justice, and a corrupt party system are as much toxic assets as those the banks hold, and if intervention is inevitable, the discipline mandated from outside ought to touch the country to the quick. If and when Brussels decides to put the Iberian house in order, it ought to recognize which administrations have practiced fiscal restraint and are capable, under good governance, of meeting European standards. Spain could well be the last ditch of the European monetary union and of the political union itself. But timely political reform in Spain could be the last opportunity not only to keep the country within the EU but also to hold it together as a meaningful political project.

Enrique Peña Nieto was elected Mexico's president promising to curb the drug-related violence that exploded during Felipe Calderon’s past six years in office. His victory means the Institutional Revolutionary Party, or PRI, will return to power after being defeated 12 years ago in the country’s first truly democratic election.

The PRI has a complicated history of corruption. But it also built a reputation for guaranteeing political stability and making the peace among Mexican post-revolutionary warlords during its 71 years as the country’s ruling party.

Associate professor of political science Beatriz Magaloni talks about what to expect from Peña Nieto, what his policies may mean for Mexican-U.S. relations, and how his government would likely allow drug cartels some freedom to operate in exchange for the promise of peace.

Magaloni is the director of the Program on Poverty and Governance at the Center on Democracy, Development, and the Rule of Law at Stanford’s Freeman Spogli Institute for International Studies.

What do we know about Enrique Peña Nieto? Who is he?

His campaign slogan was “Because you know me.” But the paradox is that nobody knows him at all. He’s been the governor of Mexico State for six years, but he doesn’t have a particularly good or impressive record. There hasn’t been a lot of scrutiny of his performance, and people perceive him as a product of the media. He’s married to a soap opera star, and he’s known for his good looks – but also his shallowness. He was asked to list three books that have influenced him, and he had a lot of trouble answering the question.

Peña Nieto is the new face of an old party. What did the PRI accomplish in its 71 years of power?

Mexico had a social revolution in 1910. After the revolution there was continuous violence for almost two decades, and the PRI was created to put an end to the violence by bringing together all the post-revolutionary warlords into one single organization. The idea was they would stop killing each other and as long as they joined this organization, they would be guaranteed a piece of the pie.

The party did tame violence in Mexico, and that’s a big accomplishment. The party also has a history of social reform. They organized massive land redistribution, expanded welfare benefits to workers and oversaw moderate economic growth.

But the PRI was so successful in monopolizing power that they became increasingly corrupt. In the end, the corruption wound up destroying Mexico’s development. By the time of the PRI loss in 2000, we had more than 20 years of economic catastrophe. There was huge inflation, devaluation, unemployment, and a lot of corruption that was exceedingly destructive.

What does corruption in Mexico look like today, and how can it be addressed?

The relationships among cartels, police and politicians are very complicated throughout the country. Mexico has 31 states and one federal district. There are more than 2,400 municipalities, each with its own police force. There are also state and federal police. There are about 15 cartels, and as many as 10 different gangs operating in many of the larger cities. So in each region, you never know who the police are really working for.

The drug trade is so profitable that there are huge incentives for vast sectors of Mexican society to participate. You have to offer people opportunities and chances to make money outside of the drug market. You have to give civil society groups the room they need to grow and influence communities. Tijuana has been successful in turning things around. There was a big push to engage entrepreneurs and make them understand it was up to them to reclaim the city. They helped support the arts and culture. And, most importantly, they gave young people opportunities.

There have been at least 50,000 drug-related killings during Calderon’s term. Why has it been such a bloody six years?

This is a big debate. Some people blame Calderon’s policy of attacking the cartels, which they say forced them to strike back with more force. They say that if he didn’t do that, Mexico wouldn’t be as violent as it is now. Implicit in that critique is that Mexico shouldn’t have done anything about the drug problem. This is the argument that PRI is capitalizing on now – this notion that things were better off when we did nothing.

The other argument from Calderon and his supporters is that criminal organizations were already out of control when he took office. He said cartels were the de facto power holders in vast areas of the territory throughout Mexico, and the government had to do something about it to regain control.

How will the drug war shift?

Peña Nieto says he’s going to control the violence more than fight the cartels. So that’s implying that you have to let the cartels operate. Wars are ended with either a pact or a victory. There can be no victory as long as the drug market is as lucrative as it is. So you need a pact that says as long as the cartels don’t kill or kidnap or do violence, they can operate. But the problem with that is they will continue to be extremely powerful and in control of state institutions. It is very hard to draw the line between that kind of pact and absolute state corruption. I fear it’s hard to reach that pact without acknowledging that Mexico will never have rule of law.

It is clear that we cannot continue with the violence as it is. That’s the biggest thing that needs to be addressed. People are suffering so much. Crimes are not being solved. There is no real sense of justice.

As Mexico’s neighbor and the largest consumer of drugs moving out of Mexico, what role does the United States need to play in reducing the violence?

Much of the problem is about the demand for drugs in the U.S. That’s the source. But people aren’t going to stop consuming drugs. So you need to do something about the legal nature of drugs. Making all drug use and trafficking into an illegal activity is what’s fueling a lot of the violence. So if you legalize drugs – that doesn’t mean you sell them as freely as you sell alcohol, but you can sell them under legal regulation – I think violence will be reduced. And if the United States doesn’t become more engaged and rethink its policies, the violence is going to eventually come across its borders.