Italy is the home of the spaghetti western and none is more famous than “The good, the bad, and the ugly” starring Clint Eastwood. In the wake of Italy’s election that is an appropriate characterization of the economic and political scenarios facing Europe.

The outcome of the election should come as a surprise to none. Neither right nor left in Italy are offering acceptable solutions. Mr. Berlusconi and his party of the right are not credible. Messrs. Monti and Bersani and their parties of the technocracy and center-left offer more of the same austerity with stagnation. Voters are therefore turning away and either did not vote or voted for the comedian, Beppe Grillo and his Five Star Movement.

None of this is good. Politics is beginning to fracture and fray. The failure to escape the economic crisis is creating an opening for strange developments. These are the type of conditions that have opened the floodgates for political swamp monsters in the past.

This is far more than an Italian problem. It is a European problem. Political fractures are developing all over Europe. In Greece there is the rise of the fascist Golden Dawn Party. In Hungary the fascist Jobbik Party has acquired national standing. In France the far right shows strength, and in Germany discontent has taken the form of political cabaret via the Pirate Party.

With the rise of the Five Star Movement, Italy’s election has helped bring Europe’s three scenarios more sharply into focus. The good would have the election prompt the euro zone’s establishment parties to recognize the dangerous political process now underway and shift to advocating and implementing policies that grow Europe out of the crisis.

The bad is more of the same fiscal austerity that augurs stagnation without end.

The ugly is true economic and political crisis when the system fails to reproduce itself. Economic crisis will involve disintegration of the euro that causes another financial crash and a deeper depression. Political crisis will involve the swamp monsters taking charge.

What is needed for the good scenario to materialize? First, the European Central Bank must act as government banker and start financing government budget deficits across the euro zone on a per capita basis. Second, Germany must abandon its export-led growth policy based on wage suppression and shift to a policy of domestic demand-led growth based on rising wages. Third, Europe must adopt greater wage and fiscal policy coordination.

Germany is therefore the key to realizing the good outcome. German authorization is needed for the European Central Bank to change its identity and behavior, and only Germany can change German economic policy.

All eyes must now turn to the German elections scheduled for September 2013. But tragically, both German center-left and center-right seem stuck in a status quo discourse that is deaf to current dangers.

That makes the good future distinctly unlikely. The bad is already in place, while the ugly grows more plausible by the day.

(Copyright Thomas I. Palley)