Constantin Gurdgiev is adjunct professor of finance at Trinity College, Dublin.
The euro zone is now in the midst of a full-blown restaging of Sergio Leone’s 1966 classic The Good, the Bad and the Ugly; and the end game is shaping up exactly like a spaghetti western.
Here are the actors and the action:
The Good are the Teutonic Four: Germany, Finland, Austria and the Netherlands: the states that live within their economic means as long as someone else is paying. In the case of Germany and Finland, the payment is for exports of goods and much less of services. In the case of Austria and the Netherlands, for exports of services. For now, the world still wants (if not exactly needs) the Mercedes, Nokias, Raiffeisens and INGs. Hence, the Good are a happy bunch, watching their backs and taking the easier route through the crisis. That means doing nothing as long as possible, and once that course becomes untenable, doing as little as necessary to return to doing nothing when the crisis spikes.
The Bad of the euro zone are the quietly sick France, Belgium, Ireland and Portugal – for now also joined by Italy, although the latter is risking joining the Ugly. These economies can’t really stomach the Good, but have to pretend they are happy to travel along, as long as there’s a sack of gold on offer at the end of the ride. Like the Bad of Leone’s classic, they have repeatedly stuck their necks into fiscal and banking-sector rescue nooses presented to them by the Good and so far walked away with some cash in return, via loans (Ireland and Portugal), subsidies (Belgium and France), power brokerage (France) or a promise of fiscal stimulus (Italy). They grumble about the Good’s esoteric choices of action, but still toe the line when it comes to each new iteration of the already tried scheme.
The Ugly are the euro zone’s “greedy and lazy” bunch – per the quasi-official definition pinned on them by the Good. Greek and Spanish unwillingness (or inability) to partake in the austerity feast pushed on to their collapsed economies with the tacit, albeit unhappy, approval of the Bad, plus their staunch determination to test the patience of the Good are testaments to their supposed “nature.”
As far as the Good are concerned, the Ugly are constantly out to get the loot all to themselves – seeking fiscal subsidies, financial easing, the restructuring of debts and burden-sharing across the euro area. The Ugly are seen as treacherous and unwilling to co-operate.
Italy occasionally changes roles in this western. The country promptly abandoned its fiscal commitments back in the summer of 2011 when the European Central Bank’s bond-buying programs were running on full power. More recently, there seems to be a widening gap between Italy’s promises to control its deficit and the reality of rising costs of funding the debt amid a shrinking economy. As a political standoff in the country nears, prepare for Italy to turn into a full-fledged version of the Bad character in the Leone film known as Angel Eyes.
Past the mid-point of this saga, as the unholy trinity embarks on their joint adventure in search of someone else’s gold, it is becoming increasingly clear that the euro zone version of this epic is heading for a Leonesque denouement. The Ugly will be dropped. Italy, with its historic penchant for jumping from a sinking ship to the dry shore, might stay with the Good and the Bad and even mutate over time into joining the Good as a sort of experimental convert.
The Bad will be left with a promise of a payoff at the end of the game. But as they remain in the slow growth, low investment, high capital-cost union with the Good, the prize will be a pyrrhic one. Years of supressed growth – to which Belgium is accustomed by now, but which Ireland and France, with their demographics cannot sustain – will spell the slow death of their economies.
And the Good will be riding off toward the horizon, holding on to their salvaged gold. History will repeat, if not as a replay of itself, at least as a rerun of the Sergio Leone classic.Report Typo/Error
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