Europe lacks a respected father figure to rewrite the debt rules. But then, so does the world

The situation remains exactly the same as it was two weeks ago regarding the EU’s peripheral fiscal crisis. In a nutshell, Merkel wants the banks to pay more, with no rescheduling of debt. The banks want to pay less and shove all the cost onto the taxpayer. And the French are, as ever, in the middle, favouring a  bit more from the banks, quite a bit more from the taxpayer, and a whole lot more rescheduling. In time terms, this could be abbreviated further to ‘now, soon, and never-never’.

Describing her position on German television yesterday, Chancellor Merkel told the electorate that she will only attend an emergency EU summit in Brussels on Thursday if there is going to be an agreement on a new rescue plan for Greece. She insisted on no Greek debt rescheduling, and said the deal would have to involve substantial voluntary involvement of private creditors….that is, the banks.

That isn’t so much setting the agenda as defining the result. Once again she told German viewers, “The more voluntary financial involvement the private creditors make, the less likely will it be that further steps are needed”. The problem with these demands is that the banks aren’t going to go with them. It’s the kind of match that will go to penalties, after which Merkel will lose. That said, the German leader is at least doing one thing right: standing up to the banks. But at the moment, all the positions being adopted in this stand-off are unreasonable.

The key thing to realise in watching this slow-motion drift towards Crash 2 is that nobody believes anyone else. Merkel doesn’t believe the banking intransigence is genuine, the banks don’t believe they’re going to get their money back, Sarkozy doesn’t believe the situation is that serious anyway, and nobody believes the Greeks can afford the current level of repayments.

So where now? The Americans don’t care, just so long as something decisive happens, and it doesn’t involve them paying any money out in insolvency insurance to the French banking system. So it is that former Treasury Secretary (under Clinton) Lawrence Summers waded in yesterday with vapid platitudes about getting on with it….but offering diddly-squat in the way of a specific solution.

“It is to be hoped that European officials can engineer a decisive change in direction but if not, the world can no longer afford the deference that the IMF and non-European G20 officials have shown toward European policy makers over the last 15 months,” Summers opined. It would also be preferable for the Americans to engineer a decisive decision on their deficit ceiling too, but their aren’t many ideas knocking about on that one either. Summers rumbled on:

“There must be a clear and unambiguous commitment that whatever else happens, the failure of major financial institutions in any country will not be permitted,” Summers wrote, adding that punishing creditors for the sake of teaching lessons or building political support was reckless in a system that depends on confidence.

Finance folks, eh? Are theysomething else or what? ‘What you must do is stop being so reckless, sell higher taxes to the proles, and leave we the bankers who created all this mess out of it, otherwise confidence will disappear, Ithangyoo.’

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What we are seeing here is the latest round in a heavyweight kick-boxing bout between the banks and the politicians. So far, the banks have won every round: in the UK, then America, then in the ClubMeds, then in China, back to the UK, and then onto Ireland, and now back to Greece on the way to Italy and Iberia. They suspect they are going to lose – the markets of all kinds increasingly suspect everyone will lose –  but the game’s the thing, and the unwritten rule for them is No Retreat. Wolfgang Schauble, Germany’s finance minister, accepts that they will win this round too – but his boss doesn’t.

Only one thing will destroy the power of the banks and wake up the political class, and that’s catastrophe. Which is why catastrophe is what we’re going to get. Catastrophe may seem like a big price to pay in order to put the banks back in their box; but my view from the start has been consistent: this is a financial catastrophe we’re talking about here. Generally speaking, in this kind, nobody dies.

This is not to suggest that pensions will be fine, savings will be reimbursed, and a week after the catastrophe everything will be back to normal again. But from Day One in 2008, the banker bluff has been unwavering: “Save us, or there will be a catastrophe”.

It would take me a book to analyse what shape the catastrophe might take, and it would be overtaken by events anyway. But we long ago reached the stage where Ireland, Spain, Portugal, Greece and Italy are going to avoid wending their way down the toilet of insolvency. So if we’re going to have a collapse, let’s have it now – and let’s focus on debt forgiveness. The later we leave it, the more expensive it will get.

To me, this is irrefutable common sense. But we are at the stage in Crash 2 where instead of being hidden, self-interest is becoming more and more obvious. A eurocrash would collapse America, and a collapsed America would bring China to a halt, and a static China would sink Australia. What the players in this farce are effectively doing is, once again, putting off the pain: ‘we mustn’t lose face, and we mustn’t lose money. We know we must really, but we mustn’t.’

As always, what we’re lacking here is accountable leadership. What we have instead is the Pro-Am European Unaccountable Can-Kicking Championships.

Every parent has dragged a screaming child away from the pointless “aaww…just one more game” negotiation of a summer’s evening. The kicking, puce-faced infant mustn’t go to bed, but it must and it will. What the world economy – let alone the European one – lacks at the moment is that parent. The result is infantile paralysis.