Crowd members in the background, Lone Ranger out front

French central bank chief signals support for Geithner plan as Berlin lays the ground for a potential eurozone exit

There are growing signs this morning that preparations are advanced in the German Bundesrepublik for a return to the Mark. Whether this is being leaked to kick the other 16 euozone members up the backside is as yet unclear, but sources agree that the German Government has the option well and truly covered. The Greek default position, meanwhile, has been fudged once again.

Greece has missed its deficit targets, but announced the completion of ‘cuts’ totalling 8.8 billion euros. It should therefore not get the bailout tranche, which spookily enough is slightly less than the cost cuts, at 8bn euros. But if it does, Athens will be swapping future cost cuts for instant cash – literally, hand to mouth stuff. The tranche of cash represents 2.3% of the outstanding debt. The Greek right to this tranche is at the Elgin Marbles stage of clarity. It truly does not get any madder than this.

In this happy situation, EU finance ministers are gathered in Luxembourg  to weigh the threat of a Greek default, grapple with how to shield banks from the fallout, consider a further boost to their rescue fund, and tackle the question of “governance” — shorthand for trying not to be quite so spineless and incompetent in future.

There are signs, however, that while some are trying to fix the hole, others are investigating the ongoing lifeboat situation. We may be on the verge of some genuinely earth-shattering developments.

“The eurozone is the new international scapegoat,” Carsten Brzeski, an economist at ING Group NV in Brussels, said at the weekend, “It seems as if the advice from Washington didn’t fall on deaf ears. Policy makers are already considering new measures behind closed doors.”

I’m not entirely sure that Obama (and Cameron for that matter) saying “Get your sh*t together” counts as advice so much as armchair commentating….however, the key phrase there is ‘new measures behind closed doors’. But I doubt very much if Mr Brzeski is party to what they are. Quite a few of those closed doors are in Berlin, not Brussels.

Let’s try and be real about this. This week or next, there’ll be what the eurocrats will see as a curved-ball, left-field event in the EU. It won’t be anything more than the inevitable coming straight at them from centre field, but we’ll let that pass. While that is sending everyone crazy, something else simply has to give.

This is easy to define. Either Germany needs to give in. Or Greece needs to leave the eurozone. Or the banks need to accept something closer to a  crewcut than a light trim around the ears. The first (see earlier posts) isn’t going to happen. There is no mechanism for the second to happen. And there are two chances of the third one happening. Unstoppable force, immovable object and all that.

Something has to change the game…and we can’t just wait for a French bank to collapse, because by then it will be too late. You think this is inflammatory (or even defamatory) bollocks? Well get this: today, France’s central bank Governor Christian Noyer said he’s “open” to the idea of using borrowed money to enhance the capabilities of a European rescue fund as policy makers turn their focus to the next steps to contain the region’s sovereign-debt crisis.

Now, this is a bonkers idea – Geithner revisited. To the Germans, it is fiscal insanity. But read what Christian says:

“It would be unrealistic to expect an increase in the EFSF itself, but I am personally open to any scheme that would allow existing commitments to be leveraged to provide greater intervention capacity.”

This is code for “without the two trillion, France is going to be CCc by the end of the year”. But if the EU majority goes this way (and I think they must look at it, even though the ‘leveraging’ money is yet to be discovered) this leaves Germany out on a limb. Hold that thought.

The deputy leader of the Christian Social Union, one of three parties in Chancellor Angela Merkel’s center-right coalition, said yesterday Greece may be better off leaving the euro zone if it cannot restore its fiscal health. Alexander Dobrindt told Deutschlandfunk radio that a Greek exit from the euro would be a last resort measure…but Greece would “find it easier to recover” outside the currency bloc. “I believe it is a solution, if one wants to bring Greece back into a economically stable competitive condition, that this would be done outside the euro zone,” he said.

That is very much the official anti-Merkel position, but Dobrindt is way beyond the inner circle. Late last week, however, economic commentator Philippa Malmgren of Principalis said this at a London investment conference (my italics):

‘My view is that it is Germany that will have to pull out of the euro…..the decision has already been made by the government that leaving the euro is a possibility…I think they have already got the printing machines going and are bringing out the old deutschmarks they have left over from when the euro was introduced.’

Although she accepted that this would mean a sudden rise in its export prices, Ms Malmgren believes Germany’s industries are in a strong enough position to deal with high prices in the near future.

Is Philippa Malmgren a mad person? I think not. Check her out at Wikipedia….or at 52,6oo other Google places if you wish. One of her key consultancy roles these days is to advise Deutsche Bank. She used to advise Bush. Pippa is a seriously heavy hitter. This from a trusted Slog source based variously in the US, UK and Asia:

“Philippa Malmgren is incredibly well connected. Her father was the US Special Trade Representative, and she has all the usual high level contacts.” In short, Malmgren is a geopolitical mover: she knows stuff we lesser mortals don’t.

Now we must ask ourselves: is Pippa Malmgren simply using her planetary-sized brain to reach a personal opinion based on looking down the road littered with cans? Or does she know something concrete?

Over to The Slog’s Bankfurt mole. This is what he told me two hours ago:

“We are Germans, so we have back-up plans, and a return to the Mark is looking more likely than it was a month ago. I have no doubt that, in the classic sense of alles in ordnung [everything’s ready], Germany could very quickly achieve such a thing with speed and efficiency. But on the other hand, if I wanted to frighten the Finance Ministers in Luxembourg today, this is exactly what I’d want out there.”

Very good point: but did he know of any specific plans being under way?

“I know it is an option – a real option. But it would be a lot easier not to do this. That said, the ClubMeds would be delighted, as the euro would fall by at least 50%. Suddenly, they could start exporting again. The real loser would be France.”

Yes indeed. Had he seen Noyer’s speech transcript re the borrowed leverage?

“I have seen it, and it says to any informed observer that the French banking system is in a state very near to collapse. But we knew this already. There will be no leveraged borrowing, because nobody would lend us the money except at enormous cost. We would be mortgaging our great-grandchilden. It would be a crime”.

German bankers, you see, do not think like US and UK bankers in every case. Just as the French still put France first, so too the Germans will pursue the ‘European ideal’ – but not by bankrupting the Fatherland. It is the return to national self-interest of which The Slog posted last week.

Stay tuned to what’s between the lines out there. It is the key to working out what’s most likely to happen.

The lighter side is at The Big Top.