Hamish McRae: Europe's leaders first need to buy themselves time

The greater the loss imposed on debt holders, the greater premium they will impose on new loans
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Yes, but what is actually going to happen? We will get some sort of outline deal out of the European summit today, but neither the detail nor the full consequences are likely to be immediately apparent. In any case, though the detail does matter, it gets in the way of understanding the consequences.

So whether the "haircut" imposed on Greek bondholders is 50 per cent or 60 per cent and how the European Financial Stability Facility is geared so that it can guarantee more sovereign debt is of considerable significance to holders of Greek debt or would-be buyers of Italian bonds. But for Europe as a whole the thing that matters is that Greece is on some sort of glide path back to a position where it can borrow money again from willing lenders and whether investors feel they can safely lend to Italy – or Spain or the other weak eurozone countries – and have a half decent chance they will get their money back.

Unfortunately the greater the losses investors have to accept on Greek debt, the less likely they are to want to lend to Italy, or even France. France has seen the gap between what it and Germany have to pay for their respective loans widen to the greatest amount since the eurozone began.

That points to a fundamental dissonance between politics and finance that has really only become clear in the past few weeks. The dissonance is that the political pressure is on governments to impose as much as possible of the burden on private holders of Greek debt, the "make the banks pay for their stupidity" argument. The problem is that the greater the loss the greater the premium those holders will impose when making new loans, not just to Greece but to any even slightly suspect eurozone country. Either way, the taxpayers pay more.

But this does, however, give us a benchmark to measure the success or otherwise of the action Europe is taking to contain its difficulties. If, after a few days, the spreads narrow between German bonds on the one hand and Spanish, Italian and French bonds on the other, then this summit will have achieved some sort of success. It will have bought a bit of time, as indeed Mervyn King told the Treasury Select Committee yesterday. That must be the more likely outcome. If they don't, or at least don't narrow significantly, then I am afraid the next summit will have to come up with something else, and fast.

There is a great temptation to see summits as tremendously important: that success is vital and failure a catastrophe. Yesterday afternoon there was a sudden wobble as the word spread that the finance ministers' meeting was being cancelled – the leaders are meeting, but the finance ministers are not.

My own feeling is that we should not see most of these meetings as particularly significant. Maastricht was important as it established the single currency. It may be that there will be a reverse Maastricht at some future stage, allowing countries to leave the euro in an orderly way but keeping the EU intact. But that is surely years away; we are nowhere near that point at the moment. So talking about this particular impasse in cataclysmic terms is both silly and wrong.

In the end the economics will shape the politics, as they are doing this week. The single currency may need a single European treasury, as suggested by Jean-Claude Trichet in his final speech as President of the European Central Bank before he retires at the weekend. But you cannot just magic that up in a few days, nor would you want to.

As long as the economic advantages of a single currency are perceived to outweigh the disadvantages, countries will want to retain membership of the eurozone. If the disadvantages exceed the benefits then voters will force the governments of the day to get them out. The only debate then is whether it is better to get on with it and get out in a messy way or whether to try to retain order. Fortunately Europe is not yet forced to make that choice.

The Vatican is forgetting something

The wider financial concerns of the world were reflected on Monday in a paper from the Vatican calling for the establishment of a "global public authority" and a "central world bank" to govern financial institutions. The document attacked "the idolatry of the market" as well as "neo-liberal thinking". It is easy to pick holes in the detail of its suggestions but it certainly reflects real concerns that the world's financial system as at present constituted has serious flaws.

However we do already have the global institutions. They are called the International Monetary Fund, the World Bank and the World Trade Organisation. They are not perfect but they are at least tried and tested.

Also, attacking the world financial system is to ignore that, for all its imperfections, it lifts huge numbers of people out of poverty every year, particularly in China and India but also in Latin America and Africa. Thanks to this flawed system the past 20 years have seen the greatest burst of prosperity the world has ever known.

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