Matthew Norman: What possessed Osborne to pick a fight with Mandelson?

The meeting of haves and have yachts on Corfu seems too good to be true

For anyone who takes pleasure from observing developments on and beneath the surface of the steaming, bubbling swamp that is political life in Britain, this is Westminster's answer to Stendhal Syndrome.

Contemplating the fable of the Russian oligarch, the feuding Bullingdon Buddies and the soon-to-be ennobled European Union Trade commissioner, the senses are so overladen that you could, like a first-time visitor to Florence, faint at the wonderment of it all. Quite literally, you could cede consciousness. I have the smelling salts beside me, and have required three pre-emptive sniffs already.

As a vignette of eve-of-fiscal crisis, Last Days of Pompeii opulence, the meeting of haves and have yachts on Corfu seems too good to be true, the setting and cast of characters suggesting an outlandish literary partnership between PG Wodehouse and Agatha Christie.

Yet while reporters use their leetle grey cells to piece together the chronology and work out who has lied to whom about what – a Herculean task given the plethora of claims and counterclaims – the one thing in no doubt is the identity of the political corpse.

This is not to say that George Osborne won't rise again, because as the career of a certain Baron Mandelson teaches, the capacity for political resurrection is astounding.

George will need to be a fighter, though, not a quitter, because today he is finished as a viable future chancellor, undone by a tiny cabal of friends, friendly acquaintances and his own hand. Or rather his mouth.

What possessed him to pick a fight with Mandelson on terrain that overwhelmingly favoured the latter I doubt he could coherently answer himself. But his decision to break the Code of the Bullies, by passing on confidences gleaned at billionheir Nat Rothschild's villa amounted to a form of suicide by cop. He simply begged for the bullet.

On reflection, Lord M's counterstrike deserves another point of reference. Forgive yet another boxing analogy, but here we find Mandy as Muhammad Ali to Osborne's George Foreman. For this is the most sensational act of political rope-a-dope ever witnessed.

For two weeks, he soaked up incessant haymakers from front-page headlines about his connection with the oligarch, and for all the world looked ready to drop. And then, quite suddenly, he danced off the ropes to unleash a murderous combination of his own, with a little help from that tireless correspondent with the editor of The Times, Mr Rothschild.

One particular beauty about the Rumble in the Jungle was The Punch Ali Never Threw. Knowing it would ruin the elegance of the knock-out, he stopped himself hitting Foreman again as he began his slow motion lump to the canvas. I like to think Lord M will show such restraint, graciously retiring to his corner to be mobbed by delirious hangers-on from the Labour benches. They should hail him as their new, undisputed champion because that, miraculously, is what he has become.

While it would be dementia gone mad to predict that the Osborne Calamity will cost the Tories the election, the public is listening closely enough to be heavily influenced. This isn't always so with scandals of this kind. Whenever Mandelson is centre stage, indeed, the temptation is to switch off – we've heard it all before with the mortgage, the Hindujas etc – and mutter a weary "So tell me something I didn't know". For all the frothing, homophobia-laced insinuations in certain papers, Mandy is like Captain Jack in Doctor Who. He cannot be killed for very long.

When the chief suspect is a pristine young chap like Mr Osborne, however, when he initiated the whole wondrous mess himself with rancidly hypocritical off-the-record briefings, and when he is spearheading a sustained attack on governmental mores, the electorate pays close heed. It may be bemused and even bored by the fine detail, but the story's texture seeps into the collective consciousness and will remain there until polling day. The texture here is abrasive enough to draw blood. On the verge of the scariest economic crisis for seven decades, just as Messrs Cameron and Osborne were fine-tuning their repositioning to Labour's left on social policy (Osborne interrupted his Corfu hols to fly home for a conference on poverty; and bless his heart for that), he's supping champers with Mr Rothschild once again.

Albeit they probably didn't play raucous drinking games this time, that fact alone is enough to give the ever-present Bullingdonian spectre flesh. Out come the old snaps, the protagonists ringed as always, and there's little Georgie, bottom left, affecting an imperious stare into the distance, his expression halfway between the insouciant gaze of the New Romantic and the undisguised sneer of the lurid waistcoat-clad member of Pop.

Given the hideous timing, this image of born-to-rule arrogance may be barely less lethal to him than the substantive matter of whether or not he tapped up Mr Deripaska for a £50,000 donation, laundered through a company the Russian owns over here or otherwise.

About his non-denial denials, frankly, there is something grubbily Clintonian, the carefully crafted legalistic precision inspiring no confidence in Mr Osborne's fidelity to the absolute truth. Ultimately, to adapt the former president, it depends on what your interpretation of five meetings with Mr Deripaska, some involving the chief Tory fundraiser, is.

But even if one believes Mr Rothschild's account (and what reason can he have to lie? As ever with disputed accounts of this kind, cui bono is the killer question), Mr Osborne seems at least to have tacitly condoned discussions that might have led to a criminal offence, when sound judgement would have had him bidding the aluminium baron a brisk good day at the first mention of money.

Caught between an Ionian rock and a hard place, David Cameron will be damned whatever he does. If he brazens it out and keeps Osborne, he looks feebly in thrall to aristo tribal loyalties that will undermine his egalitarian message disastrously. If he sacks him, the implicit admission of Osborne's guilt damages the fragile new Tory brand horrendously.

It' s a shocking call to have to make, but on balance he should fire him quickly for the veneer of decisiveness, and make William Hague his shadow Chancellor. Apart from his intellect and popularity, Mr Hague's comprehensive schooling in Yorkshire makes him a very handy antidote to all the Bullingdon poison.

Meanwhile, by way of an indecently delicious irony, the noble Lord Mandelson can rejoice in having diverted the twin, incoming warheads of consorting with plutocrats and dodgy party funding towards his enemies. Scores of his former colleagues on the Labour benches may very well remain there for years to come thanks solely to this ermined Ali.

Let them continue to loathe him if they must, but they should be on their knees to him. If they had an ounce of decency, in fact, they'd get Lord Levy to organise a whip round and buy him a yacht.