An entire system of global trade is at risk

By Telegraph View

Sir Mervyn King, the Governor of the Bank of England, this week called the current financial crisis “the most serious… since the 1930s, if ever”, in justification for a further £75 billion of “quantitative easing”. Since Sir Mervyn cited the chaos of the inter-war years, it seems appropriate to quote Winston Churchill: “Want of foresight, unwillingness to act when action would be simple and effective, lack of clear thinking, confusions of counsel, until the emergency comes, until self-preservation strikes its jarring gong – these are the features that constitute the endless repetition of history.”

We are at just such a moment again. Little more than two years ago, global leaders were happily congratulating themselves on having avoided the mistakes of the 1930s, thereby averting a depression. But now it appears that the difficulties of 2008 were but a foretaste of what was to come. With the European banking system again on the verge of collapse, there is a sense that politicians and economists are out of options, that governments and central banks are powerless before events. The best of the cavalry has been sent into battle, and it has come back in tatters. The fiscal armoury has been exhausted, the support offered by the boom in emerging markets such as China and India over the past two years seems to be on its last legs, and there is but the small rifle fire of the central bank printing presses left to defend us.

If it has been obvious for some time that we are caught up in an extreme financial crisis, the extent of its severity has acquired greater clarity in being described by the Governor of the Bank of England. Never before has the global financial system been so interlinked and integrated, which means that problems in one part of the world are capable of causing severe stress almost everywhere else. We once more face a perfect storm of cascading default, contracting credit and collapsing economic activity.

Yet, despite the parallels, the current situation need not end in the same catastrophe of economic, political and social meltdown as occurred in the 1930s. For most advanced economies, these outcomes are still avoidable. But escaping them is going to require leadership, nerve and collective resolve – things that have so far been in short supply.

The problem is not in Britain – which, despite the appalling legacy of debt left by the last government, is doing most of the right things – but in mainland Europe, where lack of foresight, unwillingness to act, confusion of counsel and lack of clear thinking are indeed everywhere to behold. We can but hope that self-preservation will eventually force governments into corrective action, but they are leaving it perilously late.

It is, first, essential that confidence in the eurozone’s banking system be restored through recapitalisation of its banks, where necessary with public money. This would help bring a halt to the destructive downward cycle in credit.

Politically unpalatable though it would be, Britain may have to stand ready to participate in the process by similarly supporting its own banks. To once more dip into our pockets to bail out the bankers, at a time of deep public spending cuts and swingeing tax increases, will to most people be anathema. And for UK banks, it may not be strictly necessary – the Chancellor, George Osborne, insisted yesterday that they were well capitalised and liquid.

Yet, like it or not, we remain joined at the hip to Europe. This is especially the case through the banking system, which is highly exposed to the eurozone’s inner tortures. If a plan of mass recapitalisation is to work, it has to include everyone, good as well as bad. For countries and bankers to start squabbling among themselves about who needs to be bailed out and who doesn’t merely risks accentuating the paralysis.

There are, in any case, ways of sugaring the pill. A precedent already exists with the Royal Bank of Scotland, which pays £320 million a year for a promise by the Government that it will provide £8 billion of new capital if it is ever needed. This is a kind of insurance policy which could be used as a model for a wider recapitalisation of European banks – a way of underpinning confidence in the system without actually having to put up the money to do so.

But in the end, none of these measures can be any more than sticking-plaster solutions. Until the imbalances between creditor and debtor nations in the eurozone and the wider world economy are addressed, it is only a matter of time – and possibly not much time at all – before the crisis returns anew. It is therefore to be hoped that the G20 summit in Cannes next month can come up with some form of global contract that goes beyond the meaningless commitments and rhetoric of the past to provide convincing mechanisms for addressing such imbalances and strains once and for all.

At risk is a system of global trade and interaction unparalleled in human history – one that has lifted hundreds of millions out of poverty and delivered unprecedented prosperity to hundreds of millions more. Will this really be thrown away for want of resolve?