There is a difference in this crisis compared to all the many crises, both political and economic, since WWII. This time nobody knows what to do, or if they know, they cannot act. There is a political paralysis in the euro zone. It is made worse because there is political dysfunction in the U.S.
There is now panic because growth has stalled. It has stalled because of the burden of debt. Like a company over borrowed, the entire western economic structure is now in trouble because of this. Within that structure some countries are less borrowed and it is expected they will rescue the over borrowed. Nowhere is there a political fabric to facilitate this in timely fashion, nor is there a democratic majority to sanction it. In the euro zone Greece is, in effect, in default, yet still euro land tries to pretend that it will be able to carry on. When Greece does go, the French banks are in trouble. The contagion will spread through the banks and through the other countries at risk, Ireland, Italy, Portugal and Spain. There are not enough central funds to deal with all of that. Time is running out for the Europeans to rescue their dream. If they dither much longer it will crumble.
What will then have to happen is this. There will have to be a universal write down of debt in which all, including the cash rich countries of the east, take part of the loss. There will then have to be a fresh start for the euro which will have in its membership only those countries willing to cede their economic sovereignty to central control. The rest will have to be manage on their own with heavily devalued currencies. No longer will growth be the only source of prosperity, since growth will have to be earned, not borrowed. It will be slow and uneven. In the re-vamped euro area policy will be made to Germany’s bidding. The EU will become a confederation; the drive to ever closer union will have been abandoned.
Meanwhile in the U.S., now badly alarmed at the disarray in Europe, the age of spending much more than is raised in taxes will have to stop. Either a political consensus will emerge as to how the balance of tax and spend is to be struck, or the nature of the United States itself will have to change to something nearer the Confederate model. This will mean the end of the dollar as a reserve currency. America, especially the Tea Party, has yet to envision the gravity of its own crisis, or the potential force of the tensions now tearing at its heart.
The U.K., with its limited democratic structure and unwritten constitution, is able to organise stable and decisive government at times of crisis. The difficulty for the British is that even with austerity and cuts, if Europe and the US are in trouble, there will be no escape for them either, but it is not the first time in history that Britain stood alone against the odds. The Coalition would be wise to accelerate the reform of the banks and to do all it can to galvanise friends in Europe and in America to find a way through their problems. Having a Plan B to stimulate growth when its two key markets are in turmoil may not be any longer useful. A Plan C to survive without external growth, built on home consumption, using earned money from a balanced budget to reduce debt, whilst controlling inflation, may be needed. That will be tough, but failure to get ready could be a lot tougher.
It is not time to prepare for the end of the world, but it would be timely to prepare for the end of the world as we know it. We should also get closer to the Chinese. Hope must not be lost. Where there is a will there is a way. It is the absence of political will which is at the heart of the loss of the economic direction in Europe and America. It must not happen in Britain. Unity of national purpose has for long been the strongest suit in the British hand. The time to play it is, once again, drawing closer.