Alf Young: Crisis response? What crisis response?

DAY after day the language has grown more apocalyptic. “We now face an economic crisis that is the equivalent of war,” warned the Sage of Twickenham, Vince Cable, speaking to Liberal Democrats on Monday. “The world is in a danger zone,” cautioned World Bank president Robert Zoellick on Thursday. Hours later, David Cameron caught that same grim mood of the trenches when he told the Canadian parliament we are all close to “staring down the barrel”.

Overnight into yesterday, with global stock markets plummeting, finance ministers and central bankers from the G20 group of leading industrial economies, meeting in Washington this weekend, felt compelled to rush out a communique promising “a strong and coordinated international response” to the ongoing risks from sovereign defaults, further banking crises, vanishing growth and civic unrest and joblessness spreading across much of the western world.

The penny – or, perhaps, the euro – has finally dropped that this is a crisis of truly generational and global significance. The great contraction that started three years ago, in the wake of the Lehmans collapse and the resultant banking crisis, never really went away. Forget talk of a double-dip recession. What is now in prospect is no longer the economic equivalent of a mass bungee jump.

Rather, if credible action isn’t taken to prevent it, we all face a sustained slump in our living standards that could last for years. What befell Japan when its property bubble burst at the start of the 1990s with its banks mired in crisis – the lost decades – now looms for much of the developed west.

The great rebalancing that was supposed to follow that first phase of contraction simply hasn’t delivered on anything like the scale needed. Deficit nations were to mend their profligate ways, reining in debt-fuelled domestic consumption while boosting private investment and exporting more. Surplus nations boost their own domestic consumption, creating demand for all those additional exports economies like ours were producing.

Thus rebalanced, the global economy would step back from the brink and start growing steadily again. Instead, as the IMF demonstrated this week in the latest of a series of downgrades to its World Economic Outlook, in the US, across the eurozone, in the UK and Japan and in the newly industrialised Asian economies, outwith China, growth prospects are shrinking fast.

The picture is particularly grim in the developed west. Too many of the fiscally challenged players in this great game of rebalancing are clustered on both sides of the Atlantic, all trying to find salvation exporting more to each other while demand across the region as a whole, having stuttered back into life last year, has now stalled again.

Many have banking sectors that became hopelessly over-leveraged in the boom years, are still in intensive care, but remain addicted to the notion their own survival (and the bonus culture that goes with it) matters more to the future of the market economy system than the survival of their customers.

Worse, a number of those deficit economies and their banks are members of the embattled eurozone, locked into a common currency that deprives them of some of the key sovereign tools, like devaluation, that would enable them to tackle market fears about their current indebted state.

With no agreement yet across zone members as a whole to collective solutions to this crisis – whether by the issue of ECB-backed eurobonds or by a much faster pace of fiscal integration and bank regulation than has happened since the euro was launched – all that is left are increasingly desperate rounds of austerity imposed on the worst transgressors, bringing angry citizens on to the streets and, certainly in the case of Greece, masking an uncomfortable reality that some kind of default is now all but inevitable.

Eurozone political leaders and policy-makers have responded with a strategy of what former Clinton advisor Larry Summers calls “grudging incrementalism”. Doing just enough to avoid collapse, but never enough to ensure the return of confidence. If that continues, he adds, catastrophe beckons. But the eurozone leaders are far from alone in failing to come up with what the G20 is now urging – a strong, coordinated international response that delivers results.

The G20 itself isn’t ready to tell us what that strong response will look like until its next summit, in Cannes in November. President Obama seems too locked up in his own battle for political survival with the wilder shores of Tea Party republicanism to embrace a leading global role. And our own Prime Minister is playing a curious positioning game.

Having visited Libya last week with Nicolas Sarkozy to jointly reap the plaudits of the anti-Gaddafi forces and the UN this week to urge more supportive action to help realise the hopes released elsewhere by the Arab Spring, David Cameron did find time to say something about the unfolding economic crisis.

First he joined the prime ministers of Australia and Canada and the presidents of Indonesia, Mexico and South Korea, in writing to the French president, as current head of the G20, criticising a “lack of visible political will” to take the decisive action needed to get the global economy growing again.

Then he went to Ottawa to praise Canada for getting “every major decision right” in the run-up to the current economic crisis, getting to grips with its own deficit, “fixing the roof while the sun was shining”.

The current crisis, Mr Cameron insists, is fundamentally a debt crisis. Not for him any Keynesian stimulus. Forget all those rumours floating around Whitehall and the Lib Dem conference of a £5bn infrastructure package to turn the tide.

“Yes demand matters,” he told Canada’s parliamentarians. “But boosting it by undermining financial stability is self-defeating and damages the confidence on which economic growth depends. So a long-term solution must tackle the fundamental problem. We must address excessive debt.”

What’s been good for the UK, he went on, is also the right course of action to tackle the high level of indebtedness in many eurozone countries. Hair shirts all round for as long as it takes is the Cameron prescription, it seems. But what that means for the prospects for growth across the developed west, even in the medium term, he did not say.

The Prime Minister did hold out hope that the November G20 summit might manage to kickstart the stalled Doha trade round. “We’ve got to refight the argument for free trade all over again,” he said. “The truth is trade is the biggest wealth creator we’ve ever known. And it’s the biggest stimulus we can give our economies right now.”

But a successful trade round is still years away. Demand and confidence in the global economy here in the west are withering away right now. Others, like the IMF’s new managing director, Christine Lagarde are already calling for a more expansionary policy response.

If this really is the sum total of David Cameron’s answer to how we get Europe, including the UK, growing again, he should stay well away from that barrel he claims we are all close to staring down. It could blow his chances of staying in power till 2015 to smithereens.