Clem Chambers: Nations like the UK that face the pain of realignment sooner, not later, will recover faster

The Dow, Dax, Cac-40 and FTSE all show the same, extreme swings. Markets – be they foreign exchange, bonds or commodities – are all in trauma. Will there be a big rally or a jumbo crash? The market doesn’t know.

The key reason for this is what’s at stake and the sheer scale of what could go wrong.

No-one believes Europe can let itself go up in smoke for the sake of political grandstanding, yet a solution to the European credit crisis is unclear. They say madness is caused when the mind is trapped in a “double bind” where the logic of a situation is unrecognisable. Markets are “mad” because they imagine the consequences both of failure and a way out.

Banks lent long and borrowed short; many went bust. Governments taxed short and took on long-term overhead commitments, which is effectively the same thing. As such, governments are like broke banks on a giant scale.

Of course, a broke creditor can keep partying if a crazy credit card lender or a mortgage bank is happy to keep lending. If lenders stop shelling out, however, everyone gets hurt. Pain is inevitable, but no-one wants the pain on their patch, so the system attempts to let things down gently. Instead of short-term pain, the economy gets slow agony.

There are many layers of problems needing to be solved to see the back of this crisis.

Not only must governments heal financial systems, they also have to balance budgets – or at least get them back to something that looks like sane economics. Then they have to solve the balance of payments crises and get their economies on a footing to compete with developing markets – all the while hoping to avoid social unrest. It’s no wonder paralysis reigns.

The UK is about the only country in this mess that has taken the bitter pill of realignment. Inflation of 5 per cent and above is in place, the currency crashed and public sector overheads are being squeezed.

Five years of this arduous plan will right the economy of Britain, although the pain will be significant. Inflation is unfair and ugly, yet it is a brutally effective tool.

The US will follow this strategy after the election. Germany has been against this simple but certain path from the start, but it seems likely to step onto it at the end of the month, when Europe must state its solution to the unravelling of the EU. Europe will then get one more shot at averting a global meltdown.

It should be a simple matter to set the wheels of rescue in motion: printing money. Inflation insidiously levels the playing field. The active get paid out and the passive get robbed, yet when there is no way to pay off debts, inflation is the only way to cut liabilities outside of default.

This is why gold is around US$1600 an ounce and the Swiss franc and the yen are so strong. No government has an alternative to austerity and inflation.

Germany and France have one more shot at stopping contagion. If the opportunity is missed, the UK may suddenly look like a haven.

• Clem Chambers is chief executive of stocks and shares website ADVFN.com and author of 101 Ways to Pick Stock Market Winners