Alistair Darling: What Europe must do, now, to avert calamity

Europe's growth has stalled and its leaders continue to wring their hands ineffectually. The longer the delay in doing what is needed the greater the financial cost will be. Worse, the longer nothing is done the greater the risk that markets will doubt not only the political will of eurozone leaders, but their financial ability to do what is needed. Now we hear of plans yet to be disclosed to break up the euro in the midst of the raging firestorm. Talk about careless talk costing lives.

A leadership vacuum lies at the heart of the global crisis. Last week's meeting of the G20 leaders was an abject failure just at a time when the world needs strong leadership and a clear sense of direction. Europe still fiddles as Rome threatens to burn and ignite a fire far beyond its borders .

Understandably people are frightened of what the future holds. They are worried about their jobs and why no one seems to be getting a grip. They are confronted with austerity yet they see their leaders offering little more than weary resignation to perhaps years of stagnation. The cry goes up, there is nothing to be done. It is not surprising that the nascent protests in London and New York, despite their inchoate and disparate demands, attract so much attention. There is not much else on offer.

Globalisation, we know, can bring immense benefits. But at times like this the downsides are all too felt. National governments struggle to impose order in this new world where there is no overarching global governance. How frustrating then that where there is some semblance of structure, in Europe for example, it is not being used. Or in the case of the G20 last week, it is reduced to apparent impotence.

The G20 had apparently three objectives. An action plan for growth, the removal of key obstacles to growth. And of course sorting out the eurozone. They failed spectacularly on all three.

The G20 is far from perfect. But it can work. In 2009 when it met in London its decisive statement to do whatever it took to avoid recession sliding into depression gave markets confidence that governments were not powerless in the face of global events. And it worked because ministers were scared stiff of what failure would mean.

Today the situation is far more serious. If ministers are not yet scared they should be. We are now told that G20 finance ministers may meet again before Christmas. Another failure will reinforce the sense of hopelessness and engender further scepticism if not cynicism about what governments can do. Leaders should order their finance ministers to start work immediately to see what countries can do together to get growth going. Governments can make a difference.

For the 30 years before this crisis struck there was a consensus that the role of government was limited. The crisis in 2008 changed all that. If ever there was a case of where governments can make a difference that was it. Without growth, deficits will go up, not down, as we are seeing here at home. Across Europe, imposing austerity is killing off growth. Borrowing is likely to rise, threatening recovery.

Governments acting together are far more effective in a globalised world, as we saw clearly two years ago. The G20 urgently needs to come up with a plan to get growth going again. Even Asian governments are now fearful that what is happening in Europe will slow their economies right down again. The bigger questions of imbalances between countries like China and the US can only be resolved at a global level. A repeat of the grand bargain struck in 1944 at Bretton Woods would be a useful starting point.

Surely the G20 with all the political firepower it has could have persuaded the eurozone that it cannot allow this crisis to fester on and threaten the entire global economy? Here is the irony: the European Union and the eurozone do have structures that could be made to work. The European Central Bank can buy government bonds. Existing treaties offer decision-making powers.

A single currency means the richer countries must help the poorer ones. Of course countries must help themselves. There have to be reforms in Greece especially. But we cannot afford to let this crisis carry on any longer.

A break-up of the euro now would harm not just the eurozone but us too. It is the last thing we need. The eurozone will have to decide if it wants closer union and whether its membership remains intact. If there is closer union then that clearly raises issues around the relationship between it and the rest of the EU. That, however, is not today's problem. There are three things Europe's leaders need to do right now. First, even with a new Greek government there is no one who seriously believes that the present Greek fix will work. A plan that leaves Greece with debt at 120 per cent of its GDP in 2020 – more than it had when it went into this crisis – is doomed to fail. We know that. So why not fix it now?

Second, bank recapitalisation cannot wait until next summer. If Greek, Italian or Spanish banks begin to falter, what happened in 2008 will seem like a squall compared to the hurricane that would be unleashed in Europe, and soon.

Third, the rescue fund does not exist. Nor does it look like existing any time soon. The European Central Bank does exist and should be allowed to buy bonds from distressed countries. In a crisis you have to use what tools you have to hand. We are now in a worse position than we were in 2008. It is compounded by a lack of vision and leadership at every level. Time is running out. To avoid this foreseeable calamity we must act now.

Alistair Darling was Chancellor of the Exchequer from 2007 to 2010