Alistair Darling - British Chancellor of the Exchequer, 2007-2010 HARDtalk

school building programme. That is the summary of the news, that's it

from me tonight. It is now time for Just how close to meltdown is the

eurozone? With Greece preparing for election which many see as a de

facto referendum on a euro exit, the Continent's markets are awash

with fear. Ankaras, contagion, systemic collapse. -- Bank runs.

These are threats to the global economy. My guest today is Alastair

Darling, who was the Chancellor during the financial crisis of 2008.

Is there a way out for the economic hole that Europe has dug for

Alastair Darling, welcome to HARDtalk. I want you, if you would,

to compare the feelings that are brought now with those that you

were so very aware of in 2008 at the height of the financial crisis.

Is there more reason to be concerned about European and global

economic stability now than there was then? In some ways there is

more reason because here we are three-and-a-half years since the

collapse of the banking system and there is still no end in sight. In

fact we have now moved from a banking crisis into a situation

where the world economy is did come together to get growth going, then

we took the fat off the pedal. We still have this downturn in various

stages across the world -- the foot off the pedal. In Europe, not only

have you got Greece, but in the last couple of weeks there has been

concern about the banks which is so similar to what was happening in

2008. It is. You talk about Greece being at the heart of it, but is it

fair to say that it is about so much more than Greece? There's a

systemic challenge now to the viability of the euro as a common

currency. Do you accept that? are three inter-related problems

and you can't look at them separately. The overarching problem

is that if you have a single currency then the economic and

political necessities are that you come closer together, the richer

parts have to help the poorer parts. That is part of the problem. One of

the problems is Greece, whatever happens has to be some sort of

settlement that enabled Greece to get through things and have some

hope. Second the European and eurozone area did not clean up the

banks in the way they should. Thirdly, this business of austerity

alone been sufficient, this is complete nonsense. Until they put

that behind them they are going to be stuck in this downward spiral.

We have got Greece, the viability of Europe's banks, and a broad

economic strategy across Europe. Let's take one by one and let's

start with Greece if we make. I referred in the introduction, June

17th election, many saw it as a vote as to whether to stay in the

eurozone. If the answer is No Then Greece will be forced out. Do you

believe the Germans and others are right to insist they can be no

renegotiation of the bail-out deal? -- they can. I have always been

critical of the deal because I don't think it will work. In eight

years' time that will mean Priest will have a debt level higher than

when they went into the crisis -- Greece will have. Can it ever get

on its feet? That is one fundamental problem. The other

side... Let me stop you there. If you take the position that this

deal is incredible, and therefore not worth the paper it's written on,

are you suggesting every creditor that is owed money by the Greek

government has to write all of it off? That is a separate issue if we

carry on much longer. Supposing there were no Greek elections at

all, not for years, and the Greek government carried on as a

technocratic government. When they signed off the last attempt to

impose a settlement on Greece, everybody knows they will have to

come back for more. The European Union knows that, the eurozone

countries know that. This is a settlement that leaves Greece with

debt levels of 120 % of its national income in a year's time.

That is not the message coming from the pro bail-out deal Greek

politicians and also the eurozone, either somebody is lying to the

European public or you are overstating the case? If anything I

am trying to understate it, because there are huge things at stake here.

After this was signed it emerged that within the eurozone there was

an acceptance it would have to come back for more. That is one side of

it. On the other side you can't say to Greece, you are off the hook if

you like. Equally I have no time for politicians in Greece who say

they don't have to do anything, they can just forget everything and

they will write off al our debts. If they stay in the eurozone there

are issues, but if they leave, they will be pain in Greece. If they do

leave the eurozone it will be inconceivable that Europe will not

have to do something to help Greece transition into something it will

then have to be. I take your point and there is going to be paying

either way. Whether there's a way of keeping Greece inside the

head of the IMF, said something very interesting hours ago.

"Everyone in Europe must analyse the costs and the benefits of both

of these scenarios very carefully before deciding what to do". As a

former finance minister, what do you think that analysis of costs

and benefits leads you to conclude about Greece and the euro? I think

it would be better if we could reach a settlement with Greece

within Europe than out of Europe. So somebody else will have to pay a

substantial amount of their current outstanding bills? Whatever happens

there will be a cost. If it all goes wrong, suppose Greece is

forced out, the risk is the contagion spreads to other

countries, the countries, like Spain for example, where the cost

to the remaining eurozone members is therefore much bigger. Greece is

tiny in the scheme of things, it is 2% of the whole economy. When you

talk about the bigger countries it is a different ball game altogether.

I would like to say Greece signed up to a deal that could be made to

work, so there's no way of getting out of it. But what I see in the

deal they signed is one that is not credible. Part of the problem is if

you impose a treaty on a country, where people don't believe there's

a lot of pain yes, but at least there is a game at the other end,

but they don't see that, and they see all the suffering not getting

them anywhere, it is not surprising that they are seduced by people

with simplistic arguments and pain- free solutions. Isn't there a

credibility gap the other way, and let's move on from Greece, because

you have already alluded to the fact there is deep trouble in Spain

and the Spanish financial system, and real problems in Italy and

Portugal as well. A lot of European politicians, and I am thinking of

France while Holland in France and the Prime Minister of Spain, and

others as well -- Francois Hollande. They are all talking about Euro

bonds, as if this could be the solution to this spreading problem

and spreading fear of contagion. Do you believe the idea that you

collectivised the debt and use the full power of the European Union to

guarantee the debt of sovereign nations in Europe on its, can that

be a viable solution? It is certainly a solution -- European

bonds. You might have some problems with the German constitutional

court. They almost certainly would. As I said at the start of this

programme the logic of a currency union is you get increasing

economic and therefore political co-operation and ultimately Union.

I don't think we want that yet. But the logic of that means something

that allows you to swimming pool the cost of boring, so the rich

carry the poor.... Germany will have to act as a guarantor?

European Central Bank is pouring money into the banking system.

Clearly it is a European central bank so all of the countries are

standing behind it. The power of that Bank was used at the start of

this year to stop what I think would be the collapse of some major

banks. There's an example where the collector advising happens already.

The German view is that if you give Greece an inch it will take a mile

-- collect revising. I understand that and if you don't put your foot

down there is a risk that they will say they don't need to bother. But

if you impose something, it has got to be something that sticks. But on

your central point, is there a value in Europe coming together?

The United States is a fully federal country, the richer bits

help the poorer bits. But it is a nation state, it is a federal

nation. Is it your contention, I want to tease out the logic of this,

that Euro bonds, which are already been talked about, can only happen

when there's a clear commitment to full fiscal and in the political

union? They cannot be separated. What you have got in the eurozone,

everybody knows it is a fudge. If you go back to when it was set up

at the end of the 1990s they had a thing called a stability and Growth

Pact, which is there to keep the economy is in line. The first two

countries that broke it were France and Germany and nobody did anything

about it for these reasons, they were too big. Even in the situation

you have got now, I kind of halfway house, you can still do euro bonds.

What about a moral hazard? In 2008 you had to deal with that when he

rescued the banks and in a sense that continued bad practice. Would

it not be the same thing for sovereigns? If you are allowed euro

bonds to rescue terrible decision making at the top in Spain, Greece

and other countries, you would be exacerbating the problem of moral

hazard. I understand the concept of moral hazard but let's look at

Leeman Brothers. The Americans tried out something that had not

been tried before, and you let a very large bank crash. You could

say that is an a sample of moral hazard, it does not matter how you

arrived at it, because it was an unfortunate accident more than

anything else. But it brought the banking system within hours of

collapse. You could say to the Greeks, you lot have completely

screwed up, suffer the consequences. If Greece went out of the euro that

weigh the consequences would be terrible for Greece, and we would

not be able to sit back and say it does not matter. But it would be

terrible for countries doing the right thing, countries that are

trying to put their house in order. They would be hit by the backwash

if you got this contagion spreading through Europe. Marach moral hazard

is fine in peace time, but in a cute crisis which is what we are in

at the moment, it is a brave set of governments that say let's see what

happens. I hear your voice of experience from 2008 when you say

that. But some quick-fire questions, how close are we right now to a run

on at least one significant European Bank? You can never tell

with these things. I have no reason to think it will happen in the next

few hours. But as you saw last week, when stories start to spread, the

Greek money has been taken out of the banks, the Spanish government

had to deny there was a run on one of their banks. Look what happened

with Northern Rock in 2007, everything is fine Monday and it

isn't the next. In other words, this is what worries me, something

could happen one morning that leads to panic. What I learned from 2008

was that in order to stop this you have to do far more than people are

expecting an you have to do it more quickly and that hasn't happened.

You have to do it more and quicker, how can that happen in the European

context when we see every day the differences between Francois

Hollande, and Angela Merkel in Germany? We see all of the

differences and confusions coming out of Greece as well. How is it

possible to imagine the quick decision-making you're talking

about coming out of the European I can only imagine it happening in

one circumstance, and that is if everything absolutely goes wrong,

and that finance ministers are scared stiff less. The chairman of

RBS, one of the largest banks in the world, they say they are

running out of money. They say they could last only to hide than three

hours. If that bank shut its doors, that would spread through the

entire system. Are you saying that we need that kind of deep crisis to

force European leaders to find a viable and common policy? If I look

at what has happened with the eurozone in Greece, they started to

try to sort it out at the last meeting I went to in 2010, they had

been consistently behind events, and when they needed to do

something, they had done not enough, too late, and sometimes completely

the wrong thing. They have got a month before we see the colour of

the next great government. I hope they use that time to good effect.

A final thought on the eurozone. The current Euro autumn Italy will

have to go. It will be better it the eurozone broke up. -- the

county record and Italy. I just wonder in the current climate,

where there you could have an orderly break-up. Remember how long

it took to put the euro to get there? It took decades. If you are

breaking up, you are talking about acquiring a new currency that is

good to use on Monday morning. If you are in tranquil times, it could

well be that you reach the conclusion that the euro was never

going to work, so let's recognise that ate it may be better off for

everybody. But remember where we are now. The Continent, a large

part of it is in recession, and coming back to the UK, it is very

important to us. If you are going to start that kind of thing, you

have to be sure where you are going to end up. You mention the UK. I

want to talk more about the UK. There is a continuing and important

debate about economic strategy. The Government is committed to the

strategy of austerity, putting it front and centre, getting the

deficit down and cutting national debt. The Labour Party, your party,

has consistently said that they are doing it too fast and too quickly.

That they would moderate the cuts. Christine Lagarde said, when I look

back to 2010 and what could have happened without the sort of fiscal

consolidation the current government has taken, I shiver.

What she actually said, if then that -- if there was not a credible

plan, she would shiver. She is referring to the David Cameron and

George Osborne plan. Nobody is arguing that they needed to be a

plan. She backed their plan. The kind government's emphasis on

austerity, on slashing the deficit quickly as possible, is the right

strategy. She endorsed the Government's plan. But she also

said, as the iMac said 12 months ago, the risk is that we are

institutionalise an economy of low growth. If it does not work, we

need a Plan B. It is not our government's plan. George Osborne

says he has created the space, in the end it is about confidence,

because of the programme that he has taken, he has got the

confidence of the ratings agencies, the bond markets, to allow him some

space to take measures such as boosting the construction industry.

You need a credible plan to get your borrowing down. I wanted to do

that, the Government is doing that as well. But he is borrowing more

than he said he was in 20th June 10. -- June 2010. He cannot say that he

is on course. We do happen to be back in recession in this country,

something that I did not think would happen, that he did not think

would happen, but we are back in recession. I am in favour of all

the infrastructure projects. The problem is that there is a long way

between announcing and that contractors being engaged, jobs

being created, and the projects being completed. A lot of the

projects have not been started. The IMF was making the point, that out

government, may well have to do far more than they bargained for, if we

do not get growth going again. they say that for right now, the

Government is on the right track. I want to tease out the Labour Party

economic strategy. We have a crisis in the eurozone, a recession at

home, but the Labour Party has not decided what it wants its economic

policy to be. Would you agree with that? There are a few voices more

influential than yours when it comes to the debate. The present

government did not tell us what they were planning before the

election. But there are signals that can be sent. You can look

around Europe and have views on what is happening elsewhere.

Francois Hollande has made it clear that he is going to attacks 75% on

people earning over one million euros. He is going to regulate the

banks on a very pro active way. He is going to talk about a financial-

services tax. Those are signals being sent about where he puts his

economic priorities, which Ed Miliband is not prepared to take.

He set it out in deep as it -- the election campaign. Which he

happened to win. Is there not a message for Labour? The time is to

set it out when we approach the election. I'm not asking for every

dot to be signed off one, but I am asking for the Labour could -- the

Labour Party to restore the 50% tax rate, which the Tories had decided

to reduce? In my view, and I cannot speak for my party, in my view is

that you will have to take that decision closer to the time. I

would not have taken it off this time. Because at a time when people

are still finding their income squeezed, it seemed wrong that the

first place that you go to take taxes off our people at the top end

of the scale. He has made that clear. We have made it clear that

the Government ought to be doing more to bring forward the

infrastructure programme. You will not be painted into a corner in

give too much Pacific, but let's talk about the Greek radical left,

the leader, going around the European capitals, saying that they

have to stand up to corporate capitalism. They have to fight for

a better economic system that represents workers better, and are

not simply in the interests of the capitalists. I think it is a Greek

situation. I think if you look at the broader lessons that need to be

drawn, the system for banks failed, it needs to be tightened up, these

institutions are so important to the economy that you cannot leave

it to chance. On the economy, the fundamental difference between us

and the Conservatives, we believe that governments cannot define the

forces of gravity, but they can make a difference in terms of

fairness and the way that you'd cut the deficit, and to get economic

growth going again. When Ed Miliband made a speech about

predatory capitalism, very soon afterwards Tony Blair appeared in

the press and according to sources close to him said, we have to be

credible with business, we cannot go into the election without a

single CEO from a big company backing us as we did in the last

election. If you want to win, you have to win from the centre ground.

I agree with that. It is a trip in the UK that you cannot win

elections did he come from the centre. -- a truth. You have to

have a policy that makes sense for businesses. But if you are running

an economy in such a way that business cannot flourish, they are

not going to do the things that you want to do in order to help people.