The EU's leaders abhorred stimulus. Now the eurozone is so weak they fear the very idea that the US might stop spending

At the launch of Richard Roberts's new book about the great financial crisis of 1914, Saving the City, Andy Haldane, the widely respected executive director of the Bank of England, confessed that when the recent financial crisis occurred, not many people in the Bank of England were even aware of the economic upheaval that immediately preceded the first world war – a classic case of the modern economics profession's obsession with mathematics rather than history.

If Roberts's book had been available at the time, they would immediately have realised that the 2007-08 crisis was not simply one of the liquidity of the financial system but also of solvency. The penny, or the cent, eventually dropped in official circles.

Gordon Brown has been widely acknowledged around the world – but hardly at all in this country – for having demonstrated international leadership in moves to recapitalise the banking system and, via the coordinated "stimulus" agreed by the G20 in April 2009, to arrest what had become a freefall in world economic activity.

Unfortunately, international understanding of the scale of the crisis and the need for a protracted stimulus proved shortlived. In the runup to the G20 meeting the following June in Toronto, the consensus collapsed: a development lucidly explained in Mark Blyth's book Austerity – The History of a Dangerous Idea.

By the summer of 2010, Brown was out of office, and the German government and the European Central Bank were opposing his allies in Washington who argued that "the withdrawal of fiscal and monetary stimulus… needs to proceed in step with the strengthening of the public sector."

Far from strengthening the public sector, European policymakers, egged on by a new British chancellor called George Osborne, conducted a brilliant propaganda coup, managing to persuade far too many people that the crisis had been caused by excessive public spending – not by the real perpetrators: the banks and other practitioners of the dark arts of modern "financial engineering".

Until the onset of the financial crisis, the ratio of debt to gross domestic product in the UK had been lower than in the final year of the previous Conservative government. Again, the much-maligned Italian government had managed to bring public debt down from 125% to 100% of GDP.

But, with the German finance minister Wolfgang Schäuble and, alas, my old friend Jean-Claude Trichet, then president of the European Central Bank, in the vanguard, Europe embarked on a period of "growth-friendly fiscal consolidation", which soon evolved into the oxymoronic label "expansionary fiscal contraction".

The Organisation for Economic Co-operation and Development (OECD) estimates that between 2010 and 2013 the fiscal contraction in the euro area has amounted to about 4% of GDP on average, although the contraction has been much more severe in countries such as Greece. (Incidentally, anyone who wishes to know how serious the crisis has been in Greece could do worse than invest in Vicky Pryce's updated Greekonomics, which is a riveting read.)

Things have been bad enough elsewhere, but Greece has suffered a decline of more than a quarter in GDP in the past five years. Greece may have been one of the few European countries where public spending actually was out of control, but medicine should not, on the whole, be designed to kill the patient.

The OECD calculated that fiscal contraction next year in the euro area will be "only" 0.5% of GDP. In an interesting analysis, Russell Jones of Llewellyn Consulting notes that with "fiscal consolidation" almost complete in the euro area, "the key question [is] whether the private sector will prove robust enough to establish the economy on a sustainable recovery trajectory".

The eurozone has had its fiscal contraction, which, except in the special case of Germany, was not accompanied by a revival of confidence in the private sector.

It is very interesting that the ECB is concerned about a slowing down or withdrawal of monetary stimulus by the Federal Reserve, for fear of the repercussions on a euro area whose banking system remains deeply suspect.

It almost beggars belief that the ECB, after its support for fiscal contraction, should now be crying for help from the Federal Reserve.

Llewellyn Consulting concludes: "In our judgment, investors should…prepare for variations on the theme of outright debt monetisation, fiscal repression, trade and capital controls, and so on."

Our chancellor always blames the situation in the eurozone, not his own austerity policies, for the fact that this economy has "flatlined" for three years. If, in his coming autumn statement, he is relying on a great European recovery, he may be sadly disappointed.

Andrew Tyrie's plea for a small state and tax reductions was a worrying indication of the coalition's real motivation

The impression seems to be that the autumn statement was notable for two reasons: announcements about raising the pension age, and the difficult time that shadow chancellor Ed Balls had in reply.

The real significance is that – as the statistics in the statement itself and the report from the Office for Budget Responsibility confirm – George Osborne's strategy has proved a lamentable failure, and that, not content with that, we are in for more of the same. Instead of attacking the economy's broader problems, not least its debilitated manufacturing sector and associated weak overseas trade position, this government continues to be obsessed with balancing the budget and not the economy.

Of course, it is taking a long time to do that, not least because its de facto anti-growth approach actually limits its ability to raise revenue and reduce the deficit – a deficit, incidentally, that the Debt Management Office has no difficulty in financing, with average debt maturity of 14 years or so.

I wondered, as I saw the ranks of backbenchers barracking the shadow chancellor, how many of them – mostly opponents of the euro – realised that if there is one person other than Gordon Brown who should be thanked for keeping the UK out of the structurally faulty eurozone, it is Ed Balls.

Anyway, Balls needs no help from me. He is tough and will bounce back, as he has done before. The story so far is that George Osborne supported Labour's spending plans in the runup to the crisis in 2007-08, opposed the 2008-09 economic stimulus that prevented the economy going into freefall, then withdrew his support as soon as he became chancellor.

His withdrawal was rationalised by the almost laughable argument that the state had to draw back in order not to "crowd out" a revival of private sector investment that, of course, never came. Somehow or other, monetary policy was going to support the economy, despite the fact that the banks had forgotten that their primary function is to lend money and give credit.

International Monetary Fund calculations show that in the period 2010-13 the fiscal contraction in the UK was far the biggest in the G7, at a massive 6.2% of GDP. The economist John Llewellyn, in common with others, was urging the government to stimulate growth and revenue-producing investment projects during those years. He now observes: "No wonder monetary policy has not done the trick: it did not stand a chance."

But the real significance of the autumn statement is not that Balls had an off day but that Osborne has dug in and set the seal on a policy of years of further contraction of the public sector, with all that means for the poorer sections of the population.

A leading Conservative summed up the true significance of Osborne's promise of yet more austerity in the second term – if, that is, this disturbing coalition is undeservedly returned to power. It was Andrew Tyrie, the MP for Chichester, whom I have long admired for his impartial chairmanship of the Treasury committee, but who came out in his true-blue colours with a fawning tribute to the chancellor and a plea for a small state and tax cuts.

You see the point? As far as the right is concerned, the austerity policy that held back growth for three years, and is particularly directed at the poor and vulnerable, is not really about the need to cut the deficit; it is about making the room for tax cuts.

Osborne, unlike his nominee Mark Carney, refuses to recognise that his austerity policy delayed the recovery. For Osborne, the culprit is the eurozone, which is our biggest export market by far and whose sluggishness has held back our exports. Our cavalier chancellor does not seem able to make the connection that, by preaching austerity around Europe, and making such a disastrously effective contribution to the G20's about-turn on expansionary policies in 2010, he has made a personal contribution to the climate in which our exports are held up by economic paralysis elsewhere.

Now, although most of the publicity about the OBR concentrates on its frequently revised forecasts for growth and its budgetary arithmetic, it is noteworthy that the OBR takes a pretty pessimistic view of our recent and prospective performance in overseas trade. As Roger Bootle of Capital Economics has pithily observed, "exports are the price we have to pay for imports". We just love imports in this country, but our export performance is lamentable.

Now, some observers maintain that this disappointing trading performance means that devaluation no longer works. My own view is that, without the 2007-09 devaluation, the position would have been even worse. Unfortunately, the pound has been "recovering" rather too much recently, with those inveterate miscalculators, the financial markets, apparently believing that this is justified by our return at last to growth.

However, as that tireless campaigner John Mills of the Exchange Rate Reform Group points out in his pamphlet A Competitive Pound, the recovery in the pound "is exactly the opposite of what needs to happen".

Bootle would like the Treasury and Bank "to put a cap on the pound". One of the reasons our balance of payments position is so weak is that previous overvaluations of sterling have eroded our trading position. Here we go again…

Heartless policies are merely adding to the plight of the needy. It is imperative that Labour does not follow the coalition's example

It is a pity that the duties of the Most Rev Vincent Nichols, Archbishop of Westminster, do not extend to running the country.

In a recent interview in the Times, the archbishop came out with some pertinent criticisms of the way the coalition is focusing the brunt of its austerity policy on the most vulnerable. Archbishop Nichols believes that too many people are being left behind in this so-called "recovery".

So much for the prime minister's "big society", which "hasn't helped". "Charity isn't an alternative to public service. At our last bishops' meeting, a number said that they never thought they would use the word 'destitute' again, but there are now families with nothing: that's shameful and shocking."

Nichols observes that the government's "welfare" policies are being applied without any degree of flexibility towards people's individual circumstances. I recall referring in this column more than a year ago to John Le Carré's powerful phrase about the coalition's welfare policies being tantamount to "planned penury".

The church sees the consequences of these heartless policies at first hand. The victims turn up on the doorstep. The churches see, in Nichols's words, that "there have been clumsily targeted cuts and the most vulnerable are suffering … The way assistance is administered is very degrading and the language around benefits recipients has become much harsher."

Again, the chairman of the Trussell Trust reports that the number of food banks it administers has risen to the point where they are now feeding over half a million people, compared with 41,000 in 2010. According to Iain Duncan Smith, the most prominent perpetrator of these ill-conceived "welfare" policies, the charities that draw attention to the plight of the hungry and the dispossessed are merely scaremongering and have a "political agenda".

Well, so they should have a political agenda. This is the season of goodwill but this right-wing Conservative government, thinly disguised as a coalition, is emerging as a government of ill-will.

And, as I pointed out a fortnight ago, it has a very political agenda, which is to reduce public spending not because it needs to be reduced, but because those people running the Conservative party have a religious belief in implementing tax cuts for the higher echelons of society at the expense of the social safety net that so many governments of both major parties supported for so many decades after the second world war.

David Cameron has at various times indicated his admiration for such past Tory stalwarts as Harold Macmillan and Ian Gilmour; both would be appalled by what is going on now. This government seems to be woefully bereft of any sense of humanity or fundamental decency when speaking about welfare – and, indeed, administering it.

The nature of its underlying strategy is forensically examined in a new paper by the veteran British economist Brian Henry (The Coalition's Economic Strategy: Has It Made a Bad Thing Worse?). In it, Henry gives the lie to the coalition's repeated claim that the austerity programme was necessary to clear up the "mess" it inherited.

Careful comparison of the so-called "structural" deficit leads him to the conclusion that this was no worse at the end of Labour's pre-crisis years than it had been under the Conservatives: by far the greatest reason for the deficit was the consequence of the collapse in economic activity induced by the financial crash.

It was a "demand shock" rather than the "supply shock" that took place after the oil crisis of 1973-74, when much capacity was made redundant by the huge change in relative costs of energy. The financial crisis required stimulation of demand, not further contraction.

Henry concludes: "The coalition has seized the opportunity at the moment of the UK's greatest economic crisis since the 1930s, and the widespread uncertainty about its causes, to impose a protracted fiscal contraction with the aim of reducing the tax burden."

However, Henry himself, while referring to "uncertainty", is in little doubt that financial engineering and lax regulation were at the root of the crisis. It is a mark of the success of the government's propaganda that so many people believe the "big lie" that it was all down to "Labour's mess". How long they can get away with the big lie remains to be seen.

Meanwhile, it is vitally important that Labour does not, out of timidity, try to ape the coalition in a "tough" welfare policy. Otherwise, what is the point of the Labour party?

If recovery goes too fast and the Bank of England is forced to raise rates, will the coalition regret fixing the poll for 2015?

I first encountered Mark Carney on a funicular railway in Davos in 2009, during the annual World Economic Forum. We had both been to a Barclays Bank reception and, as I recall, were the only people in the carriage. "Hi," said my companion. "I'm Mark Carney. I'm the governor of the Central Bank of Canada. We haven't had a banking crisis."

The scene shifts to 2013, and the runup – the long runup – to his appointment as governor of the Bank of England. This was made, after a long courtship, by our chancellor, who appeared to be starstruck by the George Clooney of central banking. The establishment's view is that the obvious internal candidate, my friend (now "Sir") Paul Tucker, had been ruled out on account of an unfortunate email exchange between him and Bob Diamond of, wait for it, Barclays Bank. My own view is that George Osborne was determined to employ an outsider, and that Tucker did not really stand a chance, despite being quoted at odds of 7-2 on at the bookmakers. (For non-racing readers, that meant that he was such a hot favourite that you would only win £2 for every £7 staked.)

I also think that Tucker was a victim of email culture, and that if the private exchanges between Bank officials and City figures in pre-electronic days had been subject to such scrutiny, few would have escaped unscathed.

However, Osborne got his man, and your correspondent was one of the more vociferous in criticising the extraordinarily generous financial terms on which he was appointed.

The deal rankled all the more because Osborne, Carney's champion, is the lead player in the economics of austerity – a policy, with regard to the poor and disadvantaged, which he intends to go on applying to the point where even deputy prime minister Nick Clegg is becoming embarrassed.

Now, this column did not get where it is today without trying to be fair-minded and sounding out the opinions of many of the people it meets. And, with regard to Carney, my general impression is that he is finding the job not quite as easy as running the Bank of Canada, and that he has been quite good at rubbing a number of his officials up the wrong way.

It is also apparent that his commitment to "forward guidance" is causing increasing concern among City analysts, not least because the Bank's forecasts of unemployment – the indicator at the centre of "guidance" when it comes to criteria determining changes in interest rates – appear to have been overtaken by events. Nevertheless it is also my impression that Carney is going down well with the public – seeming to win the approval of everyone from finance directors to Steve, who brews my coffee in the Pistachio & Pickle cafe.

The same cannot be said for Osborne. Which brings us to the delicate question on so many people's lips: when are interest rates going to go up?

It is a most interesting situation. Governments throughout most of my career have chosen the timing of an election to suit what they regard as their best interests, and the state of the economy has been a crucial factor.

The economy is at last experiencing a period of rapid growth – needlessly delayed by Osborne – and there are those who think the boom could get out of hand between now and May 2015, and that – who knows? – the Bank might be forced to raise interest rates sharply. But Osborne insisted on a five-year term as part of the coalition agreement, and he and Cameron are unable to cut and run if their electoral chances suddenly look favourable.

Well before his appointment, Carney was on record as believing that reliance on interest rates was not necessarily a first resort, and that other tools to control credit should be used first. And in his lecture to the Economic Club of New York on 9 December, he insisted that "forward guidance" about reluctance to raise interest rates "reduces uncertainty by providing reassurance that monetary policy will not be tightened prematurely before the recovery is sufficiently entrenched to sustain higher rates".

It was obvious from his New York lecture that Carney thought the recovery still had a long way to go: "Despite very low interest rates, resources are not fully employed. 850,000 more people are out of work than in the years before the crisis and GDP is around 20% below an extrapolation of its pre-crisis trend."

The markets have become excited by the more recent improvement in the employment position; but unemployment is still far too high.

I was impressed by Carney's New York lecture, not least by his sceptical attitude to those who think we are in for a period of "secular stagnation". My own belief is that theories of secular stagnation are revived on a cycle of their own, the last one being during the oil crisis in the 1970s. As Carney says, the US economy is more than 13 times larger than when the economist Alvin Hansen worried about stagnation.

As for the shorter term, readers might care to dwell on Carney's observation, again in New York: "Despite admirable progress by British households in recent years, aggregate debt levels remain high at 140% of incomes. In addition, housing activity is picking up and price growth appears to be gaining momentum. Moreover, the UK current account deficit is near record levels."

So when will interest rates go up? Search me, guv.

Economic history is littered with innacurate predictions. At least this time, with unemployment, the news is better than expected

The news that unemployment is falling – and faster than most forecasters expected, not least the Bank of England – is extremely good news. It was the memory of the high unemployment between the first and second world wars that drove governments to make the pursuit of high, indeed "full", employment a supreme goal of economic policy for many decades after 1945.

Indeed, it was curiosity that there should be unemployment at all that first interested my mentor at the Financial Times, Sir Samuel Brittan, in the subject of economics. (Sir Samuel has recently celebrated his 80th birthday and is as interested as ever.)

Of course, policymakers could never really achieve full employment. There was bound to be some unemployment, called "frictional", as people changed jobs. But in the 1950s the conduct of economic policy was so successful that rates of 1.5%-2% were considered perfectly normal.

The aim was to maximise economic growth and employment, provided inflation was kept under control and the balance of overseas payments (exports and imports) was manageable.

Well, whole libraries have been filled on the problems that arose after the 1950s, and policymakers faced no shortage of problems with inflation and the balance of payments. But one thing they could take for granted until 2007-08 was a reasonably well-functioning banking system. It was Gladstone who put it succinctly: "Finance is, as it were, the stomach of the country, from which all the other organs take their tone."

The banking crisis, as we know, led to the recent depression, a depression that in my opinion was severely aggravated by mistaken policies. It was therefore interesting to hear Sir Nicholas Macpherson, the urbane permanent secretary to the Treasury, reflect recently on the achievements, or lack of them, of British economic policymakers in general over the years, and of the Treasury in particular.

In his lecture to the Mile End Group on 15 January, Macpherson made no secret of his admiration for Gladstone and the 20th century Labour chancellor Philip Snowden, both of whom are often accused of being more concerned with balancing the budget than balancing the economy.

His lecture – The Treasury View: a Testament of Experience – is well worth reading in full. After running through all the "panaceas" on which policymakers placed their counter-inflationary bets – from incomes policy to monetary targets, shadowing the deutschmark and entering (and exiting) the ERM – they eventually arrived at "inflation targeting".

Like the good public servant he is, Macpherson managed the transition from Gordon Brown and Alistair Darling's Treasury to George Osborne's – an example to those who would "politicise" the civil service. He is in his 30th year at the Treasury, and has counted them all in, and counted them all out. He says: "The Treasury exists to serve the government of the day: to promote and achieve its objectives in the financial and economic field… It needs to understand, interpret and apply the philosophy and agenda of the governing party (or parties)." But experienced officials ought to be able to offer an understanding of what works and what doesn't.

Well, the Treasury has had plenty of experience of that, but nevertheless found itself deficient in resources and experience when the bankers almost brought the entire edifice down.

Macpherson has certainly tried to make up for lost time. And he is frank about one of the great policy mistakes of the 1990s and early 2000s: the belief that price stability would bring overall stability, and the lack of attention to the growth of credit.

"Looking back to the last decade," said Macpherson, "I think senior Treasury officials – myself included – became mesmerised by the length of the upswing." It was not just Brown!

Macpherson enunciated a number of propositions, one of which was that there are limits to what the state can do to regulate demand, another that fiscal policy should support monetary policy. When your correspondent asked him whether he thought fiscal policy was supporting monetary policy at that crucial time in the summer of 2010 when the new chancellor raised VAT sharply and stopped the recovery in its tracks, he said he had feared "an inflection point", at which there would be problems selling government debt.

I disagree. The Debt Management Office was having the time of its life selling debt with an average maturity of 14 years – and not, as in the case of Greece, worrying about where the next investor was coming from. Interestingly, the permanent secretary distances himself from Osborne's (and the Bank's) absurd comparisons of our problems then to those of Athens.

At all events, the latest economic panacea in trouble appears to be Mark Carney's "forward guidance" and associated forecasts that have made the new governor a laughing stock. But for those of us who have always worried about unemployment, it remains good news that it is falling – and, personally, I have not lost faith that higher productivity will follow.

However, output is still 2% below its 2007 peak, and if past trends had continued, GDP would now be 20% higher than it is. Personally, I am less concerned about the disarray of Carney's forward guidance than with his apparent lack of concern about bankers' so-called "remuneration".

Managing the mechanism of growth is tricky – particularly when austerity-hit consumers can't or won't create economic demand

For some years now, the Italian government has organised a seminar in Venice early in the year at which officials, central bankers (sometimes) and businessmen can speak frankly about the country's economic and other problems to British and Italian journalists.

These sessions are conducted under Chatham House rules, which means anything said may be referred to, but, unless the rule is waived, remarks must not be attributed to speakers by name. (I once chaired a session at Chatham House itself, where I went through the ritual of stressing the anonymity of the proceedings, and every panellist said that they would be happy to be quoted.)

One of my outstanding impressions of the past decade is that the Italian government had successfully presided over a reduction in the budget deficit from 120% to 100% of gross domestic product until the onset of the 2007-08 financial crisis when, hey presto, the deficit shot back up to 120%.

The Italian economy, in common with most members of the eurozone, has been, and is, suffering from the double blow of the financial crisis itself and the faulty structure of the arrangements for what used to be called "the single currency". And this is an economy which, for all its intrinsic faults – known technically as structural or labour market rigidities – somehow or other managed to get by quite well for years, and was admired for the ingenuity of its small and medium-sized firms.

Of course, Italy had a chronic "competitiveness" problem, with a rate of inflation persistently higher than that of Germany, a very important trading partner. It used to annoy the German economic establishment that Italy would get back in step via occasional adjustments to its currency (that is, devaluation) and I can testify that there was joy in German official circles when, as a result of joining the euro, Italy lost this important instrument of economic policy.

This year I was particularly struck by a remark made by one senior figure in Venice, who, after an elaborate disquisition on the many "supply side" reforms that were under way, suddenly confessed at the end that it was difficult to introduce reforms "when people are scared and there is no [economic] expansion".

It had been the worst crisis and "recovery" in the nation's history, he said. "Tensions are growing … We know we are at risk." He speculated about whether "growth was for democratic capitalism what repression is for authoritarian societies". Did we know how to manage a society that had lost the mechanism of growth?

There are a lot of such gloomy reflections around. A number of people I know were impressed by a recent Anglo-German Foundation lecture in London in which the Marxist professor Wolfgang Streeck asked: "Has Capitalism Seen Its Day?" And elsewhere, economists ranging from Lawrence Summers of Harvard to our own Adair Turner (former head of the Financial Services Authority) are asking whether the growth mechanism is dangerously dependent on "bubbles".

These are serious questions, but in the case of Italy and other non-German members of the eurozone the problem is not one of bubbles but of a lack of growth stemming principally from a dearth of economic demand: this is associated with the eurozone's austerity policies, and aggravated by the loss of the exchange rate instrument of economic policy.

And if anyone tells me that the restitution of exchange rate flexibility within Europe would lead to a series of self-destructive competitive devaluations, I should reply that that would demonstrate – guess what? – a serious lack of demand.

By the way, a good bit of news from Venice – all the more striking as one returned to flood-hit Britain – was that at last Italy's brilliant engineers (all those bridges and tunnels) appear to have cracked the problem of "sinking Venice" – once they were allowed to get on with the job after decades of bureaucratic wrangling. The problem is not so much that of Venice sinking as of water rising, and we were all assured that the defences are now almost complete.

One returned to Britain not only to the sight of the actual floods, but also to the spectacle of shadow chancellor Ed Balls receiving floods of abuse from Conservative back- and front-benchers on the grounds that he is being proved wrong for having attacked the policy of austerity now that, at last, there has been a resumption of economic growth in this country.

In fact he was absolutely right, and the chancellor and his allies are wrong to blame the financial crisis on Labour's public spending (which they approved of at the time) rather than the banks.

What is more, all those Eurosceptics ought to be grateful to Mr Balls: he was the one man who, even more than Gordon Brown, insisted that the faulty economic structure militated against the political case for our joining.

Thatcherism has left customers doing firms' work for them, and an economy that even the Tories now see is too unbalanced

As I wasted several hours on the telephone last week to various branches of BT stretching from here to India, I reflected on what a farce modern management has made of privatisation.

True, there are those who recall having to wait to get the old, nationalised BT to install a new line; but I seem to remember that in those days if your phone was out of order, you merely rang a three-digit number and called an engineer. Nowadays it requires endless calls and a truly Kafkaesque routine of questions and "procedures".

When the man from Shelter knocked on the door to talk about the housing crisis – about which I feel strongly – I fear I told him it was not the right moment. Then he, too, recounted a similar episode with BT.

The following day I raised the subject with a fellow passenger on a train. "It's the same with Virgin," he said. Yes, the advice to shop around – who wants to shop around for what should be a service from a public utility? – does not necessarily get one very far.

I fear there is a wider problem with modern management. They outsource to cut costs and make life difficult for the customer. And part of their secret is to make the consumer do the work. Indeed, I am lost in admiration for the way some modern businesses have managed to force so many people to "go online" and do the things that the business itself should be doing if it really wanted to provide a "service".

What has this to do with the economy, I hear you ask. Well, quite a lot. One can hardly switch on the radio or pick up a newspaper without coming across the subject of "productivity" but, frankly, I do not think all modern business practices are productive.

The biggest joke is that the originators of the drive towards privatisation – Keith Joseph and Margaret Thatcher – somehow convinced themselves that the future of the British economy lay with the development of "services". Jim Prior, employment secretary in Thatcher's first cabinet, wrote of the Treasury ministers at the time: "None of them had any experience of running a whelk stall, let alone a decent-sized company. Their attitude to manufacturing industry bordered on the contemptuous. They shared the view of the other monetarists in the cabinet – that we were better suited as a nation to being a service economy and should no longer worry about production."

Decades later, a Conservative-led coalition has finally recognised the importance of manufacturing. Manufacturing and services are interdependent, a kind of matrix. Modern economies need both. But there has been much neglect, under governments of both main parties.

As the veteran Labour MP Michael Meacher says in his eminently readable new book, The State We Need – Keys to the Renaissance of Britain: "Any sustainable growth of living standards can only be built on a strong and resilient manufacturing base. Therefore rebuilding that badly weakened manufacturing capacity, halved in the last 30 neoliberal years, should be made an overriding aim for the next Labour government."

The next Labour government? Or the next coalition? Political commentators, and indeed politicians themselves, are avidly speculating about the outcome of the next general election, although thanks to George Osborne's original insistence on a fixed, five-year term, we still have over a year to go.

There is much talk of coalitions, although traditionally these were considered extraordinarily difficult to contrive, outside wartime, because of the way our electoral system worked.

Indeed, last weekend marked the 40th anniversary of the day Sir Edward Heath, Tory prime minister from 1970 to 1974, left office after coalition negotiations with the Liberals broke down.

And next month marks the anniversary of what many consider to have been the birth of the movement that led to the rise of Thatcher. The two biggest-spending ministers in the Heath government had been Joseph, secretary of state for social security, and Thatcher, secretary for education.

It was in April 1974 that Joseph underwent his "conversion" to neoliberal policies, and embarked on a path towards the leadership. But, after some injudicious speeches on the subjects of unemployment and contraception, he withdrew and Thatcher took up the baton (a subject due to be explored on 7 April in a Radio 4 programme: Thatcher's Mad Monk or True Prophet?)

The rest is, in that well-worn but useful cliche, history. But what may be of interest to those who devote so much attention to manifesto commitments is the experience of this country in the runup to the 1979 general election and afterwards.

Until that election, the sado-monetarist and neoliberal mission of Thatcher and Joseph (the latter actually wanted to abolish the Department of Trade and Industry, of which he was nominally in charge from 1979) was largely concealed from the British public – just as, more recently, was Nick Clegg's ultimate position on university tuition fees.

Manifesto commitments, especially when there are at least two possible outcomes involving coalitions, should carry a health warning – as should the claims of certain businesses to provide a "service".

Has the Labour party thrown in the towel? Are rightwing commentators correct in claiming that recent speeches by Ed Miliband and Ed Balls amount to surrender? Given the strength of Balls's compelling case against the coalition's austerity programme from that prescient Bloomberg lecture in August 2010 onwards the news that Labour intends to stick to the coalition's spending plans for 2015-16, essentially acquiescing in a policy it had successfully ridiculed, is disturbing, to put it mildly.

That celebrated Bloomberg lecture drew reluctant admiration from no less a Conservative figure than Alexander "Boris" Johnson, who noted that George Osborne's warnings of a Greek-style sovereign debt crisis and cripplingly high interest rates proved wide of the mark. At the time Johnson, taking Balls seriously, expressed fears of a double-dip recession and called for the government to go easy on its austerity programme.

'David Cameron genuinely tried to detoxify the Conservative party in the belief that his right wing had nowhere else to go  then along came Ukip." Thus spoke a senior Conservative figure recently, on the eve of Labour's truly amazing U-turn on economic policy in general and austerity in particular.

The speaker was one of many traditional Conservatives who were bemoaning the way their party, still suffering the fallout from rightwing resentment at the defenestration of Margaret Thatcher 23 years ago, seemed to be tearing itself apart. I lost count of the number of Tories who complained that "divided parties do not win elections".

Many years ago I spotted a correlation (a favourite word among economists) between a certain financial commentator's daily pronouncements on the state of the economy and the weather. When it was sunny, the news was always being interpreted as being good; when it was miserable there appeared to be a sudden downturn in the economic outlook.

This came back to me during the recent spell of hot weather: there seems to have been an outburst of optimism about the economy, especially in the rightwing press. It has all been worth it, we are told by the Treasury: the economy is moving "from rescue to recovery". Even the International Monetary Fund is revising its UK forecasts upwards, and the newspapers hint that the IMF chief economist Olivier Blanchard was quite wrong a few months ago to call for a British "Plan B".

The beginnings of the long-awaited British economic recovery, insofar as they are soundly based, are of course to be welcomed. But insofar as the recovery depends on old-fashioned inflation of house prices, one should beware.

The idea, however, that the good figures for gross domestic product in the second quarter constitute a justification of the coalition's leeching approach to the economy is laughable, indeed contemptible.

We now understand from astrophysicists that the cosmos began with a big bang followed by inflation as predicted by Albert Einstein. There seems to be a debate about whether it was a case of "inflation, inflation, inflation ", or whether inflation was followed by a reaction.

The parallels with the economic debate are interesting. We are familiar with business cycles nothing to do with pedal cycles, but the tendency of economies to experience bursts of expansion followed by contractions. After the second world war, governments around the world assumed responsibility for trying to control such cycles, or at least to diminish the damage caused by what is now known as "irrational exuberance" (during the upturn) and a collapse of confidence (associated with a downturn).

Who will guard the guards?, asked the Roman poet Juvenal. (Quis custodiet ipsos custodes?) The perennial question raises its head once again as a result of a remarkable public intervention by the chancellor of the exchequer last week.

The background needs some explanation. When Gordon Brown became chancellor in 1997, he gave the Bank of England responsibility for setting interest rates but punished the Old Lady for its sporadically lax supervision of banks over the years: that responsibility was transferred to the Financial Services Authority.

My recent reference to George Osborne being "the zero-hours chancellor" relates to the fact that he spends so much time plotting political strategy in No 10 Downing Street that he gives the impression of being on a zero-hours contract with the Treasury.

But I am beginning to wonder, from his recent behaviour and speeches, whether the chancellor is having a midlife crisis. First we were told that the last thing he intended to do on his recent trip to Washington was to crow about the putative success of his Great Economic Plan, and attack his critics for having got it so wrong.

It would be rather amusing if sleaze came to the rescue of the Conservative party. Consider the sequence of events: a Conservative MP resigns in a cash-for-questions affair; a vacancy is created; Nigel Farage, fearing electoral humiliation, declines to stand; and the superficial level of Ukip's apparent support becomes more apparent.

I have only met the genial Mr Farage once; it was, strangely enough, at a pro-European occasion, organised by the now defunct Lehman Brothers. Messrs Cameron and Osborne must be hoping that Farage and his motley crew will go the same way as that firm. They are most certainly hoping that the British economy's return to what looks like a respectable rate of growth will enable them to pull off the confidence trick that is the essence of the chancellor's economic strategy.

'EMU [European Monetary Union], involving the fixing of exchange rates, could create disequilibria between different areas of the community since it would remove, or render less effective, the normal powers of governments to compensate for differences of performance by varying exchange rates, taxes and rates of interest."

This quotation comes from volume two of The Official History of Britain and the European Community by the distinguished British diplomat Sir Stephen Wall.

This columnist didn't get where he is today by becoming involved in debates about immigration. My Irish surname speaks for itself. But I have spent most of my career keeping a watchful eye on Europe and, in common with many fellow Europeans, I do not like the way that the European dream is turning into a nightmare.

The principal aim of the founding fathers of the European community was to ensure that there should never be another war between Germany and the rest, the most notable member of the rest being France.

When President Obama recently let it be known that he would like Scotland to remain in the United Kingdom and the UK itself in the European Union, my mind went back to one of my late history master's favourite quotations. It was from George Canning, British foreign secretary and prime minister in the early 19th century. "I called the New World into existence," Canning boasted on 12 December 1826, "to redress the balance of the Old."

Not to put too fine a point upon it, I wondered who in Downing Street had put the president up to it, the aim this time being not so much to redress the balance in Europe, as to prevent the UK and the rest of Europe from losing their balance.

Contrary to the impression this column may sometimes give, I like to think that I am at heart an optimist. What makes one seem pessimistic are economic policies that appear to be mistaken and to cause unnecessary hardship. After all, although economics has been known for centuries as "the dismal science", it is fundamentally concerned with improving the human condition.

I had thought that this was always the case although some economists have made a big thing about "the economics of happiness", as if it were an exciting discovery. This is usually associated with criticism of the idea that gross domestic product is the be-all and end-all of economic performance.

A friend of mind spotted Mark Carney and family in the cheap seats for Wolf Hall at London's Aldwych Theatre last week. He wondered whether the choice of seats was a gesture of sympathy with the majority of the population, whose real incomes, under Carney's employer George Osborne, are, shall we say, somewhat below the expensively recruited governor's. Or perhaps the play about rampaging Tudors is such a smash hit that those were the only seats available. Mind you, as my friend added with some emphasis, in tourist-filled London, even the cheap seats are quite expensive these days.

The governor has certainly been getting out and about. He was recently seen dining à deux with his predecessor Lord King, with the latter apparently doing most of the talking. Was he being given advice on the economy, or being scolded for his eccentric decision to replace cricket with rounders at the Bank of England's annual sports day?