Any quotes used must be attributed to Murnaghan, Sky News 

DERMOT MURNAGHAN:

The situation is becoming dangerous, those are the words, the bleak warning from Chancellor George Osborne, as finance ministers met in Washington this weekend.  It comes as Sky New learn that members of the G20 group of nations are making plans for Greece to default on its debts.  The message is unlikely to calm global stock markets which have plunged as the crisis surrounding the Eurozone has deepened.  Well joining me from Edinburgh is former Chancellor, Alistair Darling, who of course was at the eye of the storm during the financial crisis three years ago and a very good morning to you, Mr Darling.  Just give us your sense of how huge the economic risk is out there because Lehman Brothers collapsing in 2008 was one thing but sovereign nations going down and taking countless numbers of banks with them is another.

ALISTAIR DARLING:

I think the situation today is more serious than it was three years ago, there are lessons to be learnt and frankly they are not being learnt by those responsible at the moment.  Lehman’s told us one thing, that if you know there is a problem you need to sort it out, take action, more decisive than people are expecting if you are going to stop it.  The problem with the Greek crisis is that it has been allowed to run on and on and on and it is only this weekend that it appears that governments now realise that it is only a matter of time before Greece defaults and that is why it is imperative that the Eurozone countries take action now to try and resolve this problem and not let it drag on for the next few weeks because the risk is it will bring other countries down with it.

DERMOT MURNAGHAN:

But the  inevitability that Greece defaults, there is no point trying to keep bailing it out in your book?

ALISTAIR DARLING:

Well I think there are two problems in relation to Greece.  One is the whole idea of imposing on that country economic conditions that I don't think it can ever meet is bound to end in tears.  There is no point in saying to a country, look you have got to impose so much austerity that we know you’ll never have any growth and you’ll never be able to repay the borrowing and reduce the debt.  Now surely to goodness we should recognise that now and instead recognise that Greece has to have a remedy it can actually work with, live with and recover from. That’s the key thing, you have got to have growth.  I think the second problem is that the Eurozone countries themselves need to face up to the fact that if you have a single currency it comes with consequences and one of them is the better off, the richer countries, have to help the poorer countries get through this.  It’s not an excuse for Greece, it’s not an excuse for trying to avoid some of the difficult medicine that needs to be taken but for letting this thing drag on with a complete lack of leadership that we’ve seen over the last few weeks, this just cannot be allowed to continue because it will affect all of us in or out of the Eurozone.

DERMOT MURNAGHAN:

How long lasting do you think the  side effects of that if Greece did default and the effect it had on so many banks, the damage it does to them.  We see stock markets presumably plunging even further, confidence lacking but you feel it is worth doing that because we’d get over it and there would be a sunlit upland at the end of it.

ALISTAIR DARLING:

Well I don't think you can guarantee that just because you do something that’s very hard and very painful, that the sunny uplands await you.  Indeed the evidence, certainly from the 1930s, is the opposite.  If you impose austerity programmes right across the board, then where’s the growth going to come from?  Take a country like Italy for example, the worry that markets have got there is that it is not going to have any growth to service its debts.  I have a huge problem with the policies that have been pursued by our own government here in the UK and in other European countries of basically crushing the economy, strangling what growth there was in the economy – and remember our economy was growing after the general election as a result of the policies that we were then pursuing. Now that growth has come to a halt so I think it is not just the Greek problem that needs to be looked at, it is the whole question of how do you get growth from the wider European economy, our own included?  It’s not just me saying that, there are now members of the government who are beginning to wonder whether or not it was really such a good idea to go so fast in reducing the deficit.  If we are not careful we will not reduce the deficit, George Osborne has already had to say he is going to be borrowing more than he thought he was going to because he is pursuing a policy that is, in my view, just wrong.

DERMOT MURNAGHAN:

Do you feel that your plan, which of course you put in place when you were Chancellor, still Labour policy – and here I am at the Labour conference – to halve the deficit over four years?  Do you think that is still the right course and do you think, given Labour’s spending commitments since you’ve been out of government, that that would still be achievable?

ALISTAIR DARLING:

Well the reason that I set that course is that I was determined that we were going to get our borrowing back down but I wanted to do it in a way that would allow the private sector to step in and take the place of public spending.  Now obviously now that is not happening because confidence has been shot to bits.  If the economy had been doing better than we forecast then of course you can do more to get your deficit down but it is important that you don’t end up with a series of policies that actually choke growth off before we’ve got a chance to get that borrowing down.  That is where we are at the moment which is why I’m quite sure, although he’d never admit it publicly, I am quite sure that the Chancellor and the Treasury are thinking what do we do to get some growth in it.

DERMOT MURNAGHAN:

But on those plans, as I say you wrote them and announced them at your last budget in power, we have since had as I say a lot of spending commitments from Labour, we got a new one today in cutting tuition fees for students at universities in England to £6000, we’ve of course got the big one from the Shadow Chancellor, a cut in VAT, that would cost about 12 billion. I mean that’s swimming in the opposite direction?

ALISTAIR DARLING:

I think as far as the tuition fees are concerned, I think Ed Miliband is quite right to identify an issue that is now a growing concern to parents hoping to send their children to university over the next few years. I know that just from talking to people that it is a very real concern and I think he has set out how he proposed for that particular policy. On the wider point you make, it is not just Ed Balls’ proposals, but even last week you were listening to the Liberals who are now beginning to wonder if they haven’t let themselves into another terrible mess, they are reflecting on what you need to do to get more growth, whether it is building capital, investing in capital projects, trying to support infrastructure and so on, they were even talking about reducing the tax burden on lower rate tax payers.  Now there are all sorts of different things you could do to get the economy going.  Of course you have got to get your borrowing down but there’s a crucial point here as well I think, it is difficult for one country to go it alone because you can get picked off.  This is why I repeat my call for some international leadership here.  In 2008/09 the reason why markets had confidence was that all countries were doing the same thing together, stopping their countries going from recession into depression.  Now where is that international leadership today?  It’s nowhere to be seen so countries do need to act together.  At the moment the problem is lack of leadership, the policies that are being pursued I think are going to result in more tears and not less, and all the time the situation is becoming more and more acute and the risk is you get an uncontrolled series of fires breaking out and there will be even deeper problems than we face at the moment.

DERMOT MURNAGHAN:

Do you therefore think that George Osborne could be doing more?  He is warning of the huge dangers out there but of course Britain is listened to, as yourself and Gordon Brown were during the course of the 2008/09 crisis, do you think that George Osborne should be offering more of that leadership and getting more involved in the Eurozone crisis?

ALISTAIR DARLING:

George Osborne is absolutely right to say that the situation is deteriorating and he is also right to say this isn’t just a matter of private grief for the Eurozone members, it will hit us. Remember his entire budget in 2010 was predicated on our recovery being export led.  Who do we export our goods to? Well it so happens it’s Europe and many of the countries that are badly affected by this crisis.  I think Britain does have a voice, provided we can put forward sensible suggestions we will be listened to, just as you are right we were listened to in 2008/09 and Gordon Brown deserves a great deal of credit for actually getting countries to do the same thing at the same time in 2009.  Now that leadership has gone now and we do need to rediscover that urgency, that determination for countries to act together because we are totally dependent on each other.  Countries can’t stand aside and pretend it is nothing to do with them so yes, I would like to see our government do an awful lot more and be saying so, not just loudly but urgently.

DERMOT MURNAGHAN:

But would that involve financial support?  The cupboard is, as we have been discussing at length, more or less bare.  Billions put in to prop up the banks, huge deficits, what could Britain do?

ALISTAIR DARLING:

I think there is something you need to bear in mind here, that none of these are easy things but if it goes wrong the cost will be so much greater.  Let me give you an example, when we did the bank bail-out in October of 2008, we had to put money into the banks, yes, we took shareholdings and one day they will be sold and we’ll get the money back, but a lot of the money was in terms of guarantees for credit and also for putting money into the system, making sure that the money would continue to flow. Now actually we didn’t lose any money.  At the time there were eye-wateringly high sums of money that we had to put forward and we did that because I knew that unless we did something far bigger than the markets expected, we could be facing an absolute catastrophe so I think this is a stage where governments acting together need to realise we’ve got to do something decisive to stop Greece just simply disintegrating.  You’ve got to make it clear that you will stand by any other weaker Eurozone member if it gets into trouble and we’ve also got to pursue a set of economic policies that actually make sense.  All of us want to get the borrowing down, all of us want to do that as quickly as is reasonable but recognise we will not do it unless we get growth and it is the absence of growth now that is beginning to worry markets right across the world.  I think unless we recognise that we are going to have big problems.

DERMOT MURNAGHAN:

Finally Mr Darling, can I just ask you about your own party’s response to this in terms of that crucial relationship at the top.  You talked in your recent book about the strains it put on your relationship with the then Prime Minister, Mr Brown.  Do you see that in a way being replicated in the relationship now between Mr Miliband and Mr Balls in that Ed Balls initially seemed to repudiate your deficit reduction plan, he seems to come up with some policies on the hoof, a bit of tension there?

ALISTAIR DARLING:

No, I don't think so.  I think both Ed Miliband and Ed Balls are well aware of the problems that can arise if the two of them are not at one and I think they are going out of their way to work very closely together and I’ll be supporting them and doing everything I can because I do think it is important that people realise there is another way of dealing with the problems that are as a result of the banking crisis three years ago.  We are now in a very, very dangerous period and it needs leadership and it is the Labour party and actually the approach that we have taken, that we have set out three years ago, I think is vindicated and this is the time for us to say so loudly, clearly and with credibility and that’s the way that we’ll get listened to. 

DERMOT MURNAGHAN:

Okay Mr Darling, we must end it there, thank you very much indeed Alistair Darling, from Edinburgh, with the lessons to be learned from the banking crisis of 2008.

ALISTAIR DARLING:

Thank you very much indeed.