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Where does the European impasse now leave Britain?

One month on, Cameron's veto looks an even greater folly.

There is another side to David Cameron's eurozone veto that hasn't been told. Staying out of the euro was not a cunning example of British sagacity but rather a potent symbol of the weakness of the British economy. What was not admitted was that, though still the sixth largest economy in the world, Britain was judged not fit to compete in an open European economy where a single currency was underpinned by fixed exchange rate and interest rates.

That judgement has been amply confirmed by events. In 1982 Britain had a surplus on its trading account in goods of £1.9bn. Since then it has steadily deteriorated to the point where UK deficit on traded goods reached an unprecedented £100bn, no less than 6.8 per cent of our GDP. What makes this decline so staggering is that it occurred despite a 23 per cent devaluation of sterling over the last three years.

Such a precipitate decline is simply unsustainable. We cannot continue to enjoy our standard of living when it is dependent on such a huge loss of competitiveness.

In that context to try to preserve the City of London untouched -- when it is a major cause of that competitive breakdown as well as largely responsible for the £850bn increase in Britain's indebtedness following the financial crash -- is utterly perverse.

Instead the number one objective for Britain should now be a single-minded concentration on a renascence of British manufacturing as the only means to regain the competitiveness on which our future depends. That should be accompanied by a radical reform of UK banking so that its prime role becomes the promotion and enhancement of British industry. This approach should then determine our policy towards the euro and any future EU directive on financial services regulation.

Hitherto Britain has attracted foreign direct investment largely as a base for export to the EU market and because costs are lower through low pay and de-regulated working conditions. R&D is generally centred abroad and profits generally repatriated to the foreign country. This is not an adequate platform on which to build a dynamic, competitive and sustainable manufacturing base as the core of UK economic growth.

Instead a successful national manufacturing system requires indigenous supply chains which profitably connect the different competences of a diverse population of small-medium-giant enterprises within powerful cluster networks. British manufacturing at present has few large corporate players with UK headquarters that have a global reach, broad capabilities and a large workforce over 50,000. Yet critically these are the companies that boost cost recovery by selling branded finished goods, sustain civil R&D, build high-tech capabilities, as well as connect backwards to domestic suppliers.

Britain lacks these crucial chain-supporting enterprises because short-termism always trumps long-term market share. Giant manufacturing firms like GEC, ICI, Lucas and TI were broken up when assessed as inadequately profitable, and privatisations (for example, rail and electric power) were carried through without regard to a domestic supplying industry.

As a result Britain is now an economy of small workshops, with less than 2,000 factories employing over 200 compared with 107,000 employing less than 10. The UK propensity to import is therefore much higher largely because of reliance on foreign-owned assembly within global systems, and UK balance of trade prospects project an unsustainable increase in the deficit which will require permanent deflation to damp down import demand.

All these entrenched problems point to the need for systematic prioritising on capacity building and investment right across the whole spectrum in manufacturing, as indeed has been advocated by the CBI 20-year export recovery plan. Central to achieving that is radical banking reform. The City of London remains heavily focused on mortgage lending, derivatives and offshore speculation. Worse still, many banks lend on a one-off basis for a specific project on a limited timescale and expect high annual returns on investments to meet their loan repayments which often appear too risky in uncertain market conditions.

By contrast, relational banking is a central factor underpinning German manufacturing success, linked with the clustering concept of the Mittelstand offering a strong local or regional network uniting major manufacturing companies with their suppliers, ancillaries and customers as well as their banks. This is a business model in Baden Wurttenburg, Aemilia Romagna and other European regions which the UK should develop in manufacturing arcs round Birmingham, Manchester-Liverpool, Newcastle as well as the South-East.

But the key banking reform needed is the restoration of public control over the money supply. As a result of the Competition and Credit Control measures in 1971, the lifting of exchange controls in 1979 and the abolition of all controls over consumer credit and the de-regulation of housing finance in the 1986 Big Bang, the commercial banks have now become responsible for the issuance of over 97% of domestic credit creation.

They have used that power to become the major generator of unsustainable asset bubbles and thus of great economic instability. Through the shadow banking system, proliferation of derivatives and securitisation they have gone to great lengths to evade public controls and to pursue their private interests at the expense of the national interest. They have used their control over the money supply largely to feed the property boom and foreign speculation whilst allocating as little as 8 per cent to productive investment.

For all these reasons control over the money supply should be brought back into the public domain. This was the mechanism used by many of the most successful countries in this last century, especially Japan, Korea and Taiwan after the Second World War.

Under this "window guidance" the central bank would determine the desired nominal GDP growth and then estimate the amount of credit creation necessary to achieve this. Then in consultation with the main financial and industrial sectors, but in accordance with strict criteria, it would spread this credit across the range of various types of banks and industrial sectors.

Speculative transactions like today's lending to hedge funds was firmly suppressed. Consumer loans on any significant scale which would trigger inflationary demand for consumer goods and draw in increased imports were discouraged and hard to get. Priority was given to productive investment - plant and equipment, key services, and enhanced productivity via new technologies and R&D.

By contrast, rejection of the eurozone and keeping the City untouched and unregulated is a tunnel vision leading to economic unviability and ultimately self-destruction. Only a sustained revitalisation of UK manufacturing, the real lifeblood of the economy, together with fundamental banking reform, can now save Britain.

Michael Meacher is Labour MP for Oldham West and Royton.