We should be grateful to Gordon

Brown saved the country from falling into a second Great Depression

The New Statesman editor, Jason Cowley, sent me an email a week or so ago suggesting I take a week off. "Come back in a fortnight," he wrote, "when we will have a clearer sense of where we are. Could 'Slasher' Osborne really be chancellor on Friday?" I replied that he couldn't. Then, on Monday 10 May, Jason wrote again: "How are you fixed? I know you're not due to write this week, but do you want to write about the eurozone and the huge rescue package?" "Yes," I replied. I taught a class and then started writing.

The big news that morning was the huge intervention by the European Union to provide almost $1trn in loans to end the region's sovereign debt crisis. The political leaders of the eurozone agreed to the rescue package after the Greek fiscal crisis produced a sell-off of Spanish and Portuguese debt. A divided European Central Bank (ECB) agreed to prop up the euro by agreeing to purchase government bonds, despite the fact that ECB president Jean-Claude Trichet had denied they were going to do so at a press conference on 6 May. This statement, and the fact that the ECB seemed not to comprehend the scale of the difficulties, appears to have been the catalyst for the crisis.

Too many cooks

The Belgian economist Paul de Grauwe was reported by Bloomberg as saying that European leaders "have realised there is more to monetary union than a central bank. Whether you like it or not, that is increasingly a fiscal union." Only a few hours after the rescue programme was announced, the Bundesbank president Axel Weber acknowledged that buying bonds has "significant risks".

The EU package was well received by the markets, however. The euro rose against the pound, the yen and the dollar, before dropping back. Stock markets were up all around the world and the share prices of the banks, which had collapsed over the previous week or so, rose dramatically: Barclays's share price increased by 16 per cent; those of Lloyds and RBS by 14 and 13 per cent respectively.

In France, BNP Paribas increased its share price by 21 per cent, Crédit Agricole by 24 per cent, while in Germany, Deutsche Bank was up 13 per cent. Unfortunately, all this may not have been enough to prevent Greece from defaulting on its debt. The rescue package may have made things more unstable rather than less, since the markets now understand that it takes a deepening financial crisis for European governments to act.

This looks like the beginning of the end for the euro. The ECB is structurally incapable of acting quickly and decisively - it has too many members who speak too many languages - and its focus on controlling inflation is outdated. Indeed, the Bank itself was a major cause of the problem that led to a little Greek tragedy turning into a Europe-wide disaster that had to be fixed immediately.

Gordon Brown's decision to keep Britain out of the euro (remember his five "tests" for entry?) now looks inspired. As for his principled resignation on 10 May, it dramatically improved the prospects of the Labour Party sealing a coalition deal with the Liberal Democrats. (Let's hope that the leadership contest that is to follow doesn't become a fist fight.) A Lib-Lab alliance would be best for the well-being of the man on the Clapham omnibus. I had always expected that there would be a Lib-Lab deal without Gordon Brown as the leader - I said as much on Richard Quest's show on CNN on 15 April.

This would be no more a "coalition of losers" than a Tory-Lib Dem coalition. No single party has a majority of MPs and ours is a parliamentary system. Cameron lost an election he should have won, against an unpopular government in a terrible recession, having frittered away a 20-point lead in the opinion polls. The Tories failed to win because people didn't buy their austerity message. Voters were right: I simply don't trust Slasher, Cameron or Hague. On the economy, the choice is between Lib Dem-Labour flexibility and Tory ideology. I know which I would choose.

I was impressed by Shirley Williams's comments warning against a Lib Dem alliance with the Tories. And even Graham Brady, whom I know from his days on the Treasury select committee and who is tipped to be the new chairman of the powerful Conservative backbench 1922 Committee, warned the Tories of the dangers of an alliance. I can't see that a Lib Dem-Tory alliance could last very long, making another election, perhaps later in 2010, inevitable. In such a contest, Labour under a new leader - David Miliband, say - would be tough to beat.

Lasting legacy

This is an opportune moment to assess the Prime Minister's economic legacy. I think this has been substantial. In 1997, the incoming Labour government was anxious to appear credible and competent on the economy. Brown's decision as chancellor to create an independent Bank of England was inspired. He then helped to deliver a decade of strong economic growth. It was not his fault that there was a global financial crisis.

I think Brown's principal legacy will be his successful and speedy handling of the financial crisis that engulfed the UK economy in the autumn of 2008. The Nobel Prize-winning economist Paul Krugman went so far as to argue that Brown, together with the Chancellor, Alistair Darling, "defined the character of the worldwide rescue effort, with other wealthy nations playing catch-up". That is exactly right.

The Federal Reserve emerged from the crisis with much more credit than the Bank of England, which failed to cut interest rates early enough and equivocated over rescuing Northern Rock. But Brown acted swiftly to save our banks and he showed the way forward to other, more recalcitrant western governments. Unemployment rose much less than was feared, in large part because of decisive action by the government.

The Prime Minister understood how important it was to keep the stimulus in place to avoid a double-dip recession. Brown saved the country from falling into a second Great Depression. And that is a big deal.

David Blanchflower is Bruce V Rauner Professor of Economics at Dartmouth College, New Hampshire, and professor at the University of Stirling.

David Blanchflower is economics editor of the New Statesman and professor of economics at Dartmouth College, New Hampshire

This article first appeared in the 17 May 2010 issue of the New Statesman, On a tightrope