Alistair Darling: Osborne will change course to save face

Three years ago this week one of the world's largest bank came within hours of closing.

If RBS had gone down it would almost certainly have brought with it most of the world's leading banks. So, three weeks after the collapse of Lehman Brothers, the then Labour government bailed out the banking system to prevent not just a banking catastrophe but a profound economic collapse.

It worked because, scarred by our experience with Northern Rock 12 months earlier, we acted immediately and did far more than the markets expected. Within days, other governments followed. The immediate crisis was averted.

Three years later, on the face of it, we have learnt very little. The eurozone is in crisis because it has failed to act swiftly and decisively. And there is now a real fear of, at best, a decade of stagnation and, at worst, another recession. What's more, there is a sorry acceptance that nothing can be done to stop year after year of lost opportunity for growth at huge cost to millions of people across the world. That is wrong. The crisis can be tackled. It involves making different choices.

Three steps are vital. First, the eurozone must recognise that much more must be done to stop Greece's problems spreading to larger members.

Last week, we learned that in Washington plans are being drawn up with a Greek default at their core.

So the rescue fund will almost certainly have to be increased, not least to shore up some of Europe's banks, which are very vulnerable to the consequences of default. A failure in even a small bank could have catastrophic consequences for larger banks.The eurozone also has to recognise the consequences of a single currency. No one realistically sees a political union, but that the stronger economies must help the weaker ones is now beyond doubt. If they don't, they threaten the euro itself which is in no one's interests.

Most people realise that austerity alone won't work. That is why the second step is equally important and it affects us in the UK too. Our economy was growing at the time of the last election. Contrary to the claims of the coalition, we were always able to service our borrowing and debt and recovery had begun. The coalition's rhetoric has shifted. The reason, they now say, that growth forecasts will not be met is not because of a failure of their policy here at home, rather that Britain's problems are part of a wider global problem.

Deficits have to be brought down but the rate at which you do that affects growth. Without growth, deficits will rise not fall. We are already seeing that. That's why George Osborne will change course. He won't admit it, or call it Plan B. But he knows, because he's not daft, that what growth there was has been choked off.

Whether it be investment in infrastructure projects, or tax cuts to relieve hard-pressed families, or another dose of quantative easing, policy must change. Osborne left himself some wriggle room as to when precisely the structural deficit will be eliminated and he will need it.

Finally, the experience of three years ago is that countries that go it alone are exposed. That's why the G20 agreed to act together. We need to rediscover that spirit of international co-operation to get borrowing down and growth up. We cannot afford to stagnate for a decade or even more.

Alistair Darling was Labour chancellor 2007-10