Alistair Darling, the Miliband Dilemma and What the Party Must Do Next

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Did anyone emerge with greater credit from the smouldering ruins of the Brown bunker - the Gotterddmmerung of the New Labour years-than Alistair Darling? He did more than simply survive the paranoia, feuding and duplicities of the last days of the Labour government; it was as if he was emboldened by the dysfunction. He wanted to be straight with the electorate about the seriousness of the financial crisis and he challenged his party to wise up to the need for a credible budget deficit programme. And people respected him for it.

Darling was one of only three ministers who held a cabinet post from the beginning of the New Labour governments in 1997 right through to the end in 2010 (the others were Gordon Brown and Jack Straw, neither of whom left office with his reputation enhanced), and he was often used by Tony Blair as a kind of human fire extinguisher to put out the departmental blazes that others more careless had started. For a long period in office, he was perceived as being little more than a grey-haired technocrat, competent, loyal, a soft Brownite. Yet he grew and, in his final role as chancellor - engagingly documented in his memoir, Back From the Brink-became finally much bolder.

He became his own man. In the end, just as the banks were deemed too big to fail, so Darling was too important to sack, which was what Brown would have wished. But that was then. Now, as he tells me, he is "enjoying the freedom" of his new role outside the shadow cabinet and as Labour's most powerful unionist voice in the conflict with Alex Salmond and the separatist Scottish National Party.

Poor core

On the morning we meet, the GDP figures for the final quarter of 2011 are just out, showing definitively that the economy stopped growing towards the end of 2010. "I think 2011 has proved to be worse than anybody expected," Darling says, a little breathless from rushing back to his Westminster office after giving a hurried interview to one of the news channels. "George Osborne used to criticise me regularly for my forecasts; well, I think he's had to revise down his on four occasions during 18 months as Chancellor of the Exchequer. Looking ahead, unless and until the eurozone sorts out its problems, I just don't see any remission. I see us at best bumping along the bottom, though it must now be a better-than-even chance of us going back into recession. The crisis has turned out to be worse than even I thought it would be."

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He denounces the coalition for taking too much money out of the economy too soon" and for its rhetoric of austerity, which undermined consumer confidence even before the cuts began - the "mendacious" comparisons to Greece and so on - and says that one of the preconditions for recovery in Europe "is that the EU collectively has to have a credible plan for growth". He continues: "You particularly need to resolve this problem where you have a rich core around Germany and you have a poor core around the Mediterranean countries. Those imbalances are just not sustainable. If you don't do that, you are consigning yourself to maybe two decades of stagnation in the southern part of Europe, and that would drag down northern Europe. I understand: I've spoken to enough German politicians to understand the problems they have in German politics, the fact that debt is a complete anathema. They're worried about inflation, although I don't actually think that's a big problem.

"They would do well to remember that what precipitated the rise of Hitler was deflation, high unemployment and hopelessness, and it's that hopelessness that is beginning to permeate the body politic in Germany. The last quarter of German growth was pretty disappointing. If you start to hit people's aspirations you end up with a pretty lethal combination."

At present, the EU has a plan that "is deeply and fundamentally flawed. The treaty they signed up to last December, which locks particularly southern Europe into perpetual deflation, is the sort of argument we had in the 1930s, and we're in danger of repeating ourselves again. …