New Labour must not shrink from intervention - Krugman

The Government should adopt a more radical approach in dealing with market failures such as the railways and corporate governance, according to one of the world's most famous economists.

Paul Krugman, an arch-critic of the Bush administration but a fan of the New Labour project, said Tony Blair appeared reluctant to take on vested interests.

Mr Krugman, who has received death threats over his criticism of President Bush, said he broadly approved of the Labour government. "On the economy, the Blair government is very much like Clinton but both Clinton and Blair are a little too reluctant to face up to market failures when they happen," he said.

Speaking during a visit to London as news broke of the effective renationalisation of rail maintenance, Mr Krugman said he believed the industry should never have been privatised. "Once it was privatised I would have said it is not working and probably tended to renationalise it," he told The Independent.

He said the examples of excessive pay and corporate governance scandals on both sides of the Atlantic showed the current policy of self-regulation was not working.

"You need a suspicious regulatory climate," he said. "If you appoint regulators who feel their job is to crack down on corporate insiders then you will get more out than by appointing a regulator who views their job as to not rock the boat," he said.

Mr Krugman, who is in the UK to promote a book of his polemics in the New York Times, will take his message on government intervention to Scotland tomorrow. He will tell an audience of politicians and business leaders that government policies can have a direct influence on the performance of their economy. He will single out investment in infrastructure and education as areas that can provide a major boost over the long-term, especially in a small economy such as Scotland's.

Meanwhile, Mr Krugman will delight eurosceptics with a warning that Britain should not join the euro. He said UK's current status as the fastest-growing G7 country showed "the virtues" of staying outside the euro. He said the eurozone was not an optimal currency area when judged against criteria such as labour immobility, and a lack of a federal budget. "Against that background we are seeing the problems that you would expect to see."