George Osborne: Labour's folly has finally been laid bare

How ironic. In the very same week that Gordon Brown stood up in Parliament and claimed that he was saving the world, the world answered back. In a matter of just a few days, the German Finance Minister described Mr Brown's reckless borrowing as "crass" and "depressing", international currency markets sent the pound to a new low against the euro, and it has become clear that the British bank recapitalisation plan is the most expensive in Europe.

Mr Brown's main attack against the Tories was that no one shared our concern about his government's fiscal insanity. Now that attack has collapsed and we discover the emperor has no clothes. For let us examine how each of the central claims made by Mr Brown have been laid bare.

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First, the German Finance Minister, Peer Steinbrück, exposed the true consequences of the temporary VAT reduction. As David Cameron and I have been doing throughout this financial crisis, Mr Steinbrück pointed out that fiscal stimulus will achieve nothing except to "raise Britain's debt to a level that will take a whole generation to work off".

In a panic, Labour ministers scrambled yesterday to claim that Mr Steinbrück's remarks were all about internal German politics. But Labour's desperate claim was demolished when Steffen Kampeter, the CDU/CSU budget spokesman – not of the same party as the Social Democrat Mr Steinbrück – said: "Peer Steinbrück's comments have nothing whatsoever to do with internal German politics, as Prime Minister Brown has suggested. After years of lecturing us on how we need to share in the gains of uncontrolled financial markets, the Labour politicians can't now expect us to share in its losses. The tremendous amount of debt being offered by Britain shows a complete failure of Labour policy."

A few weeks ago, I drew attention to the impact on sterling of Labour's economic mismanagement. Sadly, this week sterling hit a record low against the euro as traders across the world showed they believe Britain is badly prepared as boom turns to bust. The 25 per cent drop is the largest devaluation in modern British history. As Mr Brown once said, a weak currency is a sign of a weak economy and a weak government. I agree – and so do investors.

It is increasingly clear that the bank recapitalisation scheme isn't working. We should not forget that recapitalisation was supposed to get lending flowing to the real economy. But, in spite of billions of pounds of taxpayers' money, thousands of small businesses are having their overdrafts withdrawn, interest rates increased and bank charges hiked.

The truth is that no other countries have adopted Mr Brown's scheme. While this Government is lending to banks at 12 per cent, and expecting them to lend to businesses at rates half that, the US and Germany is offering its loans at much lower rates. We need a new approach. We need to reduce the 12 per cent cost. We need to make the inter-bank guarantees cheaper. And we need to introduce a £50bn National Loan Guarantee Scheme to underwrite bank lending to business and get credit flowing again.

While Mr Brown's international claims have been exposed, this week has been a vindication of the decision that Mr Cameron and I made to insist on fiscal responsibility that avoids Labour's tax rises, to call for activist monetary policy to get banks lending again, and to propose targeted action to help small businesses and freeze council tax bills.

The writer is Shadow Chancellor