The confirmation last week that Britain has now officially entered a recession came as no surprise. But we have to recognise that the current economic crisis is not just another phase in the economic cycle. The depth of the turmoil in our financial system marks the end of an economic model maintained under both Conservative and Labour governments since the early 1980s: light regulation, dependence on debt, and over-reliance on financial services.
As this model crashes down, profound questions are being asked about the kind of economy, and the kind of society, we want to live in. Radical actions, once unthinkable, are now becoming mainstream: the temporary nationalisation of banks now looks necessary; it's becoming clear we need a total step change in investment in green technologies and a revolution in our housing stock. There is a public thirst for greater stability, less volatility, more balance, and less speculation in our economy.
We must look not only within Britain for new ideas, but to our neighbours in Europe. And that means keeping an open mind about whether Britain would be better off in the long run as a member of the single currency.
Looking to Europe for support and ideas will not come naturally to Gordon Brown, of course. For years, he has told us the British economy was in a class of its own. He never missed an opportunity to pontificate on the superior British model and barely hid his boredom at EU meetings. His short-sighted arrogance is only now being exposed – there is a strong possibility that Britain will be far worse hit by this crisis than our neighbours.
Several factors make our economic position unique: a wildly over-inflated housing market; astronomically high household debt; and an overblown, over-leveraged City of London which is massively dependent on foreign capital but without the backing of a global reserve currency. No wonder the international markets are now pricing most of Britain's banks as practically worthless, and currency traders are ditching the pound in droves.
We have to be open to ideas that might help, including a move into the eurozone. I am not suggesting we could or should join the euro today. It is neither possible nor desirable in the teeth of an escalating crisis. It is equally obvious that lower eurozone interest rates would have been wrong for Britain's overheated housing market in recent years.
But the future will be dramatically different to the past. As the depth of the crisis in Britain's economy becomes ever more apparent, we must start asking if a change to our currency arrangements will need to be part of the profound reconstruction of the British economy in the years ahead. The vexed issue of independent monetary policy should not be exempt from scrutiny just because it is controversial.
Silence, which is what we're likely to get from the two old parties, would be an abdication of political leadership. David Cameron's refusal to contemplate anything European, and Gordon Brown's refusal to acknowledge the gravity of the economic crisis in Britain risk coming together to create caution and silence when radicalism and debate are urgently needed. But it is clear to me that events are likely to force the issue onto the public agenda despite Cameron and Brown's best efforts.
First, the boom times for financial services in the City of London are over – not temporarily but for good. George Soros' business partner has even declared that, "the City of London is finished". We will look back on the period from the 1987 "Big Bang" to last year as an anomaly. For a long time the unrivalled supremacy of the Square Mile meant people regarded the euro as a threat. That is now being turned on its head. The now enfeebled City will look increasingly vulnerable without "lender of last resort facilities" in a global reserve currency. The euro may well come to be regarded in the coming years as part of the answer to saving the City from permanent decline.
Second, there is the wider issue of the credibility of the Government's finances. There are real questions as to whether the Government has the will to bring Britain's spiralling deficit under control. Already markets are pricing in a substantial risk that the UK will not be able to pay its debts, making Government borrowing more expensive, pushing sterling even lower and so storing up inflation for years to come.
If this were to occur, dramatic commitments would need to be made to prove that a framework of fiscal discipline will be in place once the exceptional recession-related spending is over. Again, a commitment to the stringent borrowing rules attached to the euro might be the required remedy.
And then there is public perception. I have no illusion regarding how unpopular the euro is. The euro should never be introduced in Britain without public consent confirmed in a referendum. But its unpopularity is heavily based on a perception of its inferiority. It was easy to dismiss the fledgling euro as a "toilet currency" before we realised our own economic growth was built on sand.
How different will things look if the recession is shorter and shallower in France and Germany? How different will Europe seem once millions of British holiday makers struggle to pay for European holidays? And once the immediate benefits of the sterling collapse wear off for British exporters, will they start asking questions about the value of such a volatile currency? The deeply held view that Britain's economy is a cut above Europe's is about to take a terrible battering. The shrill, ideological debates between pro and anti Europeans will increasingly give way to a more sober, pragmatic assessment of the economic needs of millions of anxious British families.
Of course, the euro is no panacea to all our problems. The eurozone will be hit hard by this crisis too, and some of the smaller, weaker eurozone countries are especially vulnerable.
But given the gravity of the economic crisis in Britain, and our unique exposure to international financial markets, silence about the euro must end. The future has never been more uncertain. People are increasingly desperate for stability in our economic affairs. We must be ready to think anew.
Nick Clegg is leader of the Liberal DemocratsReuse content