THE European crisis is far worse than the Government is prepared to admit. More alarmingly, it is far worse than the Government understands. John Smith is himself a complacent Europeanist, but he is right to call for urgent consideration of the recession and unemployment at the Birmingham meeting. Douglas Hurd, Norman Lamont and John Major all spoke of European policy at Brighton as though Europe were still healthy. Unfortunately, that is not true.

'Let us not forget why we joined the Community. It has given us jobs. New markets. New horizons. It is absolutely vital for businesses, big and small - and for our prospects of economic growth.' That was what Mr Major said at Brighton. What is actually happening in Europe is that the world recession is taking hold, that unemployment is rising and that Europe has become the highest cost economy in the world. There is a general European crisis. Recognising this is not a question of being pro-European or anti-European, though obviously it has a bearing on the ERM and Maastricht debates.

Until one has faced this reality - and the Government refuses to do so - one cannot make a useful contribution to the development of European policy. Already the European economic crisis has torn the ERM apart. One would think that would have drawn ministers' attention to reality; if the experience of Black Wednesday did not wake them up, what will?

The ERM caused Britain the loss of hundreds of thousands of jobs, failed businesses, repossessed homes. It kept our interest rates too high, for too long, for German economic reasons. Some ministers want us to return quickly. That would bring down the Government, and deservedly so. Britain must not be ruined twice by the ERM.

France, Italy, Spain, Portugal, Greece, Ireland, the United Kingdom and Denmark are already depressed areas. Unemployment in all of them is around 10 per cent and rising; Ireland is highest, with 20 per cent. Property markets have fallen or actually collapsed. Drive to the centre of Madrid from the airport and you will see lines of new office buildings that have never been let; their forlorn posters invite you to telephone Spanish estate agents. They look like a row of little Canary Wharfs.

The European heartland of Germany and the Benelux countries is behind in the queue for depression, but it is in the same queue. Germany's great export industries - cars, chemicals, engineering - have ceased to be competitive because of the grotesque overvaluation of the mark. Yet the residue of the ERM structure imposes the same overvaluation of their currencies on the Dutch, the Belgians and the French. In the Netherlands, the Eurosclerosis of over-regulation is crippling industry. Philips, one of Europe's greatest electrical companies, seems to be losing the battle against its own over-regulated bureaucracy.

This has one positive side. German interest rates have been strangling European trade. Even Britain has come down only to 9 per cent, when the state of our economy requires a rate of 6 per cent or perhaps lower. The countries still in the ERM have interest rates even higher than ours. The French have lower inflation than Germany, 10 per cent unemployment and interest rates of 13 per cent. Now German interest rates are starting to be reduced. They could well come down rapidly, and British interest rates will come down with them.

This will not secure a European recovery, though it will help. It will end the perverse process of deflating during a depression, a process that continues throughout the ERM. All Europe's main export markets, except for East Asia, are still in recession or depression. The world economy is in the worst state since the early Thirties. The economy of Eastern Europe and Russia is still in virtual collapse, with Russia in an even worse state than Eastern Europe.

The United States has escaped some of the damage caused in Europe by keeping interest rates too high for too long. Yet the recession has not gone away. In some states, such as California, it is acute; in others there is fitful and weak recovery. If, as now seems likely, President Bush is defeated in November, the recession will have turned him out. The US economy is still suffering from a serious fall in real estate values; the United States will not be able to lift the rest of the world out of depression.

This is the reality. Occasionally one hears from members of the Government the world depression referred to as an excuse, as Mr Major used it in one paragraph of his speech. What one never hears - particularly from the Prime Minister - is any understanding of the world depression or the European crisis as the true environment for policy. What was wrong with Mr Major's speech was its historical and geographical limitations, its littleness. We are living through an economic storm that is shaking the prosperity of the whole earth. He is living in the familiar Europe in which inadequate and obsolete responses such as the Maastricht treaty form the context of his thoughts. How can one convince the Prime Minister that his world has changed? The conference knew, many of the speakers from the floor knew, Patricia Morris, who opened the economic debate, certainly knew. But the Government does not know.

The most difficult problem for Britain will probably prove to be unemployment. What did Mr Major say about that? 'Unemployment is a bitter experience. So I don't want a temporary cure. I want a lasting recovery. I want to come out of this recession safe from the threat of its repetition. That's why we're looking for long-term solutions. That's why we'll take no risks with inflation. And that's why we will continue to do everything possible to create prosperity that lasts.'

Surely that is not an adequate declaration of policy towards the worst national unemployment crisis since the great slump. The belief that low inflation will eventually solve the unemployment problem was the basis of John Major's long-held faith in the ERM. There is no evidence in economic history to support it.

We know that new employment can come only from three sources: the public sector, large businesses and small businesses. The Government is determined to reduce public expenditure and raise public-sector productivity. The more successful it is, the fewer public-sector jobs will exist in the mid-Nineties. Large businesses are all raising productivity as rapidly as they can; they will be producing more and employing fewer as the Nineties go on. Small businesses have been weakened or destroyed by the low sales and high interest rates of the Nineties. The enterprise culture - one of the main achievements of Mrs Thatcher's government - has been killed. The floor at Brighton knew that, too, but the platform pretended it had not happened.

Small business is not going to produce the jobs, nor would the banks lend it the money to do so. All three sources of new employment will be cutting back on providing new jobs for the indefinite future. In particular, the construction industry is still having to fire the skilled workers it has retained as the most serious building slump since the Thirties destroys more and more businesses. I would rather fire the Treasury and keep the builders.

The Government has a duty to face the reality of the world economic crisis, of the European crisis, of the rising crisis of unemployment. In Brighton, it did not address these issues. That was the failure of the Conservative Party conference.