While the then prime minister’s sentimentality was roundly ridiculed, wanting to turn the clock back to an idealised past is par for the course for conservatives. What, though, are we to make of ostensibly progressive voices such as Jon Cruddas and Jonathan Rutherford clinging on to a romanticised Olde England, albeit a grittier one of community-owned ports and ancient fish markets? ‘Labour’s future in England is conservative’, they declare. Really?

On one thing, the need for financial reform, Cruddas and Rutherford are right. As I argue in Aftershock: Reshaping the World Economy After the Crisis, our bloated banks need to be broken up. Britain’s financial sector is a government-subsidised racket that makes monopoly profits in good times, gets bailed out in bad, crowds out productive industries, destabilises our economy and subverts our politics. Just because the government taxes away some of those monopoly returns doesn’t mean that the UK benefits from being fleeced by the financial sector.

Unfortunately, the rest of Cruddas’s and Rutherford’s often incoherent argument is wrongheaded. They defame New Labour by lumping it together with Enoch Powell, ‘the prophet of the Thatcher revolution’, while also accusing it of destroying the party’s English working-class roots by abandoning the country to immigration and multiculturalism – the very things Powell hated. So were New Labour and Enoch Powell intellectual soulmates or mortal enemies? They can’t be both. And when the two authors call for Labour to ‘confront and turn the page on what Powell started’, their prescription sounds a lot like watered down Powellism: Labour, they argue, should ‘fight for an England which belongs to the English just as they belong to the land’. Nick Griffin would no doubt agree.

Their analysis of last year’s election defeat is also confused. The notion that Labour lost because it was New Labour is bizarre. Tony Blair assembled a broad coalition of voters that delivered three election victories. While the Iraq war did a lot of damage in 2005, New Labour still won. What changed between 2005 and 2010? Gordon Brown proved to be a disastrous prime minister. The man who boasted that he had abolished boom and bust presided over the worst recession since the 1930s – a global crisis, yes, but one which this champion of the lightly regulated City did nothing to prevent. And while people weren’t convinced by Cameron’s Conservatives, they were mightily sick of 13 long years of Labour rule.

Yes, of course Labour needs to reconnect with those white working-class voters who feel it does not address their concerns about housing, jobs and public services. Labour’s biggest failure in office was housing: cheering on the property bubble while not building enough social housing. Affordable housing should be at the centre of the next manifesto: a tax on land values, for instance, would encourage the private sector to redevelop brownfield sites and help pay for a new generation of affordable homes. Labour can improve on its good record on jobs with a Danish-style commitment to lifelong learning and employability, combined with a generous but tough welfare system that provides a hand-up rather than a hand-out. Increased investment in transport – another area where Labour failed to deliver – would help spread growth and opportunity. Last but not least, a genuine commitment to good education for everyone, especially the poorest – not a piffling pupil premium carved out of a shrinking education budget – is essential. We can learn from Finland, whose schools are rated the best in the world. All this could help break the vicious cycle of deprivation that is scandalous in a rich country like ours, while also stimulating growth.

It would be a terrible mistake, though, to wrongly blame our economic and social problems on Britain’s openness to the rest of the world. Trade with China, foreign investment and Polish workers all boost growth and create jobs. Now, more than ever, if we are to break out of our unhealthy reliance on debt-fuelled consumption, housing and finance, our future prosperity depends on exporting to China, investment from India, educating foreign students and a diverse workforce that generates new ideas and businesses. And an open economy also needs to be flexible – otherwise we could end up like Spain, with a 20 per cent unemployment rate and 40 per cent of young people out of work. There is nothing progressive about a rigid labour market that ossifies the economy and excludes outsiders.

In any case, Labour cannot win again solely by appealing to a dwindling band of white working-class English voters. It also needs to win back middle-class voters, those of immigrant descent, and Scottish and Welsh voters for whom talk of ‘forever England’ holds little appeal. Labour needs to be about tomorrow’s Britain – which, like today’s, will be wonderfully diverse.

In our age of easyJet, Facebook, curry and kebabs, American TV shows and foreign news, Greenpeace and other global campaigns, national boundaries are blurring, while people within Britain are also freer to express their differences since the liberating 1960s. Is that such a bad thing?

While Cruddas and Rutherford fret about ‘what in our differences do we hold in common?’, the answer is simple: we live in the same country, vote in the same elections, accept the rule of the majority while protecting the rights of minorities, use the NHS, watch the BBC, speak English, and share aspirations for a richer, fairer and more secure future.

Our diversity too can unite us. Since modern Britain is inescapably diverse, any definition of shared identity that fails to recognise this inevitably excludes some members of society and thus divides it. Londoners treasure the city’s diversity as a key part of its identity. We all celebrate diversity in national football teams – is it such a stretch to apply this more widely? Our diversity ought to be a source of strength, not of weakness, a reason to belong not an excuse to exclude. We should embrace it rather than seek to deny it.

But the findings change when people are presented with the facts.

The average respondent thought 3 in 10 people in the UK are foreign-born.

When told it’s actually 1 in 10, more than twothirds thought this was either “not many” (36%) or “a lot but not too many” (31%). Just 30% thought it was “too many”.

The problem is partly that the causes of the crisis are misdiagnosed. This is primarily a crisis not of the euro, but of the global financial system. Not long ago, market fears focused on the dollar and the US Federal Reserve’s quantitative easing. And the key issue in Europe now is not the merits of the single currency but the parlous state of its banking system.

During the bubble years, the global financial system underpriced risk and misallocated capital. Too much was lent too cheaply to American subprime borrowers and Spanish property developers, Icelandic and Irish banks, Dubai and Greece.

Among the biggest lenders were European banks. They now hold mountains of debt – government, bank and property – that they wish they didn’t. Many are illiquid, and depend on cheap ECB finance to stay afloat. Many have also incurred huge losses that they have only partly recognised; as a result, some are, in effect, insolvent. The stress tests of EU banks were not stringent enough to shed light on this – after all, they gave both Bank of Ireland and Allied Irish Bank a clean bill of health.

At heart, the “euro crisis” is a wrestling match over who will ultimately bear these bank losses. So far, EU governments have decided that banks’ bondholders must be protected at all costs, preferring to impose losses on taxpayers instead – even if this stretches governments’ solvency to breaking point. This is explicit in Ireland, much less so elsewhere. Because voters’ tolerance for bank bailouts has worn thin, governments are acting covertly: lending huge sums to Greece and now Ireland so that they can repay German, French and UK banks in full – all under the pretence of “defending the euro”.

This strategy is not just unfair, costly and dangerous; it is ineffective. Governments are burdening taxpayers with huge bills that will impede future growth; Ireland’s “bailout” is actually a high-interest loan of €20,000 per Irish person. They are inviting a populist and extremist backlash; witness Sinn Fein’s recent success. They are corroding support for both the euro and the EU: prudent Germans rage against bailing out profligate Greeks and reckless Irish, the Irish against EU-imposed “reparations”, when their anger ought to be directed at the banks that ultimately benefit. They are encouraging financial speculation, not least by distressed banks: heads they win, tails taxpayers lose. And by guaranteeing banks’ debts, all EU governments are risking their credibility and ultimately their solvency.

Bond markets are now testing governments’ promises: you bailed out holders of Greek government bonds and Irish bank bonds, what about Portuguese, Spanish and other debt? This is a self-fulfilling prophecy: even a sound credit is in trouble if markets refuse to lend. And whereas Greece’s bailout cost €110 billion and Ireland’s €85 billion, Spain’s could top €400 billion – and then, who knows? The crisis could sweep on to Italy, Belgium, France and eventually Germany too. At some point the cost of bailing out banks would prove unbearable – there is a limit to Germany’s ability and willingness to borrow –and the euro could needlessly fall victim to the resulting political and financial turmoil.

Even if EU governments’ ability and willingness to bail out banks is not tested to destruction, the strategy remains misguided. Instead of sacrificing taxpayers to protect bondholders, watching the sovereign dominos fall and failing to tackle the underlying banking problem, what is needed is an EU-wide solution that forces banks to recognise their losses and bondholders to recapitalise them if necessary.

This would involve a much more rigorous stress test to find the holes in banks’ balance sheets. Banks would then be forced to raise additional capital, first from the market and then by converting bondholders’ bonds into shares. The weakest would be sold or closed down.  Until then, the ECB would continue to provide liquidity to banks as necessary.

Freed from worries about bank debt, most governments’ debts would be manageable; only Greece would need to restructure its debts. There would less need for self-defeating austerity; the EU could instead launch infrastructure bonds to boost growth. All this would arrest the financial crisis, boost economic growth, reduce political and social tensions, and safeguard the euro.

This is a decisive moment for the EU. Will the narrow interests of financiers prevail or those of society as a whole?

Both are stopgap measures.

The key issue is that banks need to be broken up on competition grounds so they don’t earn huge profits in the first place.