The need for immediate action is clear. The eurozone’s economy contracted in the last three months of 2011; even Germany’s shrank. The new year is looking grim. France is flat-lining (as is Britain). Italy and Spain have sunk into deep recession. Greece is in its fifth year of a slump. And eurozone unemployment is at record highs, with nearly one in two young people jobless in Spain and Greece.

The economic headwinds are formidable: fiscal austerity, high interest rates outside AAA-rated countries, credit cutting by banks, deleveraging households, weak private-sector investment, and declining exports as the global slowdown undermines demand.

Until growth resumes, any tentative financial stabilization will be extremely fragile. Recession will hit banks’ and governments’ already-weak balance sheets, increasing pressure for faster deleveraging. But, while gradual adjustment is essential, faster and deeper cuts are largely self-defeating: big reductions in private credit and government spending will cause a sharper slowdown – and thus a vicious downward spiral. A big new push for growth is therefore vital.

So far, the growth agenda has consisted largely of structural reforms, which are essential for boosting future productivity and flexibility. The crisis does provide a political opportunity for bold moves on this front in many countries; but structural reforms generally will not generate growth and jobs immediately (one exception is permitting shops to open longer).

On the contrary, a shakeout of less productive jobs, for example, would at first raise unemployment, increase government outlays, and reduce private spending. And, because demand is depressed, credit is in short supply, and barriers to enterprise are often high, it will take longer than usual for businesses to create more productive jobs. In short, structural reforms alone cannot be relied upon to stimulate growth in 2012.

Instead, the immediate focus needs to be on boosting investment and exports in economies with a current-account deficit – such as France, Italy, and Spain (and the United Kingdom) – and stimulating consumption in surplus countries such as Germany and the Netherlands.

The European Central Bank has acted decisively to prop up European banks; now it needs to support the real economy, too. While official interest rates are only 1%, solvent sovereigns such as Spain pay more than 5% to borrow for ten years, while creditworthy businesses in Italy can borrow only at punitive rates, if at all. So the ECB should do more to unblock the transmission mechanism for monetary policy; the European Banking Authority should discourage excessive deleveraging by insisting that banks raise specific capital amounts rather than hit a uniform 9% ratio; and, where necessary, national governments should provide guarantees for bank lending to small and medium-size businesses.

While improving access to finance is vital, governments also need to do more to boost investment. They should prioritize measures to make it easier to start a business, lift barriers to venture capital, and introduce temporary 100% capital allowances to encourage businesses to bring forward investment. At the EU level, the (callable) capital of the European Investment Bank should be greatly increased, as European Commission President José Manuel Barroso suggested in his State of the Union speech last September, so that the EIB can finance a big wave of pan-European investment, notably in infrastructure.

Boosting exports is also essential. Deficit countries need to become more competitive, increasing productivity while cutting costs. A more competitive currency would be welcome: just as the sterling’s collapse since 2008 has lifted UK exports, a weaker euro would help Mediterranean economies regain competitiveness for price-sensitive exports. A fiscal devaluation – slashing payroll taxes and replacing the revenues with a higher VAT – would also help.

Surplus countries, too, must do their part, which is in their own interest. Just as China needs to allow the renminbi to rise, so Germany – whose current-account surplus exceeds China’s both as a share of GDP and in absolute terms – needs a higher real exchange rate. That means that Germans need to earn higher wages, commensurate with their increased productivity, so that they can afford more Greek and Spanish holidays. If businesses will not oblige, an income-tax cut would do the trick.

That brings us to fiscal policy. Governments that cannot borrow cheaply (or at all) from markets have no option but to tighten their belts. But they should pursue smart consolidation rather than unthinking austerity. So they should maintain investment in skills and infrastructure, while cutting subsidies and transfer payments. They should also legislate now for future reforms, notably to encourage people to work longer.

Last but not least, governments that can borrow at unprecedentedly low rates – 0% in real terms over 10 years in the case of Germany – must play their role in supporting demand. Would it be really be so difficult to see VAT coming down ahead of the German election next year?

Even strong swimmers such as Finland and the Netherlands are straining against the undertow. Banks are struggling to stay afloat – their capital providing little buoyancy as funds drain away – while businesses that rely on credit are in trouble, too. All signs point to a eurozone recession.

Left unchecked, this panic about sovereign solvency will prove self-fulfilling: just as a healthy bank can fail if it suffers a run, even the most creditworthy government is at risk if the market refuses to refinance its debt. One can scarcely bear imagining the consequences: cascading bank and sovereign defaults, a devastating depression, the collapse of the euro (and perhaps even that of the European Union), global contagion, and potentially tragic political turmoil. So why aren’t policymakers doing whatever it takes to avoid catastrophe?

Ever since Italian bond yields first spiked in early August, I have believed that only an open-ended commitment by the European Central Bank to keep solvent governments’ bond yields at sustainable rates could calm the panic and create the breathing space needed to implement confidence-boosting reforms. Everything that has happened since then has only confirmed this view.

Now that the crisis has reached the “core” of the eurozone, the resources needed to backstop weaker sovereigns exceed the limited fiscal capacity of stronger ones. Financial wizardry cannot disguise that, while throwing a bigger lifeline risks dragging everyone down. Piling everyone on to the same life raft – through Eurobonds backed by joint and several guarantees – is not legally feasible for now, and would be politically toxic if attempted prematurely. Nor can a systemic crisis be resolved by individual governments’ actions – not least because the panic is outpacing politicians’ ability to respond. Only the ECB has the unlimited wherewithal to save Europe from the abyss now.

The ECB has a strong rationale to act: to ensure the smooth transmission of monetary policy, to prevent a depression that would lead to deflation, and to avoid the breakup of the euro. Yet it has so far refused to do so, hiding behind a legal fig leaf.

Granted, Article 123 of the Lisbon Treaty prohibits the ECB from purchasing bonds directly from public bodies, but intervening in the secondary market is permitted. The ECB has long been doing so through its Securities Market Program. Where in the treaty does it say that extending the SMP is prohibited? Indeed, a credible open-ended commitment to contain interest-rate spreads would actually require fewer purchases than the ECB’s current limited and temporary program does.

Unfortunately, many Germans, notably at the Bundesbank, loathe the idea of central-bank intervention, because it conjures up memories of 1923, when the Reichsbank printed money to fund government borrowing, the resulting hyperinflation destroyed middle-class savings, and a decade later Hitler came to power. Yet Germans ought to remember that it was in fact the financial panic provoked by the collapse of the Austrian bank Creditanstalt, the resulting slump, and misjudgment by the German political establishment that cleared the Nazis’ path.

Far from precluding action, history justifies it. Besides, there is no reason to panic about inflation when monetary growth is low, bank credit is contracting, and people are hoarding money rather than spending it. Moreover, any ECB purchases could continue to be sterilized.

Another objection is that ECB intervention would ease the pressure on the new governments in Italy and Spain to reform. Yet, as it is, reformers have no time to establish their credentials, and if the eurozone collapses, the door will be open to populist extremists. So why doesn’t the ECB strike a bargain with solvent governments to keep rates down as long as they stick to their reform programs?

Eurozone leaders could also set out a roadmap towards Eurobonds, subject to strict conditionality, and tied to a credible mechanism for ensuring fiscal prudence. This would provide an additional incentive for governments that wish to qualify to introduce the necessary reforms, while reassuring the ECB and markets that governments remain committed to making the euro work.

Exceptional times demand exceptional measures – and I believe that the ECB will feel obliged to act if the eurozone is pushed to the brink. But the longer the ECB delays, the greater the hit to people’s jobs and savings, the deeper the enduring damage to investors’ confidence in the eurozone financial system, and the bigger the risk of a catastrophic mishap. The time to act is now.

My new article for Project Syndicate explains how.

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”.