Back from the Brink

by Alistair Darling

  It had been agreed that I would hold a meeting of the G20 finance ministers two weeks before the emergency summit to be held in London in April. This was to get a lot of the donkey work done, and actually nearly all the conclusions reached by the heads of government had been agreed at this earlier meeting, which was held at a country hotel in West Sussex. There was a genuine sense of purpose at that meeting, which, besides the finance ministers, was attended by the governors of the central banks. In addition, the European Commission and the ECB, together with Dominique Strauss-Kahn from the IMF and Bob Zoellick of the World Bank, were there. The IMF was now coming into its own. The brainchild of John Maynard Keynes, it was set up following the Bretton Woods conference of 1944. Keynes had devoted the previous two years to trying to establish an international body that could act as the world’s banker of last resort. It became regarded as an organization that rescued countries that got into economic trouble, providing funds in return for their introducing usually stringent economic policies as part of a recovery programme. Inevitably there was some stigma; it was seen as a failure on the part of a government to have to call in the IMF. One of our objectives at this conference in Sussex was to recast the role of the IMF so that it could play a greater role in shaping the direction of countries facing difficulties. In the same way as an individual or a company might go to their bank for a loan to tide them over while they rearranged their affairs, so too could a country use the IMF, and without stigma. We haven’t got there yet.

  Finance ministers tend to be a cautious breed, particularly the more technical types, and central bankers by their nature lean towards extreme caution. Mervyn King did an excellent job with his colleagues, winning them round to taking whatever action was needed to support their economies. He was very engaged. Some were already convinced, others were more reluctant. Looking back at the notes of the contributions made by ministers, it is striking how worried everyone was. The previous year, when we met in Japan, the problem was seen very much as a Western one. Now, speaker after speaker was seized with the necessity of putting money into their economies, and regulating an unwieldy and often opaque global banking system. There was a genuine sense of fear. Even the Asian countries could see that what was happening in the West would affect them. The weekend involved a series of one-to-one meetings as well as more formal sessions, including a working dinner which stretched into the night. Much of the discussion concentrated on the difficult question of financial regulation. There was still a sense that the UK–American model had been the cause of such a spectacular series of disasters in the banking world.

  However, most models of financial regulation had failed. They had failed simply because no one, at whatever level, had been asking the right questions with sufficient determination. And calls for more regulation don’t necessarily deal with that problem either. There is much talk about whether institutions are too big to fail, or even too big to save, but there is another category too: too big to know what’s going on. We agreed that all systemically important financial institutions and markets needed an appropriate degree of regulation and oversight. Gordon had called for something like this nine years earlier, and a lot of preparatory work had been carried out by Mario Draghi, governor of the Italian central bank. He had helped establish the Financial Stability Forum (now the Financial Stability Board), which was designing the architecture we needed. We also agreed on the need to contain credit in the good times so as to be able to dampen, rather than amplify, the economic cycle. Some of this has borne fruit: for example, on cross-border regulation covering multinational banks. Other areas still require attention, such as the need to regulate credit-rating agencies which contributed to the crisis by certifying sub-prime loans as AAA.

  Crucially, there was unanimous agreement about the need to boost demand until growth was restored. We also agreed that the IMF should assess what effect these policies were having and make recommendations on what else might need to be done. Finally, there was an agreement to help developing countries through the World Bank, as well as the now traditional call to resist protectionism and to do more to establish free and fair global trade. This agreement laid the foundation for the major G20 summit in London three weeks later. What was needed now was for world leaders to sign up to what was, on any view, an ambitious and demanding agreement. The problem, as ever, was that a commitment to see it through had to be maintained over the longer term.

  On the political front, too, we gained a great deal. Ever since the dramatic rescue of the banks in October, countries had taken a fresh look at us. We had come a long way since the dark days of Northern Rock, when an uncertain response had hardly boosted confidence. I think there was a feeling that the British government could make a success of the emergency summit in two weeks’ time. Gordon certainly invested a great deal of effort in building support. He chartered a plane and flew around Europe and South America, as well as visiting the US, where he was the first European leader to meet President Obama in the White House. No effort was spared. Heads of government were met as they arrived in the UK, to make them feel welcome. I was dispatched to meet President Obama and the First Lady as they came down the steps of Air Force One at Stansted airport. As we waited at the foot of the steps for the door of the presidential plane to open, my eye was caught by a huge, and evidently very recently erected, sign on the other side of the airport. It was situated in a direct line between the world’s press photographers and the place where the plane would come to a halt, so that as Air Force One was photographed, the name Ryanair would appear prominently in the picture. I was told the airline’s chief executive, Michael O’Leary, had visited the site a week earlier and hit on this free advertising ploy.

  On this, Obama’s first visit to Britain, there was a celebratory air surrounding him, and unsurprisingly he and Michelle captured much of the public attention in the coverage of the summit. As we walked across the tarmac, he said he would do ‘whatever it took’ to make the summit a success. He knew Gordon had done a lot of work and was determined to help him succeed. Margaret was relieved to find the Obamas as open and warm as she had hoped. ‘What if, after all this, they aren’t for real?’ she had wondered as the plane doors opened.

  We met again the following morning when the president sat across the Cabinet table from Gordon Brown. Two things struck me. One was his direct gaze. The other was his clarity about what America would and would not do. As Gordon went through his proposals, it was clear the new president knew the details as well as he did. Some things he would sign up to, some things he wouldn’t. Normally, leaders go out of their way not to disagree with each other across the table. It is left to the briefers later to spell out their differences. Obama’s approach was refreshingly direct and very welcome.

  He was very engaged and, whether it was those of us who met him privately in Downing Street or the harder-bitten journalists who questioned him later, people were impressed. He did embody a sense of hope, something that we all desperately needed. The night before the summit, the Queen hosted a reception for leaders and finance ministers at Buckingham Palace. I lost count of the number of staunchly republican ministers from around the world who asked if they might be introduced to the Queen. For some, this was the high point of the summit.

  There were three dinners arranged for that evening. Two were in Downing Street, and mine, with the finance ministers, was in the Tate Modern. That meeting was workmanlike. It is a shame high security demanded that the spectacular views from the Tate across to St Paul’s and the City had to be blanked out by closed blinds. Perhaps, as one of my colleagues remarked, they didn’t want us to look at the City of London, haunt of the bankers who were causing us such difficulties. The harder work was done at Gordon’s dinner in the state dining room, one floor up in Downing Street. His single-minded resolve to get the conclusion he wants can be offputting to some. But he was determined to make it work. No agreement was reached that evening and it was clear that a lot of heavy lifting would be needed the next day.


  The third dinner was probably the one most people would have chosen to attend. Sarah Brown had borrowed the state room in No. 11 to host the leaders’ partners and a gathering of invited women. Margaret, greeting guests as they arrived in the downstairs sitting room, was happily surprised to find Michelle Obama among the first to join the gathering. Two young members of staff from my private office were helping out. They were moved beyond words to be greeted by a spontaneous hug from the First Lady.

  On the day of the summit we had to be at the massive ExCeL exhibition centre, near Canary Wharf, at the crack of dawn, or so I was told. Moving so many security targets around must have been a logistical nightmare. Protocol demanded that the ministers should arrive at four-minute intervals for the ritual handshake and photograph. It was a long, long wait.

  Part of the art of summitry is knowing when to cut short the formal exchanges. Every country wants to set out its stall. The hard bit is getting an agreement. We were sitting around a massive circular table. Opera glasses would have been useful in order to see who was sitting on the opposite side. It didn’t make for an informal discussion. The breakthrough did not come until after lunch, when Gordon insisted the leaders meet by themselves, without advisers or finance ministers to raise irritating questions. He locked the doors and told them they were not going until they had reached agreement, which they did two hours later. The sticking point was over tax havens, with President Sarkozy and the Chinese president, Hu Jintao, at loggerheads. Sarkozy wanted to ‘endorse’ a blacklist. President Hu did not like that word. It took the combined efforts of Gordon and President Obama to come up with a form of words both could live with. It was one word, actually: they agreed to ‘note’ the blacklist.

  Potentially, the greatest achievement was to give the IMF more money, some $750 billion, as well as extra funds to support trade and aid. Looking back, the significance of the summit was perhaps not so much what it agreed as the signal it sent, that countries were ready to act together. This was a time when many were despairing that anything could be done to retrieve the economic situation. I made a statement to the House, reporting on the agreement reached. What was striking was how well it was received on both sides. There was, I think, a genuine sense of hope. There is no doubt too that the aura surrounding so many world leaders in London, especially the new president of the United States, had had a remarkable effect.

  I met Gordon in his flat in Downing Street later that evening. He and Sarah were entertaining the Australian premier, Kevin Rudd, and his wife, Thérèse Rein, and asked Margaret and myself to join them. Far from being exuberant, Gordon was surprisingly low. He should have been in his element – big international occasions suit his temperament – but he was already worrying about the next problem around the corner. Being Scottish, Gordon and I find it difficult to compliment one another; it doesn’t come naturally. I did say to him that he could look at this summit with a real sense of achievement. Kevin, being Australian, was far more effusive in his enthusiasm.

  It was a high point – although, to be realistic, international achievements do not always score points at home. But an achievement it was. The summit helped us begin to claw back political support in the polls. We both knew we had to capitalize on it. Although the momentum was maintained later in the year in Pittsburgh, it was lost when we were defeated in the general election. There was simply no one to do the heavy lifting like Gordon and he deserves immense credit for it. If he had not been there, it wouldn’t have happened.

  I now had to turn my attention to the Budget. Gordon had intended that the G20 would give us scope to do more in the way of stimulating the economy than would otherwise have been possible. If everyone else was doing it, this would provide us with political cover. I wasn’t so sure. And anyway, I thought we had reached the limit of how much we could spend. Our borrowing was set to reach £178 billion – that’s 12 per cent of our national income.

  As we prepared to go up to Edinburgh for a short Easter break, I knew that this would be the most difficult Budget yet, and that an impending clash with Gordon could not be far off. As it happened, our break was disturbed not by Budget preparations but by an all too predictable political catastrophe in No. 10, this time involving one of Gordon’s spin doctors. Throughout his time in government, Gordon had relied heavily on these attack dogs, first Charlie Whelan, then Damian McBride. McBride had been caught out briefing against deputy leader Harriet Harman at party conference in October 2008 – by Harriet herself, who had overheard him. Rightly, she threatened to report him to the Cabinet Secretary unless Gordon did something about him. He promised to move McBride to where he could cause less trouble. It was to no avail. McBride’s briefings against me to senior journalists and political editors were faithfully reported back. Gordon refused all entreaties by Cabinet colleagues to let him go and tethered him instead in an office in No. 10. It was another flawed fix, and he continued to roam.

  Things finally came to a head when emails were published showing that McBride was involved in a shabby exercise to damage opposition figures and, in one case, the wife of a shadow minister. This time he had to go. Unfortunately, the disgrace did not leave with him. The repercussions for Gordon were disastrous. People had daily questioned our competence and our ability to control events. Now they had confirmation of what they suspected: we were a nasty party too. The perception was that our moral compass had irremediably lost its bearings. The McBride affair further destabilized the whole No. 10 operation.

  It also made the Budget preparation even more difficult for me than in the previous two years. Once again, at its heart, lay a dispute about the Budget forecasts. The assumptions we made on these would drive how much we were likely to raise through taxes, how much borrowing would be, and what we had to raise in tax or cut in spending. It wasn’t an academic exercise. I wanted our growth projections to be, above all, realistic. If they weren’t, no one would believe anything else we had to say. As always, Gordon thought I was being too pessimistic. He kept saying that he understood the Treasury, the inference being that I did not. I just took the view that coming out of recession would be a long haul.

  Both Gordon and I had been distracted, understandably, for much of March by preparations for the G20. I had been working on Budget proposals throughout that time, but the details could only be worked up once I had the overall picture in my mind. It wasn’t really until the Easter weekend that Gordon and I spoke about it on the phone, and then he was preoccupied by the McBride affair. The same old dispute between us was very much to the fore. At its heart was a political argument rather than an economic one. Gordon wanted to paint the Tories as ‘cutters’, with us as ‘investors’. The ‘investment versus cuts’ story had worked in 2001 and, to a more limited extent, in the general election of 2005. A hapless Tory shadow minister, subsequently a member of the Tory Cabinet, had played into our hands in 2001 by suggesting that the Tories really wanted to cut £20 billion from public spending. He went into hiding. The whole election campaign was dominated by the media search for this man. Oliver Letwin was finally tracked down at a garden party, dressed in a Roman toga. We could not have paid for such a boost to our campaign.

  A more sober assessment of the outcome of the 2005 election, however, was that the Tories’ leader at the time, Michael Howard, who was still heavily associated with the Thatcher years, was as much an ally to us as were their spending plans. For most of the New Labour years, the story of Labour investing in public services, and the belief that the public sector and the private sector should complement each other, dominated the British political scene.

  The banking crisis changed all that. It changed it in a fundamental way. We could, and did, still argue that government spending was making the difference between recession and depression. Indeed, three years later, it was public spending in the shape of a still substantial deficit that was supporting the economy in the absence of a return of private sector confidence. This was, I believe, a powerful argument. What had changed, though, wa
s that the old battle lines were now hopelessly out of date. We had to show that while we would do whatever was necessary to support the country, we would have to tackle the deficit in order to get borrowing down. It was one of many preconditions for a return to growth.

  The argument, therefore, had to be more subtle. It had to strike a chord with voters. Unless what you have to say has a strong ring of truth, people will stop listening. That is precisely what happened to us. It seemed to me, in April 2009, that after showing what we had done in the financial crisis at home and abroad, we had a good platform from which to move to the next stage. I wanted to do a bit more in the Budget to help recovery, but I did not want to spend a lot more money that we did not have. Once again, Gordon disagreed. He felt that we needed to spend rather more in order to ensure our recovery. Gordon believed we had the political cover from what had been agreed at the G20, and didn’t want to go into the election offering to spend less than we had done in previous campaigns. I wasn’t so sure. I thought the political terms of trade had changed and that our approach had to be far more nuanced.

  Our story was this: true, mistakes had been made on supervision of the banks, as had happened everywhere else. But we had stopped the system from meltdown. We took action to support the economy last autumn and would continue to do so. Once the recovery was under way we would cut our borrowing but do it in a way that allowed us to protect essential public services. More than that, we were beginning to develop a good story on the role of modern government in promoting growth. As Business Secretary, Peter Mandelson had done a great deal to re-establish the idea that government could intervene: for example, to good purpose in scientific development or investment in low-carbon technologies, where the market could not or would not function.