ANY QUOTES USED MUST BE ATTRIBUTED TO MURNAGHAN, SKY NEWS

DERMOT MURNAGHAN: Now governments across Europe are preparing contingency plans for a Greek exit from the euro. What was seen as the worst case scenario some time back is creeping forward towards reality so just how well protected are we from what happens in the eurozone? I am joined now in Edinburgh by the former Labour Chancellor, Alistair Darling, a very good morning to you Mr Darling. I mean, first of all, your assessment of the changes of the euro surviving, the eurozone surviving in its present 17 member form? Do you think it will exist like this in a year’s time?

ALISTAIR DARLING: Well it is very difficult to answer that question. My own view is that given where we are at the moment and obviously you can argue it wouldn’t have started from here, but that’s it, it would be better to try and keep Greece within the euro because the risk if they go out is that the contagion will spread round countries in Europe but I think that the most acute problem this coming week will be the reaction to the fact that one of Spain’s banks, this bank called Bankia, had its shares suspended in Friday. They made a statement yesterday which shows that they need something like 19 billion euros injected by the Spanish government. The obvious question that people will ask is, well who’s next? This is something that I think Spain in particular but the European authorities need to be very, very alive to. Remember the problem that we had in 2008 when Lehman’s went down, it spread then to RBS which came within hours of collapse and if it had done that, it would have brought down the entire banking system so this is something that can get out of control very, very quickly unless you do more than people are expecting and to do it more quickly. Now on that count, I am afraid the eurozone has been failing for the last two years.

DM: That’s an interesting analysis and of course they are very closely interconnected but as you described there, a banking crisis can happen so very, very rapidly indeed, almost in the blink of an eye. Would you say that is the biggest danger then at the moment?

AD: Well you can’t disengage one problem from the other because they are interrelated. Why are the banks in trouble? They are in trouble because so much of the eurozone is in deep economic trouble but sticking to the banks, the problem is, certainly my experience is that something can be fine one day or at least manageable one day and the next day panic breaks out and you run the risk of losing control. It happened with us and Northern Rock, I said before that was a very, very well disguised blessing because it meant that twelve months later we had no compunction about doing far more than people expected to stop our own, the bigger banks going down. What worries me in the eurozone is that over the last couple of years they have been very dilatory about all this. Remember, they did stress tests and most of the banks passed because they excluded the possibility of a default by a country. Now you can’t do that now, we know that Greece is already defaulting, we know that Spain has got its difficulties, its own government is finding it difficult to meet the austerity they are practising at the moment. What I’d like to see is a very clear statement by the eurozone that they were going through their banks and not only are they putting more capital where that’s required but crucially – and this is the problem now – I suspect there are an awful lot of banks in parts of Europe now that are now stuffed full of loans that are going to go bad and unless you do something about that, maybe writing them off or perhaps looking at the Irish or American solution where you took the bad debts out, unless you make sure the banking system is sound and stable, the risk is you get an uncontrolled run on banks and once that starts, the stakes are so much higher now than they were four years ago, it will be very, very difficult to stop it so this is a really very, very urgent matter.

DM: Well we don’t even need to describe the horrendous effects that would have on the British economy with those huge dangers out there, what more would you say the British government can do to help try to prevent that, even if it’s just in our own self-interest?

AD: Well, you’re right, the risk of prolonged downturn or recession in the eurozone will be very damaging to us because half of what we produce we sell into Europe so it would be very, very damaging indeed. I think we can say as far as our own banks are concerned, we did clean them up in 2008, that’s widely recognised and I know an awful lot of work has been done, for example, to disengage the British end of Santander from its parent and there has been a lot of work done to try and make sure our banks are as strong as possible. However, the problem is, as we know from the banking crisis three and a half years ago, banks are interlinked. Can I go on to the second related problem which is all this of course is being made so much worse because the European economy is in such a mess and this ridiculous Treaty they have signed themselves up to which binds them into a downward spiral of cutting and then cutting again, that’s exacerbating the situation. I hope that … I know there was a meeting of the European leaders last Thursday evening which was never designed to achieve anything and, true to form, it didn’t. They can’t just sit on their hands until the Greek elections on 17^th June, they have got to understand that other people are not going to stand aside, markets aren’t going to stand aside, they have got to take action when it’s needed and they need to be doing it now otherwise they could have a conflagration on their hands that they cannot control.

DM: There is no doubt then that it is having an effect on our own economy, all these turmoils in the eurozone and they have been going on some time so do you then therefore – and we’ve discussed that analysis – do you therefore share the Shadow Chancellor’s view when he says that this double dip recession that the UK is in is a recession made in Downing Street? There are extenuating circumstances as we’ve just been discussing.

AD: There’s no doubt, as I’ve said, that whilst what’s going on in Europe is exacerbating the problem, if you look at our own problem we are back in recession. Our economy was growing in 2010 when we left office, it stalled in 2011, it’s now back in recession and the portents are not good. You only have to look at the IMF report on the United Kingdom published last week which of course it had some kind words for the Chancellor, you’d expect that, but it was basically saying get your Plan B ready and in that Ed Balls is absolutely right. They are talking about things that he’s been talking about and the real problem is, because this government decided to take so much money out of the economy so quickly, they believed wrongly that the private sector would immediately step in to take its place, then our situation is much worse than it would need otherwise be. I think the government’s economic policy which they embarked on in June 2010 is way off track. They are borrowing £150 billion more than they said they were going to do, their timetable for eradicating the deficit is now running very late and no wonder the IMF – and it is quite a big thing for the IMF to be saying warm words up front but actually saying quite explicitly you will need to consider things like tax cuts, boost the economy. This is precisely the time when the government could be doing something to catch up on the huge infrastructure deficit that we have, on transport, on energy and so on.

DM: Can I just end, Mr Darling, by asking you a personal, a personal career, a political question? One of Twitter commentators today suggesting, given your high profile and indeed vast experience on issues like this, would you ever consider a return to front line politics if there is a Shadow Cabinet reshuffle? We know of course of your involvement in the anti-devolution campaign in Scotland, sorry the anti-independence campaign in Scotland.

AD: I am in favour of devolution.

DM: Indeed, what about front line politics?

AD: Well, look, this is front line in Scotland. The referendum on the future of Scotland and whether we stay in the UK or whether we leave, that is very, very front line and I’ve said that I intend to play a very full part in that, that’s going to absorb a lot of my time between now and the referendum, assuming it’s held in 2014, the end of 2014, which is actually most of this parliament so I have given that commitment and I intend to stick by it.

DM: Shadow Cabinet post though?

AD: Look, I need to spend a lot of time on this campaign and it is so important, not just for Scotland but for the whole of the UK and you really couldn’t do two jobs like that and give either of them the justice they would deserve so no, no, I have made it very clear that this is what I intend to do between now and the referendum date, as I say probably at the back end of 2014 although I wish it was much earlier, and that’s a big commitment so that’s what I intend to do. And it won’t stop me making comments on other things as well.

DM: Okay, Mr Darling, indeed, as you have been here. Thank you very much for appearing on Murnaghan, the former Chancellor there.

AD: Thank you very much.