The annual rendezvous for the world’s financial and economic elite begins tomorrow in Davos in Switzerland.

Even before the first Martini has been shaken at the fashionable ski resort, the International Monetary Fund’s Managing Director Christine Lagarde has put a damper on the meeting.

Along with the directors of among others the World Trade Organisation and the World Bank, the former French finance minister warned the European Union that its austerity has gone too far and risks toppling the first domino in a cascade towards a worldwide crisis.

At a meeting in Berlin yesterday, Lagarde strengthened her warning. The world is on the brink of a 1930s scenario if all of the EU countries all continue to cut back on public spending at the same time. The problem is not the EU’s economy as such – but rather the internal imbalances within the Union.

In brief: If Southern Europe is to cut back – and it has to – Northern Europe must relax its own austerity to a degree in order not to cause a dramatic drop in demand and force the European Union into a negative spiral.

Over the past few months, just about everything has been tried in order to take control of the crisis. Punitive austerity has been pushed through the Southern European parliaments. No effect.

The Greeks and Italians have appointed market-approved technocrats with a past history in the hallowed halls of the big villains of the finance crisis, the investment banks. Interest rates continue to rise and growth rates continue to fall. Crisis summits are called in quick succession, each proclaiming that the crisis is over.

Europe’s decision-makers, led by the German Chancellor Angela Merkel, have lulled themselves into a bizarre fantasy that public sector austerity will foster confidence among private investors, in turn creating jobs. The theory is one that the political-economic establishment subscribes to, but which has failed to demonstrate even a shadow of realism in the real world.

On the contrary, the cutbacks have reduced the prospects for growth, in turn causing consumers to hang on to their money.

Lagarde is now saying what gloomy Keynesians have been saying for months – with no-one listening. Public sector cutbacks in Northern Europe are detrimental to the economy. It is time to listen and focus on growth – including in the fiscal compact.

The most frustrating issue is that most people can see that the current economic-political consensus on savings has failed abysmally during the euro crisis. But no-one seems to have the political courage to admit it.

And that can cost us very dear in the long run.

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