AS GOVERNMENTS run hard to keep pace with events, it is perhaps salutary to try and stand back and see if our experience of previous financial challenges offers any lessons that Britain must heed in the face of the credit crunch and the economic slowdown it faces today.

Britain is now facing enormous economic and financial challenges. But the country has faced challenges like these before.

First of all, we need to maintain macroeconomic stability. Next we must let market forces work, tempered by help for the vulnerable. And there must be a focus on long-term opportunities, even while coping with short-term difficulties.

These are what will get us through the tough times, and leave us in the best possible shape to be ready for the upturn.

Restoring economic confidence through macroeconomic stability, in the context of today, means sustaining the monetary policy framework which the Prime Minister himself created, when he came to office as Chancellor 11 years ago. This will not be an easy or comfortable thing to do, at a time when family and business budgets are coming under increasing strain.

The second big lesson that history teaches us for handling times like these is that market forces have to be allowed to work their way through the system. Japan tried to resist this logic in the early 1990s, and the result was what is now known as the lost decade. There are no silver bullets to halt the decline in the housing market, or to shoot the economy rapidly back on to a growth path.

Finally, we must remain focussed on long-term opportunities while dealing with short-term challenges. The third critically important lesson from history is that even as business conditions get tougher, wise governments and far sighted businesses are preparing for the recovery that sound policies will deliver at some point in the next couple of years.

Back in the 1930s, the US helped to turn a recession into a depression by building trade barriers. This is something that must be avoided at all costs during the current troubles. As well as avoiding policy errors, we also need to focus relentlessly on the policy priorities that will make our society healthier over the longer term, such as education and training, or the shift to a low carbon economy.

And we must also build on those advantages.

  • With STEVE RANKIN of the CBI