Goodwill to all Europeans: it's the only way out of the crisis

And who started it? Well, that's always the most difficult question to answer with children, as it is with nations. The UK Chancellor, George Osborne, certainly provoked fury in France last month when he suggested that they were in a similar position to bankrupt Greece. Prime Minister David Cameron didn't help matters 10 days ago by taking his ball away from the EU Summit when they wouldn't exempt the City of London from financial reforms. But last week's attacks by Christian Noyer, chairman of the French Central Bank, and Francois Baroin, the French finance minister, were also born of petulance and pique. They said Britain should have been first on to the credit-rating agencies' downgrade "list of shame" because we have larger debts, higher inflation and lower growth than France – all of which is true.

But that's not how it works. Because Britain isn't in the Eurozone, and can print money, we are paradoxically seen as a better short-term credit risk than France, even though inflation diminishes the value of investments denominated in sterling. The reason is that we are not part of the economic suicide pact that the eurozone has sadly become. The immediate crisis facing Europe is not caused by Britain – though our banks were very much in the dock for the lending crisis that preceded it. The proximate cause is the absence of a central fiscal authority in the eurozone able to issue bonds backed by all nations collectively. In the absence of a central treasury, the fixed exchange rate – coupled with the rigid austerity budget regime being imposed by Germany – is crucifying the weaker economies such as Greece, Portugal, Spain and Ireland. The slowdown in growth makes it more expensive for them to finance their debts, which leads to credit rating agencies questioning their ability to avoid default.

Ireland is in a particularly sad position here because it really tried to make austerity work, slashing public sector wages and pensions and throwing everything at the debt numbers. The economy responded, exports recovered and six months ago it looked as if the republic really had turned the corner. But with Europe slipping into recession again, Ireland is back where it started. Its latest growth figures show a shrinkage of 2%. The rise in unemployment costs and the loss of tax revenue will make its debt crisis even worse.

The problem with Europe right now is that it is pursuing 1930s economics in a multinational age. This is what the IMF director, Christine Lagarde, meant last week when she warned of another Great Depression. Germany has persuaded itself that the eurozone problem is about lazy Greeks and Italians growing fat on borrowed money and expecting the hardworking Germans to pay their debts. There is an element of truth in that, of course, since the Mediterranean countries did allow borrowing to get out of control, and in Greece's case had largely given up trying to collect taxes. Fiscal discipline is important, but it is not the whole story.

What German Chancellor Angela Merkel seems incapable of grasping is that the real problem is deflation and uneven development. The economies of Greece and Germany are so different they cannot be expected to compete on the same playing field. In terms of productivity, Greece is still in the 1960s whereas Germany has the most efficient and productive export economy in the world. But that success in exports is, in part, a result of Germany's currency being effectively undervalued. If Germany were to leave the eurozone – or if the eurozone were to leave it – the Deutschmark would rise rapidly against the currencies of competing nations. This would hit its exports and suck in more imports.

This is not an argument for ditching the euro, which has many benefits over the old ramshackle system of lots of little currencies inhibiting trade and investment. But as almost every economist in the world agrees, you can't have a common currency without a central federal authority to issue bonds backed by all countries, make financial transfers between rich and poor regions and, in extremis, to back the banks of member states in trouble. This is what the United States of America possesses: a federal government with power to raise taxes and to redistribute them among states. In Europe we have a disunited states which is locked in a death spiral of deflation. The more the austerity, the bigger the debt. The bigger the debt; the more the austerity.

This is a horrible place to be, and Britain isn't helping by indulging in schadenfreude and economic nationalism. One reason Britain is so out of sympathy is because we tried to steal a march on all of the euro countries two years ago by devaluing the pound in a bid to undercut them and boost our exports. It didn't work, as it happened, but that doesn't make the EU feel any better about it. There really is only one way out, and that is for all the G20 nations to recognise that they have played a role in creating the debt crisis and have a responsibility to resolve it.

Lagarde is right to say that if nothing is done we will be back to the 1930s – to protectionism, competitive devaluation and worse. There will have to be an international resolution of indebtedness in Europe, and a new global system of financial regulation. But this is very difficult and slow, and politicians prefer quick and dirty solutions, involving blame and retribution. Last week, we saw how quickly economic problems become translated into national confrontation. Fortunately, this is not the 1930s and we do not go to war as readily as in the past. But as this grim year staggers to a close let's hope all nations realise that – trite as it sounds – there is no solution without goodwill. Happy Christmas.