Cable warns of stagnation risk

The euro-zone crisis, combined with the stalling of major economies, means the world is in “very dangerous terrain”, he told a fringe event at the Liberal Democrat conference in Birmingham.

The comments followed the Cabinet minister’s keynote speech, in which he insisted the Government needed to wage the “economic equivalent of war” on the downturn.

Invoking the example of Winston Churchill’s coalition against the Nazis, he said: “You could say: that was war, that’s different.

“Yes, it is different. But we now face a crisis that is the economic equivalent of war.

“This is not a time for business as usual, or politics as usual.”

Mr Cable went further last night, raising concerns that the UK could suffer a spell in the economic doldrums like Japan in the 1990s.

The prospect of a second financial crash could not be ruled out, although he stressed that was not a “mainstream probability”.

“What could happen? The optimistic view is we get our public finances in order, we do what is beginning to become apparent, which is we rebalance towards manufacturing, exports, investment, green technology ... and (there is) quite a lot of evidence that some of those things are happening.”

But he went on: “There is, increasingly, a kind of middle-level scenario which says ‘well, actually it’s much more difficult than that and this problem is going to linger for some years’ - kind of the Japan story, possibly.

“It’s possible. I’m not saying it’s likely but it could happen.

“And of course the people who really want to frighten themselves think that there could be another financial crisis as well.

“We hope not, but it could happen if something goes badly wrong with the whole of the euro-zone and not just Greece - Greece is a very small country - but with Italy and Spain, and this affects the banks’ assets in those countries and goes through our system, particularly in Ireland.

“All kind of things could happen but I think that’s a tail risk, I don’t think that’s a mainstream probability.”

Mr Cable said Europe was in an “existential crisis” and “as the European party, it’s down to us as much as anybody to say ‘well, how the hell do we get out of this? How do we relate to this thing?’.

“We can’t just sit as bystanders.”

He insisted there should be no “backward movement” by Britain from ties with the EU.