I appeared on Newsnight last night, to discuss the Eurozone crisis – and Greece in particular. (You can watch it with the BBC’s iPlayer..our slot is about 7 minutes into the show.)

As mayhem breaks out on stock markets; as Eurozone banks freeze up; and as the global financial system approaches a frightening ‘danger zone,’ the champions of the globalised ‘free market’ and of the Euro are in search of a scapegoat.

Instead of accepting that it is the broken banking system; the de-regulated financial Eurozone, and the deflationary monetarist policies of the Maastricht Treaty that are the roots of the crisis, the Troika (the IMF/EU/ECB) want to identify a convenient whipping boy.

Instead of going after the real culprits — un-regulated bankers that lent recklessly, confident they would always be bailed out by taxpayers — the approach of the Troika is to scapegoat Greece. The implication is that the whole fabric of the Euro, and with it the global economy, is torn apart because one poor country, Greece, will not enforce ever-deeper austerity on her people.

Let’s get this straight. The Greek economy — and with it the Euro — is disintegrating because Greek politicians are implementing austerity, not because they are failing to.

As one of the poorest of the Eurozone economies, Greece was always the most vulnerable to the global financial crisis. The ‘Troika’ can build a credible case that Greece’s politicians should not have borrowed from the private bankers of Europe, and therefore Greeks share responsibility for the debt.

But Greece was only able to borrow because, with the help of Goldman Sachs, she was welcomed by Europe’s bankers and leaders into the pre-existing de-regulated, financial framework that is the Eurozone. A monetary union designed above all to promote, protect and subsidise the interests of money-lenders and speculators in the private bank-debt and sovereign debt markets.

Greece’s entry into the Eurozone was of course a mistake. But the idea that Greece has misbehaved to an extent that deems her responsible for destroying the European and global financial fabric is, frankly, absurd.

The fact is Greece and Greece’s debt is a symptom of the crisis, not the cause.

That is why the spectacle of the IMF’s representative Bob Traa hectoring Greeks this week was both hypocritical and spurious.

All unbiased persons of common sense recognise that more austerity — more unemployment, poverty, suicides, family breakdown, civil unrest — will crush Greece. It does not require a PhD from Harvard to work that out. Last year Greece’s GDP declined by 4.4%, according to the IMF. So far this year GDP has plunged by a further 7.3%, according to official statistics.

That is why the IMF’s call for “a reinvigoration of structural reforms” is so profoundly irrational and self-serving.

Who believes that declining economic activity in Greece can save both her economy, the bankrupt European banking system and the Euro?

No sane person can believe that sacking 100,000 civil servants in a single year, increasing taxes on fuel, lowering the tax threshold so that the poorest Greeks pay for this crisis, cutting back on wages and old peoples’ pensions — will a) repay debts b) re-capitalise banks and c) lead to economic recovery.

Instead, these policies will trigger wider social unrest and the inevitable default — sooner rather than later. And a Greek default, accompanied by social upheaval will be contagious, making things much, much worse for Europe as a whole.

So stop whipping Greece.

As we at PRIME have repeatedly pointed out, austerity policies pose a grave threat to a global financial system over-burdened by the debts generated by an out-of-control banking system.

The Troika seem unable to acknowledge that austerity is the wrong remedy for another crisis; the crisis of a bankrupt banking system broken on the back of de-regulated finance.

To address that crisis, the Troika must manage the write-down and write-off of unpayable private and sovereign debts in an orderly manner. This they refuse to do.

Instead their approach is that the private banking system must be protected from losses (and the discipline of the market) — at all costs.

By this approach they are failing the people of Europe, as well as Greece: throwing good money after bad.

It is the failure of the Troika to extend their focus beyond the narrow interests of the private, wealthy banking elite of Europe — and towards the interests of all Europeans — that is causing economic failure.

Above all it is the failure of the Troika to promote policies in Europe that would create and increase employment — in Greece and throughout the Eurozone.

For employment is the only way to raise the income (and tax revenues) needed to repay debts; and to restore the economy and the public finances (of Greece and other countries) to health.

Because the IMF, EU politicians and ECB bankers cannot accept or implement these self-evident remedies, the people of Greece are well advised to go it alone; to default and escape the clutches of politicians and officials determined to strangle all possibility of economic recovery.

Others have gone before — and recovered: Russia in 1998; Argentina in 2001 and Iceland in 2008 — after the biggest banking collapse in economic history.

Greece has only her austerity chains to lose.

I appeared on Al Jazeera’s ‘Empire‘ on Thursday evening – hosted by Marwan Bishara, the panel was made up of myself, Dr. Georges Corm (former Lebanese finance minister and former special consultant), World Bank Professor Alex Callinicos (director of European Studies, King’s College London and author of ‘Bonfire Of Illusions’) and Dr Mario Blejer (former governor, Argentine Central Bank and former advisor, Bank Of England).

Click here to watch the hour long special >

“Marwan Bishara asked: will the International Monetary Fund regain its influence and reshape its role?

“The world is undergoing seismic economic changes, from the international financial crisis to the shifting balance of power between developed and developing countries.

“In this new world order the International Monetary Fund (IMF), the most prestigious and powerful international economic organisation on the planet, is reduced to a mere advisor, even spectator.

“This bastion of capitalist ideologies and neo-liberal policies is coming under attack from all sides.

“The developing world accuses the IMF of exploitation and favouritism, and the current scandals have only added to their woes. And the developing world refuses to be treated by the IMF as if was merely developing.

“But in the last three years the global economy has shifted and the old divides between east and west, north and south have become blurred. Many nations are looking at what the fund has to offer and are increasingly saying, “Thanks, but no thanks.”

“The IMF talks about reform, but is it empty rhetoric? Will it or can it change to reflect the new reality?

“And more importantly, with bailouts, defaults and rich nations living in a state of permanent crisis, are the IMF’s free-market policies part of the solution, or just perpetuating the problems?

“Empire asks: do we still need the IMF?”

Watch the show here >

As world leaders meet in Pittsburgh and then Istanbul (for the World Bank and IMF meetings) expect much self-congratulation and back-slapping for having got the world through the post-Lehman crisis.

But behind the cacophony of self-praise, watch out for three alarms flashing red:

• The escalating foreclosure and rising mortgage delinquency rates in the US
• The dramatic contraction of credit in the US over the summer – putting paid to any hope of the US acting as the ‘engine’ of a global recovery
• That big accident waiting to happen to the European economies –Spain

With the help of a great new book – about to be published in the US – let’s take a look at why there is no room for complacency.

“No way to run an economy” (Pluto Press, 2009) is by a man whose research and analyses I have come to respect and rely upon – Graham Turner of GFC economics. While the book is full of solid facts and data – it is eminently readable for those prepared to unleash their inner wonk.

Turner lived and worked in Japan through the last twenty years of debt-deflation – and now looks at the US and European economies through the prism of that prolonged deflationary crisis. And it’s not a pretty sight.

He first takes a close look at the Bernanke/Geithner/Summers strategy for reflating the US economy. There are, or at least were, five planks to this strategy – lower interest rates, the Public Private Investment Program (remember that?); mortgage modification; fiscal expansion and ‘stress tests’.

While free money and fiscal expansion, Turner argues, may have helped the Dow move up – it’s not reflating the economy. On the contrary, debt-driven deflation is the order of the day – reflected in debt defaults, falling house prices, rising foreclosures and mortgage delinquencies. But stabilising the housing market is key to bank solvency, to generating employment and to kick-starting a full recovery.

All the signs are that despite their massive collective brain power the Bernanke/Geithner/ Summers strategy will not give President Obama and the Democratic Party the sound economic recovery needed to win over the electorate in 2010.

So self-congratulation should be put on hold for a while…..

What of the Europeans? They will be at Pittsburgh to boast of imminent recovery, and to contrast their economies with Anglo-American economies. They will imply that in Euroland policy-makers were more cautious about lending, and that their economies are therefore less prone to Anglo-American-style bubbles.

That might be plausible – if it were not for Spain, Ireland, Eastern Europe and the European Central Bank (ECB).

For if the Federal Reserve has blundered – and it has – the governor of the ECB is guilty of criminal inaction and continued complacency. Indeed at the height of the crisis – in July, 2008 – the ECB actually raised interest rates! Consider one of the most disastrous impacts of that massive strategic miscalculation: the growing debt-deflationary crises in Spain, Ireland and Eastern Europe.

Of these the crisis in Spain is the most alarming. Just as in the US, real interest rates are still high – despite recent, belated cuts by the ECB – and remain well above falling and negative prices and wages. According to Variant Perception the Spanish real estate crash is worse than widely believed; banks are hiding their losses, and while Forbes magazine might argue that “Spanish banks are in Top Form” – that may be because Forbes has not looked closely at their balance sheets. Spanish banks are hiding their losses, it is alleged – by sophisticated accounting tricks, by not marking loans to market (i.e. valuing them higher than the market would) and by lending to what Variant call ‘zombie companies’ – mostly in the construction sector.

Sound familiar? Could this be happening in other parts of the global financial forest?

Spain, like the US is experiencing deflation. Prices have been falling for three months in a row. At the same time – and just as in the US – unemployment is still rising – heading towards a socially and politically disruptive 25% .

It’s worse in much of the rest of the European periphery. Prices in Ireland are falling at an annual rate of 5.9% – the highest deflation rate in the world.

The big losers will not just be the poor and middle classes of these countries: deflation will have ‘broad ramifications across the European banking sector’.

Why? Because countries on the periphery are net debtors, and the rest of Europe – including France and Germany – are net creditors. When the debtors stop paying their creditors – then Germany, France and other members of the European Union will face huge losses. On top of that they will need to re-capitalise Spain and the periphery economies – costly to their taxpayers.

When that crisis comes, Mrs Merkel may well have survived a German election campaign. But other G-20 leaders will not be so lucky.

Their management of the global economy and their legitimacy will have been severely tested – this time by voters.