The world's major economies are increasingly vulnerable to falling into a global economic downturn unless they can swiftly coalesce to patch up a tattered European financial system and embrace policies aimed at generating vigorous growth, former British Prime Minister Gordon Brown warned during a meeting with HuffPost editors and reporters on Wednesday.
Brown said that the world's major economies need to agree to a global growth pact and international financial standards in order to escape from an avoidable but increasingly likely global economic downturn.
"Global problems need global solutions," Brown said. "If you can't actually grow your economy, then the danger is that most of the action you take does not achieve the results that you intended it to achieve."
Europe is teetering on the edge of a financial crisis. If Greece defaults on its debt, then other troubled European countries would become more likely to default on their debt as interest rates rise, and European banks holding sovereign debt would be in danger of running out of cash and going bankrupt. As a result, U.S. banks could slash lending, and the American economy could shrink, according to some economists.
While the euro zone has funneled loans to Greece to postpone a default, it has not taken action to restructure Greece's debt, and its bailout fund amounts to only 440 billion euros -- a fraction of the debt of the five European countries in danger of defaulting. A German finance ministry spokesman said on Wednesday that the size of the bailout fund will not be increased, according to Reuters.
Brown, who was prime minister of Britain during the height of the financial crisis between 2007 and 2010, said that European political leaders need to take "radical action" to prevent a global economic downturn.
In Brown's view, world leaders never fully addressed the underlying fundamentals of the financial crisis and are now facing the same persistent problems -- too many banks with too little cash on hand and a lack of knowledge about where money is flowing and how it puts the system at risk. Unless political leaders agree to international financial regulations, he said, major banks will continue to threaten to move elsewhere in a "race to the bottom."
Brown diagnosed the crisis in Europe primarily as a banking and economic growth crisis, dividing himself from northern European leaders who have characterized southern European countries as reckless spenders that now must face severe austerity measures.
Greece's economy has been shrinking since the announcement of austerity measures, and the country has become even less able to pay its debts as tax revenue drops. Conservative politicians in other European countries also have cut or refused to increase spending, and their economies are slowing in response. Even Germany, Europe's largest economy, has seen its growth slow to a halt.
Brown said that European banks are dramatically undercapitalized, putting them in danger of running out of cash and going bankrupt if investors demand their deposits at the same time. Brown's solution is ensuring that the European Financial Stability Facility hold up to $3 trillion in order to bail out European banks if necessary.
In addition to fixing its financial system, Brown said Europe also needs to grow its way out of its economic crisis. To ensure global economic growth, he said that world leaders need to agree on a mechanism that would allow emerging markets to consume more imports and developed economies to produce more exports so that both areas of the world can grow in sync.
Brown's comments come as the global recovery has hit a wall. The American economy grew at a rate of just 1.3 percent in the second quarter of this year, Europe's economy has slowed to a crawl, and even China's export-driven economy has slowed as demand for Chinese goods from other areas of the world has fallen.
Brown also insisted that any international economic plan must include China. He proposed a mutually beneficial deal for the China and U.S. -- China agreeing to increase its historically-low consumer spending and the U.S. agreeing to increase investment in order to ensure that its national economy will grow.
Instead, American political leaders have increasingly blamed China for allegedly claiming American jobs in manufacturing and other areas, as well as keeping its currency artificially cheap compared to the dollar, allowing them to export more of their goods around the world.
Brown warned that a repeat of protectionism from the Great Depression -- in which countries retreated into their own "silos" and devised "self-defeating" solutions -- would ensure a mutually assured economic downturn.
He did not express much optimism as to whether European politicians would rise to the challenge of drafting a visionary global plan for economic growth.
"Every time there's a crisis, they take action that is too little and too late, and so the next time you have to deal with the next problem, it's a bigger problem, and you have to take even more radical action," Brown said. "You move from what was perhaps a manageable problem to a situation that has gone out of control because it hasn't been dealt with adequately."