Finally, I did a bit of a farewell tour to highlight things we had done and try to bolt it all down. I went to Sierra Leone; to Libya; to South Africa, to emphasise the importance of governance as well as aid to Africa's future. We held the first government-sponsored, high-level interfaith conference. There was the G8 at Heiligendamm in June; a NATO session at Rostock; and then of course the EU Council. I had seen George for the last time in May. I saw the Pope at the Vatican in the middle of June. And, as it sounds, it all pa.s.sed in a bit of a blur.

The policy doc.u.ments from the 'Pathways to the Future' programme were coming out, but Gordon had rather lost interest and the country was looking forward to the new man. The deputy leadership contest for the party had several contenders. It was clear that the GB camp was backing Harriet Harman, who went on to win. Alan Johnson never quite got lift-off, though he made it to the last round and by rights he should have won. Jon Cruddas did well. As the out-and-out moderniser, Hazel Blears scored only moderately, but fought a good campaign.

There was no contest for the leadership. John Reid could have stood, but the Murdoch papers, I fear at Rupert's instigation, just wrote him off, though John was obviously more in tune with Sun Sun readers than Gordon. This was where Gordon's strategy of tying up Rupert and Dacre really paid off any likely contenders didn't get a look-in; they got squashed. readers than Gordon. This was where Gordon's strategy of tying up Rupert and Dacre really paid off any likely contenders didn't get a look-in; they got squashed.

David Miliband came to see me. Two years later he would be a different calibre of politician, with clear leadership qualities; back then in May 2007, as he sought my advice, he was hesitant and I felt fundamentally uncertain as to whether he wanted it. And that is not a job to be half-hearted about. He asked me if I thought he should stand and I said I couldn't make that decision for him. 'What would happen if I did?' he asked.

'I think you might win, not obviously but very possibly,' I replied.

David thought, with good cause, that Gordon had it sewn up. I didn't think so actually, and I also thought the moment there is a campaign and people start to flush him out, the ambiguities in his position, the gaps in hard thinking and also the trading off to the left, would become apparent. Played correctly, it would put full square the choice of New Labour or not.

But David was unconvinced. Some then and later criticised him for being too cautious. Personally, I really sympathised. This wasn't like me in 1994. This was a wholly different order of calculation of risk. I didn't blame him at all, but I did say he should be prepared in case the issue arose again, sooner than we might think. I thought by then that a) it was going to be a mess, not quite New Labour, not quite not; and b) as a result, Gordon's self-evident personal drawbacks would very quickly mean he was under pretty brutal attack for which he was not psychologically wired. With a strong clear programme he could have come through. Without it, he would be running on his personality and that was never going to work.

Man to man, as it were, we got on fine; I just totally disagreed with what I knew he was going to do. But I had realised the impossibility of changing it. I wrote him one last memo in February 2007, though not with any confidence it would persuade. I can't say I can hold it against him. From his point of view, he had waited ten years for the d.a.m.n job. He could be forgiven for thinking: Why doesn't he just clear off and let me get on with it? So we talked through some issues, gauged our thinking on the up-and-comers for promotion and it was all perfectly amicable.

In the memo I explained that there were only two ways that Labour could win the election. One was a decisive rupture with my time in office, what I called 'Clean Break'. But that would require a new and credible agenda. The other was 'Continuity New Labour', i.e. keeping to New Labour but using it to address the new challenges. I told him, however, that he could only win on the second, as he was part of the previous ten years. Any distancing and he would drift off slightly to the left, just enough to destroy the New Labour coalition. I laid out a plan for us to coordinate and cooperate in the months before I left so that he was seen as authentic New Labour, and not a traditional Labour leader.

In conversation after conversation, I tried to explain that he didn't need to worry about separating out from me. That was obvious; he was a completely different personality. The contrast in character would be sharp. But if he attempted to switch the basic track of policy, he would end up shunted off in a siding that led nowhere.

I reread the note now and I'm afraid it is precisely what he should have done and didn't. The Budget was a great chance to bind in a joint legacy, and to consolidate the fiscal position, but the people he felt closest to didn't really agree. He could talk to me and at one level respect me, as I did him, but the intimacy was broken. As with me, so with Alastair. And Peter. And Philip. He could absorb what we said and see its force, but deep down he didn't feel the same in the guts, as it were; and those with whom he was intimate actually disagreed with it in their guts. It was never going to work.

It's really hard to say all this, and I have thought long about it. There's nothing worse than 'oh if only he had listened to me' rubbish, and so, after trying valiantly not to fall into self-justifying mode a bane of political memoirs, I fear it's a pity I have. Yet I look at those policy papers now the work on social exclusion, on the use of social security budgets, on structural financial savings, on tax reform, on the next phases of crime, health and education reform and I do think how different it would have been if we had done it. If we had struck out to a new level of New Labour and not wandered into a cul-de-sac of mixed messages and indecision, we would have been so much better placed for the economic crisis; and so far ahead of the Conservatives in thinking. But there it is. It didn't happen, and that is that. The milk was spilt. The weeping and gnashing of teeth is pointless.

So we come to the final few days.

It was strange to be bowing out. I was at the height of my powers, if not my power. I knew I was a much better prime minister in May 2007 than in May 1997. I still felt highly motivated and energised. I was convinced that the policy agenda I had been working on was the only viable one for Britain's future. It probably had support in the country too, if explained effectively. Yet I was leaving.

My const.i.tuency in the media had evaporated. They admired the showmanship and political skills, but they had ceased listening to the political argument. They were bored. They were cynical. Iraq still caused too much bitterness and obstructed sensible a.n.a.lysis of the broader picture. They had bought the GB package, though I felt their motives were very mixed in doing so. Some on the left genuinely thought he would deliver a leftist programme. I had a hunch those on the right princ.i.p.ally thought he would deliver a Tory government.

For my part, I thought I had gone as far as I could at that moment in time with that constellation of political circ.u.mstances. Gordon had me hemmed in. Many senior members of the Cabinet had no real sense of the policy divide between us, with notable exceptions like John Reid and Tessa Jowell. Many of the others could see which way the wind was blowing and thought: Let's get on with it.

I had toyed with the idea of staying in Parliament. I knew pretty soon the problems with Gordon would emerge and the party would not know what to do; but I also knew that although there would be a clamour for me to return from some, fiercely rejected by others, there would be the most frightful falling-out and the pitch would be queered for anyone else. Neither could I engage in the political debate while he was leader. If I did and said even one word that was a millimetre out of place, there would be accusations of disloyalty and disunity. So I decided I had little option but to leave the UK political scene, at least for now.

As for the country, they too, or at least a large proportion of them, had stopped listening and were irritated with the manner in which I continued to press policies they had decided they didn't agree with. They didn't buy the foreign policy, which they thought far too close to the US. They didn't like Europe and I seemed to. They were persuaded there were easier, less confrontational ways to reform public services. They were confused over the law and order agenda, supporting its basic message but unconvinced we were actually enforcing it.

Most of all, they were being bombarded, deluged even, with stories about 'cash for honours', 'lies' over Iraq, this corruption, that scandal, the other shortcomings of government. We were like two people standing either side of a thick pane of gla.s.s trying to have a conversation. I thought, and still think, that they could be persuaded, but when I spoke they couldn't hear me; and after a time they stopped trying to.

When I ventured out and met people, which in those last months I did very frequently, the people I met would not have the pane of gla.s.s in the way. We would converse very well and both found the experience interesting. Right up to the last moment, I was really learning from those encounters, but they can never be with more than a tiny fraction of the people. The rest can only engage indirectly, and for them, the pane of gla.s.s swiftly becomes a pain in the neck.

For me and for the people, this was sad. My relationship with them had always been more intense, more emotional, if that's the right word, than the normal relationship between leader and nation. It was partly the sensation of the 1997 victory; partly New Labour; partly that I communicated and felt normal at the beginning, and then over time seemed to become distant, aloof, presidential, and therefore full of my own importance but not of theirs. Of course, part of the media worked hard to construct this image and then make it stick.

However, it was more than that. In 2005, I had an unusual polling presentation by Charles Trevail of Market, Social and Opinion Research. Their theory, which at the time I found amusing and diverting but far-fetched, was that my relationship with the British people was more like a love match or marriage. At first, people felt an abnormally close bond. They trusted and liked me. Then in the second term, I suddenly left and went off on a foreign adventure, almost on an affair. I stopped caring about them. I became arrogant. I seemed to think I had grown bigger than them; or to put it another way, we grew apart and I found Britain too small for my egotistical ambition. I used to make them feel good; now I just sounded irritated that they wouldn't go along with me.

Charles said they had never conducted research on a person and seen such strong feelings aroused. Indifference was virtually non-existent. Now, Mrs Thatcher aroused that strength of feeling, but that was about her policies; this was about me as a person. Some hated, some loved; but they talked about me as someone they knew not just as a leader but as an individual. The predominant view, however, was that I had lost that common touch which had defined the earlier time in office and which had created the bond.

I was certain part of this derived from the nature of the job. People see you on the news every night serious face, serious issues, laying down the line, other people saying nasty things, PMQs and its confrontation, all messy, all off-putting. Occasionally I would step into an arena that was different, as I had done with the Des O'Connor interview in 1996. In March 2006, just before the 'cash for honours' imbroglio began, I appeared on Parkinson Parkinson. Again it showed the other side and really worked. Kevin s.p.a.cey was the other guest and got it just right, chafing me about George Bush but in a funny way that had no malice in it. It was to be part of a major effort to reconnect on a personal level, but once the 'scandal' broke, it was stillborn.

However, I came to realise that this almost inevitable distancing over time was not at the core of the problem. The problem was that I was doing things, not just in foreign policy but more broadly, that were generating opposition and disagreement; and I wasn't budging. The left hated the support for America and public service reform; the right hated the support for Europe, the style of the government and, most of all of course, the fact we were still in power and they were still marginalised.

The difference between the TB of 1997 and the TB of 2007 was this: faced with this opposition across such a broad spectrum in 1997, I would have tacked to get the wind back behind me. Now I was not doing it. I was prepared to go full into it if I thought it was the only way to get to my destination. 'Being in touch' with opinion was no longer the lodestar. 'Doing what was right' had replaced it.

I knew this was causing upset in the matrimonial home in which I and the nation had lived happily together. It seemed arrogant; conceited even. But it wasn't that I had run off with another woman. I had reached the conclusion that the family wouldn't prosper and be taken care of unless we lived life differently. I wanted to move location. I could see the world changing rapidly. I could see our place in it needing fundamental and quick adjustment. The comfort zone was not where we needed to be. This time, the feeling was not about the party. It was about the country.

I looked at the G8 and this was before the economic crisis in 2008 and I realised that there was no way it could survive. China, India, Brazil and others would demand a seat at the table; and if they didn't get one, they would get their own table. I saw the danger for Europe of a G2: US and China. And then, if we weren't careful, a G3: US, China and India. Or a G4: US, China, India, Brazil. And so on. In other words, we had to face the fact that Britain is a small island of 60 million people off the continent of Europe, in a world where two nations alone would each have populations twenty times ours and, in time to come, economies to match. How absurd and futile to believe we could be Little Englanders in such a scenario, or ignore the vast importance of our US relationship.

As the new economies emerge, we have to compete. How? By brains and skill, by moving up the value-added chain. By working harder. By competing on merit, on ability. To do that, our education system and welfare state have to be reformed not more cautiously but more boldly. I could see the twentieth century left/right debate of Western politics dying on its feet, still swinging the odd punch but essentially just getting in the way of the practical debate about what needed to be done, and done urgently.

I looked at the NHS and was proud of the change we had made, but I was in no doubt: as technology advances and people live longer, there is no way that health care systems of developed nations can survive at reasonable cost and with a minimum level of equity in provision, without putting individual responsibility and public health policy at the centre of the debate. I have described already how I saw the problems of nineteenth-century criminal justice procedures trying to cope with twenty-first-century crime and social dysfunction.

The point is that it wasn't dissatisfaction with the relationship that was driving me; it was a sense that unless I spelt out the necessity to seek a different context in which to nurture that relationship, I was not being honest or trustworthy. The irony was, right at the moment when, to my detriment, I was being most open about what needed to be done and why, my integrity was most under question.

I had faced the fourth lesson of political courage that I refer to in Chapter 1 the incalculable risk and taken that step. I was now embarked on the fifth: doing what I thought was right, even though the people disagreed. I had started by buying the notion, and then selling the notion, that to be in touch with opinion was the definition of good leadership. I was ending by counting such a notion of little value and defining leadership not as knowing what people wanted and trying to satisfy them, but knowing what I thought was in their best interests and trying to do it. Pleasing all of the people all of the time was not possible; but even if it had been, it was a worthless ambition. In the name of leadership, it devalued leadership.

None of this meant or means that the leader should not seek to persuade, and in doing so use all the powers of charm, argument and persuasion at their command. That's tactics, and they should be deployed effectively and competently. The strategy should be to point to where the best future lies and get people to move in that direction.

As I have said, in those last weeks, we were going full pace, both at home and abroad. Inside the Downing Street flat we were packing up. I don't suppose there has been a period when the prime minister has had so much time to prepare the leaving. There were vast boxes full of the acc.u.mulated detritus of ten years. It was the longest time I had ever lived in one place. Leo had never known anywhere else. However, I am not sentimental about houses. When I left Downing Street and Chequers, I was sad to leave the people, but I didn't mope over the physical structures. It's lovely to live in historic and beautiful places, but it's not of the essence. Home is where the family is.

I got back from my last European Council on the Sat.u.r.day, and then went up to Manchester on the Sunday for a special party conference to announce the leadership results and the handover to Gordon. I made my speech, shortly and without emotion I had done all that at the last party conference. I could see they were eager to get on with welcoming the new era. Also, I was now, in my own mind, anxious to quit the stage. The farewells had to be gone through, with dignity and if possible with elan, but without mawkishness.

I made a statement to the House on the European Council on Monday 25 June. On Tuesday I did my last visit as prime minister. It was to a primary school and was, in a surreal touch, with Arnold Schwarzenegger, the governor of California, who had come to Downing Street for a meeting on climate change. As he walked down the line of children who had been sent out to greet him, one infant piped up in a slightly halting rehea.r.s.ed tone, obviously having been tutored by one of the teachers who must have been ignorant of Arnold's films 'h.e.l.lo, Mr Governor. I did like watching your film The Terminator. The Terminator.' I hastened to tell him we might have misheard. Anyway, he was great and the schoolkids were delighted. Anyway, he was great and the schoolkids were delighted.

Next day, the Wednesday, was my last PMQs. I knew it would be weird. There was no point in me trying to advance things; no point in the Opposition trying to criticise things; no point in anything other than try to take one's leave decently. The first thing, however, was to send condolences from the House to the families of fallen soldiers. Having done so, I also said the following: Since this is the last time that this, the saddest of duties, falls to me, I hope the House will permit me to say something about our armed forces, and not just about the three individuals who have fallen in the last week. I have never come across people of such sustained dedication, courage and commitment. I am truly sorry about the dangers that they face today in Iraq and Afghanistan. I know some may think that they face these dangers in vain. I don't, and I never will. I believe they are fighting for the security of this country and the wider world against people who would destroy our way of life. But whatever view people take of my decisions, I think there is only one view to take of them: they are the bravest and the best.

At the end, I gave some words in support of politics and politicians, which I also felt strongly about and knew the House would welcome: Some may belittle politics but we who are engaged in it know that it is where people stand tall. Although I know that it has many harsh contentions, it is still the arena that sets the heart beating a little faster. If it is, on occasions, the place of low skulduggery, it is more often the place for the pursuit of n.o.ble causes. I wish everyone, friend or foe, well. That is that. The end.

David Cameron kindly got them to give me a standing ovation; and there it was. I went back to say farewell to the staff at Downing Street, and unlike in 1997, they were now crying at my leaving, not my arrival. The family posed with me one last time on the steps of Number 10. I went to the Palace, said goodbye to the Queen who was, as ever, very gracious; and got on the train to Sedgefield to say goodbye to my const.i.tuency too.

I felt calm and at peace. I felt there was unfinished business; but then I consoled myself with the thought that the business is never finished. I was on to my new life. I had always been fortunate in having a pa.s.sion bigger than politics, which is religion. I had, have, new ambitions now. I have come a long way on the journey, but I am painfully aware I have much further to go. There are greater steps and larger lessons that lie ahead. Maybe in time a more complete a.s.sessment of the ten years will come. Maybe not. But my own a.s.sessment of it no longer depends on whether it does or does not.

In any event, the knowledge that the journey continues, the excitement at the new challenges to be explored, the sense of purpose that is as great as ever make me a very fortunate human being. There is so much frailty still to overcome, but in overcoming it lies the meaning of life. That, at least, I have learned.

TWENTY-TWO.

POSTSCRIPT.

The term 'the West' is a bit of an old-fashioned throwback to the days when the world was split by Communism, but it serves as shorthand for 'our' type of nation: open, democratic, committed to a market economy, confident militarily (certainly since the fall of the Berlin Wall), and led by the world's only superpower, the USA. For almost twenty years after 1989, the West set the agenda to which others reacted. Some supported us and some opposed us, but the direction of the globe, the destination to which history appeared to march, seemed chosen by us.

True, certain cracks in the edifice had begun to appear. There was even the odd hole punched in the outbuildings. New forces were busy building something different, not far from where we were. But it was our model that still imposed itself and commanded most attention. So it looked in June 2007, when I left office.

The three years since then have seen something of a revolution in that apparently una.s.sailable order. The economic crisis of 2008 ruptured our confidence in the rationality of the market economy. The war in Afghanistan hangs in the balance. President Obama, as we did in 1997, faced an orgy of expectation when he came to office and, like any president or prime minister, has to face the difficult choices of government. The rise of China is there in real life, visible and pulsating, a fact, no longer an interesting intellectual conjecture. Power is shifting east. Other nations such as Brazil and Turkey grow a.s.sertive, no longer seeking permission to play a role, but simply playing it. The European Union is in trouble, and for once the word 'crisis' is not an exaggeration but a description. We in the West remain democracies, but we have never had less respect for those we elect.

We thought the ultimate triumph of our way of life was inevitable. Now it is in shadow. Our confidence is low and our self-belief is shaken. Most of all, we feel weak, at points almost listless. The future, once so firmly in our grip, seems to have broken loose in search of new masters. Read much of our media, and that's how it is: malaise, decline, impotence, challenges unmet, promises unfulfilled.

Personally, I have never felt a greater sense of frustration or indeed a greater urge to leadership. I enjoy my new life much more than my old one, and find in it huge purpose. I am fighting for my world view, but in a different manner from that of being in conventional office. I have tried to gain a bigger and deeper understanding of the world. China is no longer such a mystery, though that is only a relative sentiment. The Middle East is endlessly fascinating and frightening. I see the economy from a broader and different perspective in business. In my two major charitable areas Africa and faith I find complete spiritual as well as political satisfaction.

I'm living life full pelt, but I find my old world in a state of despair and feel both shocked and galvanised by this. Perhaps that is because I am removed from it and so think I see it more clearly. (This could be an illusion.) Perhaps it is because some of the boulevers.e.m.e.nt boulevers.e.m.e.nt is directed at precisely what I represented in office: liberal economic policies, market reforms in welfare and public services, and engagement and intervention abroad. For whatever reason, a chapter that I intended to write as a postscript now resembles more of a credo. is directed at precisely what I represented in office: liberal economic policies, market reforms in welfare and public services, and engagement and intervention abroad. For whatever reason, a chapter that I intended to write as a postscript now resembles more of a credo.

To summarise: I profoundly disagree with important parts of the statist, so-called Keynesian response to the economic crisis; I believe we should be projecting strength and determination abroad, not weakness or uncertainty; I think now is the moment for more government reform, not less; and I am convinced we have a huge opportunity for engagement with the new emerging and emerged powers in the world, particularly China, if we approach that task with confidence, not fear. In short, we have become too apologetic, too feeble, too inhibited, too imbued with doubt and too lacking in mission. Our way of life, our values, the things that made us great, remain not simply as a testament to us as nations, but as harbingers of human progress. They are not relics of a once powerful politics; they are the living spirit of the optimistic view of human history. All we need to do is to understand that they have to be reapplied to changing circ.u.mstances, not relinquished as redundant.

The dramatic and far-reaching impact of the financial crisis of 2008 is still being played out. It will probably register in history as the most significant economic event since the 1930s. The facts of what happened are well known and don't require repet.i.tion, but the interpretation of them is and should be a matter of enormous debate.

Almost at once, as occurs now in virtually any such drama, a conventional wisdom arose that was extremely resistant to challenge. It has gone roughly as follows: there was a catastrophic failure of 'the market', necessitating a rescue by 'government' and a Keynesian reflation to counter the deflation. In late 2008, banks were stabilised by the injection of government support; regulatory systems began to be overhauled in order to bring the rogue financial sector into line; deficit spending became economic policy.

Politically, of a sudden, the state was back in vogue. The market-led reforms of the 1980s and 90s appeared wrong. The economic growth was said to be a delusion based on debt. Above all, government was in the ascendant. You could almost touch the Schadenfreude Schadenfreude of large parts of political and academic opinion as 'the market' was exposed as having been bereft of clothes after all. of large parts of political and academic opinion as 'the market' was exposed as having been bereft of clothes after all.

This led progressive politicians, on the left especially, to a.s.sert that politics was going to undergo a radical shift of direction towards a more interventionist and statist position. This seemed to accord with the change in mood in the US (though Obama's appointments to key economic positions were actually very centrist). It signalled the end of an era that began over thirty years ago with the Thatcher/Reagan economic and political philosophy.

Disentangling all of this and putting it in some order is a hugely difficult task, made much more difficult by the fact that challenging any part brings a fair amount of criticism since it is a conventional wisdom that is so entrenched. But we do need urgently to unravel it and come to a better and more considered view.

First, 'the market' did not fail. One part of one sector did. The way sub-prime debt was securitised, spliced and diced and sold on with no real appreciation of underlying risk or value was wrong, irresponsible and immensely damaging. Some of the rewards, the huge payouts for shuffling round securities, the bonuses, are not just presentationally awful; they can't be justified and, at worst, have helped create a propensity to 'do the deal' whatever the long-term merits, in a way that significantly contributed to the crisis. All this is correct and should be acted on. However, such practice should not define or represent the whole of the banking sector, let alone the whole financial sector, let alone 'the market'.

Second, government also failed. Regulations failed. Politicians failed. Monetary policy failed. Debt became way too cheap. But that wasn't a conspiracy of the banks; it was a consequence of the apparently benign confluence of loose money policy and low inflation. The responsibility for the crisis should be shared, not borne by the market alone or even by the banks alone.

Third, the failure was one of understanding. We didn't spot it. You can argue we should have, but we didn't. Furthermore and this is vital for where we go now on regulation it wasn't that we were powerless to prevent it even if we had seen it coming; it wasn't a failure of regulation in the sense that we lacked the power to intervene. Had regulators said to the leaders that a huge crisis was about to break, we wouldn't have said: There's nothing we can do about it until we get more regulation through. We would have acted. But they didn't say that.

Fourth, financial innovation is not bad per se. Actually, very often it is good: it increases liquidity and boosts economic activity. The danger lies in innovation that has consequences we don't understand, and effects which we therefore can't track.

Fifth, when a crisis occurs and I suspect this may be true of any significant economic crisis today its consequences are magnified beyond any comparison with days of old by the supremely interconnected and interdependent nature of the modern global economy. It impacts in its own right; and then the impact is multiplied through that elusive but profoundly powerful force called 'confidence'.

I am not suggesting confidence is just some airy sentiment unconnected to the facts. The arithmetic, naturally, determines the fundamentals of the confidence. But the swings in confidence derive, in part, from the psychology of how the arithmetic is being handled, and that depends crucially on the politics. The equation revolves around the interplay between arithmetic, psychology and politics. So the arithmetic remains uncertain, the politics unclear, the psychology therefore troubled, and confidence therefore erratic.

When I say we have to disentangle the conventional wisdom, I mean this: it is absolutely right that the state intervened at the outset of the crisis not to have done so would have been ideologically blind and practically stupid; the problem, I would say error, was in buying a package which combined deficit spending, heavy regulation, identifying banks as the malfeasants, and jettisoning the reinvention of government in favour of the rehabilitation of government.

Funnily enough (or perhaps predictably enough), the public has got this more than many politicians and commentators, which is why the great lurch leftwards has not materialised. The public understands completely the difference between the state being forced to intervene to stabilise the market and government back in fashion as a major actor in the general economy. The role of government is to stabilise and then get out of the way as quickly as is economically sensible. Ultimately the recovery will be led not by governments but by industry, business, and the creativity, ingenuity and enterprise of people. If the measures you take in responding to the crisis diminish their incentives, curb their entrepreneurship, make them feel unsure about the climate in which they are working, the recovery becomes uncertain.

This is even true of the financial sector, however heretical it sounds to say it. Of course there should be a regulatory overhaul, but most of all there should be systems of national and global supervision that enable us to understand this new financial world and to track it, so that we can intervene where the risk of systemic failure demands it. What there should not be is a wholesale attempt to predict every potential crisis and construct rigid rules in advance to prevent it. That way we risk flattening our financial system, squeezing the innovation out of it, trying to return it to the world of yesteryear, which is neither sensible nor economically productive.

One result will be that as the banks do less, the state will have to do more. At present, we have gone from irresponsible lending to the other extreme whereby even worthy businesses and customers are refused credit. Indifference to risk should not be and need not be replaced by aversion to risk. For example, credit default swaps and derivatives are not in themselves a bad thing. On the contrary, properly used and understood, they can be immensely helpful. So understand them, supervise and regulate them when necessary, but don't treat them as a consequence of greed. Treat them as what they are: new financial instruments to be used with care.

My preference is to approach regulation with caution, not to deny the financial sector a say in putting it right since it was the author of the wrong, but to deal with it as a partner in trying to achieve the correct balance between supervision and regulation, global and national action, and diminishing risk while allowing innovation.

As for the state itself, and the role of government, that also should be regarded as suitable material for reform, as part of the problem and not just part of the solution. For one thing, the fact that anxiety over the economy has shifted from banking practices to sovereign debt should ill.u.s.trate how foolish it is to ignore government and state responsibility for what happened.

The eurozone crisis has not created the sovereign debt issue; it has merely exposed it.

The truth is that over an extended period of time, the developed world has been moving but with far too much hesitation towards reform of their welfare, public service and governmental organisations. Ageing populations, declining birth rates, greater expectations and changing social conditions have been confronting us, ever more insistently, for decades. The economic crisis should have been (and indeed still can be) the moment when, instead of lazily succ.u.mbing to the idea that more state spending dressed up as fiscal stimulus is the sole answer, we took the opportunity to accelerate and sharpen reform. Getting value for money in services like health care, opening up compet.i.tion in areas like education, radically altering welfare so that it becomes a genuine safety net for those who need it and a leg up for those who can and should stand on their own feet, and at every point questioning, rea.s.sessing, changing, not so as to abandon social solidarity but to make it effective in a changed world; that is what we ought to be advocating as progressives and embracing as nations.

Take two examples: procurement and pensions. With the first, there is no doubt we could get far better value if we adopted practices the private sector has long regarded as axiomatic. But we still confuse the aspects of public services that are genuinely different in scope and purpose from private services, with means of doing things common to both, and where they are done either efficiently or inefficiently. Procurement during my ten years came a long way, but it is nowhere near where it should be and could be.

In respect of pensions, I favour the link between earnings and pensions because of National Insurance contributions. But as a society we need to ask ourselves what we really mean by retirement now. In our developed world, people expect to be still energetic in their late sixties and beyond. Maybe I am an exception, but I would regard the idea of stopping work at sixty as absurd; horrifying, in fact. Now we can change gear, even change job, so it makes no sense to a.n.a.lyse the world of 2010 through the eyes of my grandfather.

Step by step we have been feeling our way towards a new paradigm of the state and the services it provides, how technology can save money through new ways of working; flexibility in professional demarcation; outsourcing, and so on. But the crisis simply brings home to us the need to speed it up.

Which brings me to the related issue of deficit spending. Again there is no doubt that in the event of the sharp contraction and credit crunch of 2009, governments needed to stimulate domestic demand. However, there are two important qualifications on such action. The first is that when a historical a.n.a.lysis of stimulus packages is conducted, I think we will find that it is the specific and targeted measures, e.g. for the car industry, that were most effective.

The second is that the operation of such deficit spending needs to be calibrated with immense care in the circ.u.mstances of the global economy of 2010.

Keynes was a great man, a revolutionary thinker, a rare example of an outstanding intellectual who could give practical advice. I bet he would be surprised at how his theory is being applied today.

In the 1930s, the amount of public spending relative to GDP in the UK was 26 per cent, in the USA 19 per cent. In 1950, after a world war, it was 34 per cent and 24 per cent. Today, it is 47 per cent and 45 per cent.

Of course there was a need to have a fiscal stimulus as demand dropped sharply in 2009. Keynes' insight was that the state should act to lift demand if the consequence of contraction was a spiral downwards of shrinking growth, cuts to spending, resulting in even less growth and so more cuts. But it was never clear that the effect of 2008 was going to be a savage fall in growth that continued over years. The savage fall was itself partly due to the psychological collapse of the markets after Lehmans, leading to a collapse in confidence, leading to people deserting the market, cancelling investment and retreating to the bunker. What I noticed in 20089 was that even those with money were hanging back. Once the market stabilised, they came out of the bunker and recommenced activity.

The danger now is this: if governments don't tackle deficits, the bill is footed by taxpayers, who fear that big deficits now mean big taxes in the future, the prospect of which reduces confidence, investment and purchasing power. This then increases the risk of prolonged slump. So yes, fiscal consolidation has to proceed with care. I agree entirely that a precipitate withdrawal of stimulus packages would be wrong. This is a judgement that is, if you like, one of right vs wrong, not right vs left. There is a need to balance the opposite impacts of deficit reduction: less overall demand, because of a contraction of government spending on the one hand; more confidence among consumers and businesses due to reining in the deficits on the other. There is a judgement to be made. But if we fail to offer a convincing path out of debt, that failure in the global economy of 2010, as opposed to that of the 1930s, will itself plunge us into stagnation.

The other vast difference today is the position of the emerging economies. They are a wholly new dimension and have their own fragility, but essentially they will keep on pushing forward. Ironically, they will continue to embrace liberalisation at the very point we seem to lose faith in it. Their risk is failure to implement their own government reform (e.g. India) and/or that through policies that stagnate growth we curtail the market for their goods (e.g. China).

So, if we take Europe, what Europe needs is a package of measures: a carefully calibrated deficit reduction plan; the fundamental reform of the European social model, the need for which the crisis has highlighted, not created; regulation that tracks systemic risk but does not suppress innovation and enterprise; and, for the eurozone, the fiscal coordination that a single monetary policy was always going to require.

But it is a package. Do one part and not another and we risk a worse crisis. In particular, cut the deficit and reduce incentives, or fall short on true structural reform, and the imbalance in measures will cause the package to fail, or at least significantly reduce its effect.

Consider the issue of Greece or Spain. If they have, as I hope they do, credible policies to sort out, in the former case the deficit, and in the latter the financial health of their banks linked to the deficit, the euro will stabilise if accompanied by far-reaching reforms. The market will recover and the reforms, necessary in any event, will make both countries more compet.i.tive. The result will not be to change the fundamentals of the economy the West has been developing over many decades, but to provide adjustment and reform to make them work more effectively.

What should strengthen this belief is that the new economies now rising up the rankings are doing so precisely by following more open economic policies, and faltering when they don't. China is opening up, and thrives when it does so. India needs less bureaucracy and less state power, not more. President Lula's success in Brazil is partly because he continued the anti-inflationary macroeconomic policy of his predecessor Fernando Cardoso. The economies in the Middle East, like Saudi Arabia, are focusing today on compet.i.tiveness and removing barriers to enterprise, not erecting them. It would be odd if we moved in the opposite direction. And foolish.

However, we may recover our confidence faster on the economy than on security. I have set out my explanation for Iraq, how it happened, what went wrong and why I still believe the decision was nonetheless right. Now Afghanistan hangs in the balance in a similar way. As in Iraq, we remove a regime that is hated, and do so with good intentions. The citizens of the country seem to intend the same, but we are thwarted by those with the opposite intentions. Over time, the issue ceases to be who is well intentioned and who is not, and becomes the apparent inability to overcome the forces against us and secure a definitive 'victory'. So our allies lose heart, our public loses faith, and we ask: When and how will it end?

This is a picture moving fast; and with each evolution of political or military struggle, things can look different month to month, even week to week. So trying to stand back and see the picture clearly is hideously difficult. I will go right back to the first principles and try to put it in simple, even crude terms.

What is the nature of the threat? It does not derive from something we have done; there was no sense in which the West sought a confrontation. This is a vital first base in the argument. The attacks of September 11 came to most of our citizens as a shock that was utterly unforeseen. Countries like America and Britain were not singling out Muslims for unfair treatment; and in so far as Muslims were caught up in generalised racism towards those of a different race or colour, such att.i.tudes were on the way out, not the way in.

The extremism we fear is a strain within Islam. It is wholly contrary to the proper teaching of Islam, but it can't be denied that its pract.i.tioners act with reference to their religion. I feel we too often shy away from this a.s.sertion, as if it stigmatises all Muslims. But if it is true and it is it has to be faced, not just because it is true, but because otherwise we don't a.n.a.lyse the problem or attain the solution properly. If it is a strain within Islam, the answer lies, in part at the very least, also within Islam. The eradication of that strain can be affected by what we outside Islam do; but it can only be actually eliminated by those within Islam.

Most problematically, there is a (natural) tendency for us to believe that the best way to empower those within Islam to take on the extremists is to reach out and meet people halfway. Let me explain what I mean by this, because it is at the root of our present policy dilemma.

The conventional wisdom is that the Bush/Blair position was wrong because it confronted when we should have reached out. It is accepted by many that Afghanistan was a justifiable conflict; Iraq was not. Iraq then 'caused' a schism between the West and Islam, it is said, that made it harder for our allies to get traction within Islam to take on the extremists. Our policy towards Israel is likewise seen as one-sided and that fuels the view of the West as inherently inimical to Islam. Turkey's rebuff from the European Union is seen similarly.

President Obama's speech in Cairo in June 2009, which was a brilliant exposition of the case for peaceful coexistence, marked a new approach, and if he is given the support and partnership he needs, it is an approach that can combine hard and soft power effectively. While hanging tough in Afghanistan, he has reached out. The speech was carefully calibrated. The hand of friendship would be offered, even to Syria and Iran. It was in part an apology, and taken as such. The implicit message was: We have been disrespectful and arrogant; we will now be, if not humble, deeply respectful. But join us, if you will.

The trouble is: respectful of what, exactly? Respectful of the religion of Islam, President Obama would say, and that is obviously right; but that should not mean respectful of much of the underlying narrative which many within Islam articulate in its politics today.

Here is where the root of the problem lies. The extremists are small in number, but their narrative which sees Islam as the victim of a scornful West externally, and an insufficiently religious leadership internally has a far bigger hold. Indeed, such is the hold that much of the current political leadership feels impelled to go along with this narrative for fear of losing support.

This is a situation with practical consequences. Iraq and Afghanistan are seen as the West's battles. With a few notable distinctions, this is not perceived as a struggle for the heart and soul of Islam. Yet the outcome is surely vastly determinative of such a struggle.

I have my criticisms of Israel and my ideas as to how to make progress, set out in earlier chapters. But leave aside for a moment the details of the peace process. As I started to spend more time in Palestine, I was surprised to find it is often easier to raise money for the 'resistance' than to fund the patient but essential process of Palestinian state-building. Israel can and should do more to push forward the necessary changes on the ground the West Bank and Gaza that can underpin the peace process. However, it is also true that if the Palestinian cause gave up violence emphatically and without ambiguity, there would be a peace agreement within the year. Not enough voices in the Muslim world are asking them to.

It is America today that leads the challenge to Iran and its nuclear ambitions. But let us be frank: Iran is a far more immediate threat to its Arab neighbours than it is to America. It is of course a threat to us, too, but this is partly because of what a nuclear-armed Iran would mean for the Middle East, rather than as a direct threat.

The problem is this: defeating the visible and terrifying manifestations of religious extremism is not enough. Indeed I would go further: this extremism won't be defeated simply by focusing on the extremists alone. It is the narrative that has to be a.s.sailed. It has to be avowed, acknowledged; then taken on, inside and outside Islam. It should not be respected. It should be confronted, disagreed with, argued against on grounds of politics, security and religion.

If we argue this case confidently and persuasively, it will give strength to those within Islam who know this argument has to be had and yet hesitate. They hesitate because they are afraid of being left out there alone, because we in the West, who are their allies, tacit or overt, find it all too hard, too wretched and above all too long a battle to contemplate.