It is pure guesswork whether last night’s European measures will create stability or trigger a further rout in financial markets when they open this morning. But two things are fairly clear about this surprisingly strong and cohesive package. First, while short-term stock market reactions are unpredictable, there can be reasonable confidence about the package’s economic impact — it will avert a catastrophic economic collapse or long-term depression. Secondly, the ability of European governments to launch their own financial rescue without waiting for US leadership represents a fundamental shift in global economic relations.

Let me begin with this second point. Since the creation of the Bretton Woods monetary system in 1944 every global financial initiative of any significance has been devised, led and co-ordinated by the US Government. This US leadership did not mean that America always got its way in financial affairs — nor that US co-ordination always succeeded, as exemplified by the breakdown of Bretton Woods in 1971. But it did mean that international financial initiatives were never attempted until ideas and the leadership came from Washington. The sole exception to this rule in the past 30 years was the creation of the euro; but this was viewed in Washington as an intra-European affair with limited global consequences.

The present global banking crisis has been a very different matter, since it originates in the US itself. Even a few weeks ago a solution without US leadership would have been inconceivable. In the past few days, however, the failure of the Bush Administration to follow through in any concrete way on the $700 billion “Paulson package” that it rammed so painfully through the Congress, has focused attention on Washington’s vacuum of leadership and ideas. Aghast at the dithering incompetence of the US in handling this crisis, European politicians have realised that Henry Paulson, the supposedly brilliant US Treasury Secretary, was an emperor with no clothes. Instead of waiting for US leadership, they had to take responsibility for Europe’s problems. In trying to do this, they have found an unlikely intellectual guide and champion: the British Treasury and Gordon Brown.

Which brings me back to the reasons for cautious optimism about the economic impact of last night’s European measures. Like the British version, this package addresses the two fundamental causes of the present financial crisis: the panic among bank depositors created by Mr Paulson’s disastrous decision to put Lehman Brothers into bankruptcy; and the panic among bank shareholders created by his equally misguided decision to expropriate the shareholders in Fannie Mae.

By effectively guaranteeing all bank deposits in “systemically important” banks, European governments have dealt with the most important threat created by the post-Lehman financial crisis: the risk of an all-out bank run by individual savers and cash-rich companies, which could have triggered the collapse of every leading bank in the world. Moreover, European governments have backed up this primary defence of the bank system with an important secondary measure: a commitment to buy new shares in banks that appear undercapitalised. Assuming this two-stage solution is quickly confirmed through legislation or unambiguous political pronouncements, interbank lending should gradually resume in the coming weeks. That, in turn, should mean credit lines to household and business borrowers remain open, averting the avalanche of bankruptcies that would have become inevitable if the paralysis in financial markets had continued much longer.

In Europe, as in Britain, it is now probably too late to avert a recession, but after last night’s package, a catastrophic depression is much less likely — and Europe’s dependence on US leadership will never be the same again.

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