Europe's financial crisis is acquiring the stench of Munich. No, it is not Nazi Germany. But it is the same ceaseless meetings and pretend deals, the same flying here and there and getting nowhere, the same refusing to acknowledge catastrophe on the horizon, hoping someone else will take a tough decision.

In 2008 the financial spotlight was on Washington. Banks were rescued, but not the American economy. Now the spotlight is on Europe. Again the talk is of saving banks, and none of saving economies. Britain's banks have been given another £75bn, which makes £275bn over two years. No one seems to have a clue where this stupefying sum has gone. Most has allegedly vanished overseas, covering bad debts, fuelling commodity prices, depressing the pound and increasing inflation. Meanwhile, Britain's economy has ground from slow to stop. Quantitative easing is like filling a car with petrol when the tank is disconnected from the engine. It is a dreadful policy.

At the weekend's G20 financial summit, the Americans implored Europe to rescue its stumbling finances by next week at the latest. This meant restructuring Greece's desperate debt mountain, somehow propping up other eurozone debts, and a crash programme to boost spending through our old friends – ponderous "big investment projects", which somehow always take precedence over demand. Angela Merkel dismissed all this pleading out of hand. "Dreams building up of a package when everything will be solved by Monday" were impossible, the German leader said. Stock markets duly plunged further.

British growth, already among the lowest in Europe, has fallen to virtually zero. On Tuesday inflation rose yet again, to over 5%. The Bank of England governor, Mervyn King, blithely declared that the country "could be facing the most serious financial crisis since the 1930s, if not ever". Yet all he can think to do is hurl more money at banks.

The common belief is that the 2008 credit crunch was the result of something new, the globalisation of credit. Therefore no one could have foreseen it and no one was to blame. Yet the late-Victorians invested far more overseas than anyone does today. From 1890 to the outbreak of the great war, some two-thirds of all British savings went overseas. Much if not most was lost. Loans to American railway and mining companies vanished. France lent massively to Russia and lost the lot.

What is significant is not what happened but that it repeats itself. As he surveyed the wreckage of the pre-Munich economy, Keynes warned that "international investment always has been and always should be defaulted" – because such lending is by its nature uncertain and ill-informed, driven not by hard analysis but political whim, herd instinct, greed and fashion. Keynes added: "To lend vast sums abroad, without any possibility of legal redress if things go wrong, is a crazy construction." As for the recent belief that the risk of default could be offset by buying dud insurance packages, it beggars belief.

Will anyone now declare Greece in default? No. Will anyone begin to extract its currency and thus its economy from the euro straitjacket, so it can begin to restore a sensible trading relationship with its neighbours? Apparently not. The hysterical pursuit of "ever closer European union" put monetary shackles round 17 often widely differing economies and pretended they were thereby one. Floating exchange rates were thus denied their role in evening-out competitive imbalances, with the discrepancy covered by debt. The intellectual error was massive, the collapse predicted by even the mildest of Eurosceptics.

Those who uncritically championed the euro are now heading for the hills. Some claim they never meant European union to extend to full monetary union. Some claim that all would have been well had "stronger disciplines" been in place. Others plead that a little thing like a recession should not call into question a cause to which they have devoted their careers and their idealism.

These are the attitudes that, between the wars, created the League of Nations, the spirit of Locarno and the Peace Pledge Union, a collective European belief that merely asserting the death of war could make it so. Then Germany was rearming, but no one dared act on it. Now Greece is bankrupt, as possibly are other states, but no one dares act on it. Europe's leaders prefer to plunge the whole continent into unemployment and waste to prop up a defunct idealism.

Back home the same blindness afflicts the government. The most difficult thing in British politics is to change one's mind; the parliamentary system renders it a humiliation. When the coalition was formed 18 months ago it declared that inflation would stay low and growth rise by 1.7% and then 2.5% a year. Those forecasts, while plausible at the time, have proved false and require a shift in policy.

Osborne's squeeze on public spending was, in itself, neither savage nor unreasonable. But the resulting squeeze on consumer demand has been devastating, not least to the Treasury in falling receipts and rising benefits. The risk of resumed recession is so great that any sensible person would plead for a cross-party consensus to assess the figures and agree preventive measures. Economic policy these days is an issue not of ideology but of understanding the facts, of disentangling cause and effect.

Britain's only counter-recessionary policy at present is one that appeases the past recklessness and present greed of bankers, in the certain knowledge that none of the proclaimed boost to domestic credit will go anywhere near it. The reason for this blindness is grim: follow the lobbyists. I recently asked a group of bankers why it would not be better to direct the next £75bn of printed cash straight into high street demand, through higher benefits, scrappage schemes and vouchers. This would surely help rescue closing shops, unemployed workers and struggling enterprises by building credit lines from the frontline in the market place, rather than from top down. They looked as if I were mad. The look said it all. It is our turn now. We are in power. Give us the money and we will decide how to use it.

In the 1920s and 1930s, intelligent, liberal people failed to read the economic and political realities of Europe, partly out of misplaced idealism, partly out of self-interest. The outcome was disaster. The same is true today. The outcome is unlikely to be war, but the risk is now plainly of prolonged and desperate economic misery. All the gilded armies of public policy seem impotent to prevent it. They care only for banks.