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Relax. That was Larry Summers' basic advice to the bankers and officials at Davos when he spoke to me last night.

For days, the great and good of world finance had been full of questions about President Obama's surprising new plans for reforming the banks - particularly the part about banning commercial banks from owning hedge funds or trading on their own account.

What did it mean for the global reform effort? How could it work across different national jurisdictions? Was it practical or even relevant to the crisis we have just had? And - of course - what did it tell us about the political standing of the Obama administration, and the relative position of the likes of Summers or Treasury Secretary Tim Geithner?

But in his interview, Summers rather took the air out of a lot of that discussion, by suggesting that the contentious parts of the new Obama plan needn't have much effect on the global reform effort at all.

He pointed out that although we have tended to look for global rules for things like minimum bank capital standards or limits on leverage - there's always been a wide range of institutional and regulatory arrangements for the structure of banking institutions within countries.

Continental Europe has had its universal banks; the US, after all, had Glass-Steagall until quite recently. All that time, no-one thought there was a great need to bring the systems closer together.

"We've followed what we've perceived to be the best approach, other countries have different approaches - this has always been an area where countries have had different views," he said.

Now it seems rather an obvious point. But it was one that a lot of people here at the World Economic Forum missed.

Many have said could be complications to applying the US approach to big global banks like JP Morgan. But he doesn't seem to think they are insurmountable. (Others may well disagree.)

Nor does he think this piece of Obama's plans will solve every problem or prevent every crisis. It's not intended to. It's one piece of the puzzle.

Given the careful way the separation proposal is framed, I would say it was a relatively unimportant one. But Summers did not take things that far: he said it was a "serious and constructive" step.

Alistair Darling, the UK Chancellor, told me yesterday that he thought the US approach, in effect, was either impractical or irrelevant to the issues we faced with, say, Northern Rock or a Lehman Brothers.

Summers response: "in matters of finance, generals should be wary of fighting the last war." Funnily enough, in their meeting, the UK chancellor told Summers that the US was doing the same thing.

Enough, already. What's the take-away from all this bickering and debate? I would draw three conclusions.

First, governments are going to disagree on this important but not all-important structural issue of whether or not to limit the activities of commercial banks. But it needn't prevent agreement on core reform issues such as bank capital and liquidity - or coming up with an effective resolution regime for failing institutions.

With luck, it won't. Ministers and central bank governors just need to take a collective deep breath between now and their meeting in the far Northern reaches of Canada next weekend. (They'll need to stay close together to keep warm.)

But second, you can still worry about countries going their own way too much. The IMF Managing Director, Dominique Strauss-Kahn told me yesterday he thought there were risks in a country-by-country approach on some of these issues. He worries about starting another dangerous race to the bottom in global finance.

The chancellor insists that he's rejecting the Obama solution on the merits - not to reassure the City that London's a nice place to be after all. (He's not alone, by the way - behind the scenes, French and German officials here have been voicing similar doubts.)

Maybe it is all principled and innocent. But we can't get back to ministers playing the City against New York, chipping away at regulation or standards to steal a march on the competition. Without a bit more coordination, that is definitely a risk.

Finally, on the broader question of what this tells us about the Obama administration of course, Summers denied that the US bank plans were a knee-jerk response to the disaster of the Massachusetts vote. (If you watch the interview you'll see his response on this was amusingly comprehensive.) You wouldn't expect him to say anything else.

I don't think anyone sensible really thought these plans were cobbled together in two days, as a result of last Tuesday's catastrophe. Certainly Summers vehemently denies that - insisting that the speech came as a result of an internal policy memo agreed between himself, Geithner and Volcker at the turn of the year.

But reading between the lines, you can't help concluding that the fanfare around the speech was politically-driven. Summers and Geithner might have agreed the policy. With Massachusetts in the air, I bet the politicos dictated the set-piece speech and the fiery talk about bankers from President Obama at that Thursday press conference.

If the resulting headlines generated more global heat than the proposals strictly deserved, you could say that the administration has no-one to blame but itself.

Davos: "We will help Greece if they really need it. Just don't tell the Greeks that." That's the message the European authorities would like to send the international bond markets. Alas, they can't. Which explains the conflicting signals coming out of Davos and Brussels in the past 24 hours on the subject of bailouts.

At this year's Davos, Greece has been rather like the small unattended package at the back of the hall. Everyone thinks it could be a big problem. But no-one wants to be the first to open it up.

As I said on the Today programme this morning, by the markets, telling everyone who will listen here that Greece will fix its own problems without help from anyone else.

He gave that speech at a rather low-voltage public session on the Eurozone yesterday, sharing a stage with a typically tight-lipped ECB President Jean-Claude Trichet. But Prime Minister Papandreou added that he thought that Greece had been the victim of malign anti-Euro forces, picking on Greece as the weak link in the Eurozone chain.

Many have dismissed this as a typical "blame the speculator" move from leaders facing public debt crises - which, of course, it is. But I think he was also quietly reminding everyone in the room that the Eurozone was indeed only as strong as its weakest link. He would very much like Brussels and Frankfurt to see Greece and the Eurozone's fortunes as tightly intertwined.

The further falls in the Euro today have rather made his point. As things stand, the Euro will have fallen more than 2% against the dollar since the start of the year.

The likes of Axel Weber, the Bundesbank president, dearly wish it was not a collective problem. As I have explained before, the ECB has been giving back-door support to the likes of Greece, by allowing domestic banks across the Eurozone to post domestic government debt as collateral for nearly-free central bank cash.

Harder-liners such as Weber have not been very comfortable with even this. Thought of a proper, front-door bailout for fiscal miscreants like Greece makes them positively ill. Especially when there is supposedly a "no bail-out" clause in the Euro treaty, specifically written (by Germany) with (Portugal, Ireland, Greece and Spain) in mind.

But- as ever - that clause can be suspended in special situations. Last spring even Germany realised that the global financial crisis was a special situation, and European officials sent out a strong signal to the markets that desperate countries would, in fact, get support. That underpinned confidence in the thick of the crisis.

Now, from the standpoint of Frankfurt at least, the crisis has passed. In December, the ECB announced that normal service would soon be resumed - and the days of bucketfuls of cheap cash were coming to an end.

That's why the markets have been spooked. They also know the French and German want every country to take responsibility for fixing its own budget mess.

Greece has put forward such a plan - to cut borrowing from nearly 13% of GDP to just 3% by 2012. But few believe that the Greek population will put up with it. There's a general strike planned early next month.

So the question is being asked again: will Europe stand behind them? But, as we're seeing, "Europe", at times like this, does not speak with one voice.

The European commission president went for a positive-sounding fudge in his remarks yesterday - indicating that there would be a European solution to the crisis, if needed, but with studied ambiguity about whether it would be under the auspices of the Eurozone or the EU.

Given the bail-out clause, EU support would be a lot easier, constitutionally, but it's not entirely clear where the money would come from. Also, as we've already seen, the political obstacles are not small. This morning, the UK Chancellor, Alistair Darling, appeared to rule out EU support for Greece though that could change.

So we return to my opening thought: Eurozone officials would like a way to say yes to the bond markets, without appearing to let Greece off the hook. But it's not clear that such a path exists. And if they keep looking for one, they risk making the bailout they fear that much more likely.

The lesson of history - repeated again and again - is that uncertainty about the end-game only brings it closer. The more doubt there is about the Greek safety net, the higher the risk premium on Greek debt will go - the more likely it is that Greece will fall.

Update 15:00: I note that the French Finance Minister, Christine Lagarde, has now given her take on the Greek situation. Or should I say takes.

In a piece headlined "Lagarde says no eurozone bailouts", Reuters has her saying the following in an interview this morning:

"(The euro zone) is a monetary zone which holds us together. There's no way out. There's no bailout system and we have to deliver on the commitments that we made."

That seems pretty clear-cut. Except, it seems, to AFP. On the basis of the same interview, they report: "Lagarde said fellow eurozone member Greece would not be abandoned while it seeks to tame a runaway public deficit. 'Greece is not alone', Lagarde told CNBC television at the World Economic Forum in the Swiss mountain resort of Davos."

Apparently Ms Lagarde had left plenty of room for interpretation.

And to think I had accused European officials of sending mixed signals.

Davos: It's "decoupling" day in Davos. Or that's how it feels. Everyone's talking about the Eastward shift in the balance of global economic power - and China, especially, as the key engine of global growth in 2010.

Even the World Economic Forum is moving its centre of gravity Eastwards. The WEF is holding a special Davos-style event in Tianjin later this year. "At least it might be a bit warmer," one Central Bank President muttered to me while brushing the snow off his coat. We're expecting 12cm of snow here today, and not everyone came well-equipped.

But "decoupling" doesn't seem the right word for what's happened to the relationship between the emerging and advanced economies. A better word would be "deconstructed".

How so? Well, it's certainly true that the emerging market economies have brushed off the troubles of the major developed economies in fine style. A year ago, one of the things that was making participants extra-gloomy about the crisis was the perception that the developing economies were being sucked into it as well. News was coming in of mass lay-offs in Brazil, as domestic car production fell off a cliff. Exports across Asia were falling at double-digit rates.

But for many of those economies, all that now seems like just a bad dream. Most of the Asian tigers have come back roaring, their long-term development story intact, and their position relative to the US and Europe rather stronger than before.

HSBC hosted an interesting breakfast on the subject this morning with the FT. A new report by HSBC's chief economist has the key headlines for the story:

"No longer is it possible to argue convincingly that the US or European nations determine the agenda for the world economy as a whole. 2009 will surely go down as the year when we both uncovered the scale of the crisis in the developed world and celebrated the resilience of much of the emerging world in the face of what appeared to be a perfect economic storm. We found, in particular, that China was able to stand on its own two feet, capable of delivering rapid economic growth even while its export engine was badly misfiring."

It's all true. It's also true that China has some important challenges to address in managing its economy - short-term and long-term, which will have important consequences for all of us.

But I wonder whether we've gone from expecting too little of China to expecting far too much. That's what I mean when I say the relationship has been deconstructed.

China does indeed need to rebalance its economy in favour of domestic demand. I've written a lot about that in the past, and there was much talk about it this morning. Reducing its chronic over-saving will help deliver more efficient, and more sustainable economic growth in China. And it will help the rest of the world as well.

But it won't magically provide a new engine for US and European demand. Nor will it make the problem of global imbalances go away.

This might sound obvious. But listening to the rhetoric of US politicians in Washington - not to mention many economists and officials here in Davos - you could easily come away with a different view.

The way US congressman tell it, all that's needed to transform the outlook for US exports (and jobs) is a stronger renminbi. And even the likes of Martin Wolf, the FT's distinguished economic commentator, can sometimes give the impression that a balanced China will balance the world.

It won't. For the simple reason that China, for all its new ascendancy, is still just one economy - about one-fifth of the size of the US.

As the UBS economist Larry Hathaway points out, even if the Chinese current account surplus (in effect, the "excess" that it lends to the rest of the world in return for buying so many Chinese goods) fell to 2% of GDP over the next few years, instead of the 6% of GDP now forecast, at most that could only add about 0.2-0.3 percentage points to US and European annual growth. And that's if those countries were able to take full advantage of the shift in demand. It's far from clear that they would.

True, in their current state, the US and Europe will take every scrap of growth they can get. But it's not the solution to global growth or global imbalances. Nor are you going to make it happen by simply pushing up the Chinese currency.

If there's one thing that the average Davos participant and the average US congressman has in common it would be a fervent belief that the Chinese need to revalue. They do - and the signs are that they will, probably in the second half of this year.

But remember, we've had enormous swings in the value of the dollar and of the yen in the past 30 years. It hasn't made a big difference to the rate of growth of imports or exports in the US - or the Japanese desire to save.

China's going to play an increasingly pivotal role in the global economy in the next few years. But it's one piece of the global economic puzzle coming out of this crisis. It can't solve the whole thing.

Davos: Once again, the Americans are dominating Davos. And they're not even here. Or not yet anyway.

Last year the delegates forgave the new Obama administration for not sending senior figures here. His presidency was only a few days old. And there was the small matter of a global financial crisis to fix.

The timing's bad again this year: President Obama will be giving his crucial State of the Union address tonight, and more than ever, senior officials need to be there in Washington to back him up.

Larry Summers, the president's senior economic advisor, will be the administration's sole representative here. And he doesn't arrive until lunchtime Friday.

This is a major source of frustration for many delegates - and certainly the organisers. Why? Because - as Robert Peston has discussed -last week the Obama administration turned the Davos agenda upside down.

Seven days ago I thought I would be here discussing the strength of the global recovery, the potential for future sovereign debt crises, and the challenge of re-balancing the global economy - along with continued and important discussion of international financial reform.

Now - all anyone can talk about is Obama's plan to break up the banks.

Robert has outlined some of the bankers' responses to Obama's plans. I've been talking more to officials than to bankers. They, too are worried that the administration's have not been fully thought through.

But my sense is they are less focussed on the substance of Obama's proposals than on what they tell us about the political strength of the administration - and the balance of power within it.

A few months ago, at the time of the G20, it was clear that Tim Geithner and Larry Summers were in charge of US policy.

Witness the careful and determined opposition to widespread - US and global - calls for caps on banker bonuses.

Now the pendulum appears to have shifted - in favour of more populist rhetoric, and the ideas of Paul Volcker.

At least, that's the popular interpretation. Perhaps when we hear from Dr Summers later in the week we will get a better sense of whether it's true.

But it won't just be Americans that will be paying attention to this State of the Union. There could be some avid - if weary - viewers in Davos as well.

A "policy-driven, multi-speed recovery". That's how the International Monetary Fund (IMF) summarises the prospects for the , which has just came out.

Put another way, it thinks the recoveries in the US and Europe are going to be low-speed - and still driven largely by policy stimulus.

In the high-speed emerging economies like China, by contrast, the question for policy is going to be how, and when, to slow things down.

True, the a bit faster in 2010 than it thought - by 2.1% instead of the previous 1.3%.

But growth next year has been revised down slightly - to 2.4%. In the emerging economies in 2010 it expects average growth of 6% in 2010 and 6.3% in 2011. Both of those forecasts have been revised slightly up.

It's good news for everyone compared to what was forecast even six months ago.

But good news with a twist, because the Fund says we're only getting a rebound thanks to an "extraordinary amount of stimulus... there are still few indications that autonomous (not-policy-induced) private demand is taking hold, at least in advanced economies".

Tell us something we don't know, you might say, given .

Funnily enough, the IMF has today revised the UK's forecast upwards - to growth of 1.3% this year and 2.7% in 2011.

That latter figure is still below the chancellor's forecast, but it's interesting to note that the Fund is expecting the UK to grow faster than every other major advanced economy in 2011 (unless you count Canada, which is forecast to see growth of 3.6%).

Growth in the eurozone is forecast to be a measly 1% this year and 1.3% in 2011.

Just before Christmas, I said a big question for this year would be .

Apparently, the IMF thinks it won't show up in a big way on either side of the Atlantic in 2010 and 2011. The 2010 forecast for the US has gone up sharply - causing much celebration in the markets this afternoon. But the forecast for next year has been marked down by 0.4 percentage points, to 2.4%.

That may be why why the Fund says the biggest downside risk to the forecast is "that a premature and incoherent exit from supportive policies may undermine global growth and its rebalancing".

As you can imagine, Downing Street is very keen on this particular paragraph and think it makes the point I was highlighting earlier - that it could be a risky time to slam on the brakes.

Earlier the report also says that "the fiscal stimulus planned for 2010 should be fully implemented". No 10 has that bit underlined in red.

But read on a sentence or two, and there's a downside risk the Tories will appreciate as well: namely, that "rising concerns about worsening budget conditions and fiscal sustainability could unsettle financial markets and stifle the recovery by raising the cost of borrowing for households and companies".

It also says that countries facing growing sustainability concerns "should make progress in devising and communicating credible exit strategies".

In case you were wondering, Alistair Darling, that means you.

So once again, we could be damned if we do and damned if we don't. Somehow, the next government has to convince the financial markets that it will make herculean efforts to cut borrowing over the next few years, without necessarily doing much about it right away.

David Cameron discovered the other week that you couldn't get credit with the electorate for supporting marriage unless you're willing to pay for it up-front.

If the recovery turns out to be as weak as these early numbers suggest, the next government will be looking for bond investors to take a more generous view - accepting their commitment to cut the deficit on faith.

More details on future spending cuts could certainly help win them over. But generosity is not exactly what the international bond markets are known for.

Perhaps we should call it the Office of Negative Statistics. Almost to a man - and woman - economists had expected a modest, but respectable growth figure for the .

But the (ONS) tells us that it grew barely at all - by just 0.1%. It's a recovery - but not, if you'll forgive the jargon, a statistically significant one.

Three quick points about this meagre outcome. The first, naturally, is that the number will almost certainly be revised, and in recent times the average revision has been positive.

This is especially true when you consider the full three years when data is still coming in, rather than the first three months, when everyone's paying attention.

But the second is that blaming the ONS can only take you so far.

Even with some revision - in fact, even if it turns out that the economy actually started to grow in the third quarter, given that the first estimate of a decline of 0.4% has already been revised up to minus 0.2% - we are still talking about an extremely lacklustre recovery.

Finally, I think this is bad news for both of the major political parties. It's a blow to the government, because they would prefer to have a bit more evidence for their claim that Labour policies has softened the impact of the recession.

The last three months of 2009 was the period when the VAT cut was supposed to have had the greatest effect.

Of course, we don't know the counterfactual - it's possible that the little growth we had in the last three months of 2009 was due to people spending before VAT went back up to 17.5%.

Ministers will also point to the strength of the motor industry, but the claim will ring rather hollow on the back of 0.1% growth overall.

In fact, it might be better for the government if the temporary stimulus did not have a big effect on the last three months of 2009.

Why? because If consumers did bring forward spending from the start of the year, that suggests the growth figure for the first quarter of 2010 could be even worse than this one.

Even worse than 0.1% growth means no growth at all. And - wouldn't you know it - we'll get the first estimate of that figure will come out on April 23rd, probably in the last stages of the campaign.

But I'm not sure that a weak recovery plays that well for the Conservatives either. They are being painted as a party keen to clamp down on public spending - and borrowing - from their first days in office.

Even if that's a caricature of their position, it's a caricature that they have broadly accepted. The weaker the recovery, the easier it may be for Labour to argue that the economy is too weak for shock therapy just yet.

"Don't put the recovery at risk" could be an election slogan for all three of Britain's main political parties. The debate is over what, exactly, the greatest risk to the recovery will turn out to be.

We know Labour thinks the danger lies in squeezing the budget too quickly - before the economy is really back on its feet. For the Conservatives, it's the opposite: that by delaying too long in cutting the budget, the UK will lose market confidence, thereby pushing up the cost of borrowing for the government and the rest of the economy - and stunting the recovery that way.

Nick Robinson asked Gordon Brown to be honest about those risks in his press conference a few minutes ago. As ever, he got a long reply rather than answer. But our prime minister did admit, eventually, that timing the squeeze was a judgement call, and it certainly is.

Vince Cable had to tackle this basic issue in his big economics speech this morning. He said:

"Delaying action on the budget risks a secondary infection: a sovereign risk crisis leading to higher borrowing costs. But treatment that is too abrupt - sending off the sickly patient to do 200 press ups in the gym - risks a fresh heart attack: a relapse into recession. Treatment has to reflect the patient's condition."

At this point some of the more cynical of you may be thinking: typical Liberal Democrat, sitting on the fence rather than taking a definitive view. But Cable is right that there is too much uncertainty about the recovery to take a dogmatic view on policy for 2010 and 2011. I suspect that most investors - and ratings agencies - accept that as well. But any prospective governing party does need to show clearly how they will bring the deficit down and, crucially, how the pace of deficit reduction would respond to different economic conditions.

The Liberal Democrat shadow chancellor doesn't exactly provide that in today's speech. He does set out "five objective economic tests for determining when and how quickly the big budget correction should be attempted: the rate of growth; the level of unemployment; credit conditions; the extent of spare capacity (and therefore, inflation risk); and - crucially - the borrowing conditions in international markets."

But this sounds a lot more precise than it actually is.

In truth, there are no "objective" estimates of the extent of spare capacity, let alone inflation risk. Once again, it's a matter of judgement. In the US, officials at the Federal Reserve don't think that the crisis has made any permanent dent in the country's economic capacity. As a result, the amount of "spare capacity" in the economy is thought to be well over 10% of GDP.

In Britain, we're thought to have less to play with because the Treasury reckons that 5% of national output has been permanently lost in the crunch. But no-one knows what the truth will turn out to be. Not even Saint Vincent Cable.

The "right" answer on whether to when to start squeezing the budget is even less clear. Last month the FT asked 71 top economists whether they thought the government should tighten this year - or leave it til 2011. Thirty-three said wait. Thirty-one said make a start this year. (Though, it should be said, a large majority thought that the tightening from 2011 onwards needed to be faster and deeper than the chancellor's current plans.)

We do know there are historical precedents to support both sides. If you think the risk lies in cutting too soon, the great examples are the US in 1937, when premature tightening by Congress and the Federal Reserve helped make the Depression a lot Greater than it would otherwise have been, and, much more recently, the case of Japan.

This chart, from , tells the story: the Japanese government raised taxes fully seven years after their financial bubble burst, the economy went straight downhill again (though, as the chart reminds us, the timing was made worse by the fact that the Asian Financial Crisis started a few months later, in the summer of 1997).

That's the chart that has even small 'c' conservative economists wondering whether a tougher squeeze is the right call for the UK in 2010. But there are just as many precedents on the other side: in effect, nearly every emerging market debt crisis of the past 100 years, and certainly most of Britain's previous economic crises, have come from governments putting off the day of reckoning too long - and thus making the eventual bill that much larger.

As the Conservatives correctly note, monetary policy could play the role of insurance policy, staying looser, for longer, if an incoming government tightens more in the early years of the recovery than Alistair Darling now plans. But, the Bank is already in the realm of extra-ordinary measures, with its policy of quantitative easing.

There may be no "objective tests", but you could have a clear rule suggesting how, exactly, you would allow good or bad economic news to affect your targets for the structural budget deficit.

Alistair Darling has gestured very vaguely in this direction - but none of the key players has laid down a clear plan.

If the recovery is as weak as many expect, privately, even senior Conservative advisers admit that there will be a limit to how quickly an incoming government can cut. We also know that the faster they want to act, the more they will need to rely on tax rises. Though probably inevitable, that's not an edifying prospect for Tory high command.

I'll be saying a lot more about this in the next few weeks. Suffice to say that, for all the parties, this is indeed going to be an election about economic risk. The bad news for all of us is that there is plenty of it to go around.

The government is taking credit for - are they entitled to? The answer is they can certainly claim some of it. But some help the government has provided has been by accident more than design.

A quick reminder of how surprising this all is. The economy has shrunk by 6% since the recession began - one of the sharpest recessions since the 1930s. On past experience, you would expect employment to have fallen rather more than output - in the 1990s, for example, the economy shrank by 2.5%, but employment fell by 3.4%.

But this time, employment has not even fallen as much as in the 1990s. Overall, employment has fallen by around 2% - a fraction of the fall in output.

On the broader measure, unemployment in the three months to November stood at 2.46m, the first quarterly fall in 18 months, and 450,000 less than the government and others predicted a year ago.

Labour says the difference this time is down to government policies - policies which, as it happens, the Conservatives opposed. As ever, the facts are not so clear-cut. But it's such an important question for the campaign I thought it worth having a long hard look. You'll see the results on the main UK news bulletins tonight.

As I discussed last month, employer behaviour is a big piece of the explanation. Companies are hoarding labour in this downturn - rather more than in the past. This is not all down to the government - far from it.

In fact, the biggest factor was that companies came into this recession with higher levels of profitability than in the past. There were fewer companies who had to rush into massive job cuts - simply to keep their heads above water.

The sheer level of government stimulus has played a part in keeping profitability up through 2009 - another stark contrast with the early 90s and early 80s. But I'm not talking here about the very modest stimulus package introduced in November 2008. I'm talking about the massive and very rapid cut in interest rates - not possible in past recessions due to the ERM, and the need to bring down inflation.

There's also the fact that the government went into this recession with real spending - and borrowing - much higher as a share of the economy than anyone had really intended. This inadvertent stimulus - driven by an optimistic view of the long-term sustainable growth of the economy - meant that there was more of a cushion for overall demand than there would have been under more "prudent" policies. That's what I mean when I talk about accident rather than design.

However, both the VAT cut and the "Time to Pay" initiative have shifted more of the cost of the recession onto government revenues - rather than company profit.

It's hard to get solid figures here, but the Treasury claims that this initiative has let more than 150,000 companies spread tax payments worth more than Β£3bn.

Anecdotally, I do hear of a lot of small businesses for whom this has made all the difference - though, of course, it doesn't change the long-term bottom line.

There are specific regulatory changes that also seem to have played a role. For example there's now no balance sheet advantage now to kicking workers into early retirement, because the cost-shifting now has to be clearly noted on the bottom line. (Also company pension funds don't have nice fat surpluses any more to make the shift worth doing.)

More generally, regulations now make it much more onerous for employers to lay off staff. That's hardly the mark of a "flexible" labour market - and it's not being trumpeted by the government today - but I'm sure it has played a role.

Taken together, these regulatory differences have helped transform the experience of this recession for older workers. Last time around, they took the brunt of the adjustment - now it's the young who are getting it in the neck.

However, employer hoarding isn't the whole story. Arguably, workers themselves have made the greatest contribution - by accepting a tight squeeze in pay. As I discussed when the December figures came out, real earnings have taken the brunt of this recession.

Those in work have been accepting little or no pay growth - and those out of work have been taking new jobs which pay less.

As hundreds of thousands of people will testify, companies have laid off workers on a grand scale in the past year - far more than you might guess from the headline change in unemployment.

The difference is explained by a dramatic rise in part-time working - either female partners are going back into the workforce to make up for the lost pay packet, or those full-time workers have taken part-time work instead of staying on the unemployment rolls.

Today's figures show another fall in the number working full-time - it went down by 113,000 over the three months to November, whereas part-time work went up by 99,000 - to a record high of 7.7 million. Of those, over a million were working part-time because they couldn't find a full-time alternative.

That big rise in part-time work explains why hours have fallen more sharply in this recession than in the last. Full-timers are working shorter hours too, but, interestingly, according to Professor Paul Gregg at the University of Bristol, no more than in the past.

But here's the big thing: people are exiting unemployment faster than in past recessions. We have seen a smaller rise in inactivity and long term unemployment than everyone - including the government - expected.

I think there are many reasons for this - including the fact that people were gloomier going into this downturn, and perhaps more willing to take lower paid work than in the past. But the tax and benefit system does appear to have helped.

In relative terms, unemployment benefits - especially for families without kids - are lower than they were in past recessions, and it is harder to qualify for incapacity benefit. Whereas - whatever you think about the bureaucratic downsides of tax credits, in a recession they do make it more attractive for people to take lower paid work. According to the Treasury, in 2008/9, 355,000 families whose income had fallen received on average an extra Β£35 per week in tax credits.

Job centres have changed, too, though this contribution is harder to gauge. From I can certainly attest that they are more "user-friendly" than their 1980s predecessors, where the chairs were chained to the floor and 4-inch screens separated the claimants from the benefit officers. Everyone's a "customer" now, and the system does seem better geared to getting people back into work - even if it's only a short-term job.

Once again - I think the macro aspect is the key here. One of the reasons those job centres have jobs to give is the public sector's kept hiring - the number of jobs in the public sector rose by more than 90,000 between the third quarter of 2008 and the third quarter of 2009.

It's hard to get comparable figures, but in an equivalent period during 1991-92, public sector employment rose by just 6,000. At Hertford, employment in job centres across the district had risen by 60% since the recession began.

Of course, this cannot last. We know that both the spending and the public sector jobs are going to be squeezed in the next few years. In fact, most of the new people working at job centres and the like are on fixed contracts which run out in April of 2011.

There's the rub. The government may be able to claim some credit for the curious behaviour of the labour market in this recession. But - to coin a phrase - we can't go on like this. All of this only adds up if the economy comes back strongly in the next year or two - so that employers can hold on to the workers they've fought to retain, and public borrowing can stop taking so much of the strain.

And, in the meantime, you have younger people taking far more than their fair share of the rise in unemployment that has occurred.

It's true that there are full-time students included in the headline figures for youth unemployment. But many others - drifting between inactivity, casual work, and intermittent school, aren't being counted at all.

Professor Gregg thinks the decline in employment among 16-17-year-olds and 16-24-year-olds is storing up huge problems for the future.

So yes, it's good news for all of us - not just the government - that unemployment is flattening out. But we're not out of the woods yet.

There's been talk of a truce between the Bank of England governor and the chancellor. I'd be surprised if that were true. If we've learned anything in the past year it's that both men have a tendency to go their own way.

But reading Mervyn King's speech at Exeter University tonight - and - the prime minister would be forgiven for suspecting a tacit conspiracy between them, to box in No 10.

The had it that Alistair Darling has agreed to talk tougher on the deficit - in exchange for Mervyn King talking about it not at all. But King shows no such reticence in tonight's speech - although he does choose to speak through the words of another.

It's worth quoting the relevant paragraph in full:

"A key element in raising the national saving rate is the elimination over time of the structural deficit in the public finances. Of course, there is a perfectly sensible debate about the appropriate timing of the withdrawal of the temporary fiscal stimulus as the economy recovers. Some has in fact already been withdrawn with the return of the standard rate of VAT to 17.5% at the beginning of the month. But uncertainty about how and when fiscal policy will respond has a direct bearing on monetary policy. And markets can be unforgiving.
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"As Federal Reserve Chairman Bernanke said recently about the similar fiscal position in the United States, "near-term challenges must not be allowed to hinder timely consideration of the steps needed to address fiscal imbalances. Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth". The Chancellor has made clear that the Spring Budget provides the opportunity to do precisely that."

Some may consider the remarks about inflation to be more newsworthy - in effect, he reminded us all that the headline inflation rate could be high for some time, as the effects of the VAT rise and the weak pound work their way through the system. For this and other reasons, he said "the patience of UK households is likely to be sorely tried over the next couple of years".

For sure, it's not news that the governor thinks more details are needed on how exactly the government plans to cut the deficit. He doesn't repeat here any suggestion that the cutting itself should be more ambitious than the plan sketched out by the chancellor. In that sense he is holding his fire.

In fact, these remarks are entirely consistent with the chancellor's words to the FT - and earlier in the new year, in which he said he plans to provide more detail in his budget about where the spending axe will fall.

The two are indeed singing from the same hymn sheet. At least for now. It's just not the same hymn sheet as Gordon Brown.

Disappointed but not surprised. That's the appropriate reaction to the eye-popping .

We knew that inflation would jump in these few months, thanks to the distorting effect of the VAT cut in December of 2008. When the temporary VAT cut was announced in late 2008, Mervyn King said it should guarantee a happy Christmas for 2009, as shoppers rushed to buy before prices went back up this month.

He also will have known that it was going to play havoc with his inflation target.

To judge by the Christmas returns announced in the past few weeks, his forecast came true for many retailers. And it looks as though some of them took the opportunity to put their prices up a month early (or at least not to discount as heavily as they did in that gloomy Christmas of 2008).

All told, Capital Economics calculates that about three-quarters of the headline rise in the CPI from 1.9% in November to 2.9% in December is due to the "level" effect of last year's VAT cut. The fact that oil prices were falling sharply at the end of 2008 had an impact as well.

It's not over yet. We can expect the rise back to 17.5% in January to push the headline rate up even higher, perhaps to 3.5% or more, before falling back.

If - or when - inflation goes over 3%, it will be amusing to read Mr King's letter to the chancellor, explaining how the chancellor's own policy has caused the Bank to miss the target the government set for the MPC. But for the Bank, the amusement value may be somewhat diluted by the poor timing.

On 4 February, the MPC will vote on whether to continue with their quantitative easing policy or put it on hold. Perhaps thankfully, that will be well before the January CPI figures come out on 16 Feb, and the MPC won't have any inside information on what the January number will be. But you can expect them to fully factor it into their inflation report forecasts, which we'll see a week later.

As I've discussed before, even if the Bank's policy makers opt to stop buying gilts for a while, they will be at pains to signal to the markets - and all of us - that it doesn't necessarily mean the end of the policy, or that they are expecting a strong recovery.

Explaining their actions will be hard enough, without also having to explain why inflation is about to head over 3%.

But at least this inconvenient jump in inflation will reverse itself in a few months. The challenge of engineering a solid recovery in the broader economy and a smooth exit from QE is going to weigh on the Bank for rather longer.

One more month, then it's make-your-mind-up time. Today, the Bank of England's policy-makers decided to leave everything as it was. It would have been a shock if they had done anything else.

But on 4 February, it will be a different story. Then, the committee members will have to decide whether to expand one more time the asset purchase programme fondly known as QE - or, as so many people expect, put it on pause. Crucially, they will also have to work out how they are going to explain it.

It's probably never been more important for the Bank of England to provide a lucid explanation of its actions - or more difficult.

We tend to focus on the gilt market piece of this. Clearly the MPC wants to avoid a big bond market sell-off in reaction to a pause in QE. If they indeed put the policy on hold, they will want to find a form of words that emphasises the conditional nature of the decision.

There may be no way to prevent City headlines proclaiming that QE is over. But you can expect them to do their best. Maybe they could have the statement bid "au revoir to QE, but not necessarily farewell". Then again, maybe not.

But, in my view, there's a much bigger problem with explaining the MPC's actions, which is that even if they all agree that a pause is the right way forward, they won't necessarily agree on why.

The "textbook" reason to pause would be that Β£200bn in asset purchases is enough. It may not be obvious right now, but that's just because the lead times are even more "long and variable" (in Milton Friedman's phrase) than usual.

On that view, putting even more cash into the economy could risk further distortion of the financial markets - and could even be counter-productive if it raises market fears of asset bubbles and/or excess inflation down the road, pushing up long-term interest rates as a result. All the MPC needs to is sit back and watch, as the fairly strong recovery forecast in their latest November Inflation Report takes place.

To repeat, this is the "textbook" reason to pause. MPC members refer to the same textbook when they give speeches explaining how QE has worked. David Miles ran through the litany, in passing, in about the future size of the UK banking system just before Christmas:

"Since QE began corporate bond spreads have fallen sharply; for both investment-grade and non-investment-grade bonds, to their lowest levels since September 2008. And since the beginning of the QE policy, the FTSE All-Share Index has increased by about 45%."

"Falling corporate bond spreads and rising stock prices have encouraged companies to raise funds in the capital markets. Cumulative corporate bond and equity issuance in 2009 has been much stronger than on average during 2003-2008."

Here endeth the lesson. But even if QE has achieved all of this, you can still view it as a deep disappointment.

David Miles goes on to mention that since the beginning of 2009, the British non-bank corporate sector has repaid Β£45.2bn in bank debt - more than the net Β£38.4bn that they have raised on the capital markets.

Monetarists like Roger Bootle, firm supporters of the policy, have been particularly dismayed that, nine months on, lending across the economy is still so weak. As he says in a note today:

"[T]here is still little evidence that the MPC's policy of quantitative easing (QE) is having the desired effect on money and credit. At its last meeting, the committee deemed the rate of broad money growth 'disappointing'. That's an understatement - the money multipliers have collapsed."

As I said, he's a fan of QE. He thinks that all this is a reason for the MPC to offer the economy another "shot in the arm" next month. The policy-makers may decide to follow his advice.

But, as I suggested in my pre-Christmas post, there will be some on the MPC who favour a pause, not because they are sure that the policy has worked, but because they think it quite possible that it will not.

I know that at least one member of the committee thinks that if Β£200bn hasn't worked, it's hard to believe that another 25 or 50 billion will make all the difference.

In that latest Inflation Report, the Bank was quite clear about the downside risks to the "central projection" for a decent recovery. True, the charts showed the single most likely outcome, in the Bank's view, was economic growth of more than 4% in 2011. But the mean - average - forecast was around 3%, because there was still so much in the recovery scenario that could go wrong.

And top of the list of things that could go wrong is that QE does not have the larger long-term effect on the economy that the textbook hopes for and fondly expects. The traditional channels for lending in our our post-crunch economy might simply be too bunged up for QE to turn things around.

In that same post, I said the Bank and the Treasury were quietly thinking about a Plan B. 4 February will not be the day for rolling it out. The textbook scenario could yet materialise.

As I've said, if they decide not to authorise further purchases of assets, they will want to explain that a pause in QE does not necessarily mean the end.

What they will not want to explain - in so many words - is that the end of the policy will not necessarily mean that it has worked.

Few incoming US presidents have faced a first year in office as challenging as President Obama's. Come Christmas, most commentators were saying he'd come through it with a decent grade. He gave himself a "B plus". But 2010 is going to be no picnic either.

Last January, confidence in US banks was at a low ebb, and serious commentators were quoting the odds on another Great Depression. Fixing the economy was "job one". But then there were the small matters of Afghanistan and Iraq to consider, not to mention fulfilling his election promise to overhaul the entire US health system.

There were many who said that the healthcare bill should have been deferred - to let Obama and his advisors focus all their energies on the economy and the financial system. The health battle certainly sapped the administration's political capital over the course of the year, but when the healthcare bill was passed in the Senate on Christmas Eve the doubters seem to have been proved wrong.

The legislation that is likely to come out of the congressional wrangling of the next few weeks - as the Senate and House bills are reconciled - have plenty of bad features. Economists are particularly dismayed by the very limited effort to restrain future healthcare costs.

However, even the critics - and there are many, particularly among Republicans, only one of whom voted for either bill - agree that it's the most significant piece of US social legislation in a generation. And it is very nearly on his desk ready to sign. What is more, the economy is growing again, in no small part thanks to the administration's stimulus package. That is not a bad score card for year one.

But he's not taking much credit from that into year two.

At least in 2009 there was some agreement that difficult times called for difficult measures. Put another way, the economics and the politics pointed in (roughly) the same direction. Voters thought healthcare reform and the economy were the number one priorities, and they were broadly in favour of the government spending some money to fix them.

Now the opposite is true. The federal budget deficit last year was $1.4 trillion - 10% of GDP. Polls suggest the public favours balancing the books immediately - by wide margins, even as they punish the administration for failing to tackle unemployment.

As I've discussed before, employment in the US has fallen further, faster, in this recession than in most other advanced economies. Many of those job losses may have already been "baked in the cake" - the lagged effect of what happened in 2008, before Obama took office.

But foolishly, the Obama administration predicted a year ago that passing the stimulus package would keep the jobless rate below 8%. Now it's 10%, he's paying the price.

The relatively slow pace of job creation in the US goes back to the last recession but one. recently that American private sector employment is now slightly lower than it was at the start of the 21st century - the first decade on record when that has occurred.

There's plenty of debate about the reasons for that, and even greater uncertainty over the federal government's ability to achieve lasting change in the way the US labour market works. But one thing we know for sure - it's hard to respond to the employment situation right now without spending money.

For all the talk of spending restraint, the House of Representatives recently passed a four month extension of unemployment insurance and Congress and the president are committed to producing a new "job creation" package in the next few weeks.
And yet, that is exactly what the public say they don't want. In the the dilemma rather well:

"Thus the Democrats' predicament: high unemployment is making them unpopular, but the only steps they can take to reduce unemployment are themselves unpopular. If the Democrats actually gave the people what they say they want - $1.4 trillion in spending cuts and/or tax hikes to eliminate the 2010 deficit - Republicans would capture approximately 100 percent of Congress in the next election."

British politicians aren't the only ones facing a year of "tough choices".

It wasn't so long ago that the prime minister was drawing battles lines for the election between Labour investment and "Tory cuts". Now, it's Conservative profligacy versus Labour austerity and restraint.

Or that's today's message, anyway. No doubt there will be another worthy skirmish between the major parties tomorrow (sigh).

that the Tories have made pledges to raise spending or cut taxes worth at least Β£45bn a year by the end of the next parliament - but offered only Β£11bn in tax rises and spending cuts to pay for them.

If you don't believe him, he's got a 150-page document to show you, costing each and every Tory aspiration.

I'm sure the numbers are right, as far as they go.

But - with apologies to the poor souls who had to come up with all of those pages - the numbers aren't the issue. The issue is whether any of this is Tory policy, and whether any of it would actually be implemented by any Conservative administration on the timetable that Darling's document suggests.

The Conservatives have been quick to jump on the "dodgy dossier" - there's a detailed rebuttal due to land in my inbox any minute. David Cameron claimed to have seen at least Β£11bn wrong with the paper in the first seconds of looking at it.

For example, to get the Β£45bn figure. Labour has thrown in nearly Β£5bn in tax cuts for married couples, and another Β£5bn from abolishing stamp duty on shares. Yet the Tories have have not made any detailed policy pledges in either area, as is perhaps demonstrated by the fact that the Labour researchers only throw these tax cuts into the last year of a putative Tory parliament in their calculations.

This happens rather a lot in the course of those 150 pages: not having a firm commitment from any minister, the authors assume that a given tax cut or spending increase will only happen in 2014-15. The result is the so-called "credibility gap" goes up from Β£13bn in 2013-14 to Β£34bn in just one year.

Labour says this shows them being "generous" with the Conservatives - because the cost would be that much greater if the changes were assumed to be implemented any earlier. You could also say it shows the arbitrariness of the entire exercise.

I don't think people will come away from this thinking: "gosh, I can't vote Tory - they're going to be throwing too much tax-payer money around". Labour wouldn't want anyone to think that either.

But it's true that there have been a number of not-quite-pledges in the rhetoric of senior Tories over the past year - like the talk of tax cuts for married couples, or reversing the 50p rate for top earners. Here and elsewhere, they have wanted to gain credit for aspiration, without having to pay for it.

Yet, to coin a phrase, it's not the thought that counts.

The only message that Labour wanted to get across with this document is that you can't have your cake and cut it too. To the extent that the Conservatives are now forced to clarify what they have and have not promised for a Tory first term, I suspect Labour will consider this first big day of the 2010 campaign a success.

In fact, no sooner had I written those words than the Chief Secretary of the Treasury, Liam Byrne, called me to say he was "not unhappy" that the Tory leader had already come out denying that these were formal pledges. It's a question of trust, he said, which Labour is planning to keep running with, right through the next few months.

Which is all fine and dandy. But there are risks to this particular credibility game.

The first is that, while voters are unlikely ever to think of the Conservatives as profligate spenders, all the talk of uncosted pledges makes it that much harder for Labour to paint the Conservatives as the party of reckless spending cuts (whatever the true differences between the parties).

The other is that pre-election slanging matches involving big headline numbers can come back to haunt you.

At the last election, Labour said that Conservative policies would involve a Β£35bn cut in spending on public services, and spent most of the campaign going on about it. But using the same (rather flawed) methodology, the IFS has calculated that Labour now plans a cut of more than Β£80bn.

In the coming months, you can bank on the Conservatives to make as much hay with that big headline number as they possibly can.