Lord Adair Turner yesterday lambasted the weak regulatory rules that contributed to the financial crisis, and warned the global economy was in danger of a deflationary spiral.

The head of the Financial Services Authority (FSA) echoed similar comments made by David Cameron when he claimed, ‘We are far from out of this crisis: it is far deeper and more difficult to escape than many of us initially thought.’

Turner was giving a speech at the Centre for Financial Studies in Frankfurt, focused on debt and deleveraging in the wake of the economic crisis.

He labeled the regulatory framework of the financial system pre-crisis as ‘woefully deficient’ and blamed the instability of the system as ‘a result of the cumulative effect of several decades of profound intellectual error and faulty policy design’.

He also reiterated the fear that if we all, individually and globally, attempted to escape recession ‘just by saving more, borrowing less and deleveraging, by paying off our debts, we will produce a still deeper recession’.

His comments came as the Eurozone sovereign debt crisis escalated, with Spain the latest country to see its bond yields approach the 7 per cent mark that could require a bailout.

After referring to the Eurozone as a flawed construct, Turner stated, ‘The Eurozone architecture needs to combine tight political and market discipline of subsidiary sovereign debt with the creation of Eurobonds, and with an acceptance that if necessary the ECB (European Central Bank) can conduct quantitative easing operations at the Eurozone aggregate level.’

The Eurobonds suggestion is likely to meet with mixed reactions because while European Commission president Jose Barroso yesterday voiced his support for such a scheme, Angela Merkel remained vehemently opposed to
the idea.

Such radical reforms and policy actions are also reflected in Turner's calls for changes in the structure of the financial system.

He said, ‘Private leverage and bank maturity transformation has to be constrained by capital and liquidity standards far higher than those which had developed pre-crisis. We must not divert from the Basel III reforms. And we need powerful macro-prudential levers to contain credit and asset price cycles.’