The keen wind of recession whistled down Hope Street last week. In Liverpool, the question on everybody's lips was simple: would it blow away the city's dreams of turning its year as Europe's Capital of Culture into a decade of regeneration? What price those millions sunk into great theatre, street carnival, cutting-edge art and Simon Rattle concerts? Were they simply to be swept out by economic forces that no one had predicted?

For those of us on the government panel that chose the city from 12 rivals five years ago, the issue has a certain urgency. It was an article of faith for us that the arts should hold the key to helping a city to transform its fortunes. By investing in culture Liverpool would invest in its future, since building audiences and attracting visitors was, in itself, energising.

We had all been brought up on the rumbustious story of Glasgow's 1990 bid, which took a grim, declining city and made it, for a year, a place where everything seemed to happen. We knew about the Guggenheim Museum in Bilbao, the Manchester Commonwealth Games and the Edinburgh Festival. But Liverpool now faced the ultimate test of those high-minded ambitions.

In the Everyman Theatre, watching Pete Postlethwaite's heart-rending Lear, I wondered if we could indeed “shake all cares and business from our age, conferring them on younger strengths”, or whether his gloomy prognostication that “nothing will come of nothing” was closer to the truth.

What is certain, as Liverpool approaches the final weeks of its cultural year, is that the city has more than lived up to the expectations that it set for itself. It has mounted a series of stunning events, such as the opening concert, that drew 40,000 people on to St George's Plateau; the giant spider that crawled down the side of a tower block to usher in five days of street performances; the Berlin Philharmonic, the Gustav Klimt exhibition, the ballet and Shakespeare - all have drawn visitors from outside, and, by the end of July, it was estimated that six million people had seen at least one cultural event in Liverpool; that could double by the end of the year.

But what is the evidence that culture can do more than provide a few memorable experiences, the odd moment of inspiration, a joyful distraction from the harsh severity of life? Those who argue that it can be instrumental in changing permanently the fortunes of a city or country sometimes struggle to make their case, because it is ultimately hard to distinguish between the impact of the arts and the complex economic factors that work together to turn decline into growth. In 1990 Glasgow failed to turn its year into sustained success, because it thought that the acclaim would be enough to get momentum going; it was wrong, and only recently has it found the key to improvement. Bilbao, on the other hand, used the international success of the Guggenheim Museum to build on a growing economy that continues to attract investment.

Smaller places make the case more persuasively. Hay-on-Wye's book festival has been the making of the town; in Scotland, Wigtown, a sad and declining place on the Solway Firth, decided to do the same, and has seen its fortunes transformed, using its annual book festival to draw visitors and to encourage economic expansion; rarely can the printed word have wrought such dramatic change.

Whether larger cities can do the same remains a moot point. The track record of Europe's capitals of culture has been patchy at best, and some have found themselves stranded after spending millions in their year of glory. It would be hard to claim that Lille, Cork, Patras or Sibiu changed significantly as a result of winning the title. As to whether the arts can act as a bulwark in the teeth of recession, that remains even harder to prove.

What is certain is that recessions do not mean the end of spending, and at times of hardship, culture may play at least as important a part in raising the profile of a city and drawing in the outside world as a lavish shopping mall. It must, however, go hand in hand with a clear-sighted plan for economic growth.

The signs for Liverpool are encouraging so far. “Legacy” has become a key word, repeated endlessly by officials and councillors alike. So developments already in hand will be carried forward - the Museum of Liverpool, to open in 2010; the canal that will link the newly opened Pierhead to Leeds, and bring narrow boats into the city centre; the underground transport system; the linking of the King's Dock and the huge new Liverpool One shopping centre; the refurbishment of rundown housing.

There is one other gain. Liverpool's year in the sun has instilled a sense of confidence in its people that is almost palpable. “This has been about us, and not anyone else,” Phil Redmond, Liverpool's cultural chief, told me. “We didn't always have this confidence, but we do now.”

Unquantified, uncosted, impossible to measure, that self-esteem may prove, in the end, to be every bit as important for Liverpool as the millions invested in its year of memorable celebration.

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