Financial inculsion

FINANCIAL inclusion is a process of ensuring access to appropriate financial products and services needed by all sections of the society in general and vulnerable groups in particular,at an affordabl e cost, in a fair and transparent manner,by regulated, mainstream institutional pl ayers.The objective of financial inclusion is to transform the lives of poor people by providing them access to bankingfinance and ena bling them to generate stable income.
The government and RBI have been making concerted ef forts to extend financial inclusion across the country. The measures initiated by the government include nationalisation of banks starting from the State Bank of India in 1955, and other banks in 1969 and 1980; having a network of rural cooperati ves and regional rural banks; and liberal loan melas of the 1970s and 1980s .RBI has been making ef forts through policies like the priority sector lending since the early 1970s.In recent years,efforts were made from November 2005 when the scheme of ‘no-frills’ account was announced but the formal thrust came from 2008 after the adoptionof report of the Committee on Financial Inclusion (GOI, 2008). RBI’s cautiouspolicy on financial inclusion has been to ensure a balancebetween equityand efficiency as well as ensuring financial health of banks and preserving their lending capacities.RBI has adopted a bank-led approach and has been neutral to the use of technolo gy by the individualbanks.It is reported that as a consequence of these measures ,i n January 2013, banking facility had reached more than two lakh villa ges with nearly 80% through the business correspondent model, and nearly 10 crore savings bank deposit accounts including erstwhile no-frill accounts had been opened in the last three years,according to RBI. The achievementsseem commendable thoughRBI is aware that financial inclusion still remains a substantially unfinished agenda.
The public sector banks,traditionally involved in social banking, are playing an important role in extending bankingto the rural sector.Some of the banks benefit frominstitutional memory as they had pigmy, honey deposit or jeevan nidhi schemes and now some of those accounts are migrating to the nofrill or basic saving accounts.
The majorconstraintis low number of transactions and low volume of turnover. A key reason for low level of transactionsin such accountsamongst others is that rural people think that these accounts are specifically meant for one-sided transfer from the go vernment and that in the case of certain transfers,government rule requires that if balancesare maintainedin these accounts,then after 90 days,such balances will be remitted back to the government as unused funds.
The servicepr ovidersare imparting training to business cor respondents (BCs)/agents(BCAs)rangingfroma few weeks to a few months and monthly remuneration ranges from R1,000 to R5,000.SomeBCs/BCAsare specifically recruited for the purpose while others are generally shopkeepers and housewives who do this as an additional job. As the attritionrate of thoseBCs/BCAs especially recruited for the purpose ,because of low salary and low transactions,is high, man mana gement as-

Frequent changes in implementation strategy hampers focused work in the specific area and the existing infrastructure gets overstretched well particular ly withhand-helddevices due to constraintof terrain and connectivity.BCs sometimes resort to climbing trees to get connectivity.There are cases where due to connectivity problem, there have beendata transfer failures. A number of instructions from different sources ,sometimesfrom the government while normally through RBI, tend to confuse the bankers .Also,frequent changes in implementationstrategy hampers focused work in the specific area and the existing infrastructure gets overstretched.villages with less than 2,000 population. The implementationof electronicbenefit scheme further stressed the existing infrastructur e. In somecases ,there was a shiftin the area of operationsbetween different banks which implied that the investmentmadein that area was lost. The private sector banks are also contributing to the ef fort but there are instances where they are charged different rates by the service providers adding to their cost of operations. The amountof credit expansionunder financial inclusion is low as some bankersfear aboutthele vel of NPAsand perform underloomingshadow of loan melas/waivers culture, especially during election times .In any case,money lendersare securely ensconcedas credit disbursalis generally nottakingplace throughtheBCs/BCAs.Also,there is no evidence that the banking route has begun to be used for remittancepurposes. An important contribution of this policy has been that a banking culture is beginning to develop in rural areas andsomebankerspercei ve it as a litmus test to eventually establish a physical branch. This augurs well for financial inclusion. However,key questions that remain to be addressed are: to what extent rural poor perceive that access to banking facility has been created? How would they like to make use of it and what are the key constraints? Has it made any impact on their li velihood?

SoROS VS sINN

Hans-Werner Sinn has deliberately distorted and obfuscated my argument. I was arguing that the current state of integration within the eurozone is inadequate: the euro will work only if the bulk of the national debts are financed by Eurobonds and the banking system is regulated by institutions that create a level playing field within the eurozone.

Allowing the bulk of outstanding national debts to be converted into Eurobonds would work wonders. It would greatly facilitate the creation of an effective banking union, and it would allow member states to undertake their own structural reforms in a more benign environment. Countries that fail to implement the necessary reforms would become permanent pockets of poverty and dependency, much like Italy’s Mezzogiorno region today.

If Germany and other creditor countries are unwilling to accept the contingent liabilities that Eurobonds entail, as they are today, they should step aside, leave the euro by amicable agreement, and allow the rest of the eurozone to issue Eurobonds. The bonds would compare favorably with the government bonds of countries like the United States, the United Kingdom, and Japan, because the euro would depreciate, the shrunken eurozone would become competitive even with Germany, and its debt burden would fall as its economy grew.

But Germany would be ill-advised to leave the euro. The liabilities that it would incur by agreeing to Eurobonds are contingent on a default – the probability of which would be eliminated by the introduction of Eurobonds. Germany would actually benefit from the so-called periphery countries’ recovery. By contrast, were Germany to leave the eurozone, it would suffer from an overvalued currency and from losses on its euro-denominated assets.

Whether Germany agrees to Eurobonds or leaves the euro, either choice would be infinitely preferable to the current state of affairs. The current arrangements allow Germany to pursue its narrowly conceived national interests but are pushing the eurozone as a whole into a long-lasting depression that will affect Germany as well.

Germany is advocating a reduction in budget deficits while pursuing an orthodox monetary policy whose sole objective is to control inflation. This causes GDPs to fall and debt ratios to rise, hurting the heavily indebted countries, which pay high risk premiums, more than countries with better credit ratings, because it renders the former countries’ debt unsustainable. From time to time, they need to be rescued, and Germany always does what it must – but only that and no more – to save the euro; as soon as the crisis abates, German leaders start to whittle down the promises they have made. So the austerity policy championed by Germany perpetuates the crisis that puts Germany in charge of policy.

Japan has adhered to the monetary doctrine advocated by Germany, and it has experienced 25 years of stagnation, despite engaging in occasional fiscal stimulus. It has now changed sides and embraced quantitative easing on an unprecedented scale. Europe is entering on a course from which Japan is desperate to escape. And, while Japan is a country with a long, unified history, and thus could survive a quarter-century of stagnation, the European Union is an incomplete association of sovereign states that is unlikely to withstand a similar experience.

There is no escaping the conclusion that current policies are ill-conceived. They do not even serve Germany’s narrow national self-interest, because the results are politically and humanly intolerable; eventually they will not be tolerated. There is a real danger that the euro will destroy the EU and leave Europe seething with resentments and unsettled claims. The danger may not be imminent, but the later it happens the worse the consequences. That is not in Germany’s interest.

Sinn sidesteps this argument by claiming that there is no legal basis for compelling Germany to choose between agreeing to Eurobonds or leaving the euro. He suggests that, if anybody ought to leave the euro, it is the Mediterranean countries, which should devalue their currencies. That is a recipe for disaster. They would have to default on their debts, precipitating global financial turmoil that may be beyond the capacity of authorities to contain.

The heavily indebted countries must channel the rising their citizens’ discontent into a more constructive channel by coming together and calling on Germany to make the choice. The newly formed Italian government is well placed to lead such an effort. As I have shown, Italy would be infinitely better off whatever Germany decides. And, if Germany fails to respond, it would have to bear the responsibility for the consequences.

I am sure that Germany does not want to be responsible for the collapse of the European Union. It did not seek to dominate Europe and is unwilling to accept the responsibilities and contingent liabilities that go with such a position. That is one of the reasons for the current crisis. But willy-nilly Germany has been thrust into a position of leadership. All of Europe would benefit if Germany assumed the role of a benevolent leader that takes into account not only its narrow self-interest, but also the interests of the rest of Europe – a role similar to that played by the US in the global financial system after World War II, and by Germany itself prior to its reunification.

Robert J. Samuelson Samuelson writes a weekly column on economics.

An insistent question of our time is, how much government debt is too much. Is there some debt level that becomes crushing as opposed to merely costly? The controversy over research by economists Carmen Reinhart and Kenneth Rogoff shows how explosive the issue is. They suggested that debt exceeding 90 percent of a country’s economy (gross domestic product, or GDP) corresponds to a sharp drop in economic growth. But their work is being challenged by three other economists, who say that Reinhart and Rogoff made basic errors that invalidate their results.
This dispute, which would normally be confined to obscure scholarly journals, has assumed greater visibility because it involves the debate over deficit spending. One group of economists and policymakers argues that annual deficits must be cut because they’re creating — or have already created — dangerous debt levels. Another group contends that large deficits are needed to propel stronger recoveries and reduce huge unemployment.

It’s “austerity” versus “stimulus.” If debt exceeding 90 percent of GDP is hazardous, then the case for austerity seems stronger. (Already many countries exceed or are approaching the 90 percent mark.) If not, deficit spending remains a possible temporary spur. Which is it? Although the newly discovered errors in Reinhart and Rogoff’s 2010 paper (“Growth in a Time of Debt”) are embarrassing, they do not alter one of its main conclusions: High debt and low economic growth often go together.
Glance at the table below. It compares the annual economic growth rates of 20 advanced countries from 1945 to 2009 at various debt levels. The debt-to-GDP levels are given in the left-hand column. The next two columns show the annual economic growth rates estimated by Reinhart and Rogoff and then by the challenging economists from the University of Massachusetts. (They are Thomas Herndon, Michael Ash and Robert Pollin; Reinhart and Rogoff are both at Harvard.)

Debt/GDP	Annual economic growth, 1945-2009
	Reinhart/Rogoff	UMass economists
0-30%	4.1%	4.2%
30-60	2.8	3.1
60-90	2.8	3.2
90+	-0.1	2.2

After recalculating the Reinhart/Rogoff data, the UMass economists confirm that high debt implies lower economic growth. At the highest debt levels, growth is half what it is at the lowest debt levels. Whether debt causes low growth or merely reflects economic weakness is undetermined. But the UMass economists debunk the notion that growth collapses when debt hits 90 percent of GDP. One problem with the Reinhart/Rogoff study: A coding error excluded five countries — Australia, Austria, Belgium, Canada and Denmark — from the calculations.
Still, these modest mistakes have inspired outlandish allegations. “Did an Excel coding error destroy the economies of the Western world?” asked economist Paul Krugman in his New York Times column. Well, no. The Reinhart/Rogoff paper was published in January 2010, more than a year after Lehman Brothers’ failure and the onset of the financial crisis. At that point, all the ingredients of Europe’s debt crisis (housing bubbles in Spain and Ireland, huge budget deficits in Greece, weak banks throughout the continent) were also in place.
“How much unemployment was caused by Reinhart and Rogoff’s arithmetic mistake? That’s the question millions will be asking,” suggests Dean Baker of the Center for Economic and Policy Research, a left-leaning think tank. Actually, millions won’t ask, and the answer is: probably none. History may or may not judge Europe’s austerity a mistake, but German Chancellor Angela Merkel — its chief advocate — was not taking her cues from Reinhart and Rogoff. Her policies reflect strongly held German beliefs and values.
Something similar can be said of British Prime Minister David Cameron. He took office in May 2010 when the Reinhart/Rogoff paper still enjoyed standard academic obscurity. Cameron’s decision to make deep cuts in Britain’s budget deficits, then running about 10 percent of GDP, was controversial. At most, Reinhart/Rogoff provided some intellectual cover for policies that would have occurred anyway.
The charge that Reinhart and Rogoff cooked their numbers to support a preconceived policy position is contradicted by their 2012 paper (“Public Debt Overhangs: Advanced-Economy Episodes Since 1800”). It showed that results varied by country and that the slowdown at the 90 percent debt/GDP level was generally more gradual. As for American “austerity,” there hasn’t been much. Though declining, budget deficits remain large and the Federal Reserve’s monetary policy remains loose.
What’s sobering about this brawl is that it settles nothing. With some exceptions, most advanced countries, including the United States, seem caught in a similar trap. Their debt/GDP ratios are high and rising, so it’s hard to embrace massive deficit-financed stimulus programs. But austerity programs of spending cuts and tax increases may dampen growth and raise debt/GDP ratios. There is no obvious exit from this dilemma except a burst of spontaneous growth, which is conspicuous by its absence.

Water

Jim Rogers, the investor who foresaw the start of a commodity rally in 1999, said he was “extremely opti-

mistic” about investing in water amid a scarcity of supply in countries from India to the US. “If you can find ways to

invest in water, you will be extremely rich because we do have a serious water problem in many parts of the world

like India, China, the south-western part of the US, and west of the Red Sea,” Rogers, chairman of Rogers Holdings,

told reporters at his home in Singapore today. The world’s growing food demand will create a pro-

gressive shortage in supplies, according to the United Nations Food and Agriculture Organization.

Water used in farming will rise 70 to 90 per cent through 2050 as food demand doubles over the

same period in emerging countries, Pasquale Steduto, principal officer of the FAO’s water development and

management unit, said in March.

“There are some companies out there that clean and transport water,” Rogers said, adding that he has owned

shares in Singapore’s water treatment company, HyfluxLtd, for a few years.

“Find one with good management and invest in it andyou’ll be rich.

GOLDY GOLD

The reaction to Gold’s crash has produced some astonishing rationalizations. The refusal to acknowledge basic trading facts leads us to recognize that Gold bugs and traders have very specific rules that they MUST follow. These social conventions look less like a debate about asset classes and more like a religious cult.
The advocates for any sort of investing thesis have their rules, metrics, heuristics and biases. Here are the rules we teased out for the Gold Trade:

The Rules of Goldbuggery
1. Gold is a Currency: This is rule number 1. It is not a decorative or industrial metal, it is a permanent store of value, as dictated by Greeks in Lydia around 700 B.C. And, it shall be ever thus.
2. The price of gold cannot fall, it can only be manipulated lower: When gold’s price falls, it is an unnatural act. It can only occur as the result of an international cabal of Central Bankers and politicians. Its a conspiracy, and we know who the guilty parties are.
3. If the price of gold is rising, it is doing so despite enormous and desperate efforts by manipulators to prevent the rise: This is the corollary to the prior Rule of Gold manipulation. Gold runs up despite the overwhelming opposition to it.
4. The world MUST return to the Gold Standard one day:  It is inevitable that we will return to a Gold Standard. We all know this to be true. When we compare the size of the money supply to past amounts when there was a Gold Standard, we can derive prices of Gold in the $7,000, $10,000 even $15,000. Hence, we know its cheap even at $2,000.
5. Central Bankers are printing money relentlessly, and this can only drive Gold prices higher: NOTE: You must ignore, for the moment, that Gold has not gone higher for the past 2 years as Central Banks around the world have ramped up QE. This only means that ultimately, Gold will go much much higher.
6. Gold works whether the economy is good or bad: When we have a red hot economy, Gold is your hedge against inflation. When we have a bad economy, Gold is a safe harbor against collapse. It is a one way trade that never fails!
7. Gold will survive after the world economy crumbles: Gold is the ultimate currency, as it has a value that will survive even after the whole world tumbles around you. Get yourself some gold coins and a Glock and you will be just fine when the whole world goes to shit. We welcome the era envisioned in the movie Mad Max.
8. Never admit that Gold is essentially a sucker’s bet: Never discuss how in the last century, gold has run up only be to trounced in repeated massive sell offs (always blame rule #2 for this). Do not discuss how this has happened in 1915-20, 1941, 1947, 1951-66, 1974-76 1981, 1983-85, 1987-2000 and 2008.
9. Gold is a rejection of government, and their control of fiat money and finance: There are no printing presses that produce gold, it is finite, natural and God created. How much we scrape out of the ground each year is limited, and the only variable to the old equation. (Just ignore Man’s natural tendency to organize into to City-States over the past 12,000 years).
10. All Gold discussions must contain ominous macro forecasts: Your description of why Gold is going higher must consist of spurious correlations, unprovable predictions, and a guarded expectation of bad things in the future. Avoid empirical data at all costs.
11. Gold is always rallying in one currency or another: Sure, it may be down 30% in Dollars, the reserve currency it is priced in, but you can always find a currency falling faster than it does and claim you own it in that denomination. Last week, it was up in Japanese Yen. This week, it is up in Zimbabwe dollars.
12. China & India know the value of Gold; the Western world does not: The massive buying of gold by consumers in Chindia reflects the culture, intelligence and investing savvy of the people in these countries. The West doesn’t get it, and it is their loss.
Bonus rule: Never admit Gold might be falling because it trades on human emotions and psychology and has no intrinsic value whatsoever.

The enormous amounts of dollars involved in the Gold trade has attracted all manner of charlatans and frauds to the Gold trade. Although this list can help you separate the true believers from the criminals, time has proven them to be both are enormous money losers.
Ignore the risks of being a gold bug at great peril to your portfolio . . .

Gold baby gold rock n roll

The case of gold (GLD), circumstances are far from clear. After a decade of marching higher and outperforming just about every other asset class, the precious metal has been in a slow and steady decline since October.

Since global markets are in a state of rapid change; it's not unreasonable to think that sentiment in gold has changed significantly and perhaps permanently.

In cases such as these, where there are both strong bullish and bearish arguments to be made, pros often turn to the charts for insights.

Mad Money host Jim Cramer turned to analysis provided by Carley Garner, the co-founder of DeCarley Trading, the author of A Trader's First Book on Commodities and a Cramer colleague at TheStreet.com.

According to Garner the gold bulls may have the last laugh.
Looking at something called the Commodity Futures Trading Commission's Commitment of Traders Report, Garner has identified a positive pattern.

The latest report shows that large speculators are now holding the smallest net long position in gold since mid-2012. The last time big money trimmed their positions by this magnitude, gold shot higher.

At the time, the price of gold was $1,530, and it then ran up to $1,790, for a nearly 17% gain.
The analysis suggests there is plenty of upside once the selling is exhausted. But that begs the question - when will the selling be exhausted?
Looking at the Relative Strength Index or RSI, Garner thinks gold is already oversold. Specifically, she says the RSI has dipped below 30 - not only is that an oversold signal, it's the first time gold has touched this kind of oversold level since well before the financial crisis.
Looking at key levels, Garner believes the level at which it bounced overnight - $1,320 - is significant. She thinks it could become a level of strong support.

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Going forward, Garner believes the next critical level is $1,450, gold's sharp down-trend resistance line. (It was also a level at which Goldman Sachs issued a bearish recommendation on the precious metal. As it happened, that level turned out to be the starting point for the accelerated selling.)
If gold can pierce that $1450 level Garner thinks gold could breakout.
From there, Garner believes the next level of resistance should be $1,500, and if it can break through that level, she thinks gold trades $1,620.
Of course it's worth noting that not all chart patterns are bullish. If current levels don't hold, she thinks gold might trade down to $1,285.

However, her analysis suggests the path of least resistance should be higher, even if there's another leg down first.

Jim Cramer largely agrees. He believes that gold is an important part of every portfolio and says, "If you don't own any gold in your portfolio, you might want to take this opportunity to do some buying, albeit slowly."

Child dies in India

CHILD MORTALITY ESTIMATES REPORT 2012 RELEASED: INDIA AT TOP
In the Child Mortality Estimates Report 2012 published on 12 September 2012, by United
Nations Children’s Fund (UNICEF), India was placed at the top position in the chart of 10
countries that topped on the chart. The other countries with their names on the chart are
Nigeria, the Democratic Republic of Congo, China, Pakistan, Indonesia, Ethiopia, Bangladesh
and Afghanistan.
As per the report, Nigeria, the Democratic Republic of Congo, China, Pakistan along with India
are the countries with more than fifty percent of the total deaths. The countries with world’s
lowest mortality rate are Singapore, the Nordic Countries, Japan and some of the European
Countries. But the good news of the report is the decrease in the number of the under five
mortality to 6.9 million from that if the 12 million in 1990. This fall measures to 51 per thousand
in 2011 from that of 87 per thousand in 1990.
THE IDENTIFIED CAUSE FOR THE MORTALITY IS
 14 percent due to pre-term birth complications
 18 percent due to Pneumonia
 11 percent due to Diarrhea
 9 percent due to Intrapartum related complications
 7 percent of the total deaths happen

When incomplete ideas get embodied in institutions and the people in them

As I have said before, its too easy to be rude about austerity. It is harder to put yourself in the mindset of reasonable individuals who take a different view, and pinpoint exactly - in ways that they will understand - why their view is wrong. So this paper from Marco Buti and Nicolas Carnot (HT Philip Lane) is useful because it shows us that mindset.

The argument in the paper is essentially this. “We recall that large adjustments are needed

in most economies to restore sustainable fiscal positions, not because of the arbitrary will of the markets or of EU institutions.” So the debate is about the precise speed of adjustment, and the Commission is trying to strike the “right balance”. In particular, it recognises the need for different speeds in different countries. I think this view characterises the position of many international organisations, including the OECD, and many in the IMF.

There is a big mistake being made here. It essentially involves the prioritisation of issues. Fiscal adjustment is seen as the overriding priority. Issues involving the state of the economy are secondary: they are one factor in judging the appropriate speed of adjustment. This is the wrong way around.

The major priority at the moment should be doing something about the demand led recession in the Eurozone (and other countries like the UK). The budgetary position of some countries is a secondary factor that may influence the country by country balance of any fiscal actions required to deal with this priority.

This point about priorities is not an expression of political preferences. It is about what basic macroeconomics tells us. The recession is a problem right now. If it is not dealt with now, the loss of resources is permanent and irretrievable, and in addition there is likely to be a more permanent scarring effect through hysteresis. Given the imbalances within the Eurozone, and the political tensions generated by creditor/debtor relationships, the costs of a recession could be greater still. Budget consolidation is a permanent, long term issue, and there is clearly a right and a wrong time to deal with it. Recessions are the wrong time, not just because it conflicts with other priorities, but because it may not even work, because of hysteresis effects, or political effects, or banking effects.

So why is this obvious to me, but not to those running policy? To repeat,my own view is in no sense about the relative importance, in some abstract sense, of deficit bias versus avoiding recessions. As regular readers will know, on deficit bias and long run goals for debt I am something of a hawk. I just do not see why we cannot avoid recessions and bring down government debt.

In some cases those running policy take a different view because of ulterior political motives, but not in all cases. I’m prepared to give those in the Commission, and other international organisations like the OECD and IMF, the benefit of the doubt on this. I believe an important influence on their mindset is that they are working in a framework in which overall demand stabilisation is not their problem. That is monetary policy, not fiscal policy. It is very revealing that in the Commission paper two phrases do not appear at all: they are  ‘zero lower bound’ (ZLB) and ‘liquidity trap’. Too few in government have recognised that when we hit the ZLB, the rules of the macroeconomic game fundamentally change, and the institutions of government - and those in them - have to adapt too.

Thisis hardly a novel point, but as Paul Krugman keeps stressing, it is absolutely central. It is why I get annoyed by those who insist that, if only we did monetary policy differently, all would be well - what I call ZLB denial. Few (unfortunately not all) deny the central role and importance of monetary policy in getting us out of recessions. When monetary policy fails - which it patently has, mainly [2] because of the ZLB - fiscal policy has to take its place. Countercyclical fiscal policy becomes as important as monetary policy normally is. Institutions, and habits of thinking, that are set up for normal times must adapt. The IMF recognised this in 2009, but I’m not sure the OECD or European Commission ever did.

We can see how this failure to change priorities influences the subsequent discourse by looking at two issues that are covered by the paper: OMT and Germany. The paper recognises the importance of OMT in altering market expectations. But they then say “As is clear as well however, the OMT announcement per se does not address the underlying sustainability concerns.” Of course OMT does not directly change the outlook for future primary balances. However it is a game changer in allowing periphery countries to change priorities. When you cannot sell your debt, this has to take priority over recession concerns (although fiscal consolidation can still be designed to try and avoid recession). What OMT allows countries to do is change priorities. If it had been implemented earlier, priorities could have been changed earlier. The paper does not see this, because for them fiscal consolidation remains the key priority.

The paper says “In Germany, the fiscal stance is now broadly neutral [3], hence consistent with

call for a differentiated fiscal stance according to the budgetary space”. Which makes perfect sense (albeit using the rather tortured language of international organisation space), except at the ZLB. At the ZLB we need overall fiscal expansion in the Eurozone. The differentiation point still stands, so from an overall Eurozone perspective the Commission (and the OECD, and the IMF) should be arguing for substantial fiscal expansion in Germany. However, if your priority is fiscal consolidation, advocating doing nothing can seem quite radical and brave.

Right at the end there is a hint of recognition, but in a way that reinforces my point. To quote in full:

“A dedicated stabilisation fund could improve the conduct of fiscal policies throughout

the cycle by enforcing tighter policies in good times and providing additional leeway for cushioning downturns. Such a tool could strengthen the existing automaticstabilisers while maintaining a credible rule-based framework. It would be particularly useful in the current predicament characterised by large cyclical differentials across the zone as well as a not insignificant average output gap. However, according to the Commission blueprint such a tool should only be considered in the longer term in the context of full fiscal and economic union.”

In other words countercyclical policy at the overall Eurozone level would be useful right now, but it needs to wait until we have the institutional change that can accommodate it. [4] Which tells me that those in the Commission think institutions are very important, but it does not tell me why existing institutions (and those within them) have to be behave in such a blinkered way.

Syria , Lebanon

On Friday, Lebanese Prime Minister Najib Mikati resigned. His departure followed a stand-off over extending the term of a senior official responsible for internal security and a new national election law, but it had every sign of being sparked by the civil war unfolding across the border in Syria, which has become increasingly sectarian. At the heart of last week’s events in Lebanon lies Hezbollah, the armed group whose members have been covertly fighting to keep the Syrian dictator, Bashar al-Assad, in power. (On assignment recently in Lebanon, I reported on Hezbollah’s unacknowledged activities inside Syria itself, where I outlined the group’s efforts to prop up Assad’s murderous regime.) It now appears increasingly likely that the Syrian civil war will ignite some kind of sectarian strife inside Lebanon as well. Lebanon is a small country with only four million people, but it’s an extraordinarily diverse place that nearly every government in the Middle East has struggled to dominate. Since 1990, when its own civil war ended, Lebanon has maintained a fitful but functioning democracy, one that relies on a delicate balance of power among its main sectarian groups: the Christians, the Sunnis, the Shia, and the Druze. Since 1990, the greatest threat to Lebanon’s democracy has been the Syrian regime of Assad and his local proxies, Hezbollah. Like his father before him, Assad has sought to dominate Lebanon, truncating its politics and extracting millions of dollars from its economy. Hezbollah, in turn, has used its Syrian cover to nurture its own army, which is stronger than that of the Lebanese state. Even after Syrian forces were forced to withdraw from Lebanon in 2005 following the assassination of the former Lebanese Prime Minister Rafik Hariri, Assad and his satraps continued to manipulate Lebanese politics, often by assassinating their Lebanese opponents. Both Syria and Hezbollah rely heavily on Iran; Syria provides the crucial conduit for Hezbollah’s money and weapons. Now, of course, the Assad regime is fighting for its survival, as much of its own population has risen up against it. The crucial aspect of the Syrian war, as regards Lebanon, is its sectarian nature. The Assad regime is dominated by members of the Alawite sect, which considers itself an offshoot of Shia Islam, the religion of Hezbollah (and of the Iranian regime). As the civil war in Syria has carried on, it has dragged more and more of Lebanon along with it. Terrified that it will lose its supply lines, Hezbollah has not been content to sit on the sidelines and watch Assad fall; its leaders have been sending fighters into Syria to fight for the Assad regime, actions that are supposed to be secret but that are widely known in Lebanon. That, in turn, has severely strained Hezbollah’s relations with other Lebanese, especially its Sunnis, who accuse Hezbollah of killing their brethren across the border. At least four hundred thousand Syrian refugees, most of them Sunnis, have gathered in Lebanon. The peace has held in Lebanon, but the Sunni anger is swelling. This brings us to the resignation of Prime Minister Mikati. Under longstanding national agreement, the Prime Minster must be a Sunni. (The President must be a Christian; the Speaker of Parliament a Shiite.) Since taking office in 2011, Mikati has presided over a coalition whose most powerful partner is Hezbollah—which, in addition to being an army, is also a political party. Hezbollah’s activities inside Syria have been putting enormous pressure on Mikati, who is seen as the leader of the country’s Sunnis. Those pressures came to a head last week. The immediate issue was the extension of the term of Major General Ashraf Rifi, chief of the Internal Security Forces. Rifi is a Sunni and close to the Lebanese opposition, which is staunchly opposed to the Syrian leader and friendly with the West. Hezbollah, which dominates Mikati’s cabinet, refused to extend Rifi’s term. Hezbollah’s intense dislike for the Internal Security Forces is well known: in October, the head of intelligence for the same agency, General Wissam al-Hassan, also an ally of the United States, was blown up by a car bomb. Many people in Lebanon suspected that Hezbollah or the Syrian government were behind the attack. Among other things, Hassan, and the I.S.F. more generally, had pushed for the indictment of four Hezbollah members in the assassination of Hariri. Hezbollah regards the investigation as a pro-Western put-up job. But the decisive point is that, with civil war raging next door, Hezbollah is clearly trying to make the Lebanese state more friendly to Assad. The other issue was a dispute over a new election law, which is supposed to be approved before new parliamentary elections can be held in June. The deadlock over the law appears to reflect a growing sense of strength among Lebanon’s Sunnis, particularly vis-à-vis Hezbollah, as the Sunni opposition in Syria strengthens as well. If Lebanon’s President, Michel Suleiman, accepts Mikati’s resignation, as he seems likely to do, the country could be entering a protracted political crisis, without a functional government. That kind of power vacuum, in a country as fragile as Lebanon, could lead to sectarian violence. Mikati himself, in his televised statement on Friday, seemed to hint at just such a possibility. “The region is heading toward the unknown,’’ he said. Indeed it is. For all Lebanon’s travails, its democracy has been an example to its neighbors. It would be especially sad if it became a victim.