What went wrong with Eurozone countries

 This desire to punish rather than co-operate ensures that the ongoing crisis continues and continues to get worse. Credit remains tight, capital flight from the Eurozone is becoming a real problem and Standard and Poor’s will most likely downgrade several member states

Like most investors I spent most of last week addicted to news about the crisis in the Eurozone. I have assiduously followed the progress of the European summit together with the market reaction. After extensive emersion in every newspaper, magazine, radio program and television show my conclusion is that I have totally wasted a week. Little if anything was accomplished. The reason is quite simple. The Europeans are trying to solve the wrong problem. What they should do is to learn from US history. They didn’t and it will cost them and everyone else.

The most recent agreement is based on the idea that fiscal malfeasance is the origin of the crisis. The thesis goes something like this. Wicked spendthrift governments mostly in Europe’s periphery borrowed a lot of money and blew it on social programs. Now they can’t pay the money back.

To solve this problem the summit decreed penitence. All Eurozone countries would be forced to adopt budgetary discipline through a “fiscal compact”. They would also pass ‘golden rules’ to ensure balanced budgets. If the rules were broken, they would be punished with automatic penalties. They also added a few Euros to the bailout fund, but much of the fund depends on leverage and anyway it wasn’t enough.

This approach was politically acceptable but has some definite problems. The first is that a recession is the wrong time to adopt an austerity package. Austerity creates a vicious circle of economic decline. It reduces domestic demand which raises unemployment and lowers revenues from taxes. This in turn creates larger deficits which lessens confidence in banks and shaky sovereign debt. Besides it isn’t the problem.

Before the crisis Spain, Estonia and Ireland had much better control of their deficits than Germany, Austria or France. They were in fact running a surplus. As a result of their fiscal discipline Estonia, Ireland and Spain has much better control of their public debt than Germany and France. Although Greece and Italy’s public debt is over 100% of their GDP (gross domestic product), Spain’s debt is only slightly more that Germany or Austria’s. Estonia and Finland have surpluses.

The real problem was competitiveness. The Eurozone countries that got into trouble, Estonia, Portugal, Greece, Spain, Ireland and Italy were all running substantial trade deficits. Estonia’s current account deficit was over 10% of GDP. So when the crisis hit in 2008 and private financing of the external imbalance dried up, the countries were in deep trouble.

Estonia is sort of the poster child for the problems of the lack of competitiveness and what to do about it. Estonia is a tiny country and its banking system is owned by foreign firms, mostly from Sweden. During a construction boom, Estonia’s growth was at double digits. After the crash it fell by 14%. The result was pain. Unemployment rocketed to 18%.

One tried and tested way to increase competitiveness is to devalue your currency. The Chinese are especially good at keeping the yuan low in order to insure their competitiveness. But since Estonia like Italy and Greece is a member of the Eurozone, this option was not available. Instead they went through an internal devaluation, which included slashing 9% of GDP from their budget and big cuts in nominal wages. The medicine worked. Estonia now has surpluses and its growth rate at 8.5% is the highest in Europe.

But Estonia had something else that was very important. It had a regulatory framework that encouraged business and was fairly clean. On the Doing Business Index and Corruption Index it scores slightly below Germany. In contrast Italy’s business climate is worse than Mongolia’s and Greece is worse than Yemen. As to corruption both countries are worse than Rwanda.

One thing that the Eurozone could do would be to create a form of joint liability like Eurobonds. These could be adopted with a credible sanction. Any country that spent too much couldn’t use them.

The success of this method was proved over 200 years ago in the United States. In 1790 the recently created country had a massive war debt of $54 million or about $4 trillion in today’s money. The problem was that the debt was very unequal. Some states like New York were deeply in debt, while others like Virginia were almost debt-free. One of the country’s “founding fathers”, Alexander Hamilton had an idea. The new United States federal government would assume all the debt and create joint liability of US bonds.

Mr Hamilton’s plan was an incredible success, but sadly no such solution was agreed to by the European summit. This desire to punish rather than co-operate ensures that the ongoing crisis continues and continues to get worse. Credit remains tight, capital flight from the Eurozone is becoming a real problem and Standard and Poor’s will most likely downgrade several member states. So don’t expect a happy New Year anywhere.  

(The writer is president of Emerging Market Strategies and can be contacted at [email protected] or [email protected]).



What is said at conferences is very different from what is implemented in practice

 It is very easy to talk high flying concepts at conferences and also publicly claim that the same is being applied in practice. In reality, however, much of the intended strategies do not get implemented in microfinance and that is something that conference organizers, industry associations, regulators and stakeholders must take notice

Good morning folks and as I was browsing through the Internet this Saturday, I came across a very interesting video on the web. It was a video clip of Ajay Verma, the then CEO of Sahayata Microfinance, speaking at the 2010 Microfinance India Summit at a session titled, ‘Risks in Microfinance: Current Environment and Mitigation Strategies’

Speaking at the 2010 Microfinance India Summit, Mr Verma touched on three themes: 

a) Managing multiple lending: He said that multiple lending can only be managed if organizations themselves drive their credit policy very hard. He said the key is to have a (good) credit policy, adhere to it and build systems to check that the credit policy is working. He also stated that the proposed industry efforts for a credit bureau will help reduce multiple lending. And he also argued that the high (annual) growth of 100%-300% can be better managed if multiple lending is managed as this will then taper down the growth

b) Have engagement at all levels: Here he stressed employee engagement through good training— where there would be emphasis of organizational core values and code of conduct— within the institution. He said that MFIs (microfinance institutions) must have a strong and solid agenda to engage with their employees as it is employees who can create engaged customers. He also said that customer engagement must be absolutely transparent and they must be given complete information on products, charges, fees, etc. His cautioned that it would not be enough to merely provide information to customers but rather more importantly to ensure that they understand various facts clearly. For this, he said that engagement through financial literacy would be necessary so that low-income clients are educated on the dangers of debt trap and the need to invest borrowed money in income generation ventures. He further stressed for open engagement with the local authorities, stakeholders and funders so that information can flow transparently to them

c) Focus on product innovation: He said that 99% of the industry is on a single product and he said that a life-cycle approach must be used to have product innovation. He argued for starting with basic loan and as client income grows, he suggested that MFIs look at education loans, housing loans, etc

The MFIN website ( still lists Mr Verma as one of its board members and introduces him as follows: 

“Ajay Verma | CEO & MD of Sahayata

Ajay Verma is the managing director and chief executive officer of Sahayata microfinance institution. As a former banking professional with extensive experience in risk management, start-up and product management, he brings into Sahayata 18 years of experience from banks across the world, where he was the head of risk for consumer and SME banking. Ajay Verma has worked outside the country for over nine years with companies like GE Capital.”

Sahayata is also listed as a partner with Atomtech ( where Mr Verma’s following statement is given: 

“Sahayata supports livelihood initiatives of women entrepreneurs— they have consistently shown a good credit record and have repaid their loans on time. We seek to work towards the upliftment of underprivileged women; strengthening the social fabric by providing women with financial independence and nurturing their entrepreneurial spirit and self-reliance. In our journey, we are happy to be associated with the dedicated and intellectually gifted team at Atom Technologies; and look forward to optimally utilising their customised mobile solutions for microfinance to the benefit of our customers by providing them with a best-in-class service experience.”

Well, all is fine with the above statements including the high sounding concepts and strategies espoused at the 2010 Microfinance India Summit (November 2010) by the then MD and CEO of Sahayata Microfinance. What makes the above video very interesting to view is the fact that, barely, within a year (around November 2011) of his making the speech at the Microfinance India Summit, charges of serious misreporting and mismanagement had surfaced with regard to Sahayata Microfinance—which had until then been the darling of so many investors, lenders and stakeholders. 

And as Business Standard, 18 November 2011 noted, “Sahayata Microfinance Pvt Ltd has suspended the brass, including its chief executive, on charges of mismanagement. …The board questioned chief executive, chief financial officer and other senior managers on charges of serious misreporting and mismanagement. ... While chief executive was suspended with immediate effect, the CFO and head of operations were stripped of their duties immediately. They were subsequently suspended.” 

The icing on the cake is the fact that Sahayata had also won several awards and recognitions (national and international) for its good governance, innovative practices and the like and readers may want to read a previous Moneylife article that sheds light on this and other aspects with regard to Sahayata Microfinance going astray (Award winning Sahayata Microfinance is the latest to go astray)

Ok folks, the larger point I want to make is that it is very easy to talk high flying concepts at conferences and also publicly claim that the same is being applied in practice. In reality, however, much of the intended strategies do not get implemented in micro-finance and that is something that conference organizers, industry associations, regulators and stakeholders must take notice of with regard to Indian microfinance. And therein lies the pathway to overcome the present impasse and I sincerely hope that the Indian micro-finance industry recognizes this basic fact and devises appropriate strategies to overcome this serious gap between policy and implementation. And what better place than the on-going 2011 Microfinance India Summit to be a natural starting platform for this introspection with integrity… 

(The writer has over two decades of grassroots and institutional experience in rural finance, MSME development, agriculture and rural livelihood systems, rural/urban development and urban poverty alleviation/governance. He has worked extensively in Asia, Africa, North America and Europe with a wide range of stakeholders, from the private sector and academia to governments)



Public Interest Exclusive
Father, Dr L M Singhvi initiated Lokpal Bill in 1964; Son, Abhishek Manu Singhvi derails it in 2011

The weakened 48th Report on the Lokpal Bill was released by Dr Abhishek Manu Singhvi, chairman of the standing committee. Interestingly, the Bill was first initiated by his own father Dr L M Singhvi, aimed at creating a strong anti-corruption law, based on the Scandinavian model. Here is a brief history of the Lokpal Bill and how it got weaker over the years

This is The 48th Report on the need for a Lokpal, tabled in Parliament on 9th December has caused Anna to announce another round of agitation. While the Prime Minister had provided an official, written assurance to Anna Hazare conveying the ‘sense of the house’ on inclusion of three contentious issues, these have been thwarted in the report. They were: bringing in the lower bureaucracy under the ambit of the Lokpal Bill; having a citizen charter and instituting lokayuktas in every State. 

Lets look at the history of the Lokpal Bill against the backdrop of the one day agitation called by Anna Hazare at JAntar Mantar today. The move for a Lokpal bill was first initiated by Abhishek Manu Singhvi’s father, Dr L M Singhvi in 1964, as the son points out in the 48th report on the subject.

In the introductory part of his report, Singhvi’s, rather uncharitably terms Anna’s movement as ``demonstration.’’ Chapter 2 says: ``Though the Lokpal Bill, 2011 was referred to the Committee on August 8, 2011, it was followed immediately by a demonstration by Team Anna, a large gathering at Ramlila Maidan and a fast by Shri Anna Hazare. These events occupied the space from 16th to 28th August, 2011.’’

But even a quick reading of the report shows that this is far from the truth – when a few lakh people demand a statutory enactment whose journey began in 1964, it can hardly be likened to a petulant “demonstration” led by one man. 

Lets start by looking at  Singhvi’s Lokpal report itself to see how the objective of instituting an Ombudsman ( based on the Scandinavian model) to crush corruption has been diluted in its journey over the decades. It says: 

"The initial years following independence witnessed legislators conveying the people’s concerns to the Government over the issue of corruption through raising of questions and debates in Parliament. At that time, the scope of the debates was contextually confined to seeking information from the Government about its anti-corruption measures and to discussions regarding the formation of anti-corruption committees/agencies and vigilance bodies to put a check on corruption, but it clearly reflected the seriousness on the issue of corruption in the minds of Members. 

"Acknowledging the need for a thorough consideration of the issue, the Government set-up a Committee under the Chairmanship of Shri K. Santhanam to review the existing instruments for checking corruption in Central Government. 

``The Committee inter alia recommended the creation of an apex body for exercising superintendence and control over the vigilance administration. In pursuance of the recommendations of the Santhanam Committee, the Government established the Central Vigilance Commission through a Resolution on 11.02.1964. The Commission was concerned with alleged bureaucratic corruption and did not cover alleged ministerial corruption or grievances of citizens against maladministration. While laying the report on the creation of the CVC on the table of the House, the then Deputy Home Minister, interestingly recognized that the Commission would be overburdened if the responsibility to redress the citizens’ grievances against corruption were to be placed upon it and the Commission might, as a result, be less effective in dealing with the core problem of corruption.  

``While the country had been grappling with the problem of corruption at different levels including at the level of Parliament, there emerged globally, and especially in the Scandinavian countries, the concept of Ombudsman to tackle corruption and/or to redress public grievances. 

"A proposal in this regard was first initiated in the Lok Sabha on April 3, 1963 by the Late Dr. LM Singhvi, MP. While replying to it, the then Law Minister observed that though the institution seemed full of possibilities, since it involved a matter of policy, it was for the Prime Minister to decide in that regard. 

"Dr. LM Singhvi then personally communicated this idea to the then Prime Minister, Pandit Jawaharlal Nehru who in turn, with some initial hesitation, acknowledged that it was a valuable idea which could be incorporated in our institutional framework. On 3rd November, 1963, Hon’ble Prime Minister made a statement in respect of the possibilities of this institution and said that the system of Ombudsman fascinated him as the Ombudsman had an overall authority to deal with the charges of corruption, even against the Prime Minister, and commanded the respect and confidence of all. Resolutions, in this behalf in April 1964 and April 1965 were again brought in the Lower House and on both occasions, during the course of discussions, the House witnessed near unanimous agreement about the viability, utility and desirability of such an institution. However, in his resolution, the Member of Parliament (Dr. L.M. Singhvi) did not elaborate upon the functions/ powers of the institution, but instead asked for the appointment of a Committee of Members of Parliament who would consider all the complex factors relating to this institution and would come forward with an acceptable and consensual solution. While making a statement in the House on 23rd April, 1965, Dr. L.M. Singhvi elucidated the rationale of the institution as“ institution such as the Ombudsman must be brought into existence in our country. It is for the sake of securing justice and for cleansing the public life of the augean stable of corruption, real and imaginary, that such an institution must be brought into existence. It is in order to protect those in public life and those in administration itself that such an institution must be brought into existence. It is to provide an alternative to the cold and protracted formality of procedure in course of law that such an institution should be brought into existence. There is every conceivable reason today which impels to the consideration that such an institution is now overdue in our country....’’

``These efforts set the stage for evolving an institution like Ombudsman in India and consequently, the idea of Lokpal surfaced in the national legislative agenda. Later, the Government appointed an Administrative Reforms Commission which in its recommendation suggested a scheme of appointing Lokpal at Centre and Lokayuktas in each State.  

"Thereafter, to give effect to the recommendations of the First Administrative Reforms Commission, eight Bills were introduced in the Lok Sabha from time to time. However, all these Bills lapsed consequent upon the dissolution of the respective Lok Sabhas, except in the case of the 1985 Bill which was subsequently withdrawn after its introduction.

``A close analysis of the Bills reflects that there have been varying approaches and shifting foci in scope and jurisdiction in all these proposed legislations. The first two Bills viz. of 1968 and of 1971 sought to cover the entire universe of bureaucrats, Ministers, public sector undertakings, Government controlled societies for acts and omissions relating to corruption, abuse of position, improper motives and mal-administration.

"The 1971 Bill, however, sought to exclude the Prime Minister from its coverage. The 1977 Bill broadly retained the same coverage except that corruption was subsequently sought to be defined in terms of IPC and Prevention of Corruption Act. Additionally, the 1977 Bill did not cover maladministration as a separate category, as also the definition of “public man” against whom complaints could be filed did not include bureaucrats in general. Thus, while the first two Bills sought to cover grievance redressal in respect of maladministration in addition to corruption, the 1977 version did not seek to cover the former and restricted itself to abuse of office and corruption by Ministers and Members of Parliament. The 1977 Bill covered the Council of Ministers without specific exclusion of the Prime Minister. 

"The 1985 Bill was purely focused on corruption as defined in IPC and POCA and neither sought to subsume mal-administration or mis-conduct generally nor bureaucrats within its ambit. Moreover, the 1985 Bill impliedly included the Prime Minister since it referred to the office of a Minister in its definition of “public functionary.” 

The 1989 Bill restricted itself only to corruption, but corruption only as specified in the POCA and did not mention IPC. It specifically sought to include the Prime Minister, both former and incumbent. 

Lastly, the last three versions of the Bill in 1996, 1998 and 2001, all largely;

(a) focused only on corruption; 

(b) defined corruption only in terms of POCA; 

(c) defined “public functionaries” to include Prime Minister, Ministers and MPs; 

(d) did not include bureaucrats within their ambit





6 years ago

So many congressis will go to jail after formation of a strong lokpal.. no wonders, congress is putting everything possible at stake to not let it pass. or to weaken it by not letting CBI go out of its hand and also by not letting lokpal chairperson to be appointed by an independent body.


6 years ago

excellent piece

P R Chandna

6 years ago

Change is knocking at the doors..Dawn of New Era has #AnnaHazare.. no one can derail it..

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