Census 2011: Technology

Do you hold an identity in a country which houses more than a 100 crores of people? Each one of us will as the work on Census 2011 unfolds. As Home Minister P. Chidambaram has pointed out that it is the biggest exercise since mankind came into existence and it is nowhere in the world that a government tries to count and issue identity cards to more than a billion people. The dimensions of this entire charade are hard to envisage. It is being labeled as the world's largest exercise in terms of the data captured, manpower involved and the expenses involved but it is also a technological marvel to achieve such goals!It is a matter of great pride that India has till date been able to hold censuses without any breaks since 1872 every 10 years. Struggle for Independence, Partition, wars, floods and earthquakes, have had no impact and have not been able to interrupt the exercise so far.The Head count operations were halted even in England during World War II but it was successfully conducted in India. Why is the 2011 Census being hyped beyond proportions? Why is it so unique and different from its predecessors? It is the setting up of the National Population Register (NPR) which is the database of every single citizen of India. How's that different from what the Census was already doing? The Census is a purely statistical exercise which involves only the head count whereas the NPR involves individual data collection such as your name, relationship to the head of the family, father's name, mother's name, sex, marital status, date of birth, nationality and the details of the present address (residential) etc.After the forms which have been designed by the National Institute of Design in Ahmedabad are filled, they are scanned and then the images are processed using ICR technology. No other country in the world uses such sophisticated technology to process its Census data.This is indeed a technological marvel for the census in India. It has not been achieved overnight and its evolution has been a gradual process which began about fifty years back. It would be interesting to trace this Technological Evolution. Let us see how it all began a few years back.
Census India: Technology used in 1961 CensusPrior to the 1961 census the data entry and data collection was done manually. The 1961 census initiated and adopted the use of 'Unit Record' systems. The mode of data entry were d punching machines which were used for the first time where the cards were inserted one by one. The punch cards consisted of 80 columns which converted the data into machine readable formats. The data processing was done only on 5% of the data picked out from the large data base. Around 70 officers were involved in the data entry, programming and machine operations. Reproducer was used to duplicate the entire set of punched cards.Verifiers and sorter machines were used for data processing. SRTT Printers called Serial Rolling Total Tabulator cum Printer was used for the tabulation and printing of the collected data. There was no provision for keeping any back up for the huge data.
Census India: Technology used in 1971 CensusThe census in 1971 saw the advent of both mechanical and electrical key punching machines for entering data. As against inserting the cards one by one, punch cards consisting of 80 columns were used in a stalk by the machine. Processing was could be done on 15% of the data picked out from the main data collected. Around 90 officers were involved in the data entry, programming & machine operations. An IBM 1401 computer, Card Reader and a Printer were used for data processing. For the first time, provision was made for back up storage of data and data processing was done using large size spools of magnetic tape.
Census India: Technology used in 1981 CensusData entry was introduced for the first time in the 1981 census and 15 data centers were created across the country along with one main center. More than one state was attached to each center.New technological devices which were used to convert paper based information into machine readable form were 'key to disk' systems supplied by ECIL, ICT and GCS. HP 1000, CD-Cyber 730 and NEC-1000 systems were used for the first time to process data.at the National Informatics Center (NIC), New Delhi and the Regional Computer Center (RCC) at Chandigarh. The data processing facilities were not available at the main center. 25% of the data collected could be captured and processed .Around 1200 officers besides the officers at the 15 data centers were engaged for the entire census data processing activities. The requisite software for data validation, editing, processing and tabulation was developed by the officers at the Data Processing Division at the Office of the Registrar General (ORG), India.
Census India: Technology used in 1991The 1991 census saw dramatic and revolutionary changes in the data processing technology. It was during this time that the ORGI launched its indigenous computing facility and installed the Medha- 930 main frame system using the operating system Unix which was connected to the servers at 15 data centers where the data was entered. Transfer of data between the centers was done using magnetic tapes. Four Regional centers at Delhi, Bhopal, Bhubaneshwar and Chennai were created for editing and generating lower level tabulations and reports whereas the main data processing and generating tables at different levels was done at the Data Processing Division of ORGI and the necessary software for data validation and tabulation was developed by its officers. It was for the first time in 1991 census that camera ready copies of the tabulations were prepared in Hindi as well as English for publication. It was during this census that 45% data was captured and processed. This exercise involved around 1200 officers over and above the ones engaged at the 15 data centers. The software was developed indigenously by DP Division officers of ORGI.
Census India: Technology used in 2001 CensusThe 2001 Census was marked by a lot of hardware up gradations at the 15 data processing centers. This was done to incorporate some contemporary the latest technologies like the Automatic Form Processing Technology which was applied using Intelligent Character Recognition technology (ICR). ICR technology turned out to be the most compatible considering the magnitude of the entire data processing exercise and initiated a revolution of sorts for the census activities.The magnanimity of the data processing can be gauged by the fact that 45 NT Servers, 1060 PIII PCs, 25 High speed heavy duty duplex scanners (Kodak) were set up at all the data processing centers. Back up devices like ZIP SLR and DLT Drives were also installed for the first time. This activity involved around 1200 officers and about 500 contract based operators for capturing and processing data.) . Scanning and data file creations went on for 24 hours a day without a break and for the first time, System Integrators were nominated for these operations. Due to the latest technology hundred percent data could be captured and processed for the first time in any census which amounted to more than a billion records. The scanned images were stored permanently in an archive. The need for setting up of regional centers for tabulations was eliminated due to the use of ICR technology after scanning the schedules.This brought down the expenses drastically and saved some finances for the government. The use of this technology not only eased the process but helped the officers in imbibing new skills as the software was developed by the officers themselves and turned out to be an innovative experience for them.
Census India: Technology used in 2011 CensusIn the current 2011 census, the forms have been printed in 16 languages this time which only reaffirms the fact it is indeed the largest such exercise in the world. The ICR Technology that was pioneered by India during the 2001 census has become a role model for major countries across the globe. The improved version of this software is being utilized again for the scanning of the Census Forms at high speed and automatic interpretation of the data in the 2011 census as India already has the expertise to deal with it and it has been successfully implemented in the past.It is evident that the percentage of data captured grew from a mere 5% to 100% over the last fifty years due to the innovations in technology.In 2011 census the scanners that are being used have additional features like image enhancement, removing noises and detection and auto correction of images through its own software.The version of ICR software that is being used this time has better recognition featuresand its workflow management capacity is also enhanced.
Census India: Use of ICR TechnologyWhat is ICR Technology? Intelligent Character Recognition (ICR) software converts hand printed characters to a machine readable format. This is a very crucial technology which has a high utility value. The ability to recognize hand written characters makes it very suitable and apt for the data processing activities involved in a census and helps in saving a lot of time besides raising the accuracy levels. This could not have been achieved if done manually.The software for ICR is actually based on the science of neural networks which is like a human brain. It is termed intelligent because it is able to tackle the variations in the character shapes.Basics of ICR TechnologyNo two persons can write characters in a similar manner and hence understanding and interpreting the patterns of human writing is more complex and challenging than converting simple machine formats. Variation in characters can occur due to the differences in environment, mood or even stress. A person will fill out the form each time in a different manner (hand writing). Variations will even appear within the same word, depending on where a character appears. The hand written characters are also never evenly spaced across the page making it all the more difficult for recognition systems to effectively break words into their component characters.ICR is able to do all this and thus helps in not only saving a lot of time but does it with enhanced efficiency and accuracy. India is the only country in the world to apply this technology to the massive census exercise.Truly the census 2011 in India is not only a technological marvel but a technological challenge as well.

FDI in Retail Sector

Just back from first frenzied shopping experience in the UK, a four year old ever-inquisitive daughter asked to her father, “Why do we not have a Harrods in Delhi? Shopping there is so much fun!” Simple question for a four-year-old, but not so simple for her father to explain.
As per the current regulatory regime, retail trading (except under single-brand product retailing — FDI up to 51 per cent, under the Government route) is prohibited in India. Simply put, for a company to be able to get foreign funding, products sold by it to the general public should only be of a ‘single-brand’; this condition being in addition to a few other conditions to be adhered to. That explains why we do not have a Harrods in Delhi.
India being a signatory to World Trade Organisation’s General Agreement on Trade in Services, which include wholesale and retailing services, had to open up the retail trade sector to foreign investment. There were initial reservations towards opening up of retail sector arising from fear of job losses, procurement from international market, competition and loss of entrepreneurial opportunities. However, the government in a series of moves has opened up the retail sector slowly to Foreign Direct Investment (“FDI”). In 1997, FDI in cash and carry (wholesale) with 100 percent ownership was allowed under the Government approval route. It was brought under the automatic route in 2006. 51 percent investment in a single brand retail outlet was also permitted in 2006. FDI in Multi-Brand retailing is prohibited in India.
Definition of Retail
In 2004, The High Court of Delhi[1] defined the term ‘retail’ as a sale for final consumption in contrast to a sale for further sale or processing (i.e. wholesale). A sale to the ultimate consumer.
Thus, retailing can be said to be the interface between the producer and the individual consumer buying for personal consumption. This excludes direct interface between the manufacturer and institutional buyers such as the government and other bulk customersRetailing is the last link that connects the individual consumer with the manufacturing and distribution chain. A retailer is involved in the act of selling goods to the individual consumer at a margin of profit.
Division of Retail Industry – Organised and Unorganised Retailing
The retail industry is mainly divided into:- 1) Organised and 2) Unorganised Retailing
Organised retailing refers to trading activities undertaken by licensed retailers, that is, those who are registered for sales tax, income tax, etc. These include the corporate-backed hypermarkets and retail chains, and also the privately owned large retail businesses.
Unorganised retailing, on the other hand, refers to the traditional formats of low-cost retailing, for example, the local kirana shops, owner manned general stores, paan/beedi shops, convenience stores, hand cart and pavement vendors, etc.
The Indian retail sector is highly fragmented with 97 per cent of its business being run by the unorganized retailers. The organized retail however is at a very nascent stage. The sector is the largest source of employment after agriculture, and has deep penetration into rural India generating more than 10 per cent of India’s GDP.[2]
FDI Policy in India
FDI as defined in Dictionary of Economics (Graham Bannock et.al) is investment in a foreign country through the acquisition of a local company or the establishment there of an operation on a new (Greenfield) site. To put in simple words, FDI refers to capital inflows from abroad that is invested in or to enhance the production capacity of the economy.[3]
Foreign Investment in India is governed by the FDI policy announced by the Government of India and the provision of the Foreign Exchange Management Act (FEMA) 1999. The Reserve Bank of India (‘RBI’) in this regard had issued a notification,[4] which contains the Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000. This notification has been amended from time to time.
The Ministry of Commerce and Industry, Government of India is the nodal agency for motoring and reviewing the FDI policy on continued basis and changes in sectoral policy/ sectoral equity cap. The FDI policy is notified through Press Notes by the Secretariat for Industrial Assistance (SIA), Department of Industrial Policy and Promotion (DIPP).
The foreign investors are free to invest in India, except few sectors/activities, where prior approval from the RBI or Foreign Investment Promotion Board (‘FIPB’) would be required.
FDI Policy with Regard to Retailing in India
It will be prudent to look into Press Note 4 of 2006 issued by DIPP and consolidated FDI Policy issued in October 2010[5] which provide the sector specific guidelines for FDI with regard to the conduct of trading activities.
a) FDI up to 100% for cash and carry wholesale trading and export trading allowed under the automatic route.
b) FDI up to 51 % with prior Government approval (i.e. FIPB) for retail trade of ‘Single Brand’ products, subject to Press Note 3 (2006 Series)[6].
c) FDI is not permitted in Multi Brand Retailing in India.
Entry Options For Foreign Players prior to FDI Policy
Although prior to Jan 24, 2006, FDI was not authorised in retailing, most general players ha\d been operating in the country. Some of entrance routes used by them have been discussed in sum as below:-
1. Franchise Agreements
It is an easiest track to come in the Indian market. In franchising and commission agents’ services, FDI (unless otherwise prohibited) is allowed with the approval of the Reserve Bank of India (RBI) under the Foreign Exchange Management Act. This is a most usual mode for entrance of quick food bondage opposite a world. Apart from quick food bondage identical to Pizza Hut, players such as Lacoste, Mango, Nike as good as Marks as good as Spencer, have entered Indian marketplace by this route. 2. Cash And Carry Wholesale Trading
100% FDI is allowed in wholesale trading which involves building of a large distribution infrastructure to assist local manufacturers.[7] The wholesaler deals only with smaller retailers and not Consumers. Metro AG of Germany was the first significant global player to enter India through this route.
3. Strategic Licensing Agreements
Some foreign brands give exclusive licences and distribution rights to Indian companies. Through these rights, Indian companies can either sell it through their own stores, or enter into shop-in-shop arrangements or distribute the brands to franchisees. Mango, the Spanish apparel brand has entered India through this route with an agreement with Piramyd, Mumbai, SPAR entered into a similar agreement with Radhakrishna Foodlands Pvt. Ltd
4. Manufacturing and Wholly Owned Subsidiaries.
The foreign brands such as Nike, Reebok, Adidas, etc. that have wholly-owned subsidiaries in manufacturing are treated as Indian companies and are, therefore, allowed to do retail. These companies have been authorised to sell products to Indian consumers by franchising, internal distributors, existent Indian retailers, own outlets, etc. For instance, Nike entered through an exclusive licensing agreement with Sierra Enterprises but now has a wholly owned subsidiary, Nike India Private Limited.
FDI in Single Brand Retail
The Government has not categorically defined the meaning of “Single Brand” anywhere neither in any of its circulars nor any notifications.
In single-brand retail, FDI up to 51 per cent is allowed, subject to Foreign Investment Promotion Board (FIPB) approval and subject to the conditions mentioned in Press Note 3[8] that (a) only single brand products would be sold (i.e., retail of goods of multi-brand even if produced by the same manufacturer would not be allowed), (b) products should be sold under the same brand internationally, (c) single-brand product retail would only cover products which are branded during manufacturing and (d) any addition to product categories to be sold under “single-brand” would require fresh approval from the government.
While the phrase ‘single brand’ has not been defined, it implies that foreign companies would be allowed to sell goods sold internationally under a ‘single brand’, viz., Reebok, Nokia, Adidas. Retailing of goods of multiple brands, even if such products were produced by the same manufacturer, would not be allowed.
Going a step further, we examine the concept of ‘single brand’ and the associated conditions:
FDI in ‘Single brand’ retail implies that a retail store with foreign investment can only sell one brand. For example, if Adidas were to obtain permission to retail its flagship brand in India, those retail outlets could only sell products under the Adidas brand and not the Reebok brand, for which separate permission is required. If granted permission, Adidas could sell products under the Reebok brand in separate outlets.
But, what is a ‘brand’?
Brands could be classified as products and multiple products, or could be manufacturer brands and own-label brands. Assume that a company owns two leading international brands in the footwear industry – say ‘A’ and ‘R’. If the corporate were to obtain permission to retail its brand in India with a local partner, it would need to specify which of the brands it would sell. A reading of the government release indicates that A and R would need separate approvals, separate legal entities, and may be even separate stores in which to operate in India. However, it should be noted that the retailers would be able to sell multiple products under the same brand, e.g., a product range under brand ‘A’ Further, it appears that the same joint venture partners could operate various brands, but under separate legal entities.[9]
Now, taking an example of a large departmental grocery chain, prima facie it appears that it would not be able to enter India. These chains would, typically, source products and, thereafter, brand it under their private labels. Since the regulations require the products to be branded at the manufacturing stage, this model may not work. The regulations appear to discourage own-label products and appear to be tilted heavily towards the foreign manufacturer brands.[10]
There is ambiguity in the interpretation of the term ‘single brand’. The existing policy does not clearly codify whether retailing of goods with sub-brands bunched under a major parent brand can be considered as single-brand retailing and, accordingly, eligible for 51 per cent FDI. Additionally, the question on whether co-branded goods (specifically branded as such at the time of manufacturing) would qualify as single brand retail trading remains unanswered.
FDI in Multi Brand Retail
The government has also not defined the term Multi Brand. FDI in Multi Brand retail implies that a retail store with a foreign investment can sell multiple brands under one roof.
In July 2010, Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce circulated a discussion paper[11] on allowing FDI in multi-brand retail. The paper doesn’t suggest any upper limit on FDI in multi-brand retail. If implemented, it would open the doors for global retail giants to enter and establish their footprints on the retail landscape of India. Opening up FDI in multi-brand retail will mean that global retailers including Wal-Mart, Carrefour and Tesco can open stores offering a range of household items and grocery directly to consumers in the same way as the ubiquitous ’kirana’ store.
Foreign Investor’s Concern Regarding FDI Policy in IndiaFor those brands which adopt the franchising route as a matter of policy, the current FDI Policy will not make any difference. They would have preferred that the Government liberalize rules for maximizing their royalty and franchise fees. They must still rely on innovative structuring of franchise arrangements to maximize their returns. Consumer durable majors such as LG and Samsung, which have exclusive franchisee owned stores, are unlikely to shift from the preferred route right away.For those companies which choose to adopt the route of 51% partnership, they must tie up with a local partner. The key is finding a partner which is reliable and who can also teach a trick or two about the domestic market and the Indian consumer. Currently, the organized retail sector is dominated by the likes of large business groups which decided to diversify into retail to cash in on the boom in the sector – corporates such as Tata through its brand Westside, RPG Group through Foodworld, Pantaloon of the Raheja Group and Shopper’s Stop. Do foreign investors look to tie up with an existing retailer or look to others not necessarily in the business but looking to diversify, as many business groups are doing?
An arrangement in the short to medium term may work wonders but what happens if the Government decides to further liberalize the regulations as it is currently contemplating? Will the foreign investor terminate the agreement with Indian partner and trade in market without him? Either way, the foreign investor must negotiate its joint venture agreements carefully, with an option for a buy-out of the Indian partner’s share if and when regulations so permit. They must also be aware of the regulation which states that once a foreign company enters into a technical or financial collaboration with an Indian partner, it cannot enter into another joint venture with another Indian company or set up its own subsidiary in the ‘same’ field’ without the first partner’s consent if the joint venture agreement does not provide for a ‘conflict of interest’ clause. In effect, it means that foreign brand owners must be extremely careful whom they choose as partners and the brand they introduce in India. The first brand could also be their last if they do not negotiate the strategic arrangement diligently.
Concerns for the Government for only Partially Allowing FDI in Retail Sector
A number of concerns were expressed with regard to partial opening of the retail sector for FDI. The Hon’ble Department Related Parliamentary Standing Committee on Commerce, in its 90th Report, on ‘Foreign and Domestic Investment in Retail Sector’, laid in the Lok Sabha and the Rajya Sabha on 8 June, 2009, had made an in-depth study on the subject and identified a number of issues related to FDI in the retail sector. These included:
It would lead to unfair competition and ultimately result in large-scale exit of domestic retailers, especially the small family managed outlets, leading to large scale displacement of persons employed in the retail sector. Further, as the manufacturing sector has not been growing fast enough, the persons displaced from the retail sector would not be absorbed there.
Another concern is that the Indian retail sector, particularly organized retail, is still under-developed and in a nascent stage and that, therefore, it is important that the domestic retail sector is allowed to grow and consolidate first, before opening this sector to foreign investors.
Antagonists of FDI in retail sector oppose the same on various grounds, like, that the entry of large global retailers such as Wal-Mart would kill local shops and millions of jobs, since the unorganized retail sector employs an enormous percentage of Indian population after the agriculture sector; secondly that the global retailers would conspire and exercise monopolistic power to raise prices and monopolistic (big buying) power to reduce the prices received by the suppliers; thirdly, it would lead to asymmetrical growth in cities, causing discontent and social tension elsewhere. Hence, both the consumers and the suppliers would lose, while the profit margins of such retail chains would go up.
LIMITATIONS OF THE PRESENT SETUP
Infrastructure
There has been a lack of investment in the logistics of the retail chain, leading to an inefficient market mechanism. Though India is the second largest producer of fruits and vegetables (about 180 million MT), it has a very limited integrated cold-chain infrastructure, with only 5386 stand-alone cold storages, having a total capacity of 23.6 million MT. , 80% of this is used only for potatoes. The chain is highly fragmented and hence, perishable horticultural commodities find it difficult to link to distant markets, including overseas markets, round the year. Storage infrastructure is necessary for carrying over the agricultural produce from production periods to the rest of the year and to prevent distress sales. Lack of adequate storage facilities cause heavy losses to farmers in terms of wastage in quality and quantity of produce in general. Though FDI is permitted in cold-chain to the extent of 100%, through the automatic route, in the absence of FDI in retailing; FDI flow to the sector has not been significant.
Intermediaries dominate the value chain
Intermediaries often flout mandi norms and their pricing lacks transparency. Wholesale regulated markets, governed by State APMC Acts, have developed a monopolistic and non-transparent character. According to some reports, Indian farmers realize only 1/3rd of the total price paid by the final consumer, as against 2/3rd by farmers in nations with a higher share of organized retail.
Improper Public Distribution System (“PDS”)
There is a big question mark on the efficacy of the public procurement and PDS set-up and the bill on food subsidies is rising. In spite of such heavy subsidies, overall food based inflation has been a matter of great concern. The absence of a ‘farm-to-fork’ retail supply system has led to the ultimate customers paying a premium for shortages and a charge for wastages.
No Global Reach
The Micro Small & Medium Enterprises (“MSME”) sector has also suffered due to lack of branding and lack of avenues to reach out to the vast world markets. While India has continued to provide emphasis on the development of MSME sector, the share of unorganised sector in overall manufacturing has declined from 34.5% in 1999-2000 to 30.3% in 2007-08[12]. This has largely been due to the inability of this sector to access latest technology and improve its marketing interface.
Rationale behind Allowing FDI in Retail Sector
FDI can be a powerful catalyst to spur competition in the retail industry, due to the current scenario of low competition and poor productivity.
The policy of single-brand retail was adopted to allow Indian consumers access to foreign brands. Since Indians spend a lot of money shopping abroad, this policy enables them to spend the same money on the same goods in India. FDI in single-brand retailing was permitted in 2006, up to 51 per cent of ownership. Between then and May 2010, a total of 94 proposals have been received. Of these, 57 proposals have been approved. An FDI inflow of US$196.46 million under the category of single brand retailing was received between April 2006 and September 2010, comprising 0.16 per cent of the total FDI inflows during the period. Retail stocks rose by as much as 5%. Shares of Pantaloon Retail (India) Ltd ended 4.84% up at Rs 441 on the Bombay Stock Exchange. Shares of Shopper’s Stop Ltd rose 2.02% and Trent Ltd, 3.19%. The exchange’s key index rose 173.04 points, or 0.99%, to 17,614.48. But this is very less as compared to what it would have been had FDI upto 100% been allowed in India for single brand.[13]
The policy of allowing 100% FDI in single brand retail can benefit both the foreign retailer and the Indian partner – foreign players get local market knowledge, while Indian companies can access global best management practices, designs and technological knowhow. By partially opening this sector, the government was able to reduce the pressure from its trading partners in bilateral/ multilateral negotiations and could demonstrate India’s intentions in liberalising this sector in a phased manner.[14]
Permitting foreign investment in food-based retailing is likely to ensure adequate flow of capital into the country & its productive use, in a manner likely to promote the welfare of all sections of society, particularly farmers and consumers. It would also help bring about improvements in farmer income & agricultural growth and assist in lowering consumer prices inflation.[15]
Apart from this, by allowing FDI in retail trade, India will significantly flourish in terms of quality standards and consumer expectations, since the inflow of FDI in retail sector is bound to pull up the quality standards and cost-competitiveness of Indian producers in all the segments. It is therefore obvious that we should not only permit but encourage FDI in retail trade.
Lastly, it is to be noted that the Indian Council of Research in International Economic Relations (ICRIER), a premier economic think tank of the country, which was appointed to look into the impact of BIG capital in the retail sector, has projected the worth of Indian retail sector to reach $496 billion by 2011-12 and ICRIER has also come to conclusion that investment of ‘big’ money (large corporates and FDI) in the retail sector would in the long run not harm interests of small, traditional, retailers.[16]
In light of the above, it can be safely concluded that allowing healthy FDI in the retail sector would not only lead to a substantial surge in the country’s GDP and overall economic development, but would inter alia also help in integrating the Indian retail market with that of the global retail market in addition to providing not just employment but a better paying employment, which the unorganized sector (kirana and other small time retailing shops) have undoubtedly failed to provide to the masses employed in them.
Industrial organisations such as CII, FICCI, US-India Business Council (USIBC), the American Chamber of Commerce in India, The Retail Association of India (RAI) and Shopping Centers Association of India (a 44 member association of Indian multi-brand retailers and shopping malls) favour a phased approach toward liberalising FDI in multi-brand retailing, and most of them agree with considering a cap of 49-51 per cent to start with.
The international retail players such as Walmart, Carrefour, Metro, IKEA, and TESCO share the same view and insist on a clear path towards 100 per cent opening up in near future. Large multinational retailers such as US-based Walmart, Germany’s Metro AG and Woolworths Ltd, the largest Australian retailer that operates in wholesale cash-and-carry ventures in India, have been demanding liberalisation of FDI rules on multi-brand retail for some time.[17]
Thus, as a matter of fact FDI in the buzzing Indian retail sector should not just be freely allowed but per contra should be significantly encouraged. Allowing FDI in multi brand retail can bring about Supply Chain Improvement, Investment in Technology, Manpower and Skill development,Tourism Development, Greater Sourcing From India, Upgradation in Agriculture, Efficient Small and Medium Scale Industries, Growth in market size and Benefits to govemment through greater GDP, tax income and employment generation.[18]
Prerequisites before allowing FDI in Multi Brand Retail and Lifting Cap of Single Brand Retail

FDI in multi-brand retailing must be dealt cautiously as it has direct impact on a large chunk of population. Left alone foreign capital will seek ways through which it can only multiply itself, and unthinking application of capital for profit, given our peculiar socio-economic conditions, may spell doom and deepen the gap between the rich and the poor. Thus the proliferation of foreign capital into multi-brand retailing needs to be anchored in such a way that it results in a win-win situation for India. This can be done by integrating into the rules and regulations for FDI in multi-brand retailing certain inbuilt safety valves. For example FDI in multi –brand retailing can be allowed in a calibrated manner with social safeguards so that the effect of possible labor dislocation can be analyzed and policy fine tuned accordingly. To ensure that the foreign investors make a genuine contribution to the development of infrastructure and logistics, it can be stipulated that a percentage of FDI should be spent towards building up of back end infrastructure, logistics or agro processing units. Reconstituting the poverty stricken and stagnating rural sphere into a forward moving and prosperous rural sphere can be one of the justifications for introducing FDI in multi-brand retailing. To actualize this goal it can be stipulated that at least 50% of the jobs in the retail outlet should be reserved for rural youth and that a certain amount of farm produce be procured from the poor farmers. Similarly to develop our small and medium enterprise (SME), it can also be stipulated that a minimum percentage of manufactured products be sourced from the SME sector in India. PDS is still in many ways the life line of the people living below the poverty line. To ensure that the system is not weakened the government may reserve the right to procure a certain amount of food grains for replenishing the buffer. To protect the interest of small retailers the government may also put in place an exclusive regulatory framework. It will ensure that the retailing giants do resort to predatory pricing or acquire monopolistic tendencies. Besides, the government and RBI need to evolve suitable policies to enable the retailers in the unorganized sector to expand and improve their efficiencies. If Government is allowing FDI, it must do it in a calibrated fashion because it is politically sensitive and link it (with) up some caveat from creating some back-end infrastructure.
Further, To take care of the concerns of the Government before allowing 100% FDI in Single Brand Retail and Multi- Brand Retail, the following recommendations are being proposed [19]:-
Preparation of a legal and regulatory framework and enforcement mechanism to ensure that large retailers are not able to dislocate small retailers by unfair means.
Extension of institutional credit, at lower rates, by public sector banks, to help improve efficiencies of small retailers; undertaking of proactive programme for assisting small retailers to upgrade themselves.
Enactment of a National Shopping Mall Regulation Act to regulate the fiscal and social aspects of the entire retail sector.
Formulation of a Model Central Law regarding FDI of Retail Sector.
Conclusion
A Start Has Been Made
Walmart has a joint venture with Bharti Enterprises for cash-and-carry (wholesale) business, which runs the ‘Best Price’ stores. It plans to have 15 stores by March and enter new states like Andhra Pradesh , Rajasthan, Madhya Pradesh and Karnataka.[20]Duke, Wallmart’s CEO opined that FDI in retail would contain inflation by reducing wastage of farm output as 30% to 40% of the produce does not reach the end-consumer. “In India, there is an opportunity to work all the way up to farmers in the back-end chain. Part of inflation is due to the fact that produces do not reach the end-consumer,” Duke said, adding, that a similar trend was noticed when organized retail became popular in the US.[21]
Many of the foreign brands would come to India if FDI in multi brand retail is permitted which can be a blessing in disguise for the economy.[22]
Back-end logistics must for FDI in multi-brand retail
The government has added an element of social benefit to its latest plan for calibrated opening of the multi-brand retail sector to foreign direct investment (FDI). Only those foreign retailers who first invest in the back-end supply chain and infrastructure would be allowed to set up multi brand retail outlets in the country. The idea is that the firms must have already created jobs for rural India before they venture into multi-brand retailing.
It can be said that the advantages of allowing unrestrained FDI in the retail sector evidently outweigh the disadvantages attached to it and the same can be deduced from the examples of successful experiments in countries like Thailand and China; where too the issue of allowing FDI in the retail sector was first met with incessant protests, but later turned out to be one of the most promising political and economical decisions of their governments and led not only to the commendable rise in the level of employment but also led to the enormous development of their country’s GDP.
Moreover, in the fierce battle between the advocators and antagonist of unrestrained FDI flows in the Indian retail sector, the interests of the consumers have been blatantly and utterly disregarded. Therefore, one of the arguments which inevitably needs to be considered and addressed while deliberating upon the captioned issue is the interests of consumers at large in relation to the interests of retailers.
It is also pertinent to note here that it can be safely contended that with the possible advent of unrestrained FDI flows in retail market, the interests of the retailers constituting the unorganized retail sector will not be gravely undermined, since nobody can force a consumer to visit a mega shopping complex or a small retailer/sabji mandi. Consumers will shop in accordance with their utmost convenience, where ever they get the lowest price, max variety, and a good consumer experience.
The Industrial policy 1991 had crafted a trajectory of change whereby every sectors of Indian economy at one point of time or the other would be embraced by liberalization, privatization and globalization.FDI in multi-brand retailing and lifting the current cap of 51% on single brand retail is in that sense a steady progression of that trajectory. But the government has by far cushioned the adverse impact of the change that has ensued in the wake of the implementation of Industrial Policy 1991 through safety nets and social safeguards. But the change that the movement of retailing sector into the FDI regime would bring about will require more involved and informed support from the government. One hopes that the government would stand up to its responsibility, because what is at stake is the stability of the vital pillars of the economy- retailing, agriculture, and manufacturing. In short, the socio economic equilibrium of the entire country.

Bringing legal aid a step closer home

The provision of legal aid to the poor and the disadvantaged exists in all civilised countries, often guided by charitable and philanthropic concerns. In a democratic set-up, the philosophy of legal aid has acquired a new meaning, with an emphasis on the concept of equality of all human beings, increasingly drawn from the universal principles of human rights. Free legal aid to the poor and marginalised members of society is now viewed as a tool to empower them to use the power of the law to advance their rights and interests as citizens, and as economic actors. Such a paradigm shift in the concept of legal aid gains greater importance when India is viewed as a growing economic power.

Parliament enacted the Legal Services Authorities Act, 1987 in order to give effect to Article 39-A of the Constitution to extend free legal aid, to ensure that the legal system promotes justice on the basis of equal opportunity. (November 9 is observed as National Legal Services Day, to commemorate the enactment of the legislation.) Those entitled to free legal services are members of the Scheduled Castes and the Scheduled Tribes, women, children, persons with disability, victims of ethnic violence, industrial workmen, persons in custody, and those whose income does not exceed a level set by the government (currently it is Rs.1 lakh a year in most States). The Act empowers legal services authorities at the district, State and national levels, and the different committees (legal services institutions) to organise Lok Adalats to resolve pending and pre-litigation disputes. It provides for permanent Lok Adalats to settle disputes involving public utility services. Under the Act, “legal services” have a meaning that includes rendering of service in the conduct of any court-annexed proceedings or proceedings before any authority, tribunal and so on, and giving advice on legal matters. Promoting legal literacy and conducting legal awareness programmes are functions of legal services institutions.

Access to justice

The Constitution treats all citizens as being equal and provides them equal protection under the law. Yet, the common person faces barriers to ‘access to justice.'

Illiteracy, lack of financial resources and social backwardness are major factors that hinder the common person from accessing justice. There are other invisible barriers: lack of courage to exercise legal rights, the proclivity to suffer silently the denial of rights, and geographical and spatial barriers are examples. Such barriers keep people disempowered and subjected to exploitation by powerful people. This results in their being shoved away from the mainstream, and they become constrained in becoming potential economic actors contributing to the nation's development.

The Act provides for a machinery to ensure access to justice to all through the institutions of legal services authorities and committees. These institutions are manned by judges and judicial officers. Parliament entrusted the judiciary with the task of implementing the provisions of the Act, as the other pillars of the government were neither inclined nor had the expertise to take up the responsibility to provide access to justice to the weaker sections.

Reaching out

One of the problems faced by legal services institutions is their inability to reach out to the common people. This hiatus between them and the common people was perceived as indirectly defeating the objectives of the Act. It is in this context that the National Legal Services Authority (NALSA) has come up with the idea of para-legal volunteers to bridge the gap between the common person and legal services institutions.

The scheme seeks to utilise community-based volunteers selected from villages and other localities to provide basic legal services to the common people. Educated persons with commitment to social service and with a record of good character are selected. The volunteers are trained by district legal services authorities. The training equips them to identify the law-related needs of the marginalised in their locality. Such needs include assistance to secure legal rights, benefits and actionable entitlements under different government schemes that are denied to them. Coming as they do from the same locality, they are in a better position to identify those who need assistance and bring them to the nearest legal services institutions to solve their problems within the framework of law. They can assist disempowered people to get their entitlements from government offices where ordinary people often face hassles on account of bureaucratic lethargy and apathy.

Legal aid clinics in villages

In order to reach out to the common people, NALSA has come up with a project to set up legal aid clinics in all villages, subject to financial viability. Ignorance of what to do when faced with law-related situations is a common problem for disempowered people. Legal aid clinics work on the lines of primary health centres, where assistance is given for simple ailments and other minor medical requirements of village residents. Legal aid clinics assist in drafting simple notices, filling up forms to avail benefits under governmental schemes and by giving initial advice on simple problems. A legal aid clinic is a facility to assist and empower people who face barriers to ‘access to justice.'

Trained para-legal volunteers are available to run legal aid clinics in villages. The common people in villages will feel more confident to discuss their problems with a friendly volunteer from their own community rather than with a city-based legal professional. The volunteers will refer any complicated legal matters that require professional assistance to the nearest legal services institutions. When complex legal problems are involved, the services of professional lawyers will be made available in the legal aid clinics.

Free and competent legal services

There has been a widespread grievance that lawyers engaged by legal services institutions do not perform their duties effectively and that the lawyers are not paid commensurately for their work. In order to solve these problems, NALSA has framed the National Legal Services Authority (Free and Competent Legal services) Regulations, 2010 to provide free and competent legal services. Scrutiny of legal aid applications, monitoring of cases where legal aid is provided, and engaging senior lawyers on payment of regular fees in special cases, are the salient features of the Regulations. In serious matters where the life and liberty of a person are in jeopardy, the Regulations empower legal services authorities to specially engage senior lawyers.

Children's rights, a neglected field

Juveniles including children constitute more than a third of India's population. Yet, children and their rights are neglected. The problems of children are often seen through the spectacles of an adult. Consequently, the rights of children who are orphaned, abandoned and in conflict with the law are not properly handled by government officials and juvenile justice institutions. Denied care and protection, they may end up as children in conflict with law. At the same time, children in conflict with the law need care and protection. In October 2011, the Supreme Court, in Sampurna Behrua v. Union of India, a public interest litigation, directed the Directors General of Police of the States to designate one police officer in each police station as juvenile/child welfare officer. The court directed legal services authorities to train such police officials and give free legal services to all children in conflict with law on an incremental basis, starting with the State capital cities.

Legal services to the mentally-ill and the mentally-retarded, to workers in the unorganised sector, and to solve disputes arising out of the implementation of the Mahatma Gandhi National Rural Employment Guarantee Act, are other schemes drawn up by NALSA for implementation by legal services institutions. A web-based monitoring system is in place to monitor their activities. NALSA works with civil society organisations, specialised statutory bodies and government departments.

Legal services institutions have until now functioned in uncharted waters, often making their presence felt only at certain ports of call like court-based legal services, organising legal literacy camps and Lok Adalats. Now, with a paradigm shift in the concept of legal services, legal services authorities are reaching out to the people to facilitate ‘access to justice' to all in the most practicable and economical manner.

social tensions & cycle of prejudice

The regularity of communal tensions and clashes in India is unfortunately accepted as part of the country's fabric. Communal frenzy, as seen in Gujarat, Delhi, Mumbai, Kandhamal and post-Babri Masjid, was considered a problem of law and order. Terrorist attacks on the public, by those belonging to different religions, also keep apprehension alive. Yet solutions to problems that beget such acts do not seem to be India's top priority. The proposed Communal Violence Bill has divided political parties, with undercurrents that are strongly coloured by religion. Religious bigotry divides people, leading to misunderstanding, intolerance, fear, hatred, social ostracism, violence and loss of livelihood and life. Yet post-mortem on major upheavals fails to focus on societal factors, which are responsible for widespread endemic tensions within communities.
Ancient and medieval India: India was always feudal, with its diverse and warring provinces and kingdoms. Its ancient civilisations, vast land mass, diverse geography, varied regional narratives, different provincial histories, distinct languages, assorted traditions and dissimilar cultures meant that its heterogeneity was always a source of tension among its numerous social groups and regions. In addition, repeated military invasions and cultural exchanges resulted in significant numbers converting to and following different religions, practising distinct traditions and appearing as discrete cultures. India as a unified nation and single national entity is a relatively recent concept.
Horrific recent heritage: While ethnic and religious tensions exist in many societies, the Partition of the subcontinent into India and Pakistan, based on religion, was a watershed. It resulted in the largest movement of people in recorded history. Half-a-million people were killed and many millions rendered homeless. There was a complete breakdown of law and order; many died in riots and massacres or just from the hardships of their flights to safety.
There have been many attempts to disentangle complex narratives of the past. Some observations suggest plausible threads, which might at least partially explain some of the current communal tensions. Stories and narratives of India's Partition clearly document that there were millions of victims and innumerable perpetrators of violence and arson on both sides. Historical accounts have recorded that ordinary people, divided by religion and driven by a need for revenge, resorted to rape, arson, looting, violence and murder against former friends, neighbours and fellow citizens. Stories of the Partition recall and record victimhood on a massive scale, on both sides of the divide. They also suggest an amazing level of amnesia among the perpetrators of the violence, of their roles in the events. Narratives of the perpetrators are rarely told, leaving each side to recall only its victimhood.
Propagated memories: The generation, which lived through and survived the Partition, often wore its victimhood on its sleeve. It could not forget the terror of the period. The recall of the horrors also resulted in an unrequited need for retribution against the perpetrators. Feelings of helplessness and lack of closure of people's experiences were passed on to their children. It was now up to subsequent generations to avenge their humiliation. Each side communicated its victimhood and branded the other the aggressor, thus propagating prejudice from one generation to the next, forgetting that both sides of the religious and national divides were victims and perpetrators in equal measure.
Perpetuating prejudice: The transmitted social tensions of the past perpetuate the cycle of prejudice. Religious chauvinism is communicated across generations. Such attitudes exacerbate social tensions between communities. Religious differences, commonly used to defend culture and tradition, are employed to exaggerate minor variations and divide a people; social constructs, articulated centuries ago, are the grounds for today's schisms. Discrimination in employment, housing and business perpetuate communal resentment.
The diversity within India, the injustices of the past and superficial differences among its people provide a fertile ground for breeding misunderstanding and hatred of the “other.” The choice of the “other” to project disaffection depends on the prejudices transmitted and the stereotypes perpetuated. While illiteracy, superstition and schooling sans an education are mainly responsible for bigotry, politics also plays a role. Leaders of diverse persuasions highlight the differences and magnify insecurities for political gain. No political formation is exempt from such manoeuvring; all exploit insecurity among their followers and within their constituencies.
Beliefs distorted in this manner are cold sanctuaries. They strongly bias and distort the perception of neutral events and perpetuate stereotypes; they become self-fulfilling prophecies, confirming one's personal prejudices. Modern technology and mass media are used to amplify such discontent and rekindle old fires. While bloodbaths and communal riots in independent India are intermittent and less intense than the violence associated with the Partition, they suffice to keep its memories and discord alive.
Rationalising crimes: Research into the holocaust suggests that the perpetrators of horrific crimes were not insane, psychopathic or coerced. Their reasoning included judgmental (e.g. victims were inferior beings) and utilitarian arguments (e.g. in the interest of national security, sacrifice of a few in the larger interest, settling of historical scores). We hear similar defence of orchestrated communal violence and pogroms. The fact that people, who usually practise ahimsa in their daily lives, seem to provide implicit support for the occasional communal riot and sporadic mass murders suggests that transferred prejudices and unacknowledged hatred have blinded their conscience. Their absolute moral certainty becomes an alibi for political violence. Their biases convince them of the validity of their reasoning and lead to the rationalisation of the most horrific crimes. Comparable reasoning is evident among those who mount terrorist attacks.
Similarly, discrimination and violence resulting from caste, linguistic and regional chauvinism are etched on collective memory. Amnesia, which selectively highlights a community's victimhood while conveniently repressing its aggression against others, works likewise, thus keeping discontent and divisions alive. All groups have bigots and fanatics who propagate their prejudices; these include many families who transmit much of their chauvinism.
Moving forward
The country needs to learn from its history. India needs a new narrative, which honestly confronts its past and its politics. We should emerge from the narrow bigoted traditions of previous generations. We need to break the chains that imprisoned those who suffered during the Partition. We should not accept divisive politics and politicians. We need to reconcile modern India with its unsettling contradictions and its divided past.
There is no point in continuing in the same vein, citing history for reasons and reasons for history, thus arguing in circles. Can we see the issues from what philosopher Hume called a “common point of view,” from some universal principle of humanity? We, as individuals and society, need to identify prejudice and bigotry transmitted through generations; we need to recognise caricatures and negative stereotypes of others passed on by our familial narratives and our factional histories. We need to re-evaluate all our firmly held beliefs and generalisations. Diligent assessments usually suggest that they are cognitive illusions.
India's diversity is a great inheritance and immense burden. A multi-religious society is as much an aspiration as a heritage. India's larger struggle is to choose the broad option of a multireligious and multicultural society over the narrow option of restricting our identities based on religion, language, caste and region.
When will we break the endless cycle of violence and counter-violence? Can we change the politics of retribution and revenge? Religious freedom, guaranteed in modern societies, is said to have two components: freedom of religion and freedom from religion. More of one usually means less of the other. India seems to have chosen the former, often resulting in a chaotic public domain in which religious ideas are allowed to jostle with one another. We need to choose freedom from exclusivist ideas over the freedom to hold them, in order to make for a less virulent civic space. We should not trade our humanity and friendships for religious bigotry.
Religions are best regarded not for their power of reason, but as a test of human tolerance of diversity. There is need to underscore the complexity of the human situation and our limitations in understanding, which unite us, rather than focus on rigid doctrines and exclusivist agendas that divide us. We need to break with history and all historical insecurities and enmities. We need to judge our humanity by those we exclude rather than by those we include. People who say “later” to religious and communal harmony actually mean “never.” The time for healing is now.

Europian Debt Crisis

Do you feel confused about the EU Debt Crisis? Or have you just not kept up with it? Not sure what will happen or how to protect yourself and prosper from it? Here’s the past 4 months summarized. It’s a bit simplified, but not by much:

Everything You Need To Know About The EU Debt Crisis And Why It Matters-A Lot

1. Greece needs to pay off about €20-30 Bln in maturing debt between April and May. They don’t have it. Spain needs a similar amount in July. Portugal and some others will also need to sell bonds over the coming months.
2. No one wants to pay for Greece and other PIIGS [Portugal, Ireland, Italy, Greece, Spain] mismanagement, corruption, tax dodging, lack of economic dynamism.
3. However, Everyone is rightly petrified of a Greek default, which would probably scare bond markets so badly that none of the other PIIGS (nor about 10 other equally distressed economies in the eastern Europe, the ME, Latin America, etc) will be able to sell bonds at affordable rates.
4. THAT CAUSES: an historically unprecedented wave of sovereign defaults by most or all of these countries.
5. THAT CAUSES higher borrowing costs even for the better economies.
6. THAT CAUSES ANOTHER CREDIT FREEZE UP AND MARKET CRASH, PROBABLY WORSE than in the Fall of 2008 following the mere collapse of Lehman Brothers (one measly big US investment bank), because NOW markets are even more nervous, governments even more debt burdened from the last round of stimulus and bailouts etc.
7. No EU leaders can volunteer taxpayer funds to bailout PIIGS without committing political suicide, because their own economies and taxpayers are struggling and the PIIGS do not evoke much sympathy anyway, having done so much to deserve their fate. Nor can PIIGS leader expect to impose or sustain the draconian spending cuts demanded by the EU over the coming years and expect to survive in power.
8. THEREFORE, the EU and PIIGS leaders best serve their own interests by pretending but failing to achieve a rescue package for Greece, (using the unstated but clear threat of a global economic crash to extract as much cash from the rest of the world as possible)
9. RESULT: Some kind of international coordinated plan that allows EU leaders a chance to save their careers, or at least, reputations:
   1. the EU leaders can contribute taxpayer funds to a bailout but tell their electorates they got the best deal they could and made the best of bad situation, paid the least, and avoided a financial collapse (at least for now).
   2. The PIIGS leaders can impose painful austerity plans and possibly cede control of their economies to international overseers (demanded by the rescuers to ensure compliance and repayment of funds contributed), thus transferring blame for the local suffering to international forces beyond their control.

With the above facts in mind, the recent events become clear. They explain:

1. The comic repetitious cycle of EU support pledges for Greece, followed by refusals to offer any actual cash, or even loan guarantees. Illogical on the surface, but makes perfect sense if the goal is just to pretend to rescue Greece without actually doing so.
2. After months of prideful declarations that the EU could solve its own problems, the sudden admission this past week by Germany that the IMF should help save Greece (and by implication, the other PIIGS). The IMF is funded internationally, the US being the biggest contributor by far. While EU leaders may not be able to get away with short term painless money printing, the US sure can.

While the long term best solution might be to suffer the consequences of the defaults and begin anew, the near term economic pain would be bad for the careers of the current global political leaders, thus they want to avoid that. Politicians tend to choose short term benefits over longer term solutions in order to defer painful solutions until after their terms in office.

Ramifications

There will be intense pressure to get Greece resolved before July.

The Twin Debt Bombs Due To Detonate In July

The pressure to devise some solution that calms markets is considerable. In July:

Spain Bond Sale

Spain needs to sell about €30 bln in bonds to avoid default. It is in better shape than Greece, but that won’t matter if a Greek default has sent borrowing rates soaring for its fellow PIIGS block members. That means a Greek default in April or May makes a Spanish one in July far more likely.

US Tidal Wave of Mortgage Rates Resets and Defaults

In the US, July 2010 begins a wave of residential mortgage rates resetting higher on scale not seen since…late 2008 (scene of our last market meltdown). As the below chart shows, 2009 was a lull in this storm during which rate resets fell to multi-year lows and took some pressure off of mortgage default rates (which have remained brisk nonetheless).

02 mar 19

Hat Tip to Graham Summers: U.S. Housing: The Big Picture

It’s no accident that the peak in mortgage resets in 2008 occurred around the same time as the last stock market collapse and extensive mortgage write downs in the banking sector.

Remember what happened to stocks in 2008?

S&P 500 Weekly AVAFX Chart April 2008 – March 2009 04 mar 19

The scale of mortgage resets to occur in 2010-2011 is identical to that of 2007-2008. Stocks are already at 52 week highs and thus have plenty to give back.

True, conditions aren’t exactly the same. They are much worse.

1. The US economy is weaker, having shed around 10 million jobs since then
2. Financial markets more nervous, as they have seen how quickly a contagion can spread
3. Bank loan portfolios are more damaged, and mask an already massive ‘shadow portfolio’ of loans still carried on the books but in fact needing to be written off (after the bonuses are paid, off course)
4. The Federal Reserve has already shot most of its bullets. In 2007, the Fed had yet to resort to its unprecedented stimulus package of special bank borrowing facilities, bailouts, takeover off bad assets, cut interest rates from 5.25% to 0.25% (from September ’07 until now), taken over AIG for $85 billion (September ’08, and later another $40 bln given), initiated TARP for $700 Billion, bought close to $2 trillion in assorted US Treasuries, agency mortgage backed securities and debt (March 2009-forward)

I’ve left out plenty, but the point is clear: the Fed’s arsenal is mostly empty, except for just expanding money printing.

How To Profit

One way or another, there will be more money printing, by most or all major central banks. That means:

1. Long Term: further feeding long term inflationary pressures and the bull market in commodities, especially the preferred USD hedges, gold and oil, and other hard assets.
2. For the rest of 2010, the fear and uncertainty should continue to favor the US Dollar and other safe haven assets, as Greece, Spain, other PIIGS debt sales, and the US mortgage resets all pressure markets lower, especially as we get deeper into the second half of 2010 around July.

We hope to do a more detailed analysis of the likely scenarios for the EU debt crisis soon. Stay tuned!

DISCLOSURE: NO POSITIONS

Euro Crisis

THERE’S SOMETHING peculiarly apt about the fact that the current European crisis began in Greece. For Europe’s woes have all the aspects of a classical Greek tragedy, in which a man of noble character is undone by the fatal flaw of hubris.

Not long ago Europeans could, with considerable justification, say that the current economic crisis was actually demonstrating the advantages of their economic and social model. Like the United States, Europe suffered a severe slump in the wake of the global financial meltdown; but the human costs of that slump seemed far less in Europe than in America. In much of Europe, rules governing worker firing helped limit job loss, while strong social-welfare programs ensured that even the jobless retained their health care and received a basic income. Europe’s gross domestic product might have fallen as much as ours, but the Europeans weren’t suffering anything like the same amount of misery. And the truth is that they still aren’t.

Yet Europe is in deep crisis — because its proudest achievement, the single currency adopted by most European nations, is now in danger. More than that, it’s looking increasingly like a trap. Ireland, hailed as the Celtic Tiger not so long ago, is now struggling to avoid bankruptcy. Spain, a booming economy until recent years, now has 20 percent unemployment and faces the prospect of years of painful, grinding deflation.

The tragedy of the Euromess is that the creation of the euro was supposed to be the finest moment in a grand and noble undertaking: the generations-long effort to bring peace, democracy and shared prosperity to a once and frequently war-torn continent. But the architects of the euro, caught up in their project’s sweep and romance, chose to ignore the mundane difficulties a shared currency would predictably encounter — to ignore warnings, which were issued right from the beginning, that Europe lacked the institutions needed to make a common currency workable. Instead, they engaged in magical thinking, acting as if the nobility of their mission transcended such concerns.

The result is a tragedy not only for Europe but also for the world, for which Europe is a crucial role model. The Europeans have shown us that peace and unity can be brought to a region with a history of violence, and in the process they have created perhaps the most decent societies in human history, combining democracy and human rights with a level of individual economic security that America comes nowhere close to matching. These achievements are now in the process of being tarnished, as the European dream turns into a nightmare for all too many people. How did that happen?

THE ROAD TO THE EURO
It all began with coal and steel. On May 9, 1950 — a date whose anniversary is now celebrated as Europe Day — Robert Schuman, the French foreign minister, proposed that his nation and West Germany pool their coal and steel production. That may sound prosaic, but Schuman declared that it was much more than just a business deal.

For one thing, the new Coal and Steel Community would make any future war between Germany and France “not merely unthinkable, but materially impossible.” And it would be a first step on the road to a “federation of Europe,” to be achieved step by step via “concrete achievements which first create a de facto solidarity.” That is, economic measures would both serve mundane ends and promote political unity.

The Coal and Steel Community eventually evolved into a customs union within which all goods were freely traded. Then, as democracy spread within Europe, so did Europe’s unifying economic institutions. Greece, Spain and Portugal were brought in after the fall of their dictatorships; Eastern Europe after the fall of Communism.

In the 1980s and ’90s this “widening” was accompanied by “deepening,” as Europe set about removing many of the remaining obstacles to full economic integration. (Eurospeak is a distinctive dialect, sometimes hard to understand without subtitles.) Borders were opened; freedom of personal movement was guaranteed; and product, safety and food regulations were harmonized, a process immortalized by the Eurosausage episode of the TV show “Yes Minister,” in which the minister in question is told that under new European rules, the traditional British sausage no longer qualifies as a sausage and must be renamed the Emulsified High-Fat Offal Tube. (Just to be clear, this happened only on TV.)

The creation of the euro was proclaimed the logical next step in this process. Once again, economic growth would be fostered with actions that also reinforced European unity.

The advantages of a single European currency were obvious. No more need to change money when you arrived in another country; no more uncertainty on the part of importers about what a contract would actually end up costing or on the part of exporters about what promised payment would actually be worth. Meanwhile, the shared currency would strengthen the sense of European unity. What could go wrong?

The answer, unfortunately, was that currency unions have costs as well as benefits. And the case for a single European currency was much weaker than the case for a single European market — a fact that European leaders chose to ignore.

THE (UNEASY) CASE FOR MONETARY UNION
International monetary economics is, not surprisingly, an area of frequent disputes. As it happens, however, these disputes don’t line up across the usual ideological divide. The hard right often favors hard money — preferably a gold standard — but left-leaning European politicians have been enthusiastic proponents of the euro. Liberal American economists, myself included, tend to favor freely floating national currencies that leave more scope for activist economic policies — in particular, cutting interest rates and increasing the money supply to fight recessions. Yet the classic argument for flexible exchange rates was made by none other than Milton Friedman.

The case for a transnational currency is, as we’ve already seen, obvious: it makes doing business easier. Before the euro was introduced, it was really anybody’s guess how much this ultimately mattered: there were relatively few examples of countries using other nations’ currencies. For what it was worth, statistical analysis suggested that adopting a common currency had big effects on trade, which suggested in turn large economic gains. Unfortunately, this optimistic assessment hasn’t held up very well since the euro was created: the best estimates now indicate that trade among euro nations is only 10 or 15 percent larger than it would have been otherwise. That’s not a trivial number, but neither is it transformative.

Still, there are obviously benefits from a currency union. It’s just that there’s a downside, too: by giving up its own currency, a country also gives up economic flexibility.

Imagine that you’re a country that, like Spain today, recently saw wages and prices driven up by a housing boom, which then went bust. Now you need to get those costs back down. But getting wages and prices to fall is tough: nobody wants to be the first to take a pay cut, especially without some assurance that prices will come down, too. Two years of intense suffering have brought Irish wages down to some extent, although Spain and Greece have barely begun the process. It’s a nasty affair, and as we’ll see later, cutting wages when you’re awash in debt creates new problems.

If you still have your own currency, however, you wouldn’t have to go through the protracted pain of cutting wages: you could just devalue your currency — reduce its value in terms of other currencies — and you would effect a de facto wage cut.

Won’t workers reject de facto wage cuts via devaluation just as much as explicit cuts in their paychecks? Historical experience says no. In the current crisis, it took Ireland two years of severe unemployment to achieve about a 5 percent reduction in average wages. But in 1993 a devaluation of the Irish punt brought an instant 10 percent reduction in Irish wages measured in German currency.

Why the difference? Back in 1953, Milton Friedman offered an analogy: daylight saving time. It makes a lot of sense for businesses to open later during the winter months, yet it’s hard for any individual business to change its hours: if you operate from 10 to 6 when everyone else is operating 9 to 5, you’ll be out of sync. By requiring that everyone shift clocks back in the fall and forward in the spring, daylight saving time obviates this coordination problem. Similarly, Friedman argued, adjusting your currency’s value solves the coordination problem when wages and prices are out of line, sidestepping the unwillingness of workers to be the first to take pay cuts.

So while there are benefits of a common currency, there are also important potential advantages to keeping your own currency. And the terms of this trade-off depend on underlying conditions.

On one side, the benefits of a shared currency depend on how much business would be affected.

I think of this as the Iceland-Brooklyn issue. Iceland, with only 320,000 people, has its own currency — and that fact has given it valuable room for maneuver. So why isn’t Brooklyn, with roughly eight times Iceland’s population, an even better candidate for an independent currency? The answer is that Brooklyn, located as it is in the middle of metro New York rather than in the middle of the Atlantic, has an economy deeply enmeshed with those of neighboring boroughs. And Brooklyn residents would pay a large price if they had to change currencies every time they did business in Manhattan or Queens.

So countries that do a lot of business with one another may have a lot to gain from a currency union.

On the other hand, as Friedman pointed out, forming a currency union means sacrificing flexibility. How serious is this loss? That depends. Let’s consider what may at first seem like an odd comparison between two small, troubled economies.

Climate, scenery and history aside, the nation of Ireland and the state of Nevada have much in common. Both are small economies of a few million people highly dependent on selling goods and services to their neighbors. (Nevada’s neighbors are other U.S. states, Ireland’s other European nations, but the economic implications are much the same.) Both were boom economies for most of the past decade. Both had huge housing bubbles, which burst painfully. Both are now suffering roughly 14 percent unemployment. And both are members of larger currency unions: Ireland is part of the euro zone, Nevada part of the dollar zone, otherwise known as the United States of America.

But Nevada’s situation is much less desperate than Ireland’s.

First of all, the fiscal side of the crisis is less serious in Nevada. It’s true that budgets in both Ireland and Nevada have been hit extremely hard by the slump. But much of the spending Nevada residents depend on comes from federal, not state, programs. In particular, retirees who moved to Nevada for the sunshine don’t have to worry that the state’s reduced tax take will endanger their Social Security checks or their Medicare coverage. In Ireland, by contrast, both pensions and health spending are on the cutting block.

Also, Nevada, unlike Ireland, doesn’t have to worry about the cost of bank bailouts, not because the state has avoided large loan losses but because those losses, for the most part, aren’t Nevada’s problem. Thus Nevada accounts for a disproportionate share of the losses incurred by Fannie Mae and Freddie Mac, the government-sponsored mortgage companies — losses that, like Social Security and Medicare payments, will be covered by Washington, not Carson City.

And there’s one more advantage to being a U.S. state: it’s likely that Nevada’s unemployment problem will be greatly alleviated over the next few years by out-migration, so that even if the lost jobs don’t come back, there will be fewer workers chasing the jobs that remain. Ireland will, to some extent, avail itself of the same safety valve, as Irish citizens leave in search of work elsewhere and workers who came to Ireland during the boom years depart. But Americans are extremely mobile; if historical patterns are any guide, emigration will bring Nevada’s unemployment rate back in line with the U.S. average within a few years, even if job growth in Nevada continues to lag behind growth in the nation as a whole.

Over all, then, even as both Ireland and Nevada have been especially hard-luck cases within their respective currency zones, Nevada’s medium-term prospects look much better.

What does this have to do with the case for or against the euro? Well, when the single European currency was first proposed, an obvious question was whether it would work as well as the dollar does here in America. And the answer, clearly, was no — for exactly the reasons the Ireland-Nevada comparison illustrates. Europe isn’t fiscally integrated: German taxpayers don’t automatically pick up part of the tab for Greek pensions or Irish bank bailouts. And while Europeans have the legal right to move freely in search of jobs, in practice imperfect cultural integration — above all, the lack of a common language — makes workers less geographically mobile than their American counterparts.

And now you see why many American (and some British) economists have always been skeptical about the euro project. U.S.-based economists had long emphasized the importance of certain preconditions for currency union — most famously, Robert Mundell of Columbia stressed the importance of labor mobility, while Peter Kenen, my colleague at Princeton, emphasized the importance of fiscal integration. America, we know, has a currency union that works, and we know why it works: because it coincides with a nation — a nation with a big central government, a common language and a shared culture. Europe has none of these things, which from the beginning made the prospects of a single currency dubious.

These observations aren’t new: everything I’ve just said was well known by 1992, when the Maastricht Treaty set the euro project in motion. So why did the project proceed? Because the idea of the euro had gripped the imagination of European elites. Except in Britain, where Gordon Brown persuaded Tony Blair not to join, political leaders throughout Europe were caught up in the romance of the project, to such an extent that anyone who expressed skepticism was considered outside the mainstream.

Back in the ’90s, people who were present told me that staff members at the European Commission were initially instructed to prepare reports on the costs and benefits of a single currency — but that after their superiors got a look at some preliminary work, those instructions were altered: they were told to prepare reports just on the benefits. To be fair, when I’ve told that story to others who were senior officials at the time, they’ve disputed that — but whoever’s version is right, the fact that some people were making such a claim captures the spirit of the time.

The euro, then, would proceed. And for a while, everything seemed to go well.

EUROPHORIA, EUROCRISIS
The euro officially came into existence on Jan. 1, 1999. At first it was a virtual currency: bank accounts and electronic transfers were denominated in euros, but people still had francs, marks and lira (now considered denominations of the euro) in their wallets. Three years later, the final transition was made, and the euro became Europe’s money.

The transition was smooth: A.T.M.’s and cash registers were converted swiftly and with few glitches. The euro quickly became a major international currency: the euro bond market soon came to rival the dollar bond market; euro bank notes began circulating around the world. And the creation of the euro instilled a new sense of confidence, especially in those European countries that had historically been considered investment risks. Only later did it become apparent that this surge of confidence was bait for a dangerous trap.

Greece, with its long history of debt defaults and bouts of high inflation, was the most striking example. Until the late 1990s, Greece’s fiscal history was reflected in its bond yields: investors would buy bonds issued by the Greek government only if they paid much higher interest than bonds issued by governments perceived as safe bets, like those by Germany. As the euro’s debut approached, however, the risk premium on Greek bonds melted away. After all, the thinking went, Greek debt would soon be immune from the dangers of inflation: the European Central Bank would see to that. And it wasn’t possible to imagine any member of the newly minted monetary union going bankrupt, was it?

Indeed, by the middle of the 2000s just about all fear of country-specific fiscal woes had vanished from the European scene. Greek bonds, Irish bonds, Spanish bonds, Portuguese bonds — they all traded as if they were as safe as German bonds. The aura of confidence extended even to countries that weren’t on the euro yet but were expected to join in the near future: by 2005, Latvia, which at that point hoped to adopt the euro by 2008, was able to borrow almost as cheaply as Ireland. (Latvia’s switch to the euro has been put off for now, although neighboring Estonia joined on Jan. 1.)

As interest rates converged across Europe, the formerly high-interest-rate countries went, predictably, on a borrowing spree. (This borrowing spree was, it’s worth noting, largely financed by banks in Germany and other traditionally low-interest-rate countries; that’s why the current debt problems of the European periphery are also a big problem for the European banking system as a whole.) In Greece it was largely the government that ran up big debts. But elsewhere, private players were the big borrowers. Ireland, as I’ve already noted, had a huge real estate boom: home prices rose 180 percent from 1998, just before the euro was introduced, to 2007. Prices in Spain rose almost as much. There were booms in those not-yet-euro nations, too: money flooded into Estonia, Latvia, Lithuania, Bulgaria and Romania.

It was a heady time, and not only for the borrowers. In the late 1990s, Germany’s economy was depressed as a result of low demand from domestic consumers. But it recovered in the decade that followed, thanks to an export boom driven by its European neighbors’ spending sprees.

Everything, in short, seemed to be going swimmingly: the euro was pronounced a great success.

Then the bubble burst.

You still hear people talking about the global economic crisis of 2008 as if it were something made in America. But Europe deserves equal billing. This was, if you like, a North Atlantic crisis, with not much to choose between the messes of the Old World and the New. We had our subprime borrowers, who either chose to take on or were misled into taking on mortgages too big for their incomes; they had their peripheral economies, which similarly borrowed much more than they could really afford to pay back. In both cases, real estate bubbles temporarily masked the underlying unsustainability of the borrowing: as long as housing prices kept rising, borrowers could always pay back previous loans with more money borrowed against their properties. Sooner or later, however, the music would stop. Both sides of the Atlantic were accidents waiting to happen.

In Europe, the first round of damage came from the collapse of those real estate bubbles, which devastated employment in the peripheral economies. In 2007, construction accounted for 13 percent of total employment in both Spain and Ireland, more than twice as much as in the United States. So when the building booms came to a screeching halt, employment crashed. Overall employment fell 10 percent in Spain and 14 percent in Ireland; the Irish situation would be the equivalent of losing almost 20 million jobs here.

But that was only the beginning. In late 2009, as much of the world was emerging from financial crisis, the European crisis entered a new phase. First Greece, then Ireland, then Spain and Portugal suffered drastic losses in investor confidence and hence a significant rise in borrowing costs. Why?

In Greece the story is straightforward: the government behaved irresponsibly, lied about it and got caught. During the years of easy borrowing, Greece’s conservative government ran up a lot of debt — more than it admitted. When the government changed hands in 2009, the accounting fictions came to light; suddenly it was revealed that Greece had both a much bigger deficit and substantially more debt than anyone had realized. Investors, understandably, took flight.

But Greece is actually an unrepresentative case. Just a few years ago Spain, by far the largest of the crisis economies, was a model European citizen, with a balanced budget and public debt only about half as large, as a percentage of G.D.P., as that of Germany. The same was true for Ireland. So what went wrong?

First, there was a large direct fiscal hit from the slump. Revenue plunged in both Spain and Ireland, in part because tax receipts depended heavily on real estate transactions. Meanwhile, as unemployment soared, so did the cost of unemployment benefits — remember, these are European welfare states, which have much more extensive programs to shield their citizens from misfortune than we do. As a result, both Spain and Ireland went from budget surpluses on the eve of the crisis to huge budget deficits by 2009.

Then there were the costs of financial clean-up. These have been especially crippling in Ireland, where banks ran wild in the boom years (and were allowed to do so thanks to close personal and financial ties with government officials). When the bubble burst, the solvency of Irish banks was immediately suspect. In an attempt to avert a massive run on the financial system, Ireland’s government guaranteed all bank debts — saddling the government itself with those debts, bringing its own solvency into question. Big Spanish banks were well regulated by comparison, but there was and is a great deal of nervousness about the status of smaller savings banks and concern about how much the Spanish government will have to spend to keep these banks from collapsing.

All of this helps explain why lenders have lost faith in peripheral European economies. Still, there are other nations — in particular, both the United States and Britain — that have been running deficits that, as a percentage of G.D.P., are comparable to the deficits in Spain and Ireland. Yet they haven’t suffered a comparable loss of lender confidence. What is different about the euro countries?

One possible answer is “nothing”: maybe one of these days we’ll wake up and find that the markets are shunning America, just as they’re shunning Greece. But the real answer is probably more systemic: it’s the euro itself that makes Spain and Ireland so vulnerable. For membership in the euro means that these countries have to deflate their way back to competitiveness, with all the pain that implies.

The trouble with deflation isn’t just the coordination problem Milton Friedman highlighted, in which it’s hard to get wages and prices down when everyone wants someone else to move first. Even when countries successfully drive down wages, which is now happening in all the euro-crisis countries, they run into another problem: incomes are falling, but debt is not.

As the American economist Irving Fisher pointed out almost 80 years ago, the collision between deflating incomes and unchanged debt can greatly worsen economic downturns. Suppose the economy slumps, for whatever reason: spending falls and so do prices and wages. But debts do not, so debtors have to meet the same obligations with a smaller income; to do this, they have to cut spending even more, further depressing the economy. The way to avoid this vicious circle, Fisher said, was monetary expansion that heads off deflation. And in America and Britain, the Federal Reserve and the Bank of England, respectively, are trying to do just that. But Greece, Spain and Ireland don’t have that option — they don’t even have their own monies, and in any case they need deflation to get their costs in line.

And so there’s a crisis. Over the course of the past year or so, first Greece, then Ireland, became caught up in a vicious financial circle: as potential lenders lost confidence, the interest rates that they had to pay on the debt rose, undermining future prospects, leading to a further loss of confidence and even higher interest rates. Stronger European nations averted an immediate implosion only by providing Greece and Ireland with emergency credit lines, letting them bypass private markets for the time being. But how is this all going to work out?

FOUR EUROPEAN PLOTLINES
Some economists, myself included, look at Europe’s woes and have the feeling that we’ve seen this movie before, a decade ago on another continent — specifically, in Argentina.

Unlike Spain or Greece, Argentina never gave up its own currency, but in 1991 it did the next best thing: it rigidly pegged its currency to the U.S. dollar, establishing a “currency board” in which each peso in circulation was backed by a dollar in reserves. This was supposed to prevent any return to Argentina’s old habit of covering its deficits by printing money. And for much of the 1990s, Argentina was rewarded with much lower interest rates and large inflows of foreign capital.

Eventually, however, Argentina slid into a persistent recession and lost investor confidence. Argentina’s government tried to restore that confidence through rigorous fiscal orthodoxy, slashing spending and raising taxes. To buy time for austerity to have a positive effect, Argentina sought and received large loans from the International Monetary Fund — in much the same way that Greece and Ireland have sought emergency loans from their neighbors. But the persistent decline of the Argentine economy, combined with deflation, frustrated the government’s efforts, even as high unemployment led to growing unrest.

By early 2002, after angry demonstrations and a run on the banks, it had all fallen apart. The link between the peso and the dollar collapsed, with the peso plunging; meanwhile, Argentina defaulted on its debts, eventually paying only about 35 cents on the dollar.

It’s hard to avoid the suspicion that something similar may be in the cards for one or more of Europe’s problem economies. After all, the policies now being undertaken by the crisis countries are, qualitatively at least, very similar to those Argentina tried in its desperate effort to save the peso-dollar link: harsh fiscal austerity in an effort to regain the market’s confidence, backed in Greece and Ireland by official loans intended to buy time until private lenders regain confidence. And if an Argentine-style outcome is the end of the line, it will be a terrible blow to the euro project. Is that what’s going to happen?

Not necessarily. As I see it, there are four ways the European crisis could play out (and it may play out differently in different countries). Call them toughing it out; debt restructuring; full Argentina; and revived Europeanism.

Toughing it out: Troubled European economies could, conceivably, reassure creditors by showing sufficient willingness to endure pain and thereby avoid either default or devaluation. The role models here are the Baltic nations: Estonia, Lithuania and Latvia. These countries are small and poor by European standards; they want very badly to gain the long-term advantages they believe will accrue from joining the euro and becoming part of a greater Europe. And so they have been willing to endure very harsh fiscal austerity while wages gradually come down in the hope of restoring competitiveness — a process known in Eurospeak as “internal devaluation.”

Have these policies been successful? It depends on how you define “success.” The Baltic nations have, to some extent, succeeded in reassuring markets, which now consider them less risky than Ireland, let alone Greece. Meanwhile, wages have come down, declining 15 percent in Latvia and more than 10 percent in Lithuania and Estonia. All of this has, however, come at immense cost: the Baltics have experienced Depression-level declines in output and employment. It’s true that they’re now growing again, but all indications are that it will be many years before they make up the lost ground.

It says something about the current state of Europe that many officials regard the Baltics as a success story. I find myself quoting Tacitus: “They make a desert and call it peace” — or, in this case, adjustment. Still, this is one way the euro zone could survive intact.

Debt restructuring: At the time of writing, Irish 10-year bonds were yielding about 9 percent, while Greek 10-years were yielding 12½ percent. At the same time, German 10-years — which, like Irish and Greek bonds, are denominated in euros — were yielding less than 3 percent. The message from the markets was clear: investors don’t expect Greece and Ireland to pay their debts in full. They are, in other words, expecting some kind of debt restructuring, like the restructuring that reduced Argentina’s debt by two-thirds.

Such a debt restructuring would by no means end a troubled economy’s pain. Take Greece: even if the government were to repudiate all its debt, it would still have to slash spending and raise taxes to balance its budget, and it would still have to suffer the pain of deflation. But a debt restructuring could bring the vicious circle of falling confidence and rising interest costs to an end, potentially making internal devaluation a workable if brutal strategy.

Frankly, I find it hard to see how Greece can avoid a debt restructuring, and Ireland isn’t much better. The real question is whether such restructurings will spread to Spain and — the truly frightening prospect — to Belgium and Italy, which are heavily indebted but have so far managed to avoid a serious crisis of confidence.

Full Argentina: Argentina didn’t simply default on its foreign debt; it also abandoned its link to the dollar, allowing the peso’s value to fall by more than two-thirds. And this devaluation worked: from 2003 onward, Argentina experienced a rapid export-led economic rebound.

The European country that has come closest to doing an Argentina is Iceland, whose bankers had run up foreign debts that were many times its national income. Unlike Ireland, which tried to salvage its banks by guaranteeing their debts, the Icelandic government forced its banks’ foreign creditors to take losses, thereby limiting its debt burden. And by letting its banks default, the country took a lot of foreign debt off its national books.

At the same time, Iceland took advantage of the fact that it had not joined the euro and still had its own currency. It soon became more competitive by letting its currency drop sharply against other currencies, including the euro. Iceland’s wages and prices quickly fell about 40 percent relative to those of its trading partners, sparking a rise in exports and fall in imports that helped offset the blow from the banking collapse.

The combination of default and devaluation has helped Iceland limit the damage from its banking disaster. In fact, in terms of employment and output, Iceland has done somewhat better than Ireland and much better than the Baltic nations.

So will one or more troubled European nations go down the same path? To do so, they would have to overcome a big obstacle: the fact that, unlike Iceland, they no longer have their own currencies. As Barry Eichengreen of Berkeley pointed out in an influential 2007 analysis, any euro-zone country that even hinted at leaving the currency would trigger a devastating run on its banks, as depositors rushed to move their funds to safer locales. And Eichengreen concluded that this “procedural” obstacle to exit made the euro irreversible.

But Argentina’s peg to the dollar was also supposed to be irreversible, and for much the same reason. What made devaluation possible, in the end, was the fact that there was a run on the banks despite the government’s insistence that one peso would always be worth one dollar. This run forced the Argentine government to limit withdrawals, and once these limits were in place, it was possible to change the peso’s value without setting off a second run. Nothing like that has happened in Europe — yet. But it’s certainly within the realm of possibility, especially as the pain of austerity and internal devaluation drags on.

Revived Europeanism: The preceding three scenarios were grim. Is there any hope of an outcome less grim? To the extent that there is, it would have to involve taking further major steps toward that “European federation” Robert Schuman wanted 60 years ago.

In early December, Jean-Claude Juncker, the prime minister of Luxembourg, and Giulio Tremonti, Italy’s finance minister, created a storm with a proposal to create “E-bonds,” which would be issued by a European debt agency at the behest of individual European countries. Since these bonds would be guaranteed by the European Union as a whole, they would offer a way for troubled economies to avoid vicious circles of falling confidence and rising borrowing costs. On the other hand, they would potentially put governments on the hook for one another’s debts — a point that furious German officials were quick to make. The Germans are adamant that Europe must not become a “transfer union,” in which stronger governments and nations routinely provide aid to weaker.

Yet as the earlier Ireland-Nevada comparison shows, the United States works as a currency union in large part precisely because it is also a transfer union, in which states that haven’t gone bust support those that have. And it’s hard to see how the euro can work unless Europe finds a way to accomplish something similar.

Nobody is yet proposing that Europe move to anything resembling U.S. fiscal integration; the Juncker-Tremonti plan would be at best a small step in that direction. But Europe doesn’t seem ready to take even that modest step.

OUT OF MANY, ONE?
For now, the plan in Europe is to have everyone tough it out — in effect, for Greece, Ireland, Portugal and Spain to emulate Latvia and Estonia. That was the clear verdict of the most recent meeting of the European Council, at which Angela Merkel, the German chancellor, essentially got everything she wanted. Governments that can’t borrow on the private market will receive loans from the rest of Europe — but only on stiff terms: people talk about Ireland getting a “bailout,” but it has to pay almost 6 percent interest on that emergency loan. There will be no E-bonds; there will be no transfer union.

Even if this eventually works in the sense that internal devaluation has worked in the Baltics — that is, in the narrow sense that Europe’s troubled economies avoid default and devaluation — it will be an ugly process, leaving much of Europe deeply depressed for years to come. There will be political repercussions too, as the European public sees the continent’s institutions as being — depending on where they sit — either in the business of bailing out deadbeats or acting as agents of heartless bill collectors.

Nor can the rest of the world look on smugly at Europe’s woes. Taken as a whole, the European Union, not the United States, is the world’s largest economy; the European Union is fully coequal with America in the running of the global trading system; Europe is the world’s most important source of foreign aid; and Europe is, whatever some Americans may think, a crucial partner in the fight against terrorism. A troubled Europe is bad for everyone else.

In any case, the odds are that the current tough-it-out strategy won’t work even in the narrow sense of avoiding default and devaluation — and the fact that it won’t work will become obvious sooner rather than later. At that point, Europe’s stronger nations will have to make a choice.

It has been 60 years since the Schuman declaration started Europe on the road to greater unity. Until now the journey along that road, however slow, has always been in the right direction. But that will no longer be true if the euro project fails. A failed euro wouldn’t send Europe back to the days of minefields and barbed wire — but it would represent a possibly irreversible blow to hopes of true European federation.

So will Europe’s strong nations let that happen? Or will they accept the responsibility, and possibly the cost, of being their neighbors’ keepers? The whole world is waiting for the answer.