but we have seen during the crisis that the mere prospect of euro area countries failing creates negative and possibly self - fulfilling feedback loops, at great cost to the euro area. without a european budget with a stabilising role, there have to be mechanisms for mutual support in the euro area. and as a condition, there have to be stronger economic governance and mutual control. the basic premise of the new social contract between euro area countries, then, is that countries have to abide by the rules of the community, and when they do, they become eligible for mutual support. euro area governments have earmarked €700 billion for countries that get into difficulty, a sum which can be lent against strong conditionality. and we are now seeing this concept being further developed before countries get into difficulty via the new idea of “ reform contracts ”. countries can decide to undertake difficult structural reforms and receive financial incentives in return. this benefits both parties to the contract by preserving the national character of the decision, while protecting the wider euro area by reducing longterm risks emanating from misguided economic policies. however, a binding contract between member states is only needed where national preferences still play a strong role. 7 for instance, it is necessary to work through reform contracts because countries have different approaches when it comes to labour relations or unemployment benefits, based on their own histories and cultures. but where national preferences play a weaker role, it makes sense to shift policies straight to the european level. then we do not need to set rules and create incentives, because decisions are out of the hands of national authorities. this is the vertical dimension of the social contract in see ch. tiebout, 1956, “ a pure theory of local expenditures ”. journal of political economy, 64 : 416 – 424. bis central bankers ’ speeches europe that i mentioned earlier – directly between the european level and the ordinary citizen. examples of this direct relationship include the regulatory roles of the eu : protecting people from the negative effects of monopolies, regulating against harmful products, and negotiating suitable trade agreements. the eu also plays a role in redistributing resources from richer to poorer regions through the cohesion funds, although these amount to only 0. 36 % of the union ’ s gdp. where the social contract between the european union and its citizens needs to be reformed is in three areas. first, as i already noted, where there is a role for national preferences, there is still a role for

k c chakrabarty : indian banking sector – towards the next orbit inaugural address by dr k c chakrabarty, deputy governor of the reserve bank of india, at the 9th advanced management programme at imi, delhi, 13 february 2012. * * * assistance provided by smt. theresa karunakaran and shri sanjeev prakash in preparation of this address is gratefully acknowledged. dr. pritam singh, director general, international management institute, dr. ahindra chakrabarti, programme director, participants from reserve bank of india and the commercial banks. it gives me great pleasure to be before you today as you embark on this journey of learning here at imi and later across paris, berlin and milan to imbibe the culture of these countries and the best practices. the advanced management programme is the ninth in the series and includes study visits to central bank / leading commercial banks of these countries and interacting with their senior management, the objective being to enable the participants to see world class banking systems, understand the strengths and weaknesses of the european banking system and develop awareness and appreciation of the emerging business environment. lectures and interactions with some leading academicians and management experts of the european business schools will give rare insights to the participants on present status of the eurozone economies. apart from the structured classroom learning, these kind of programmes offer a unique opportunity to the participants for learning from each other and also understand the best management practices across organizations. it is expected that the participants will try to develop further on these best practices and implement them in their organizations in their own way. all these and more are required as each one of you have a role to play in taking indian banking to the next orbit. having said that, i have been asked to speak on “ the indian banking sector : towards the next orbit ”. i would like to begin with an analogy. a spacecraft needs to achieve a certain momentum before it breaks free from the earth ’ s gravitational pull, leaves behind the familiar and comfortable and enters into the unchartered vastness of a new orbit. the success of the mission and certainty of reaching its goals would lie in how effectively it has made its preparation, the skills of its crew and its ability to manage the risk of turbulence and overcome the snags and obstacles in its flight path. the banking system is no different. to move into the next orbit, it is vital to understand the environment we are in, the inefficiencies, the pit