in Europe and neighboring economies. In effect, most countries are part of the global financial system and policy architecture and conform in varying degrees to the generic framework presented in the part of the paper.

Although there are some features of the EU architecture that contributed uniquely to Europe‘s multi-dimensional country and European-wide crises, these European features also share common ground with weaknesses in the global financial architecture. For example, there are pan-European financial institutions and pan-European markets that are subject almost exclusively to national regulation (with some transnational coordination), just as there are global institutions and markets that are subject exclusively to national oversight (also with some global coordination). This mismatch between financial activities and the perimeters of regulation and supervision has created wide gaps in oversight that contributed significantly to the buildup of unsustainable risk exposures that ultimately posed European (and of course global) financial systemic risks.

The last subsection points to and discusses key weaknesses that require the implementation of reforms in Europe and more broadly.

The broad conclusion of this section is, not surprisingly, that all lines of defense against a systemic financial crisis were breached during the crisis in all of the major financial centers, in many of the EU emerging markets, and in EU-accession countries. Financial-stability architectures need to be reformed in significant ways in several key areas before the threat of further systemic crises will be substantially reduced.

# **_1.1. Evolution of Europe’s Pre-Crisis Architecture for Safeguarding Financial System Stability_**<sup>**_4_**</sup>

Although the process of EU economic and financial integration has been ongoing since the early 1950s, the pre-crisis European framework for financial regulation and supervision (that is for safeguarding European financial stability) can be summarized as having been driven by four key initiatives.<sup>5</sup> <u>First, was the European Commission‘s 1985 White Paper,</u> _Completing the Internal Market_ .<sup>6</sup> The paper endeavored to spell out a program and timetable to complete the European common market as envisaged in the Treaty: ―... the creation of a single integrated internal market free of restrictions on the movement of goods; the abolition of obstacles to the free movement of persons, services and capital; the institution of a system ensuring that competition in the common market is not distorted; the approximation of laws as required for the proper functioning of the common market; and the approximation of indirect taxation in the interest of the common market.‖ (See paragraph 4 of the White Paper.) The White paper set out three principles of legal and market integration that are the foundation for the process of European integration of goods, capital, and labor markets. As such,

> 4 This section draws on the descriptions and analyses in Schinasi and Teixeira (2006), Racine and Teixeira (2009), Gaspar and Schinasi (2009), and Teixeira (2010). Also see Dermine (2000) and Rajan and Zingales (2002). 5 The EU is based on the rule of law. This means that every action taken by the EU is founded on treaties that have been approved voluntarily and democratically by all EU member countries. For example, if a policy area is not cited in a treaty, the European Commission cannot propose a law in that area.

> 6 European Commission, _Completing the Internal Market_ , White Paper to the European Council of 28/29 June 1985 in Milan, COM (85) 310 final, 14 June 1985.

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