negative externalities that created European-wide systemic risks and the adverse economic and financial spillovers experienced by countries within and neighboring the euro area and EU more broadly. Regardless of how it is achieved, greater and more effective cooperation in decision making and policy implementation is a necessary condition for achieving better outcomes in safeguarding European-wide financial stability in the period ahead.

# **_1.2. Pre-Crisis Lines of Defense Against Systemic Risks and Vulnerabilities – Critical Features of the European (and Global) Pre-crisis Architectures for Safeguarding Financial System Stability_**<sup>**_19_**</sup>

The European architecture just described reflects the historically unique and relatively successful process of economic, financial, and social integration undertaken since the early 1950s to create a ̳single market‘ in Europe. In some if not many ways, this architecture reflects the broader processes of international economic and financial integration and especially the globalization of finance. Finance is fungible and it is now global.

Thus it should not be surprising that the European architecture for safeguarding financial stability that evolved over time shares many features with the architectures in other major financial centers. In addition, as will become obvious in the discussion that follows, weaknesses revealed by the crisis in the European architecture were also revealed to be weaknesses in the global architecture that has characterized international cooperation – or the lack thereof – in global finance across the major financial centers in the world. That is, in many ways, the European architecture has many of the flaws present in the pre-crisis global financial architecture. This subsection lays out a ̳ _generic’_ architecture that represents many of the basic features of the policy frameworks in place prior to the crisis. The following Section 1.3 then highlights the weaknesses and flaws revealed by the global crisis and the crises in Europe.

# _1.2.a.  Potential sources of systemic risk and threats to financial stability_

Pre-crisis frameworks for safeguarding financial stability and encouraging economic and financial efficiency in most advanced countries, the euro area, and Europe more generally can be seen as lines of defense against systemic problems that could threaten stability. These frameworks were built over time in the major financial centers by both private and public stakeholders. The architectures evolved over time as events occurred and are the result of neither grand designs nor underlying ̳genetic‘ codes that predisposed the evolution of the systems to emerge in the way they have. The evolutionary processes should be seen as akin to an evolving patchwork of consensus decisions by stakeholders in the major financial centers to deal with problems as they emerged and as an organic collection of private and public international agreements and conventions. As the major financial centers‘ frameworks evolved so did the frameworks in other smaller advanced countries through international committees and other institutional structures. This slow process of convergence became increasingly more relevant for emerging-market countries as they became more highly integrated into the global economy and financial system. This process has been especially important in Europe, where economic and financial integration and EU enlargement were explicit EU goals.

> 19 This subsection draws on the framework presented in Schinasi (2009a) and further developed in Schinasi and Truman (2010).

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