In line with Basel III, the Commission’s proposal (so-called CRD IV) provides for higher minimum capital requirements, a stricter definition of eligible capital and more transparency. It also introduces also entirely new concepts, such as mandatory liquidity requirements and a non-risk-based leverage ratio. Beyond the micro-prudential dimension of regulation, the proposal introduces macroprudential elements, most prominently the countercyclical capital buffer regime. This constitutes an important safeguard to protect the banking sector from periods of excessive aggregate credit growth. And on top of this, the European Council has recently decided that European banks need to have a 9% core tier one capital ratio by the middle of next year, instead of by 2018, as agreed by the Basel Committee. Other important regulatory initiatives are underway. These include the establishment of an appropriate regulatory framework for over-the-counter derivatives, enhanced oversight of Credit Rating Agencies, the prevention of systemic risk coming from the “shadow banking sector” and an EU crisis management framework for bank recovery and resolution. As regards the supervisory framework, a new system of financial supervision has been established creating, for the first time, European level macro-prudential supervision through the European Systemic Risk Board (ESRB). This discussion raises an obvious question: if so much has been achieved since 2009, why have euro area authorities not been more effective in halting the crisis? In my view this is fundamentally a political question, related to making policy between 17 sovereign democracies.

This underscores my central point that a much more comprehensive approach to economic governance is now the priority for the euro area. And this means more economic and financial integration for the euro area, with a significant transfer of sovereignty to the EMU level over fiscal, structural and financial policies. Second proposition: Significant governance reforms have already been taking place Europe has responded to these policy, governance and market failures by undergoing a multi-year process of institutional reform. This leads me to my second proposition: that a much more radical change in euro area governance has taken place than many observers seem to acknowledge. There is a tendency to see the euro area response to the crisis as perennially behind-the-curve – as “too little, too late”. I concede that national authorities have not always been effective in stabilising financial conditions. But I also think this assessment lacks an appropriate benchmark. Observers expect a new “silver bullet” every few months and when one is not delivered, they are disappointed. But if we choose a more appropriate benchmark – say, the euro area in 2009 – a quite different picture emerges. The sum of the incremental steps taken since that date are, in fact, now a very big step. Take for example economic governance. The EU Council and European Parliament have agreed on a legislative package that significantly limits the discretion of national authorities, even when imposing sanctions on themselves. This includes a framework for monitoring a wide range of macroeconomic imbalances, also backed by sanctions.