It was only later that the concept of a fully-fledged Banking Union emerged, which would contain a SRM and a possible Deposit Guarantee Scheme, which has meanwhile been postponed. Rationale and objectives of Monetary Union The absence of European supervision and resolution had however already been identified by many analysts as an initial design flaw of monetary union. As the crisis developed, this became clear. The high degree of interconnectedness, in the euro area in particular, implies that the impact of supervision affects not only the domestic banking sector but also, as an externality, other countries. This has been captured by the so-called “financial trilemma”. The concept of the trilemma illustrates the impossibility of achieving simultaneously three objectives in an environment with linked financial markets. These objectives are financial stability and financial integration while preserving supervision at national level.1 The reasoning behind this is the following: with increasing financial integration, pursuing national financial policies will generally not lead to financial stability, because national policies seek to benefit national welfare, while not taking into account externalities of national supervisory practices in other countries.2 This leads to an under-provision of financial stability as a public good.3 A correction of this flaw addresses the first objective of Banking Union. A second objective for Banking Union4 stems from the evidence that keeping supervision at national level in both creditor and debtor countries contributed to the large imbalances that  1  Schoenmaker, D. (2011): “The Financial Trilemma”, forthcoming in Economics Letters.

This could take the form of an insurance-type mechanism between euro area countries to buffer large country-specific economic shocks.” Second, under the umbrella of Economic Union, we need further progress towards the completion of the single market in services, and a more co-ordinated approach to macroeconomic policy at the euro area level. Finally, the sovereignty-sharing that monetary union represents implies moving forward towards political union. We need now to complete the integration of European nations. The political union pillar, is needed to ensure that the other pillars have sufficient democratic legitimacy. I will not dwell long on this issue, as it is fundamentally a matter for the Member States and European citizens. It should suffice to say that the crisis has shown the limits of applying a national mind-set in a deeply integrated monetary union. In this sense, political union is not about moving forward, but about catching up with the depth of economic and financial integration that already exists. What is at stake refers basically to democratic accountability and legitimacy. An important element of legitimacy has been provided in the past, in the European Union and other democracies, by what Fritz Scharpf called output legitimacy (or government for the people)15, that is, by the effectiveness of the system in ensuring the continuous improvement of the citizens´ quality of life. All advanced democratic countries and consequently the European Union will face challenges in this front stemming from the prolonged period of slow economic growth that has now just started.