These externalities led to the emergence of a twin crisis, where private sector debt (often by financial intermediaries) was rapidly converted into public liabilities, resulting into the self-reinforcing negative feedback loop between sovereigns and banks I alluded to before. A single mechanism for banking supervision and a common authority with strong tools for bank resolution could have mitigated the emergence of these negative externalities. The crisis clearly highlighted that financial stability is a common good and as such requires shared responsibility for its preservation. We have learned the hard way that high financial integration without a commensurate deeper integration of financial stability policies is intrinsically unstable. Second, sustained divergences in competitiveness and macroeconomic imbalances were largely ignored. Persistent current account imbalances within the euro area, signalling vulnerabilities of some Member States, were long considered as irrelevant in a monetary union. Besides fiscal surveillance, the working assumption was that there is no need to closely monitor macroeconomic imbalances. Disequilibria originating from the private sector were supposed to be only short-lived and eliminated by market forces. The crisis has taught us that imbalances in individual countries may have powerful negative externalities on other countries within a monetary union. This recognition led to the belief that the governance of economic policies at the EU level has to be reformed: more effective macroeconomic policy coordination at euro area level is an essential building block of a monetary union. Third, the euro area availed of a fiscal policy coordination and surveillance framework.

Philipp Hildebrand: The virtues of flexible financial markets - a central banking perspective Summary of a speech by Mr Philipp Hildebrand, Member of the Governing Board of the Swiss National Bank, at the CFA Institute Annual Conference, Zurich, 22 May 2006. The complete speech can be found in German on the Swiss National Bank’s website (www.snb.ch)  *  *  *  Summary Rapid technological change and market liberalization have been the driving forces behind the remarkable evolution of global financial markets over the past three decades. The consequences of this development include a geographic rearrangement of global capital markets, a fast pace of product innovation and changes in the nature and composition of financial market participants. The benefits associated with today’s flexible financial markets are manifold. Financial markets have become much more efficient in allocating capital. New products enable a better distribution of risks and the liquefaction of previously illiquid assets. They have also increased market transparency. As a result, modern financial markets facilitated innovation and likely enhanced economic growth. Moreover, they have contributed to make economies more resilient to shocks. These extensive benefits notwithstanding, modern financial market also entails new risks. These risks tend to elicit calls for increasingly far-reaching regulation. While some regulation may indeed be required to guarantee the integrity of financial markets, the threshold for such regulation should be set high.