While further cultural integration may take time, the integration policies of the European Union (EU) had the explicit aim of removing legal barriers and building the necessary technical infrastructure. Indeed, the recent economic history of the EU has been marked by distinctive efforts aimed at the removal of barriers to cross-border activities. The EU Banking Directives (1977, 1988), the Financial Services Action Plan (1999), the White Paper (2005) are all examples of EU initiatives aimed at creating a true level playing field in the financial sector. Financial integration is essential for the functioning of the euro area as it is for other economies and regions. The financial system represents the primary channel through which monetary policy affects the economy. A stable, efficient and integrated financial market is the basis for smooth transmission of monetary policy in which monetary policy decisions are transmitted equally across member countries. The Eurosystem has taken since the launch of the euro a proactive stance to promote financial integration in the single currency area. For instance, the establishment of an integrated European payments infrastructure – through the creation of the Eurosystem largevalue payment system TARGET and its successor TARGET 2 – has been instrumental for the integration of the money market. The integration of the money market has been of particular help in the recent crisis for the ECB to react promptly and successfully. It has proven to be beneficial in effectively providing liquidity to the market, and thereby ensuring a proper and smooth transmission of monetary policy.

Therefore, to improve financial stability by a lower degree of financial integration would certainly be the wrong measure. We should not undo those reforms which have paved the way to financial integration and revert back to a retrenchment within the national borders. This is certainly not the right strategy for the euro area, and it would be undesirable at global level. Admittedly, financial integration generates greater interconnectedness, which in turn may increase the risk that failure in one part of the system may trigger chain reactions in the formation of expectations which could have a destabilizing effect. But financial isolation – the opposite of financial integration – is not the rational answer to such a risk. We nowadays live in a global world, where not only financial, but also economic and cultural links have become increasingly tighter. News spread instantaneously and shape global market sentiments; products are designed, assembled and sold in different countries; political events in a small region can send shockwaves around the world. It would be naïve to think that a country could isolate itself financially. And even if it were possible, the costs in terms of lost efficiency and productivity would far outweigh any possible benefit. 2  BIS Review 81/2010  2. Financial development – opportunities and risks  If financial integration is both an irreversible process and a process we do not wish to reverse, finance per se is not always good in any form and size. This is where we can and should have a reasonable and fruitful discussion.