ernst welteke : regulating european financial markets speech by mr ernst welteke, president of the deutsche bundesbank, at the frankfurt european banking congress, held in frankfurt, on 17 november 2000. * * * i ladies and gentlemen, “ what are the essential features of an efficient regulation of the financial markets in europe? ” that is a question which cannot be answered in a single sentence. nevertheless, it is possible to specify elements which form an indispensable part of a modern regulatory framework. these include : 1. rules for the markets and the participants - rules which are in line with market conditions and, at the same time, underpin the stability of the financial system. 2. organisational forms of financial market supervision which should mirror market structures, but not run ahead of them. 3. supervisory practices which - especially in europe - have to be harmonised even more closely in order to improve and safeguard the “ level playing field ”. 4. a sufficient quantity of highly qualified experts in the field of supervision. globalisation, technological progress and international competition are the trends that are shaping all the financial markets - and, of course, the stock markets in europe. the stock markets are engaged in fierce competition with each other. issuers and investors want a liquid market that is efficient, secure and as cost - effective as possible in terms of both trading and settlement. alliances or even mergers are strategic options for strengthening competitive positions. these changes are taking place in a setting where there is comparatively little harmonisation in the regulatory environment provided by securities and stock exchange law. relatively new competitors have recently been entering the field in the shape of electronic communication networks ( ecns ). these are electronic trading platforms but are not licensed stock exchanges. in terms of turnover, these ecns do not play a major role at present but, even so, there arises the problem of competition between licensed and regulated stock exchanges and the scarcely regulated ecns. in my view, it is very important for a “ level playing field ” to be created in this area. given this dynamic setting, analysing the present system of securities and stock exchange supervision in europe is both prudent and necessary. the group of financial experts under the direction of baron alexandre lamfalussy has presented an interim report which is to be discussed in the near future by the ecofin council. without wishing to pre - empt that discussion, a gradual approach appears to me to be a solution that is both prudent and

sovereign rights to the european level and thus combine the existing monetary union with a fiscal union. this echoes the sentiment of bundesbank president karl blessing, who in 1963 said that : “ a common currency and a federal central banking system are feasible only if, apart from a common trade policy, there is also a common fiscal and budgetary policy, a common economic policy, a common social and wage policy – a common policy all around. ” in my opinion, however, such a far - reaching transfer of national sovereignty to the european level requires the backing of both policy makers and the public at large. there was no such support when the monetary union was created and little has changed since. in the midst of the crisis, i do not see sufficient willingness on the part of eu governments or citizens – neither in germany nor elsewhere – to actually transfer sovereign rights on budget issues to the european level. merely increasing mutual liability – by introducing eurobonds, for example – without establishing greater mutual control in return, would only provide additional incentive to incur debt. after all, you wouldn ’ t entrust your credit card to someone if you weren ’ t able to control their spending. for the time being, therefore, the only answer to the crisis is to strengthen the maastricht framework. in doing so, more needs to be done to render the fiscal rules more binding – rules which have too often been stretched and ignored in the past. new agreements, such as bis central bankers ’ speeches the revised stability and growth pact and the fiscal compact, are steps in the right direction in this regard. however, it is vital that the new rules are applied in actual practice rather than existing only on paper. but the essence of a strengthened maastricht framework is that member states be held responsible for the consequences of their financial policy decisions. in this connection, it must also be possible – as a last resort – to declare governments insolvent without endangering the stability of the european financial system as a whole. to improve financial stability, the heads of state and government in euro - area countries have agreed to establish a european banking union. if implemented properly, this banking union can rectify deficiencies in competition in the banking sector through a strict single european supervisory mechanism. with an appropriate recovery and resolution regime, it can also strengthen the disciplinary effect which capital markets have on governments. the banking union once again puts the focus more squarely on the principle of liability. however, regulation must also be adapted