need to move towards a more integrated fiscal union and debt financing in the euro area, as a means to enhance stability. a more integrated financial market is likely to be a more efficient way to enhance euro area resilience. financial integration did advance rapidly after the introduction of the euro, particularly in wholesale markets. but in certain segments, markets have remained fragmented along national lines – not least retail banking. this is a politically sensitive sector, due to concerns about consumer protection and the financing of small businesses. but when retail banking markets are fragmented, governments are more likely to resort to “ national solutions ” in the face of a financial crisis – possibly in an uncoordinated fashion. experience shows a piecemeal approach can be very disruptive to financial stability and monetary transmission. for example, we have seen the externalities created by the irish government ’ s decision to guarantee all irish bank liabilities in the immediate aftermath of lehman ’ s failure in 2008. we are still dealing with the consequences of those decisions. to ensure that the benefits of greater financial integration more than outweigh the risks – including that of a more concentrated banking system – the eu regulatory and supervisory framework needs to be enhanced and harmonised, taking the necessary area - wide perspective and thereby recognising and internalising the cross - border externalities. one objection to a more integrated banking system in europe is the role of national budgets in crisis resolution. as long as budgets remain national – so goes the argument – crisis resolution has to remain national, and so does supervision. the crisis has shown that bank resolution and restructuring are more complicated for cross - border institutions, given that any asdrubali, p., b. e. sørensen, and o. yosha ( 1996 ). “ channels of interstate risk sharing : united states 1963 – 90, ” quarterly journal of economics 111, pp. 1081 – 1110. kalemli - ozcan, s., s. manganelli, e. papaioannou and j - l. peydro ( 2008 ). “ financial integration, macroeconomic volatility and risk sharing – the role of the monetary union, ” in b. mackowiak, f. p. mongelli, g. noblet and f. smets ( eds. ) the euro at ten : lessons and challenges, frankfurt : european central bank. bis central bankers ’ speeches fiscal costs have to be distributed across several host sovereigns.

as charles goodhart has said, “ … cross - border banks are international in life, but national in death ”. 3 as i see it, enhanced financial integration in the euro area does not necessarily imply a need for greater fiscal union – if that is understood as a pooling of tax revenues, harmonisation of tax rates or issuance of a common bond. instead, we must develop the capacity at the areawide level to address specific financial tensions that threaten to spill over to the area as a whole, minimising disruptions to market integration and supporting the transmission of monetary policy. the recent crisis – and, in particular, developments in ireland – have demonstrated that, despite the imperfect integration of the european financial system, very strong cross - border contagion takes place within the financial sector. the instruments available at present to block this contagion are not efficient and have side - effects. in practice, much of the burden to contain contagion has fallen on central banks. this is neither desirable nor appropriate. in my view, the european authorities need to develop a capacity to conduct a “ surgical strike ” on problematic financial institutions or market segments in the event of a financial crisis. through such actions, the area - wide externalities created by specific problems can be contained. in practice, this means ensuring that programmes such as the european financial stability facility ( efsf ) or the european financial stabilisation mechanism ( efsm ) – and their envisaged permanent successors – are given sufficient financial resources and the required flexibility by the member states to act as necessary to support financial stability. to do so, these bodies may also need to be able to support the recapitalisation of an ailing banking system, if its weakness threatens the stability of the area as a whole. all this of course comes with strict conditionality in the context of an overall eu / imf programme. this has been the case in both the greek and irish programmes, in which funds are dedicated to the recapitalisation of the weak banks. a more systematic approach should be pursued, making it easier for countries to implement such a scheme. developing an enhanced and harmonised regulatory and supervisory framework the ecb has a keen interest in ensuring that the regulatory and supervisory structure, at both national and eu level, provides all players with incentives to avoid excessive risk - taking that could lead to destabilising the financial system. in addition, consistent rules and convergent supervisory practices are essential to the creation