lorenzo bini smaghi : the economic governance of the european union in the light of the treaty of lisbon – harmonisation or competition between countries? speech by mr lorenzo bini smaghi, member of the executive board of the european central bank, at the conference on ” the european central bank : a new actor on the international scene ”, milan, 24 january 2008. * * * introduction 1 it is a great pleasure for me to speak at this conference, which gives us the opportunity to take stock – some ten years since the start of the economic and monetary union – of the institutional framework for the governance of the european economy. the book entitled “ the law of the european central bank ” by chiara zilioli and martin selmayr, which looks at the legal framework of the european central bank, is a good place to start. ten years on, it is possible to question whether this framework is still valid. i should specifically like to focus on an area of particular interest, especially in the light of recent events. the new treaty of lisbon, which was signed by the heads of state or government and the finance ministers of the 27 european union member states last december, did not make any substantial changes to the governance structure of the european economy. there continues to be a contrast between a fully - integrated monetary system, with a single monetary policy decided by the european central bank, and a financial market that is only partially integrated, since regulatory and supervisory policies are implemented at national level. this issue, which is quite complex, has been studied by various commentators, academics and officials. 2 the question is whether the current institutional framework is adequate given the accelerating process of market integration and the market turmoil experienced in recent months, or whether it should instead be strengthened in order to ensure an effective regulation of the markets. i intend to address these issues mainly from an economic perspective, leaving to the legal experts the task of outlining their legal - institutional vision in this regard. 1. the new treaty : innovation and continuity i do not intend to discuss either the controversy or the difficulties encountered during the process of revising the treaty, which took seven years : from the presidency conclusions of the nice european council at the end of 2000, through the draft european constitution outlined in 2004 and the negative referenda on the constitution in france and the netherlands in 2005, to the signing of the treaty of lisbon in december 2008. i should only like to point out that, despite the discussions which took place in various quarters

to a situation whereby legislative and regulatory autonomy are deemed “ normal ”. a high degree of coordination or complete harmonisation is only allowed if this leads to better results. the burden of proof weighs heavily on the side of harmonisation and centralisation. 2. financial regulation and supervision the european system of supervision and regulation is characterised by a combination of regulatory harmonisation and autonomy – and to some degree also of competition. no single community body bears overall responsibility. the legal instruments typically used in this regard take the form of directives rather than regulations. this gives the national authorities considerable room for manoeuvre when transposing the directives into national law. the system of cooperation and coordination among the national authorities is based on a four - level approach known as the “ lamfalussy process ”. to summarise, this consists of : 1. a few framework principles laid down in community legislation ( level 1 ) ; 2. a series of technical implementing measures defined by the european commission ( level 2 ) ; 3. a system of committees through which cooperation takes place among the national authorities for implementation of the legislation and convergence of supervisory practices ( level 3 ) ; 4. under level 4, the european commission is given the task of monitoring the application of european law, with the help of the national authorities and the private sector. although this system has borne some fruit over recent years, the question remains whether financial market developments necessitate substantial improvements in the quality of the european regulatory set - up. there are at least four arguments that support this hypothesis. first, there is no doubt that the banking and financial systems of the various countries continue to be diverse. however, the recent market turmoil has highlighted the vulnerability of various national systems to shocks originating elsewhere, underlining how, today, banking and financial activity knows no boundaries. second, until a few years ago, cross - border financial activity was somewhat limited, above all as far as retail banking services were concerned. the distortionary effects of the various national regulations did not seem to be overly pronounced. recently, the process of financial integration within europe, and in particular within the euro area, has accelerated significantly. we have seen a large number of cross - border mergers and acquisitions and today in europe there is a group of large banks that operate in various countries of the eu. 4 moreover, the recent market turmoil has shown that, in an integrated monetary system such as the euro, the monetary market can constitute a conduit for the transmission of financial