yves mersch : dinner speech at eui - nomics speech by mr yves mersch, member of the executive board of the european central bank, at eui - nomics, florence, 24 april 2015. * * * ladies and gentlemen, the crisis in the euro area has painfully exposed the weaknesses of the euro area ’ s institutional set - up. a lot of progress has since been achieved in making its governance structure more resilient. but further action and reflection are needed. in theory several ways of further developing this governance structure are conceivable. they range from loose cooperation among member states to the creation of a federal state ; from high levels of discretion to strictly binding rules ; and from legitimacy that mainly stems from national elections to legitimacy at the european level that is strong enough to speak of a political union. i am aware that across this wide range some ideas are politically less feasible than others. and it is up to those democratically legitimised to do so to decide how to adjust the union ’ s governance structure to best meet the objectives of the eu as enshrined in our treaties. in my remarks today, i will focus on how the different dimensions of further developing the euro area ’ s governance structure fit together, bearing in mind that they influence each other. these dimensions are : • first, the method of governance, • second, the source of legitimacy, and • third, the decision - making methods. getting governance right in 1992 europe ’ s heads of state and government committed to creating a monetary union. sharing a currency implies sharing sovereignty. it requires further integration, including governance structures which go beyond those of a single market which might work based on loose coordination among independent nation states. striving for supranational solutions in those policy areas that affect the smooth functioning of a monetary union would thus have been the logical consequence of the maastricht commitment. but we all know that reality often takes no notice of logic. and we have seen the consequences. today, financial policy is more compatible with the requirements of a monetary union than it was at the beginning of the crisis. we now have a european approach to banking supervision and resolution, independent of any national bias. and the creation of a capital markets union will help to better integrate europe ’ s financial markets. obviously, an integrated financial policy is an important complement to a single monetary policy. but economic and fiscal policies also play a crucial role in the smooth operation of a monetary union.

democratic legitimacy. the european parliament could, for instance, assemble in a variety of compositions. going for intergovernmental rather than federal solutions thus generates path dependencies. following the intergovernmental path in monetary policy would have led to the implementation of the uk ’ s proposal back in 1990 of parallel competing currencies rather than a single currency. the perceived lack of input legitimacy in the current institutional set - up also implies a high standard of output legitimacy ; that is, policy - makers need to generate outcomes that are in the voters ’ interest. if they fail to do so, they risk putting the stability of monetary union into question. rules versus discretion – a question of space and time? a monetary union is stable as long as its members find it more beneficial to be in that union rather than outside it. this stability is easier to achieve if everybody plays by the same rules. in a monetary union, economic well - being is not simply a domestic question. member states ’ economies influence each other, which is why a monetary union is more attractive if all its members are prospering. accordingly, europe ’ s decision - makers have given themselves common rules to guide fiscal and economic policies. bis central bankers ’ speeches these rules have repeatedly been broken. this suggests that while decision - makers favour a common set of rules to generate trust and credibility among member states, they have sometimes preferred more flexibility than the rules allow. in essence, we are facing an issue of time - inconsistent preferences : in the long run, governments have an interest in strict rules that foster trust and credibility among member states. in the short run, they might well prefer more discretionary decision - making that allows them to flexibly adapt their policies to circumstances. in addition, election cycles sometimes encourage myopic policy choices that are not necessarily in the union ’ s long - term interest. this is especially relevant in the eu ’ s multilevel governance framework with staggered election cycles at the various national and subnational levels. i respect that governments are bound by their voters ’ will. that will might well differ between jurisdictions in general, and between creditors and debtors in particular. at the same time, i see a risk that governments are making it too easy for themselves when they claim that they cannot make any further concessions at international level because of domestic political pressures. survey data shows that an unquestioning belief in opinion polls is not necessarily in the longterm interest of voters. for instance, support for the euro