jose manuel gonzalez - paramo : the regulatory and supervisory reform in europe speech by mr jose manuel gonzalez - paramo, member of the executive board of the european central bank, at the presentation of the report “ observatorio sobre la reforma de los mercados financieros 2009, realizado por la fundacion de estudios financieros ”, madrid, 22 january 2010. * * * introduction ladies and gentlemen, 1 i am very glad to participate this morning in the presentation of the latest “ observatorio ” from the fundacion de estudios financieros ( fef ). 2 this year ’ s report is dedicated to the very important issue of the reform of the european financial markets. the current financial crisis has revealed a number of deficiencies in the european and international regulatory framework, which need to be addressed in order to place our financial systems and economies on a more solid footing. as a result, a number of initiatives have been undertaken in the relevant european and international fora. the number and breadth of these initiatives is impressive and very promising. the report from fef provides a very comprehensive survey of all the current initiatives, identifying the various strands of work and summarising the main implications for the financial sector and markets. i congratulate the authors on this exhaustive report, which represents a very useful reference for whoever is interested in understanding the ongoing developments in the regulatory and supervisory field. of course, the reader may not necessarily agree with all conclusions of the report. in particular, the report identifies a major risk of over - regulation and instead stresses the virtues from industry self - regulation. i beg to disagree. in my view, the main risk right now is not to do too much, but rather that we do too little. there is a serious risk that the gradual improvement of conditions in the financial markets and the banking industry may diminish the sense of urgency and necessity of implementing reforms identified as essential to prevent the occurrence of similar crises in the future. albert hirschman, the american economist, noted that in many of the debates that precede social and political reforms of historical magnitude, the proposed changes are typically met with three arguments : ( 1 ) that they would produce perverse effects, ( 2 ) that they would be ineffectual, and ( 3 ) that they would jeopardise previous achievements. 3 i am afraid that we are now increasingly hearing the same arguments in the context of

united states. that was the view of europe ’ s founding fathers. if it was true then, it is even truer today. is the success of our currency union a precondition for the success of the european project? our currency union is the most advanced element in the process of european integration. it is the most appropriate means of realising our founding fathers ’ vision of a single market in europe. after all, you could hardly imagine a single market in the united states with different currencies in massachusetts, florida and california. you like to point out that average inflation in the euro area has been lower than … average annual inflation has, at 2. 0 % over the first 13 years, been much lower than it was before the euro in a number of member countries, and also lower than it was under the deutsche mark over the previous 50 years. our primary objective of price stability is the needle in our compass. bis central bankers ’ speeches but inflation is not the only thing that the germans fear. they are also scared that they will end up being responsible for the debts of other countries. can you understand that? first of all, i don ’ t like this talk of “ the germans ”, “ the italians ” or “ the french ”. we live in democracies. our mandate is to ensure price stability. we have delivered price stability, and the markets clearly trust us to continue doing so for the next ten years. the question of debts and who should be responsible for them needs to be put to national governments. first, to the governments who behaved improperly in the past and accumulated excessive levels of debt. and second, to the governments who simply accepted that behaviour on the part of their neighbours. we, the executive board and governing council of the ecb, have spent years arguing publicly against infringements of the stability and growth pact and warning of the dangers that this poses. do you think germany has changed over the years? i have, of course, had the opportunity to discover much of germany for myself and have gained a lasting impression of this country. this is due, among other things, to the fact that i have many, many friends here – friends such as jurgen stark, horst kohler, theo waigel and hans tietmeyer and many more. so, i have close ties with germany. i have observed changes in germany which are highly significant from an economic perspective. a simple example is the fact that, when i moved to frankfurt eight years ago,