all this clearly chimes with the preferences of european citizens, threequarters of whom support “ a common defence and security policy among eu member states ”. 1 the conclusion that follows is that we have to distinguish federalism as a state from federalism as a process. it may be the case that a full political federation is not currently desired by european citizens. but that does not mean that they reject the process of federalism – which is to say, the dynamic allocation and reallocation of responsibilities to different levels of government according to the preferences and needs of the time. while this process may benefit from the gravitational pull of a pre - defined end point, it can also advance without it, so long as actions are taken in areas where the benefits of cooperation are clear and the steps taken are legitimate in the eyes of citizens. indeed, what gave the eu both momentum and popular legitimacy in the years after the war was its achievements – effective actions in specific areas – not necessarily the visions of a unified europe. so how much federalism would satisfy these requirements today? one way to assess this is through looking at the economic aspects of federalism. certainly, as richard and peggy musgrave wrote, “ economic analysis does not tell us what degree of closeness the member units of a federation should feel toward each other ”. political aspects transcend economic ones. but economic analysis can help us better understand the consequences of various institutional arrangements and choose the instruments we should use to pursue our common objectives. in the rest of my remarks i will zoom in on some of these aspects of federalism. economic aspects of federalism an important theme – one aspect of which will be addressed in the first session today – is risksharing. the crisis has reminded us that both private and public risk - sharing are underdeveloped in europe, and that this underdevelopment comes at huge cost. so, there is general agreement that risk - sharing channels need to be improved. there is less agreement on where the emphasis should lie. some argue that the priority should be to strengthen private risk - sharing, by completing the banking union and establishing a truly integrated capital markets union. others argue that emu needs to focus on public risk - sharing, be it through introducing a central euro area fiscal capacity or creating safe assets. in reality, separating these two channels of risk - sharing is far from the obvious solution. is private risk - sharing a substitute for public risk - sharing? or do they complement each other?

the reason is that it is precisely during a crisis that the fiscal authorities try to push the central bank towards solving the fiscal problem through the inflation tax. however, the central bank is protected from this pressure by its statutes and the rules it adopts for the conduct of monetary policy. in the case of the ecb, the rules specify that it can lend only to sound institutions and against appropriate collateral. the appropriateness of the collateral depends in particular on whether the country under stress follows rigorously the imf / eu adjustment programme and is on track to regain market access. the soundness of institutions, which is assessed primarily by supervisors, is also a key principle. it has ensured that all adjustment programmes envisaged sufficient funds for the recapitalization of the banking system. these rules and principles apply to the central bank but are ultimately there to protect taxpayers and to prevent monetary policy from being misused to bail out insolvent governments. they constrain the actions of the central bank, but also give it sufficient flexibility to react in the event of a crisis. there is no doubt that these rules cause some frustration to those who would instead like to shift the responsibility for solving the crisis entirely to the central bank, even if the crisis is of fiscal origin. it is quite paradoxical that the very same people who criticise the ecb for having taken too many risks during the financial crisis are also those who criticise it for opposing any form of debt restructuring. this same group even suggests that the ecb should stand ready to accept, after a debt restructuring, the signature of a default - rated government as collateral. how are such contradictions possible? in my view they are only possible when the analysis is partial or the rationale is unclear. let me give a couple of examples. one reason for debt restructuring – which is often made by some theoretical economists – is that it helps financial markets to function better and it eliminates moral hazard. the problem with this view is that it totally omits the broader impact on the markets. trying to eliminate moral hazard in the middle of a systemic crisis is like shooting yourself in the foot. think about it : did the failure of lehman brothers make markets work better, or worse? did it reduce moral hazard? another reason for private sector involvement ( psi ) is to minimise the taxpayer ’ s contribution and to penalise bad investments. this reason is even less economically sound. lehman brothers ’ failure proved that if psi is applied in the wrong way