the moment still an open issue. even if we feel uneasy about the current practice it is not clear how a system perspective would look like in practice. this does however not imply that we should not face the challenge. to the contrary : if we take the task of strengthening the safeguards against financial instability seriously, finding an answer to these questions is indeed crucial. let me point out at this stage that oesterreichische nationalbank by its research activities tries to actively contribute to this process. the results of these efforts are published in our regular financial stability report and the working paper series of the bank. to summarize these remarks let me conclude that we have to rethink the current practice of how we supervise our banking systems. i have argued that the problem of the current approach based on individual institutions may fail to notice important risk exposures that remain hidden if we don't attempt to achieve a risk assessment at a system level. spotting the build up of financial instabilities in the banking system is in any case an extremely difficult task. but the quality of such risk assessments will be greatly improved if we manage to learn how risk assessment at a system level can be done. to be sure let me make clear that i am not arguing that the current supervisory practice is of no value in the big task of safeguarding financial stability. however, we need complementary approaches that bring in the macro - perspective of an overall risk assessment for the banking system as a whole. the problem of procyclical effects of capital adequacy regulation another classical conflict between the micro - and macro - perspective on financial stability has extensively been discussed in the case of capital adequacy regulation. while for an individual institution it may make sense to take a defensive stance in a situation of crises, if all banks do that each of them could end worse off. from the early days of the basel accord concerns about these procyclical effects of capital adequacy regulation have been raised and the issue has been widely discussed. ( see blum and hellwig ( 1995 ) ). if i discuss the procyclicality issue here i am therefore telling hardly anything new. however it seems necessary to point out at this stage that we can not close the debate yet. the mechanism by which capital standards act as a cyclical amplifier is relatively easy to understand. capital adequacy regulation can bring banks into a situation where they have to cut back credit in a recession to fulfil

requires now stronger central deciding bodies. to understand the great difficulty in addressing this issue, we have only to think about the analogy we could establish with the political trilemma of the world economy recently enunciated by dani rodrik : 13 “ we cannot simultaneously pursue democracy, national determination and economic globalization ” i will not enter into such complications. i will recall, however, that in this context, we should never forget that europe is not a nation or a state. political life and legitimacy continues to occur mostly at the level of nation - states. this implies that to foster legitimacy we have to act on the two levels the european and the national by giving for instance, the european parliament a stronger euro area dimension and engaging national parliaments more in euro area discussions. i wanted to highlight the importance of these issues but as i said i will not dwell upon them further. conclusion let me then conclude. the euro area was designed in the 1990s and we should not be too critical of the fact that its architecture was influenced by the prevailing economic theory. however, we now have more than a decade of practical experience of sharing a single currency in europe. it is unacceptable if we do not learn the lessons of that experience. the most important lesson is that, to maximise its benefits, the single currency needs strong common institutions. strong institutions to supervise and stabilise the single financial market. strong institutions to guide fiscal policies and preserve budgetary sovereignty. strong institutions to guarantee competitiveness and encourage sustainable growth. and strong institutions to engage citizens more closely in the european project. in this effort the european and national dimensions of legitimacy must be balanced. nevertheless, we must also recall that nations are a construct of man, not a natural reality, meaning that our consciousness and our knowledge are socially constituted. a form of civic community among strangers was somehow created to shape several european nation - states only as late as the xix century. that explains why we belong to two societies, our own and the european one as the essential cultural background for our universal - aspiring values. in this sense, europe is a memory, a key to understanding our own past. however, the eu, and even more so the ea, are political projects and what we want now is to pursue the project of completing and deepening the integration of european nations in a unique community of destiny that is neither a nation nor a state. it is a powerful vision of preserving and defending national identities and interests in a globalized and very challenging world.