lorenzo bini smaghi : whither europe after the crisis? speech by mr lorenzo bini smaghi, member of the executive board of the european central bank, at the inauguration of the academic year 2011, institutions markets technologies ( imt ) lucca institute for advanced studies, lucca, 11 march 2011. * * * introduction to understand how europe will develop after the crisis, let me start with two observations. first, the crisis has caught europe unprepared. second, europe has, in a sense, responded to the crisis in a surprising way. the lesson to be drawn is that europe is still evolving, growing, continuing on its path of integration. this is not happening, however, according to some pre - defined, agreed plan, but rather in response to the challenges it faces, which in some cases are likely to endanger the very existence of the union. europe moves forward when it finds itself at risk of taking a step back. at that point the costs of immobilism exceed those of mobility. it manages to find the energy needed to overcome the political difficulties of making another step forward. that step is difficult because it requires a decision of all members – now 27 – who together are forced to accept that the costs of losing the common good are higher than the benefits of maintaining their national prerogatives, often more symbolic than substantive. europe ’ s integration is therefore largely unpredictable because it depends on the challenges and shocks facing european society, and on its ability to understand that the step forward brings more advantages than immobilism. such unpredictability is the logical consequence of the original route that the eu countries are following, which neither takes inspiration from existing institutional and other political realities, like the united states, and nor does it seek to apply pre - defined constitutional models. rather, it follows the principle of subsidiarity, according to which only those powers and competences are centralised which cannot be exercised more effectively at local level. this principle cannot be applied theoretically. it is experience that permits an assessment of how the national implementation of certain competences may lead to an inefficient outcome. an awareness of the need to assign powers to a european institution – powers which previously were exercised primarily at national level – can only arise after the failure of the decentralised approach. this kind of choice cannot however be taken for granted because no institution, national or international, readily surrenders its powers to another body. for

from european and international institutions. this idea is mistaken for several reasons. firstly, it attributes the main task of disciplining governments to the financial markets. the markets – according to its proponents – work better if the conditions under which a state may fail are more explicit. this hypothesis – dear to many academics – does not however reflect reality. in the private sector bankruptcies are possible and are subject to regulation, but markets often incorrectly assess the risk of securities issued by the private sector. the markets were wrong both before and after the crisis, and continue to make mistakes, even with regard to sovereign risk. moreover, they often behave inefficiently and facilitate collusion, especially when it is possible to buy derivatives that allow you to “ bet ” on a country ’ s bankruptcy, even without having invested in it. giving the market the exclusive power to decide the fate of millions of people seems to me quite irresponsible. the recent european decision to limit the possibility of buying derivatives to hedge sovereign risk without the underlying security is therefore justified. it is precisely because this approach is wrong that the international monetary fund was created more than 60 years ago. it intervenes to prevent markets from having the exclusive power to declare countries bankrupt, particularly when they are intent on consolidating their public finances. it is not clear why europe should be more masochistic than others and do without the tools they have. another reason is that the credit rating of a country is not as simple as that of a private company. it depends on the ability and willingness of the national authorities to tax and spend. you cannot be sure that financial markets are better equipped to assess such bis central bankers ’ speeches willingness and ability. experience shows the opposite, since the vast majority of the countries that have resorted to the imf in the last 20 years have also repaid their creditors. moreover, a sovereign default has contagion effects on others. in such conditions it is not always easy to make a country go bankrupt if the costs of paying for it are to be borne by the rest of the area. we need start from the objective, which is to build a stronger euro, based on a more globally competitive economy and with sound public finances, to reflect on possible long - term solutions. i wish to put forward my thoughts in a personal capacity. to strengthen the foundations of the single currency it is necessary to encourage virtuous behaviour both in the public and private sectors, which are largely the responsibility of