yves mersch : a currency beyond the nation state – the euro and its institutional challenges ahead dinner speech by mr yves mersch, member of the executive board of the european central bank, at societe d ’ economie politique, paris, 16 november 2015. * * * ladies and gentlemen, i am deeply shocked by what happened here over the weekend. those atrocious attacks have killed and wounded hundreds of people. i would like to express my solidarity, my compassion, and my sincere condolences to the families and friends of the victims. our societies are founded on a social contract. a common understanding of fundamental values and principles, such as democracy, the rule of law and human rights, forms the basis for peaceful coexistence. such a social contract need not be constrained to the national level. it can also – and does – exist at the supra - national level. it is on this basis that, in europe, member states share sovereignty, most notably as some of us share a “ currency beyond the state ”. in my remarks today, i will : • first, lay out the legal scope for sharing sovereignty ; and • second, elaborate on what this means for further european integration in different policy areas. the lisbon treaty sets out several restrictions regarding the transfer of sovereignty from the national to the european level : • sovereignty in the union rests with the member states. the union owes its existence to the member states, as they confer competences on the union in order to attain common objectives ( article 1 of the treaty on the functioning of the european union ( tfeu ) ). • national security remains the sole responsibility of the constituent states ( article 4 paragraph 2, tfeu ). • the union is governed by the principles of subsidiarity and proportionality ( article 5 tfeu ). as you can see, the letter and spirit of the lisbon treaty do not suggest that the eu should be transformed into a sovereign state called europe. nevertheless, some national constitutional courts saw the need to further emphasise that member states remain viable and independent political entities, coining the term “ constitutional identity ”. constitutional identity assumes that each member state enjoys the right to democratic selfdetermination through its own institutions, in particular national parliaments elected by the people. however, distinguishing between the original, constituent power of the people and the derived, constituted power of the legislator does not limit the ability to share sovereignty. only a very radical interpretation

in the regulation of financial markets in the future – both at the national level and, even more importantly, at the crossborder level. we need a more rule - based approach, but the rules should be based on the principles of market economics. at the same time, we must not jump to conclusions. the crisis we are currently facing was caused not only by market failures, but also, to a large extent, by policy failures. besides the need for improved regulation and oversight of financial markets, the case for increased government involvement in the economy is weak. government intervention changes the behaviour of market agents and leads to the distortion of competition. if exit strategies are not clearly defined, governments risk becoming part of the problem, rather than part of the solution. it is particularly important to avoid large budget deficits. otherwise, the recovery will be hampered and we could end up with a whole sequence of crises, rather than just the one we are facing now. fifth, the financial system clearly needs a fundamental overhaul. financial institutions have to take a different approach and adopt appropriate incentives. risk - takers should be liable and not only reap the rewards of their actions but also bear responsibility for their consequences. we need to strengthen the regulation of the financial system and, in particular, we must improve the international cooperation between national supervisors of the financial sector. international bodies and governments should not lose momentum in their efforts to strengthen financial regulation and supervision. the financial sector will obviously become smaller, particularly in those economies in which it has expanded significantly over the past 20 years. the crisis has already led to substantial structural changes in the financial sector and, as discussed, an increase in regulation is not only very likely, but also necessary. we also need to consider the size of banks. evidence suggests that banks may have become too big to fail, too complex to be managed and even too big to be rescued. the simple statement that “ if banks are too big to fail, they are probably too big to exist ” is a reasonable rule. in any case, the post - crisis financial system is likely to be more risk - averse, less leveraged, less complex and also less profitable, at least on the basis of short - term measures of profitability. the prevailing business model will probably place greater emphasis on traditional banking activities, which tend to produce lower margins, but are also more robust, less risky and less volatile. in this respect, the crisis may well turn out to be a catalyst for a paradigm shift