the treaty requirement that each member state treat its exchange rate policy as a matter of common interest. free trade and capital movements could clearly not be sacrificed in a true single market. also, europeans saw fixed exchange rates as an important component of fair competition. it was thus the national sovereignty over monetary policies that would have to be let go. in this sense, the single currency became a way of maximising the benefits of the single market. and the empirical evidence suggests that sharing a currency has indeed boosted trade, although the effect may be smaller than was earlier suggested. 4 let me also add that, for several member states, joining the single currency implied not only greater policy efficacy, but paradoxically, greater national influence. whether austria before 1999 or latvia today, many member states pursued a fixed exchange rate policy or currency board vis - a - vis a bigger neighbour – germany in the past, the euro area today. this meant that they were effectively importing a monetary policy over which they had no say. now, as members of the euro area, they have a say. when latvia will adopt the euro on 1 january next year, my colleague the governor of the central bank of latvia will partake fully in the formulation of the ecb ’ s monetary policy. the same cannot be said of the countries that peg their currencies to the us dollar, some of which are considerably larger. from a single currency to a banking union the implications of the decision to set up a genuine single market are not limited to the creation of the single currency. the single currency itself has consequences, of which the most pressing is banking union. the establishment of a banking union has been agreed by heads of state and government in europe and is now being delivered in stages, starting with the single supervisory mechanism. this has been entrusted to the ecb and has recently been approved by the european parliament. we trust that a single resolution mechanism will enter into force by the beginning of 2015. to understand why banking union is a consequence of monetary union, it is worth recalling that only a small fraction of money is “ outside ” money, meaning the liability of the central bank. the bulk of money used in the economy is “ inside ” money, meaning the liability of a commercial bank. for money to be truly single within a currency area, there has to be full substitutability between its different forms. this means that one euro in a bank in any euro area country has to be fully substitutable with a

yves mersch : a regime change in supervision and resolution keynote speech by mr yves mersch, member of the executive board of the european central bank, at the european supervisor education ( ese ) conference, frankfurt am main, 26 september 2013. * * * ladies and gentlemen, thank you for inviting me to speak today. as you know, europe has in recent years faced the worst economic and financial crisis since the 1930s. growth remains weak and unemployment is unacceptably high, with only the first shoots of recovery showing through. yet out of these difficulties, some positives have begun to emerge. the euro area has recognised that, for its collective stability, it has to deepen integration in certain areas – and it is now beginning to do so. what we are seeing playing out today is not so much the “ audacity of hope ”, but rather the “ audacity of necessity ”. in my view, the most significant change taking place is the development of banking union. monetary union needs banking union, not least because a stable banking sector is an essential complement to a sound money. i therefore see the project of building banking union as the most important integration step since the launch of the euro. for those of us involved in supervision and other financial sector issues, it is an especially fascinating time. we are at what political scientists call a “ critical juncture ” – that rare time when a window of opportunity opens to fundamentally redesign institutions. it feels like being back 25 years ago when we were preparing emu. but this also imposes on us a responsibility. this window may not open again for many years, so we need to make sure that the decisions we take today are the right ones. most importantly, we need to ensure that banking union is not just a label – that it initiates a genuine regime change in the way that banks are supervised and resolved. how to achieve this regime change is what i would like to focus on in my remarks today. the elements of a regime change in my view, a genuine regime change has to involve two elements : first, building a single system for banking supervision and resolution ; and, once that is in place, building a stricter system as well. why do we need both elements? we need a single system to ensure that we have a level playing field for the banking sector across europe – and hence to create a truly single financial market in europe. 20 years after the single market was supposed to be completed, the banking sector