. it is all too clear, after all, that the current crisis is also a crisis of trust in the viability of countries ’ debt positions. and it is a crisis of trust in the soundness of the banks. indeed, in the crisis - hit countries there is a close connection between the crisis of trust in the banks and the crisis of trust in government finances. what bis central bankers ’ speeches we need, therefore, is clear organising principles both for the financial system and for monetary union, principles which prevent the creation of unhealthy incentives. first, bank risks and sovereign risks must be prevented from being too closely intertwined. second, the principle of subsidiarity must be anchored still more firmly. the intertwining of bank and sovereign risks is likened by many to a gordian knot, which it needs a sword to cut if the current financial and sovereign debt crisis is to be resolved. i have to admit that i find this view surprising and, indeed, astonishing. it reminds me of a story by the novelist manes sperber, in which a teacher asks one of his pupils what he knows of the gordian knot. the boy ’ s answer is somewhat unexpected : “ no one could undo the gordian knot, not even alexander. but instead of admitting this, alexander took a sword and cut the knot, which any idiot could have done. after this, alexander was called ‘ the great ’ ”. the teacher did not see the funny side of this : “ six, sit down ”, he replied. ( in those days, grades went from one to six, not aaa to d. ) the loops of the knot : systemic and fundamental aspects of the crisis in trust few words can have had such a high - profile career as the term “ systemic ”. i would like briefly to define it in connection with the financial and sovereign debt crisis. if an event is not systemic, it can be dealt with in isolation. if this were the case, the debt problems and problems with the banking systems in the various countries could be regarded as a series of standalone phenomena, rather than as a systemic phenomenon which affects the euro area as a whole. things are rather different with systemic events : there are contagion effects between the countries and contagion between financial institutions. hence my image of the gordian knot, which refers metaphorically to the feedback loops between the financial sector and the real economy. at the end of last year

markets are functioning efficiently and are supervised effectively, they contribute to an optimal allocation of resources, reduce the cost of capital, and allow for risk - sharing and risk - diversification. but are markets sufficiently efficient and effectively regulated in europe? do they perform their tasks as optimally as they should? these questions can be addressed from various perspectives : allow me to concentrate on two angles, that of financial integration and that of financial development. intuitively, it seems obvious that segmented markets – with higher transaction costs and reduced possibilities for risk - sharing and optimal resource allocation – are not efficient and hence are hindering growth. financial integration could thus be conducive to growth. what i mean by financial integration is the establishment of a fully integrated market, in which all potential market participants with the same relevant characteristics face a single set of rules, have equal market access and are treated equally when they are active in the market. moreover, the process of financial development can also further improve the performance of already well - integrated markets and thus enhance growth. what i call financial development is the process of introducing financial innovations and organisational improvements in the financial system that reduce asymmetric information, increase the completeness of markets and the contracting possibilities of agents, reduce transaction costs and increase competition. both financial integration and development are therefore crucial in contributing to the efficiency and stability of the financial system. this is the theory. but what do we make of this? what are the practical consequences and policy implications of the theoretical perspective? leonid brezhnev – a man not usually remembered for scholarly discourse – is said to have stated that “ there is nothing more practical than a good theory ”. well, this is definitely not good enough for me. we should try to assess the facts and take the necessary action to improve the situation if this is warranted. can we measure the degree of integration and the state of development of financial markets in europe? can we estimate quantitatively the effects of further integration and enhanced financial development on economic growth? the answers to these questions are important in order to know where we stand, to assess the expected benefits of further progress and to implement the appropriate policies to achieve our objectives. at the european central bank we are making a systematic effort to measure and assess the extent of financial integration and the degree of development of europe ’ s financial markets and to estimate the impact of the associated processes on the economy. to this end, we have developed a set of indicators of financial integration and we are also monitoring