carlos da silva costa : exiting the financial crisis and strengthening european integration address by mr carlos da silva costa, governor of the bank of portugal, at the conference of the portuguese association of insurers “ where is europe going? ”, panel i “ what is the future of the euro? ”, lisbon, 24 october 2013. * * * “ the countries that share this conception should be able to go further together, without excluding the others, since they can still live in a greater community of exchange and co - operation. ” jacques delors introduction the financial crisis began five years ago now, but its effects are still felt today, both in the financial markets and in the real economy. the international financial system has gradually returned to health, but fragilities remain. world economic growth remains weak, with a persistently high level of uncertainty and important vulnerabilities and risks with potentially significant consequences. even though the financial crisis began across the atlantic, the consequences for the euro area were considerable and still persist. despite the latest indicators showing encouraging signs of a gradual resumption of economic activity, unemployment remains historically high ( 12 % ) and varies widely across countries. 1 public debt is above 90 % of gdp, 2 which poses an additional challenge in a context of weak growth prospects. in turn, the financial markets remain highly fragmented, with continuing strong links between banks and their sovereigns. thus we must stay vigilant and work consistently towards making the euro area more balanced and resistant to shocks, anchoring measures taken to a long - term strategy. the crisis has taught us important lessons, including the following : ( i ) the importance of financial stability ; ( ii ) the negative effects of high levels of public debt ; ( iii ) the scale and speed of contagion effects ; ( iv ) the flaws and inconsistencies of the emu ’ s institutional architecture. the challenges brought by the crisis have also served as a catalyst for unprecedented decision - making, which will define a new “ design ” for europe, strengthening integration. the european union of today is not the same as the one of five years ago and surely will be very different from the one of five years hence. as jean monnet wrote in his memoirs, “ nobody can say today what the institutional framework of europe will be tomorrow because the future changes, which will be fostered by today ’ s changes, are unpredictable. ” if we look at the history of european integration we can see that the times of crisis

inconsistency between member states ’ policies. for this, it is key to continue strengthening the institutional framework and the governance model in the euro area. strengthening integration means strengthening rules and institutions europe needs solid and effective rules and institutions that preserve the fundamental values of the european project and that are able to manage the strong interdependence of its members, in a context of collective decisions. quoting jean monnet again, “ nothing is possible without individuals, but nothing is lasting without institutions ”. the emu is a complex construct, a union of sovereign states making up a single market and sharing a single currency. states that are at the same time independent and interdependent, united and diversified, whose actions are linked and bound by common rules and institutions, while retaining sovereignty. for this complex construct to be sustainable and balanced, a governance model is needed that ensures that the member states and the european institutions perform their roles adequately. this means responsible economic policy - making by the member states and rigorous monitoring and surveillance by the union. consequently, deepening european integration also means greater integration through the rules and institutions. the euro area needs effective rules and institutions that frame and control the interdependence between the stability of the whole and the stability of each member, preventing excessive imbalances from arising and limiting contagion effects. institutions able to ensure the collective ’ s control of each of its parts ( minimising moral hazard ), but also the scrutiny of each of the parts as regards setting and implementing shared goals. it is important to note that having rules is a necessary but insufficient condition. the rules and institutions form the foundations of any society, but they must be applied effectively and respected. however, in society, the legal system and police authorities may compel the general public to follow those rules. this does not happen in the governance of the euro area, the mechanisms for monitoring the application of the rules are essentially political and have proved insufficient for ensuring that the national governments develop appropriate and consistent policies. europe needs a strong institutional framework as well as the means and will to ensure that it is complied with. this means creating a coherent and credible framework of rules and incentives, using a stick and carrot approach, which underpins and guides national and institutional behaviour, aligning it with common interest. stronger institutions, clearer and fairer rules ( equal treatment for all member states ) and an appropriate stick / carrot system will help improve vital coordination of economic policies. great progress has already been