But both of the theses I mentioned earlier are the same: When cross-border integration progresses it is important – and profitable from society’s point of view – to create credible crisis resolution mechanisms in advance. But this is rarely or never done. One sometimes talks of Europe’s “financial trilemma”.9 We in Europe want to achieve a continued financial integration and increased financial stability, but at the same time we want to retain each country's national sovereignty. The problem is that it is possible to attain two of the goals, but very difficult to attain all three. If we want to combine financial integration with continued national sovereignty over, for instance, supervision and crisis management, as we have done so far, it will be difficult to achieve meaningful financial stability – the crisis we are currently going through provides a good example of this (Figure 3). Figure 3 Financial stability  Financial integration  National sovereignty  If, on the other hand, we want to prevent cross-border crises and at the same time maintain national sovereignty, we must accept reduced financial integration – for example, stricter regulations as to how banks can move financial assets between countries (Figure 4). One can see clear tendencies in this direction in the current discussions.
BIS central bankers’ speeches  7  The first is that one must of course have regulations in a monetary union that enable one to avoid a crisis of the proportions we are seeing now. This was what the creators of the union were thinking when they initiated the Stability and Growth Pact. However, the pact did not work very well and intensive discussions are therefore underway as to how it can be supplemented with new regulations that will guarantee that no members have excessive budget deficits or can build up excessive debt burdens. Hopefully these discussions will bear fruit. However, it is far from certain that the developments we are seeing now could have been avoided even if the Stability and Growth Pact had been upheld. Low interest rates have meant that not only governments, but also companies and households have built up their debt. But an efficient regulatory system would probably have made the crisis more manageable. A second conclusion is that when one refrains from the crisis resolution mechanism inherent in a national currency, one must replace it with something else. Because crises that entail concern over a member state’s creditworthiness are always a risk. One must have an institutional framework to manage the investors’ concerns regarding rising bond yields in, for instance, Italy now that there is no Italian currency that can depreciate and the Banca d’Italia cannot create the necessary liquidity.