The lesson that regulation and supervision of banks and financial markets must improve has now at last become conventional wisdom among politicians in Europe in the wake of the ongoing crisis. Much work, and much EU and BIS meeting time, has been devoted to these issues and much more will be needed. EU capitals will be busy analyzing and negotiating for some time yet.
Separate from, but closely related to the issue of regulation and supervision of banks and financial markets is the issue of macroeconomic surveillance. This is a much more difficult issue as it touches the very heart of national sovereignty as well as politics and ideology. This area too has been subject to upgraded mechanisms as regards surveillance in general as well as the more controversial issue of what actions to be taken when surveillance indicates that things are about to go wrong.
Much hope is attached to these planned reforms, expectations are high. We do not know yet how efficient the new rules will be, but it is important to consider the limits to what these kinds of supervision, regulation and surveillance can achieve in preventing future crises of the kind we have seen first gradually accumulating and then exploding in Europe over the past decade.
In order to shed light on this important question we can try to assess whether it would have made a difference to the crisis of the past five years if these reforms had been in place from the beginning.
