Europe’s leaders have confronted the economic crisis with much rhetorical fanfare, but have too often retreated into parochialism once things became sticky. Jacques de Larosière’s rallying cry for stronger European financial regulation deserves a welcome. His proposals are ambitious, hard-nosed and politically plausible. They should now be turned into action.

The single European market has allowed the free movement of people, goods, and capital. This is a remarkable achievement which must be defended, even as the crisis reveals its imperfections. More particularly, the single market makes Europe more interdependent – but too often it lacks the mechanisms to manage this.

In the case of finance, this is now obvious to all. A country as small as Iceland could, through its participation in the European financial system, put the bank deposits of British savers at risk. The incoherence – and frequent inadequacy – of individual countries’ financial regulatory systems led to regulatory arbitrage: holders of capital could seek out the most lax rules. National governments, eager to attract financial flows, allowed regulators to fall asleep on their watch.

Mr de Larosière and his colleagues call for a break with this irresponsibility. They propose a European Systemic Risk Council to coordinate the supervision of systemic risks to overall financial stability. It would bring together the heads of national central banks (or insurance and securities regulators when appropriate), the European Central Bank, and European Union officials. Provided the council does not become just another unwieldy committee, this is a welcome move. Current supervision focuses too much on countries’ and institutions’ risk to themselves, and too little on the risk they impose on others.

The de Larosière group wisely does not suggest a single European regulator to oversee individual financial firms. Instead, it lays out a step-by-step plan to develop existing EU-level bodies into a European Banking Authority, an Insurance Authority and a Securities Authority. These would combat regulatory arbitrage by: deciding compulsory minimum EU-wide standards; providing binding mediation between disagreeing national authorities; and coordinating international “colleges of supervisors”. But national bodies would remain in charge of day-to-day supervision and could go beyond the common standards.

European leaders say they want to improve financial regulation. Mr de Larosière’s thoughtful report is an invitation to them to raise their collective game.

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