Free exchange: Vive la différence THERE is hidden danger at the heart of the decision to establish the European Central Bank as the single supervisor of the euro zone's largest banks by 2014. The banking union is designed to reduce the likelihood of member countries going bust as they bail out their financial systems. It does so by spreading the cost of a national bail-out across members of the union, which is why a common resolution authority and funds are the next difficult steps. In return, these states demand greater centralisation and standardisation of banking regulation: enter the single supervisor. My fear is that a single supervisor will make it harder to quell the credit booms that lead to banks going bust in the first place. Bigger booms and then bigger crashes, however evenly the costs are spread, are a more existential threat to the euro area than a couple of sovereign defaults. Germany has been and is expected to be the chief paymaster of the euro area's new stabilisation structures - for which we should all be grateful. He who pays the piper calls the tune, and so we should expect these structures to reflect German views. Yet Germany's perspective on the crisis is quite different from that of countries that suffered boom and bust. Many Germans believe that they had a better experience because they followed the rules and others did not - a view that conforms to their self-image. Single minded My observations as an adviser and speaker at meetings of international regulators lead me to believe that the operational emphasis of the single supervisor will be on the strict enforcement of uniform rules across the euro zone. The new supervisor is likely to be charged with levelling all unevenness in the quest to ensure that the banks it supervises are safe. This will make macroprudential regulation harder. National regulators pressing for easier capital-adequacy rules for lending in their jurisdictions would be viewed with suspicion. Are they undermining the banking union in an attempt to give local banks an unfair advantage? And if national regulators sought to tighten lending criteria - through lower loan-to-value ratios, for example - the industry would complain to a sympathetic single supervisor that this diversity was fragmenting the single market. The supervisor and the banks would be united in the mantra of a single lending space to underpin the single currency area. But the underlying premise is wrong. Yes, rule-breakers should be brought to book, and there were some spectacular supervisory failures in the boom-bust countries, most notably in the supervision of Ireland's Allied Irish Bank, Belgium's Fortis and Spain's cajas. German supervisors, of course, were not blameless with respect to Düsseldorf-based IKB, one of the first victims of the crisis. But more importantly, even if bank supervision had been uniform across the euro zone, lending booms in Ireland, Spain and Belgium would still have taken place. And the busts would still have followed. Between 1997 and 2006 Irish house prices rose by 247%; Spain and Belgium experienced house-price inflation of 173% and 96% respectively. Once the expectation had taken hold that property prices in these countries would rise by 10% or more every year, and once modest economic growth in Germany, France and Italy kept euro-zone inflation low and interest rates at 3% or less, bank lending to the Spanish, Irish and Belgian housing markets appeared to be a low-risk venture. A euro-zone banking union that adhered strictly to common lending rules would still have incentivised bank lending to flow to these markets because rising property values would have justified more borrowing. Remember that prior to the crash, banks in Spain, Ireland, Britain and America appeared well-capitalised because of boom-time asset valuations, and not principally because of off-balance-sheet shenanigans. The solution would have been for the authorities, observing how their financial systems were caught in a self-feeding credit frenzy, to impose tighter lending criteria. Supervisors could have required banks to set aside additional capital against their lending, specifically in the housing or construction sectors. Lending contracts that did not comply with these rules could have been made legally unenforceable locally. Of course, national supervisors failed in this task before. Some tried, notably the Bank of Spain. But equipped with clearer mandates, greater independence and a hell of a history to avoid repeating, they may do better next time. A single euro-zone supervisor would have a different perspective on safety. Boom-bust cycles are more of a national than a euro-wide phenomenon, because there is so much interconnectivity at national level between housing markets, investment, consumption, employment and lending. What may appear safe from the perspective of the operations of a bank operating across Europe could be unsafe seen through the lens of a national economy. A case in point was the lending of mortgages denominated in Swiss francs by foreign banks in Hungary, which proved harmful to Hungary but was not considered dangerous for the banks. Unity in diversity Whenever Europe stumbles, a stark choice emerges: "more Europe" or "abandoning Europe." The shortcomings of the single currency are seen as proof that it must be augmented by a single everything. Yet the opposite makes more sense. A single interest rate brings benefits but one acknowledged cost is the difficulty of dealing with different credit conditions in different countries. Differentiated regulatory policy - tightening rules in booming regions and loosening them in others - addresses this failing and buttresses the single currency. A common regulatory policy, sitting alongside a common interest rate, would instead risk amplifying booms and busts, ultimately undermining the single currency. Sometimes we need to save the euro from the europhiles. Germany's recent economic success has less to do with superior bank supervision and more to do with selling superior engineering down the old Silk Road to China, India and all points east. It is a pity that not much philosophy is coming back the other way. In eastern philosophy, systems like nature and the human body are made stronger by dualities, forces that appear to be in opposition but are complementary. Systemic resilience requires functional diversity. European unity cannot be achieved by assuming away differences, but by recognising them. When it comes to regulating credit across Europe, high regulatory standards are needed, not common lending rules.