Economic Crises

Introduction The global financial crisis has exposed a weakness in the international monetary (non-)system. Desired levels of currency reserves in emerging markets have jumped over the past decade. The dollar's unique reserve-currency status has caused the bulk of these reserves to be parked in the United States, and the resulting capital flows have contributed to the underpricing of risks in the world's leading financial center. This underpricing formed part of the backdrop for the global financial crisis and may set the stage for the next one. To prevent a repeat of the past, policymakers must establish mechanisms to avoid excess reserve accumulation in surplus nations. In the early 1970s, U.S. treasury secretary John Connally could tell Europeans that the dollar was "our currency, but your problem." Today the world's dollar dependency is a problem for the United States, too. The strategy proposed here rests on two pillars. First, a novel policy tool called the excessive reserve procedure (ERP) should be implemented to discourage reserve accumulation beyond prudent levels. Second, the need for precautionary reserve holdings should be reduced via unremunerated reserve requirements (URRs). Such a dual strategy would go a long way toward stabilizing and ultimately reducing the ratio of foreign exchange reserves to global GDP. The Problem As emerging markets have integrated into the world economy, they have opened themselves up to foreign capital inflows and hence rendered themselves vulnerable to capital flight. To insure against this risk, they have accumulated large stockpiles of dollar reserves to maintain liquidity and exchange-rate stability. In many respects, this has proved a wise policy. Countries with large reserve buffers weathered the financial storm of 2007–2009 relatively well. But precautionary reserve accumulation has a cost. It can make individual economies safer, but it contributes to macroeconomic imbalances and the mispricing of financial risks on a global level. Moreover, many observers believe that some portion of recent reserve accumulation is motivated by factors other than precaution. By persistently selling their own currencies and buying dollars, countries seek to keep their currencies competitive, benefiting their exporters. Resentment over such export subsidies could spark retaliatory tariffs, disrupting the global trading system. The pace of reserve accumulation has far outstripped GDP growth in emerging economies. China now holds more than 50 percent of GDP in foreign currency reserves¾up from less than 10 percent fifteen years ago. In South Korea and Russia, the ratio stands at around 35 percent; in India and Brazil it is above 20 percent. This appetite for reserve accumulation clearly distinguishes the latest round of catching up in the global economy from previous ones. Germany and Japan in the 1960s and 1970s grew their reserve holdings at approximately the same rate as output, so that reserve levels remained constant at about 5 percent of GDP, or one-tenth of China's current levels. For the foreseeable future, this reserve accumulation is likely to be channeled into dollars because there are no real alternatives to the dollar as the world's leading reserve currency. The eurozone's problems demonstrate that not all European countries can provide financial assets that can be relied on as a store of value. The German government bond market is too small to satisfy the hunger of emerging markets for risk-free reserves. China lacks deep capital markets and may also face doubts about its long-term political stability. The notion of a world currency managed jointly by a world authority seems far-fetched for the time being. As a consequence, the world's dependence on the U.S. dollar will continue. The Need for New Policies Managing the world's dollar dependency requires sanctioning excess reserve accumulation and decreasing the need for precautionary holdings of reserves. The goal must be to stabilize and then slowly reduce the amount of reserves relative to world GDP. Reserve Monitoring and an "Excessive Reserve Procedure" The International Monetary Fund (IMF) must be tasked to establish benchmarks for adequate reserve holdings—adequate being the level that reflects legitimate precautionary concern rather than an export subsidy. The definition of adequate reserve levels should account for country-specific factors such as openness to trade and capital flows, as well as the health of the banking sector and the quality of financial regulation: A country that is very open to foreign capital flows and has weak banks will legitimately want to hold more reserves than others. In light of the recent crisis, 30 percent of GDP would seem to constitute a realistic upper limit for most countries. If the IMF determines that a country has accumulated reserves in excess of its adequate level, it should discuss the issue with the government during its regular annual consultations. Policies to slow reserve accumulation should then be considered. To give this consultation teeth, there must be a credible threat of sanctions. The IMF should therefore have the right to initiate an excess reserve procedure against noncompliant countries. If the ERP consultation does not yield results, the IMF could formally authorize the countries issuing the global reserve currency (i.e., the United States and possibly some others) to decrease the attractiveness of additional purchases of government securities. This could be achieved by means of a financial stability duty levied on bond purchases, or by imposing outright restrictions on bond sales to residents of the offending country. But the most easily implemented option is to reduce interest payments on newly purchased bonds. The mechanism proposed here would be similar to the dispute settlement procedure at the World Trade Organization (WTO). An international organization would determine the legitimacy of sanctions, but sovereign governments would implement them. In the case of the new ERP, the IMF, after consultation with the parties, would authorize individual countries to take measures to safeguard financial stability. The U.S. Treasury would then announce a date after which interest payments on newly purchased Treasury securities by residents of country X would be reduced to zero. To receive interest payments on Treasury securities purchased in primary and secondary markets after that date, the custodian banks would have to ensure that the beneficiary was not a resident of the country in question. This approach would require cooperation from the major custodian banks. Because of their location and the focus of their business, they are highly motivated to remain on good terms with prominent governments in the international system. Indeed, more than half of the emerging economies' reserve assets are held in custody at the New York Federal Reserve, giving U.S. policymakers a significant advantage in administering this sanction. If it is to sanction excess reserve accumulators, the United States must be willing to reduce the attractiveness of Treasury securities to foreign buyers despite its large budget deficits. Since medium- and long-term U.S. budget discipline is desirable in itself, this is a price the United States should be willing to pay. Moreover, lower foreign demand for treasuries would be coupled with less currency intervention and hence a weaker dollar, which should boost U.S. growth and make necessary deficit reduction less painful. Reduce the Need for Precautionary Reserve Holdings As well as sanctioning reserve accumulation that goes beyond the level needed for precautionary reasons, policymakers must work to lower the level of reserves that countries feel safe with. To this end, the private sector should be discouraged from borrowing in foreign currency, particularly when the loans are short-term and easily recalled in a crisis. Private sector borrowers should be made to deposit 20 percent of short-term inflows at the central bank, which will pay no interest on them. Emerging economies have successfully experimented with such unremunerated reserve requirements, and their effect on central banks' desired foreign exchange reserve holdings is twofold. First, the need for precautionary dollar reserves is reduced by a corresponding amount as the private sector has been forced to self-insure against a sudden reversal of short-term flows. Second, foreign investors and domestic borrowers face incentives to choose longer-dated financial instruments not subject to reserve requirements. This diminishes the risk of a reversal in capital inflows and reduces the need for precautionary reserve accumulation. The Case for Action The dependence of global trade and finance on one or two primary reserve currencies is a well-known market imperfection. Throughout the period of the dollar's ascendancy, statesmen have opted simply to live with it. But the severity of the financial crisis, together with the risk that imbalances will grow as emerging economies account for a larger share of global GDP, makes continued passivity an unattractive option. The measures outlined above would protect the global trading system. Frustrated by the extraordinary level of Chinese reserves, members of the U.S. Congress have recommended retaliatory trade sanctions, a policy that would risk opening the door to generalized trade protectionism. While the proposed ERP will undoubtedly be controversial, it entails a clear commitment to ring-fence monetary tensions. The approach proposed here would be preferable to current account targets, which have been supported by the U.S. Treasury. Such targets have been suggested as a way of reducing imbalances. But as an accountability mechanism, current account targets are ineffective. Even large current account surpluses may not reflect currency interventions or excess reserve accumulation, and a country that exceeds its target can blame policy distortions on the part of trading partners. Moreover, current account targets bring monetary conflict into the trade arena. As a first step toward implementation, the United States should initiate discussions within the G20 and at the IMF board. Opposition to the ERP can be expected from surplus countries, with China the most likely critic. But appropriate transition periods could help soften resistance, and the ERP would be flexible enough to allow foreign exchange reserves to continue to grow in absolute terms, if not as a share of GDP. Individual country targets, agreed upon by the IMF and taking into account specific weaknesses (i.e., in the banking system), could create the space for necessary diplomatic compromise and help overcome resistance.

This essay assesses the need for deeper integration in the European Union, while questioning where the current European leadership has the vision to implement such reforms in the wake of the euro crisis. Editor's Note: This essay is part of the collection Crisis in the Eurozone. Introduction Eurocrisis? What eurocrisis? This August, the streets of Florence, Barcelona, and London were full of Europeans on their (unimaginably long) holidays, acting with apparent disregard for the dire predictions in the press of a European Union (EU) on the verge of bankruptcy and dissolution. Meanwhile, financial markets backed off from their attacks on the PIGS (Portugal, Ireland, Greece, and Spain) while those porcine countries moved forward with significant reforms, slashing their deficit and debt levels. German growth in the last quarter has driven eurozone growth to above U.S. levels, giving pause to euroskeptics and glee to euroboosters on both sides of the Atlantic. And yet the EU is far from out of the woods. The past two years of global economic upheaval have sorely tested the EU's Economic and Monetary Union (EMU) and its crowning achievement, the euro. At base, the problem is simple: the EU is an outlier in political and economic history, and markets do not know what to expect from its unique combination of a single currency and separate nation-states. The eurozone crisis reveals the challenges of the EU's sui generis political status—no longer a mere collection of nation-states, yet not a fully fledged federal entity. What, then, should we expect for the future of European integration? What does the still-unfolding eurozone crisis mean for the larger geopolitical position of the EU? Absent a crystal ball, any response is necessarily hazy and conjectural. Nevertheless, it is possible to sketch out some significant milestones and signposts that will determine the path of Europe's future. The critical question is whether the leaders and citizens of Europe are willing to upgrade their political institutions and equip them with the mechanisms to ease such financial and economic crises in the future. The way these issues are resolved—or not—will fundamentally shape the broader political future of European integration. The stakes are very high, and while the preliminary evidence suggests the EU is muddling through and is far from collapse, there has been little demonstration of the political leadership needed to creatively move the EU forward. History of Innovation The EU is one of the big success stories of international politics. It is astounding that the states of Europe, so long used to dealing with each other with bayonets and tanks, are now tightly bound together within a series of interlocking laws and institutions. Rather than shooting at each other, they spend their time squabbling over the rules of long-haul truck transport and labeling of genetically modified organisms. This degree of integration of sovereign nation-states is unprecedented in modern times and has formed the basis of the peace and prosperity of Europe. In pursuing their political integration through institutional and market means, rather than warfare and territorial acquisition, the EU has created a new type of political entity in the global system, one whose tight institutional linkages and political community will not disintegrate any time soon. However, the EU's political innovation bumps up against the practical economic requirements of monetary unions and single currencies. No monetary union has ever succeeded without concurrent political union—including fiscal consolidation. Monetary unions are a modern invention, only coming into vogue in the latter part of the nineteenth century and spreading rapidly across countries like Italy, the United States, and Germany. The consolidation of rival currencies has always been part of broader state-building efforts, as a single national currency aided in prosecuting wars, building up administrative capacity at the center of a political union, and fueling the construction of a national identity. The few efforts at monetary unions without political union, such as the Latin Monetary Union and Scandinavian Monetary Union, fell apart within years. Indeed, there are intuitive reasons why political union supports monetary union. Difficult decisions around monetary issues are more easily made within communities joined by broader political solidarity. Fiscal and monetary policy work better when they are planned in concert. Thus the strange status of the European Monetary Union: a centralized monetary authority without fiscal capacity, and a relatively weak set of political institutions and identities. For years, the strong ideational consensus on the policy undergirding the EMU papered over the disconnect between political, fiscal, and monetary union. At the creation of EMU in the late 1980s, lingering concerns over inflation and fears of an uncompetitive EU begat a firm agreement on the need for a strong, stable currency based on the deutsche mark. Sober central bankers in Frankfurt would run EMU and the euro with a single focus—price stability—and with a series of rules—the Growth and Stability Pact—that would clamp down on fiscal prolificacy and instill confidence in the euro (the fact that it was always known as the Stability Pact symbolizes the lack of attention to the growth side of the equation). That consensus facilitated bargains between France and Germany at Maastricht in 1992, where plans for EMU were signed into treaty law. Countries worked hard to get within spitting distance of the austere convergence criteria for entry into EMU. Financial markets bought Europe's political commitment and, in advance of actual deficit reduction, made possible the ultimate budget cuts by reducing interest rates on borrowing by highly indebted countries like Italy and Portugal. A happy circle of self-fulfilling beliefs about Europe's further integration predominated and the previously unimaginable idea of a single European currency became a reality in 1999, with euro notes and coins introduced in January 2002. The go-go years of the dot-com expansion and the global credit bubble economy that followed allowed Europe to enjoy a strong euro, fueling real estate booms across the continent and in the United Kingdom without any serious stresses on European unity. The original EMU consensus held fast, and economic circumstances delayed tough decisions about how to coordinate EU political economies in tough times. Need for Political, Monetary, Fiscal Union Today, however, the party is clearly over, the bill has come due, and history is knocking on the door. So what will determine whether the EU stalls in its integration project or moves forward? The current economic narrative in Europe is unsure, fragmented, and does not provide the necessary political foundation for extensive institutional capacity building. For now, the lack of consensus about the correct macroeconomic formula for Europe seriously compromises any further progress in integration. The most advanced area, perhaps, is agreement on the need for more robust financial regulations, and the EU has been developing rules and institutions addressing this issue over the past eighteen months. However, price stability and austerity still have a stranglehold on policymakers, despite the risks of deflation and continued high unemployment. Surely the EU is not alone, as global leaders flirted with Keynesianism at the Group of Twenty (G20) summit in London in spring 2009, then skittered away from a coordinated fiscal expansion in favor of more orthodoxy regardless of economic bad news. For an elite political project that relies on some basic community agreement about the shape of economic governance, this policy disagreement is very difficult to overcome. A clever observer of EU history would ask, however: What about the potential for the dynamics of crisis to resolve these problems through EU institutional innovations? Could this be the time for the type of push for further political integration that a strongly centralized fiscal federalism would imply? Could this be the moment when the EU moves from being a sui generis freak of history to the broader political union needed as the basis for a single currency? The history of the EU shows that crisis often—but not always—leads to increased integration. Crisis alone will not produce results unless there is the political will and creativity to respond with decisive innovation. From the initial establishment of the European Coal and Steel Community in response to the challenges of postwar reconstruction to the single-market innovations of the 1980s, examples abound of the ability of political elites to seize crisis for policy innovation. Even so, long periods of stagnation in political, economic, social, and security arenas have persisted even in the face of serious dysfunction. In the early years of the EU, the so-called empty chair crisis blocked movement on needed decision-making reform for years. A long period of economic stagflation and hard times in the 1970s brought little in the way of policy integration. Conclusion: At the Crossroads Today certainly represents a crisis push moment. Yet despite some limited EU capacity building, there has been a striking lack of coordinated political leadership across the European capitals in the face of market pressures. If anything, the zeitgeist favors political entrepreneurs whipping up anti-EU feelings as austerity programs begin to bite, rather than pushing for further integration. The end of the Cold War and the generational change in leadership from a visceral commitment to the EU as a critical bulwark against political instability mean that Germany is no longer playing its postwar role as the engine of integration in tight embrace with France. Angela Merkel and Nicolas Sarkozy are far from the dynamic duos of Helmut Schmidt and Valéry Giscard d'Estaing, or Helmut Kohl and François Mitterrand, that powered many of the big bangs that formed today's EU. Neither is the European Commission led by an innovative policy entrepreneur like Jacques Delors, who managed to frame the single market initiative and the euro project as imperative for EU competitiveness. Therefore, a combination of historical contingencies, and the particular personalities involved, means that the creative and bold moves of the past will be very hard to come by.

This essay examines the historical roots of the eurozone crisis, tracing the roots of ongoing political and economic problems back to agreements that were made around German reunification in 1989. Editor's Note: This essay is part of the collection Crisis in the Eurozone. Introduction As former U.S. secretary of state James A. Baker III once observed, "Almost every achievement contains within its success the seeds of a future problem." The eurozone crisis of 2010 provides a trenchant example of this phenomenon. When the long-sought but controversial implementation of an European Monetary Union (EMU) finally began—as part of the bundle of deals that produced German reunification twenty years ago on October 3—it represented a significant accomplishment. Though the idea of a single European currency had been around at least since the Werner Plan of the 1970s, German reunification provided the necessary catalyst. For all the success of that achievement, however, it left behind fateful seeds, which sprouted into the 2010 crisis. The eurozone crisis resulted not only from the economic woes of weaker member states but also from flaws in the Maastricht Treaty and from Germany's long-term decrease in interest in European cooperation. Since a crisis is a terrible thing to waste, the members of the eurozone should use the sovereign debt debacle of 2010 as a second "1989 moment." They should retrofit the eurozone with the greater political institutionalization needed in the post-Cold War era—a goal that Germany sought but failed to achieve at the end of the Cold War and now no longer prioritizes. In other words, the best way to deal with today's issues is to finally address two decades of unfinished business. The Bargain of 1989-90 European integration, and especially monetary integration, has a long history of "stop-and-start" activity. The 1970 Werner Plan was a prime example: it originally called for an EMU within a decade, but each subsequent effort stalled short of implementation. The prospect of denationalizing currency and surrendering control over a fundamental tool of statecraft—currency valuation—was daunting to the member states of the European Community (EC). Politicians knew that they risked running afoul of voters if they surrendered too much sovereignty. West Germans, in particular, felt an extremely strong attachment to their postwar currency, the deutsche mark; for them, it was synonymous with the economic renewal, prosperity, and stability of the Cold War years, following on the trauma of the Weimar and Nazi eras. Beyond political worries, national capitals clashed over the question of independence for a future European Central Bank (ECB): West Germans cherished their independent Bundesbank and felt certain that it should have independence; the French prioritized political control over central bankers and how strict the convergence criteria should be—that is, how much inflation and sovereign debt would be acceptable. It took the opening of the Berlin Wall on November 9, 1989, and the actions of two decisive leaders—West German chancellor Helmut Kohl and French president François Mitterrand—to cut through the controversy and make the single currency a reality. Historian David Marsh singles out the bargain that Kohl and Mitterrand negotiated in 1989-90 as "the essential deal that launched Europe on the Maastricht monetary union path." The deal originated in the work of European Community Commission president Jacques Delors. Heading an eponymous committee, Delors made a fresh effort to map out a path to EMU in an April 1989 report. He found that the critical step, from which all else would follow, would be to convene an intergovernmental conference (IGC) for the purpose of implementing a single currency. However, the Delors Committee Report left deadlines vague, jeopardizing the prospects for its success. With the collapse of the Berlin Wall, Mitterrand saw an opportunity for rapid convocation of Delors's IGC. He understood that the wall's collapse would motivate Kohl to seek German reunification, and he realized that the smart move would be to embed increased German strength in a monetary union as soon as possible. Both Mitterrand and Kohl realized that it would be extremely difficult to reunite Germany if EC members became worried about a threatening resurgence of German nationalism. Kohl always believed strongly in European integration; the opening of the wall did nothing to undermine his trust in Konrad Adenauer's saying that "German problems can only be solved under a European roof." Kohl fundamentally agreed with the goal of a common currency, although he had previously indicated that it should be accomplished in future decades. Nevertheless, he understood that West German voters, a majority of whom favored European integration and worried about the costs of rebuilding East Germany, would resist a go-it-alone reunification process that alienated the EC. Given France's weight in the EC, this meant that Kohl needed Mitterrand's approval to proceed. In return, Mitterrand asked that Germany assent to move toward a single currency as soon as possible, with the crucial IGC convening by the end of 1990. Mitterrand further insisted that the opening of the IGC be announced in December 1989 during the French presidency of the European Council. If the French president could preside over a significant declaration about the future of European integration on French soil, Mitterrand would advocate within the EC for German unification. In the interest of success, Mitterrand acceded to German wishes for the full independence of a future ECB. Mitterrand's offer was well framed—Germany would get a currency union largely on its terms, but Kohl would have to compromise on timing. Kohl agreed to Mitterrand's bargain. Consequently, the 1989 Strasbourg summit announced both the opening of the IGC and the EC's favorable attitude toward German unification. The IGC commenced roughly a year later in Rome, on December 15, 1990, and completed its work in December 1991 in Maastricht. In the end, the EC convened two IGCs in December 1990—one on EMU and another on political union between the EC's member states. During this period, the West German officials pushed for integration and hoped to combine the single currency with a matching increase in political institution-building. Mitterrand was willing to consider robust economic governance of the eurozone, but was loath to create new political institutions, and he prevailed—Europe would share a currency but not a treasury. It is surprising and somewhat ironic that Kohl and Mitterrand achieved one of the greatest feats in the history of money. Neither had expertise, or even interest, in economic and monetary matters, apart from their political impact. Indeed, the despairing president of the Bundesbank in the 1980s, Karl Otto Pöhl, told the Financial Times—while he and Kohl were both in office—that the chancellor knew nothing about economics. The Maastricht Treaty and Its Legacy In the mad rush toward German unification and EMU, the IGC's grand bargain overlooked critical details. The final Maastricht Treaty, ratified in 1992, contained insufficient crisis contingencies; monetary union proceeded without real political coordination and with excessive faith in the omnipotence and omniscience of financial markets. The treaty's implementation relied on a hope that its terms would become self-fulfilling, obviating the need for real enforcement. The Maastricht Treaty established convergence criteria specifying that general government budget deficits of potential members should not exceed 3 percent of gross domestic product (GDP). The treaty fixed the permitted ratio of government debt-to-GDP at 60 percent. Potential participants were to have, over the year prior to joining, an average rate of inflation that did not exceed the performance of the best three member states by more than 1.5 percent. Similarly, they were to have average nominal long-term interest rates that did not exceed the best three by greater than 2 percent. The later Stability Pact, requested by the Germans, supplemented these criteria by, in theory, levying fines on violators. Further, the so-called no bailout clause specified that member states should not be liable for, nor assume, the commitments or debts of any other. The ratification of the Maastricht Treaty also started an irrevocable countdown toward implementation of EMU among qualifying countries by 1999. Finally, as part of this treaty, the EC reestablished itself as the European Union (EU). While this decision had some practical effects, such as greater cooperation in producing a Common Foreign and Security Policy (CFSP), the effects were nowhere near as profound in the political arena as they were in the economic realm. As the eurozone crisis demonstrates, the hope that the Maastricht criteria could run the common-currency area in lieu of careful economic governance proved false. Six factors explain Maastricht's failure. The first is the momentum acquired by the growing membership of the single currency. Policy-makers wanted the new currency to succeed, and started using the number of members and applicants as an oversimplified metric of success, thereby allowing weaker economies to join without due scrutiny. Such laxness allowed the entry not only of members with ratios of debt-to-GDP well in excess of 60 percent (Belgium, Italy) but also of applicants like Greece, which not only flouted the rules but also falsified its records. Second, once accepted into the union, weaker member states could borrow at roughly the same interest rate as Germany due to the ECB practice of treating the sovereign debt of all eurozone members equally at its discount window. This practice contributed to increased spending without reference to what nations could actually afford. Third, more members in the currency area meant more seats at the table, rendering decision-making about enforcing criteria more difficult. Fourth, German attitudes soured on European integration. After the onset of the housing bubble crisis in the United States and the bankruptcy of financial institutions such as Bear Stearns and Lehman Brothers, Berlin signaled that each individual European country would look after its own banks. With unification long a fait accompli, and populist resentment toward paying for the sins of other Europeans, German chancellor Angela Merkel ceased to prioritize repairs to the "European roof." Given the state of the eurozone, it is no longer possible to deny a fifth problem: the insufficiency of the Maastricht Treaty. Neither the mere existence of a no bailout clause nor the action of financial markets was, in fact, sufficient to prevent the need for bailouts. Even worse, the treaty contained no guidelines indicating how to proceed if inter-European economic rescue became necessary. Lacking guidance, European leaders held a series of panicky meetings in spring 2010, culminating in the May decision by most eurozone members to pay €500 billion in bailout, and by the ECB to intervene in markets to buy debt. Merkel insisted on involving the International Monetary Fund (IMF), which gave €250 billion in a political move meant to ensure that Europeans would not bail out Greece alone and subsequently face voter wrath. Sixth, and finally, the crisis spotlighted the weakness of eurozone economic governance. Member states had not wanted to impose overly strict penalties on treaty violators, in case they themselves fell into difficulties. Germany in particular was in a sensitive spot. The expense of renovating East Germany and the unrealistic one-to-one exchange rate between eastern and western marks inflated its money supply, destroyed already weak Eastern industries, and increased the final bill for unification. Germany's economic competitiveness declined, with the result that the member state expected to act as the guardian of monetary union standards failed to meet the Maastricht criteria itself. Germany had to ask, humiliatingly, for lenient implementation of the Stability Pact it had insisted upon, and the EU agreed. After such circumstances it was much harder for subsequent German governments to act in a holier-than-thou fashion toward any other member with economic woes. The fact that the French also found themselves in a fiscal hole for much of the 1990s only compounded the problem. Conclusion: Implications for Today The 2010 crisis has had some fortunate consequences. It exposed weaknesses within individual countries and in the Maastricht Treaty. It confirmed that the eurozone cannot rely on financial markets to address its own weaknesses. It revealed that some kind of permanent bailout procedure is necessary. And it showed that European leaders are still grappling with the seeds sown by the rapidity with which both German unification and the Maastricht Treaty were achieved. The challenge now is governance reform, not expulsion of member states. Reverting to national currencies would drive the values of reissued southern currencies into the ground and the deutsch mark into the sky, thereby undermining Germany's export competitiveness and job market, to say nothing of the collateral damage to the EU and the single market. The eurozone crisis should not signal the end of the euro but rather the start of a long-overdue overhaul. The idea of a European Monetary Fund endorsed by Wolfgang Schäuble—an elder statesman from the days of German unification and now a subordinate of Chancellor Angela Merkel—faded after Merkel dismissed it, but deserves broader support. Germany also needs to reconsider its calls for painful fiscal discipline on the part of the weakest countries until their economies regain footing. Ideally, but perhaps not realistically, Merkel should return to previous German form and spearhead a revision of the Maastricht Treaty, leading a fresh effort to do for political union what Kohl and Mitterrand did for monetary union. The unlikelihood of such a move exemplifies a fundamental problem within the whole EU: there exists a built-in tension between the lofty goals of integration and member states' collective unpreparedness to think through the consequences of their ambitious project. The great achievement of the past has been to reconcile these contradictory impulses by focusing on practical agreements. It is time to do so once again, and to realize that the necessary consequence of monetary union is greater political union. European integration has already transformed most of a famously bellicose continent into a stable zone of peace. Europeans should learn from the woes of 2010 and use them to produce momentum and legitimacy for deeper integration.