Europe’s leaders, unlike former US President George H. W. Bush,have never had trouble with the “vision thing.” They have always known whatthey want their continent to be. But having avision is not the same as implementing it. And, when it comes to puttingtheir ideas into practice, the European Union’s leaders have fallen short repeatedly.

This tension between Europeans’ goals and their ability to achieve them is playing out again in the wake of the recent EUsummit. Europe’s leaders now agree on a visionof what the EU should become: an economic and monetary union complemented by abanking union, a fiscal union, and a political union. The trouble startsas soon as the discussion moves on to how– and especially when – the last three should be established.

Banking union, Europe’s leaders agreed,means creating a single supervisoryauthority. It means establishing a common deposit-insurance scheme and amechanism for closing down insolventfinancial institutions. It means giving the EU’s rescue facilities the power toinject funds directly into undercapitalized banks.

Likewise, fiscal union means giving the EuropeanCommission (or, alternatively, a EuropeanTreasury) the authority to veto national budgets. It means that someportion of members’ debts will be mutualized: individual governments’ debtswould become Eurobonds, and thus a joint obligation of all members. TheCommission (or Treasury) would then decide how many additional Eurobonds toissue and on whose behalf.

Finally, political union means transferring the prerogativesof national legislatures to the European Parliament, which would then decidehow to structure Europe’s fiscal, banking, andmonetary union. Those responsible for the EU’s day-to-day operations, includingthe Board of the European Central Bank, would be accountable to the Parliament,which could dismiss them for failing tocarry out their mandates.

Vision aplenty. The problem is thatthere are two diametrically opposedapproaches to implementing it. One strategy assumes that Europedesperately needs the policies of this deeper union now. It cannot wait toinject capital into the banks. It must take immediate steps toward debtmutualization. It needs either the ECB or an expanded European StabilityMechanism to purchase distressed governments’ bonds today.   

Over time, according to this view, Europecould build the institutions needed to complement these policies. It couldcreate a single bank supervisor, enhance the European Commission’s powers, orcreate a European Treasury. Likewise, it could strengthen the EuropeanParliament. But building institutions takes time, which is in dangerously shortsupply, given the risk of bank runs,sovereign-debt crises, and the collapse of the single currency. That is why thenew policies must come first.

The other view is that to proceed with thenew policies before the new institutions are in place would be reckless. Mutualizing debts before Europeaninstitutions have a veto over fiscal policies would only encourage morereckless behavior by national governments. Proceeding with capital injectionsbefore the single supervisor is in place would only encourage more risk taking.And allowing the ECB to supervise the banks before the European Parliament acquiresthe power to hold it accountable would only deepen the EU’s democratic deficitand provoke a backlash.

Europe has been here before – in the 1990’s, when the decision was taken to establish theeuro. At that time, there were two schools of thought. One camp argued that itwould be reckless to create a monetary union before economic policies hadconverged and institutional reforms were complete.

The other school, by contrast, worried that the existing monetary systemwas rigid, brittle, and prone to crisis. Europe could not wait to complete theinstitution-building process. It was better to create the euro sooner ratherthan later, with the relevant reforms and institutions to follow. At the slightrisk of overgeneralization, one can say that the first camp was made up mainly of northern Europeans, while thesecond was dominated by the south.

The 1992 exchange-rate crisis then tipped thebalance. Once Europe’s exchange-rate system blewup, the southerners’ argument that Europecould not afford to postpone creating the euro carried the day.

The consequences have not been happy. Monetary union without banking,fiscal, and political union has been a disaster.

But not proceeding would also have been a disaster. The 1992 crisis provedthat the existing system was unstable. Not moving forward to the euro wouldhave set up Europefor even more disruptive crises. That is why European leaders took theambitious steps that they did.

Not proceeding now with bank recapitalization and government bondpurchases would similarly lead to disaster. Europethus finds itself in a familiar bind. The only way out is to accelerate theinstitution-building process significantly. Doing so will not be easy. Butdisaster does not wait.