To think that a European would want to return to a situation where driving a distance like the one between Boston and Washington, DC would require him/her to change five different currencies and show his passport at five different border crossings is unrealistic. The average German (and Belgian, and Pole) is also unlikley to want to know he is certain to be cooped up all his life for career purposes in only a single state--whether the size of Maryland or the size of California. So despite the unavoidable set-backs the EU project will continue to move forward, even if it pauses now for a few years or a decade. It is true that the current situation is inadequate and the EU is still not fully built institutionally but the logic of things makes it more likely that in 20 years the EU would not only still be around but would be more institutionally complete than it is now and will look more like a federal state. There is less logic to expect things can just stay in this unstable construction--the EU project has to either move forward or fall apart. Falling apart would create more every-day problems for Europeans than moving ahead.

I only take issue with your use of the term "hubris" to characterize the EU adventure into common currencies. I think you mean "naive" or "ill-conceived" as you later fault the lack of institutional constraints. Hubris -- rooted in ancient (rather than modern) Greek culture -- suggests some overreaching arrogance or ambition which flies in the face of nature and the gods. Hubris is always humbled because it misapprehends reality. The Euro may too be humbled, but for institutional rather than existential reasons.

I think what we're seeing are the natural boundaries that EU member states are comfertable with in this experiment.

Just to echo what Val said above. There are certain perks and priveledges that seem hard to go back from at this point. But when it comes to the central issues of "power" in the state system, namely the economy and military, nothings giving.

You can come up with as many NATOs and EUs as you want, sovereignty is defined by a state's economy and military, and it will not negotiate it away for any greater good.

If it is hubris, then nemesis is well earned.
khairi janbek.paris/france

My general impression is that Mr. Walt is mixing a few things.

First of all, you speak of the "Greek financial crisis" in some of your last posts. But it's not a financial crisis. Of course, if the current situation deteriorates, the Greek banking system might get badly exposed, but at the moment it's a sovereign debt crisis.

Second, I don't understand what you mean by "the creation of a common currency back in 1995." In 1995, the decision was taken to call the common currency "Euro". But it was the 1992 Maastricht Treaty that outlined the major provisions of the common currency. The currency was then introduced in 1999, and the actual circulation of Euro coins and notes began in 2002. If you want a broader understanding of "creation", instead, then it is necessary to look back at the breakdown of the post-war regime of Bretton Woods I in 1971. European leaders set in motion a process with a view to create a stable European monetary order, which resulted in setting up the European Monetary System (EMS), with the exchange rate mechanism (ERM) as its main pillar. The common currency was only the culmination of this long-term process.

But let's leave aside these technicalities. The most serious problem with our post is that you are probably not seeing the difference between the European Union and the eurozone. The European Union (EU) - which evolved out of the European Coal and Steel Community formed in 1950 - is made up of 27 countries. But only 16 countries within the EU use the common currency and form the eurozone. The eurozone is an important but much younger component of the broader EU project.

True, the current Greek tragedy has exposed serious fault lines within the EU, but it's the eurozone that is actually at the receiving end. In the worst-case scenario, the current crisis might tear the eurozone apart. But it is obviously not going to deal a lethal blow to the much broader and deeper EU, as you seem to assume.

The core problem of the current crisis is actually crystal clear. The existing institutional system is built on the following premise: "One Market, One Money". The European project was indeed driven by this powerful idea. The early decades were dedicated to create the "One Market", with the current Single Market representing a largely successful outcome. The Single Market, coupled with an active competition policy, allows, in theory, the free movement of goods, services, labor, and capital. (In fact, the movement of labor, services, and even capital is much limited). The issue of "One Money" , instead, was taken up much later. The monetary union is underpinned by an independent central bank (ECB) and the fiscal rules of the Stability and Growth Pact (SGP).

The core problem lies in the fundamental assumptions of the monetary union. The flaws in these assumptions, in turn, led to the creation of a monetary regime that is based on shaky pillars. By setting up the ECB, the eurozone members gave up their monetary sovereignty. In other words, they renounced their right to use the money printing press. And the SGP set clear limits on deficit and debt levels, with two important thresholds for debt (60% of GDP) and deficit (3%). However, countries like Greece gained euro membership even though they didn't meet the convergence criteria such as those set by the SGP. Even then, Greek's debt was much higher than 60% of its GDP. Why, then, was Greece let in? Well, the powerful idea of creating the "One Money" meant that some political leniency was inevitable.

Another pillar of the monetary union is the "no-bail-out clause". The underlying assumption is that eurozone member countries should not engage in reckless behavior expecting to get bailed out if things get messed up. The purpose was to prevent the inherent problem of moral hazard. As you can guess, it was mainly Germany - the most powerful country in Europe and the prime force behind the EU project - that insisted on including this provision. However, the markets always assumed that the "bail-out clause" was a bluff. In their view, Germany and others wouldn't not fail to help countries in trouble, not least because they would want to show their commitment to the idea of "One Market, One Money". In other words, markets assumed that they could lend freely to peripheral countries such as Greece and Spain, since there was an implicit guarantee of assistance - "a safety net" - to be provided by Germany and others.

The activation of this implicit guarantee is precisely what we are seeing right now. Despite the "no-bail-out clause", other eurozone countries are now compelled to assist Greece. Germany actually tried everything to delay the bail-out. But, unfortunately, it is exactly this delay that triggered the current crisis, with markets getting worried about the debt dynamics in the PIIGS countries and outraged at the indecision of the European political elite.

European countries, once again, are demonstrating that they are unable to get their act together and get their house in order without outside assistance, this time in the economic realm. Whether they would deal with the Greek crisis without IMF help was viewed as a „litmus test.“ And they failed miserably. The decision to bring in the IMF is therefore an ominous sign, to say the least. Not only does it suggest differing policy views within the eurozone. It also lays bare profound differences among the European political elite about the EU project. In order to advance the latter, one needs member countries that are economically healthy and politically stable. But if some countries enjoy high growth rates (e.g. Germany) while others face years of unemployment and grinding deflation (e.g. Greece), the diverging growth differentials threaten not only to tear the eurozone apart, but also to undermine the political consensus underlying the EU project.

I fear the global financial crisis will deal a lethal blow to the eurozone. The EU will of course survive, but the monetary union won't. In the foreseeable future, contemplating a political union, or even a fiscal union, in Europe amounts to suffering from dangerous delusions. Neither a common political identity nor a political will to build a common polity has ever emerged during the last six decades. And a monetary union without some sort of fiscal union is not feasible, as the current crisis is painfully reminding.

The second leg of "One Market, One Money" is doomed to fail.

Judging from the three pillars of EU, the future of EU will likely face turbulences as expected. But she probably has gone too far to turn back now, although that remains to be seen.

(1) On the Economic Front : The center of gravity lies on a single market, less so on a single currency, at least, not in the near future, when a single market is being formed and consolidated. And the Euro won't crash since its share on the global foreign exchange reserves market, if not for anything else. China's strategy to invest in Euro is under review, and probably won't be in a massive scale at this stage.

(2) On the Political Front : Granting the elected EU Parliament more power, as is given by the Lisbon Treaty, to exert internal pull of the Union, while knowing that many are still in favor of nationalism, and looking for ways to forge a patch for the Lisbon Treaty. The external pull of the Union would come from cases like that of the mid-east peace process, whereby EU has no right to choose her neighbors, namely Africa, Mid-East and Central Asia.

(3) On the Defense Front : ESDP (Common Security and Defense Policy), miniature in size presently, a burden sharing instrument, has potentials parallel to that of NATO, whose future is uncertain and, to a certain extent, dependent upon the outcome of its operations in Afghanistan.

It's indeed fascinating to watch as observers, even interesting, but certainly not much fun for the Europeans in the frying pan.

It was a huge mistake to set up a monetary union following the collapse of The Soviet Union and the end of The Cold War. What has these things got to do wihj each other, you ask. Ask the Germans and the French. The Germans , afraid of their past [but not more afraid that they were confident that this new Europe could be created in their own image and based on their own austere and strict, financial disipline.] , wanted to be tied firmly to Europe, whereas the French allways favours all the symbols of a state: A currency, an army, a President and all the Grandeur that goes with it.

Tried to conquer the worldBritain,Good ol' Motherland of Common Sense
Meanwhile the Motherland of Common Sense, Britain, has always focussed on the trade-dimension of the European Community. It was their Commissioner, Lord Cockfield, who took the initiative to the single market.

It has always been the British position to widen rather than deepen, whereas the German and French wanted the exact opposite. As always it is the British position that is the most sound, and if the French and Germans had only followed that, there wouldn't have been a single currency, and Greece could have devalued 30 % - the way thay hace always done.

It was a huge mistake to set up a monetary union following the collapse of The Soviet Union and the end of The Cold War. What has these things got to do wihj each other, you ask. Ask the Germans and the French. The Germans , afraid of their past [but not more afraid that they were confident that this new Europe could be created in their own image and based on their own austere and strict, financial disipline.] , wanted to be tied firmly to Europe, whereas the French allways favours all the symbols of a state: A currency, an army, a President and all the Grandeur that goes with it.

Tried to conquer the world
These two countries are exactly the ones that persistently have caused troubles for....esssentially the whole world. Both have had dictators and both have tried to conquer the world... through violence, rather than trade.

These are the nemesisses of Europe and the world, constantly causing trouble. Tell me, why rush into a monetary Union (that everybody knew was not going to work) just because the Soviet Union an a cold war, -- that you werent really a part in --ends? This is just another irresponsible blip being committed by irresponsible parties.

Britain,Good ol' Motherland of Common Sense
Meanwhile the Motherland of Common Sense, Britain, has always focussed on the trade-dimension of the European Community. It was their Commissioner, Lord Cockfield, who took the initiative to the single market.

It has always been the British position to widen rather than deepen, whereas the German and French wanted the exact opposite. As always it is the British position that is the most sound, and if the French and Germans had only followed that, there wouldn't have been a single currency, and Greece could have devalued 30 % - the way thay hace always done.

It is the best for all to stick to trade. The Americans doesn''t really like competitors in the Global Arena, and according to my view if the Americans doesn't like that, then it is better for the Europeans to stick to trade. Having comed to the recue of Europe two times the last century, and always kept the flag flying high in the stand-off against Communism, while others were dragging their feet, Europe really doesn't occupy any moral high ground, and if the US doesn't want competitors, then that settles it: Europe should stick to trade and refrain from crating any big entities with the aim of competing with the US.

This demands that the US in turn understands that they must continue to stay in Europe. Not necesseraly in hifh numbers, but maintain an infrastructure to whick soldiers quickly can be flown in. And the US should encourage Russia to be included in a trade relationship with the EU, at the same time as the EU itself is scaled back to being purely a trading community.

Basically then,- the US military role in Europe will be confined to ensuring that Germany , Fraqnce and others will not turn against eash other --- one of the most prominent arguments for creating the European community in the first place.

They have the efficiency of the Germans, the charms of the Latins and the Common sense of the British. This means that they can essentially solve everything. A German on his own -- without the common sense --couls start to be efficient in -- say -- exterminating different minority groups. A Greek could be charming all the way to the bank......and the list goes on. But only in America does the best traits of each blend together in a way that have truely conquered the world.

The European citizenry are not uniformly enthusiastic about the Euro and many, lamenting the passing of the Deutsche Mark, Franc, and Peseta etc. do not consider it “proper money”. I have encountered property contracts in France and Spain negotiated in the old currency and only converted, with the aid of a pocket calculator, at the end of the deal. Supermarket checkout slips and other till generated bills frequently carry an additional total in old money for “information” purposes. I have also seen calculators in stores for customers to tap in the price of an item and get its cost in "real money".The Eurozone was premature, it was hoped it would serve to bond the Union but may well have the contrary effect.

In my first post, I failed to make some suggestions on the way forward.

These days the main debate revolves around the question of which institutional changes, if any, are needed to make the eurozone work better. But, astoundingly, I have yet to come across an analysis that is explicitly based on IR theories. So let's apply some IR theories.

First of all, let’s define “international institutions” as a set of rules that prescribe and/or proscribe state action. How are these institutions formed? Realists would argue that - under anarchy - institutions are created by great powers, and that they exist so long as they serve the interests of great powers. In other words, institutions merely reflect the underlying distribution of material capabilities. Institutionalists, instead, would argue that institutions have an independent effect on state behavior. Institutionalism, which is based on a functionalist logic, holds that international institutions matter, for they provide clear legal frameworks, increase the amount of information, and reduce transaction costs. Constructivists, for their part, would claim that institutions are the result of a complex interplay between actors and social structures. The international and domestic societal environments shape actors’ identities, which in turn shape actors’ interests and behavior. And Liberals would argue that domestic politics matters, and that international institutions exist so long as they enjoy support among domestic political constituencies of member countries.

Now let's see if these IR theories help gain some insights. The current Greek crisis represents a momentous historical juncture in European history, so what follows is not merely an academic exercise.

Let's begin with realism. Realists like Mr. Walt would argue that the Franco-German political rapprochement provided the fundamental basis on which the European integration was built in the postwar era. This rapprochement, in turn, was only made possible by the implicit guarantee that Uncle Sam would intervene if Germany again were to wreak havoc. The end of the Cold War did not transform these structural realities. And the demise of the Soviet Union did not transform the fundamental nature of international politics. The international political system remains characterized by anarchy and the uneven distribution of material capabilities. As a result, even the allegedly "post-modern" Europe has to come to terms with the structural forces related to the absence of a higher ruling body above sovereign states. Nonetheless, Europe remains allied with the sole superpower. Therefore, so long as the United States remains the economically and militarily preeminent power, no serious security issue will arise on the European continent. U.S. military supremacy and NATO will continue to keep Americans in, the Russians out, and the Germans down. It follows that a military resurgence of Germany is out of the question. If the "German problem" reemerges, then it will be one of an economic kind. Also, every serious foreign policy analyst on the planet knows that the idea of “BRIC” countries is a fad. Only the letter “C” in the acronym merits serious attention. And the job of dealing with the growing Chinese power falls chiefly on Washington. Because there is no serious security threat for and within Europe, the issue of "relative gains" is largely irrelevant here. Thus, we can jump from realism to institutionalism, for the latter makes largely similar predictions in the case under consideration.

Institutionalists would claim that the existing eurozone institutions - such as the European Central Bank (ECB), the 1992 Maastricht Treaty, and the Stability and Growth Pact (SGP) - were informed by a “functionalist” logic, with the creation of one institution generating “spillovers” that made necessary the creation of further institutions. But institutionalists also would point out that these institutions all reflect underlying German interests. The critical question now is whether Germany deems useful to set up new institutions to bolster the eurozone regime. As the current crisis suggests, there are fundamentally two major issues; liquidity and solvency. The Greek issue is one of solvency, while problems that Spain and Ireland face are related to liquidity. In other words, Greece's travails are due to fiscal profligacy, whereas Spain and Ireland are suffering from the burst of real estate bubbles, not from fiscal irresponsibility. Two different problems require two different institutional solutions. With respect to both liquidity and solvency, the current system turned out to be deeply flawed. But the suspicion is that Germany remains loath to set up institutions that deal with both liquidity and solvency problems. Still, changes will be inevitable.

Germany's Finance Minister Mr. Schäuble has proposed to create a European Monetary Fund (EMF) to deal with liquidity problems. But, as you know, the idea of setting up an EMF is not new. After the breakdown of Bretton Woods I in 1971, the founding fathers of the European Monetary System (EMS) began discussing inter alia the merits of an EMF. But in the end the idea did not come into fruition. Unfortunately, prospects for a revised version of an EMF do not seem brighter today. To begin with, setting up an EMF requires amending the Lisbon Treaty, and negotiations thus would likely be tough and protracted, with a successful outcome being anything but certain. Even more important is the inherent problem of moral hazard. Germans fear that such an institution would generate perverse incentives, with eurozone countries increasingly tempted to engage in reckless financial and fiscal behavior in the knowledge that they will be bailed out. And the markets would assume that Berlin would pay the bulk of the bill. This is precisely the worst-case scenario for German policymakers. In the current crisis, it is not a mere coincidence that German Chancellor Mrs. Merkel insisted on bringing on board the IMF in helping Greece. Still, if European policymakers now succeed in stabilizing the current situation, Germany might seriously contemplate the creation of an institution similar to the EMF. But it would ask for strict conditions. Not only will German policymakers exact deep commitments from other eurozone members, but they also will view the effort as an opportunity to rein in its own banks and to impose more regulation on European financial markets. In fact, the current crisis is exacerbated by the fact that German banks have more than 60$ billion of Greek debt in their accounts. As you might guess, Greek's default on its debt would badly expose the German banking system and, inevitably, it would deal a body blow to German fiscal health. So, yes, the EMF might be an interesting medium-term option for Germany for dealing with liquidity problems.

Now let's turn to the issue of solvency. Of course, it's not always to distinguish between liquidity and solvency problems. Nonetheless, cases such as the current Greek crisis are related to solvency. Soaring debt, increasing deficit, lackluster growth prospects, and lack of competitiveness represent a frightening mix for Greece. No wonder that markets are betting against Greek debt. Debt restructuring seems almost inevitable. The problem is that Greece’s debt restructuring is not only undesirable for Germany, but also a nightmare, for it is highly unlikely to be an orderly process. Currently, the eurozone lacks a framework for dealing with debt restructuring of its members. The critical question, once again, is whether Germany is willing to shoulder the burden of paying the bill for the weaker members. Arguably, Germany might be interested in a debt restructuring mechanism in the medium-term, but on even more far-reaching conditions and commitments from eurozone members. What emerges, in effect, will resemble a fiscal union, with fiscal sovereignty only a façade in weak Club-Med countries. This system will in fact be similar to an empire, with Germany at its core and Club-Med countries and others in its periphery. Of course, German policymakers will make every effort to fend off accusations of “empire” and “political union”, and they will attempt to create a “multilateral” façade. But, make no mistake, Germany won’t miss any chance to encroach on fiscal realm of weaker countries. Greeks should understand this better that most of us. It was indeed a Greek historian who once said that “the strong do what they can, and the weak suffer what they must.”

The emergence of a tacit empire can also be explained by the constructivist approach. There is no way Europe can now turn its back on liberal democracy, market economy, human rights, and so. These norms and values remain at the heart of the European integration process. True, nationalism still remains a powerful force in Europe, and European nation-states are still loath to give up their sovereignty in core policy areas. But the fact is that the European functionalist juggernaut cannot be stopped. Rolling back and dismantling the European project is neither conceivable nor feasible. Hence, further integration – whether explicit or implicit – is inevitable. No country will dare to dash the hopes and expectations of “European unity” and “European solidarity”. These powerful ideational factors, combined with U.S. military supremacy, will contribute to prevent Germany from becoming a “normal” nation, one which refuses to subordinate its national interests to the European project. No European country wants Germany to shed its historical baggage. Since it won’t be able to break the shackles, Germany will be forced to prop up the “European community” rhetoric. But, in return, expect the German policymakers to advance the integration process even more on their own terms.

Liberals might argue that domestic political consensus on new eurozone institutions is lackluster today. For instance, they would point at the acrimonious German political debate on the Greek rescue package or at the social and political tension on Greek streets. However, there is much less consensus on dismantling the existing structures. Manifold domestic groups in eurozone countries benefit from the eurozone, such as businesses, banks and financial institutions, politicians, technocrats, and other groups. And they would be loath to lose the benefits and privileges provided by the existing regime. If anything, they might support the efforts to bolster the European institutional infrastructure, if this helps improving their lot. Granted, it may be unreasonable to expect the emergence of a common European identity. But as long as further monetary integration offers the prospects of economic growth and sustainability, support for new eurozone institutions can be mobilized. For Germany, this means that its policymakers can bank on domestic support for creating further institutions dealing with eurozone problems, not least from its companies and banks. The critical question, instead, is whether there would be political consensus in peripheral countries in trouble, such as Greece. Consensus can be mobilized, if new eurozone institutions offer the prospects for making Greece better off. Giving up some fiscal sovereignty might indeed be the better solution for countries like Greece. The challenge, of course, will be to implement it without arousing political controversies.

In sum, it seems that further monetary integration in Europe is on the cards. I’m not arguing that I support it, but the creation of various institutions to bolster the eurozone appears to be highly likely in the medium and long run.

P.S.: I would love to see a realist, somewhat wonkish, take by Mr. Walt on this issue!

"To think that a European would want to return to a situation where driving a distance like the one between Boston and Washington, DC would require him/her to change five different currencies and show his passport at five different border crossings is unrealistic."

The quarter-century-old cliche is less apt in a world of debit and credit cards. (Disclaimer: Anecdote != data). On vacation 5 and 10 years ago in Ireland (north and south), changing USD, Euro and pounds was a lot less important 5 years ago because most transactions were Visa-based. 5 years ago, it wasn't worth changing pocket money back to USD compared to saving souveneirs.

I think that the same would apply if multiple currencies or demi-currencies started circulating in Euroland.

I don't see how one can claim to be an FP analyst these days -- realist or otherwise -- without a thorough understanding of economics and financial markets.

Boy, look at the nonsense posted here. Germany will join forces with Russia, Germany will return to genocidal policies...someone who comes up with this kind of gibberish doesn't have the slightest clue about Europe. As for placing one's bet, rumours about the impending demise of the EU are greatly exaggerated. Once the European governments were confronted with the realistic possibility that a Greek bankruptcy could set off a chain reaction that would probably result in the end of the common currency - or at least a drastic reduction in its geographic scope - they moved quickly and provided the loans, even in the face of strong and vocal domestic opposition to such plans, as is the case in Germany. While nationalism does indeed pose a challenge to the legitimacy of the project of European integration and occasionally results in backlashes against it, on the whole, the European states have invested too much effort in this project and reaped too many rewards from it for it to fail. The respective governments have recognized this logic and are acting on it. And when push comes to shove, the general populace usually understands this raison d'état as well - parties railing against Europe haven't had much electoral success in the past (see the British Tories in 2001 and 2005, or the PiS in Poland in 2007).