Wihlborg and Khoury examine whether greater institutional flexibility can strengthen confidence in the euro and the European banking union. The authors highlight the costs and benefits of harmonization as compared with those arising from competition among national regulatory frameworks. Greater trust requires either that some EU member states abandon the euro as their currency, or that they effect far-reaching structural reforms. Politically, it is advantageous to divide the euro zone into two different currency areas. Regarding the EU’s banking union, Wihlborg and Khoury contend that market discipline with regard to banks’ risk-taking improves national regulatory frameworks through institutional competition. Mutual recognition between national supervisory authorities requires harmonization of rules for dealing with troubled banks, as well as for banking regulation and supervision.