Cyprus finally got a revised bailout plan last week. It taxes big, uninsured bank depositors to pay part of the cost of restructuring the country’s two biggest banks while leaving the savings of smaller, insured depositors untouched. But just days before, Cyprus, with the blessings of the smartest bankers and smartest finance ministers in Europe, came within a whisker of adopting a truly reckless plan that would have taxed small savers, undermined deposit insurance and risked sparking disastrous bank runs elsewhere, notably Italy and Spain, the euro zone’s third- and fourth-largest economies.

How could sophisticated European finance ministers — along with senior officials of the European Central Bank and the International Monetary Fund — have signed off on such a counterproductive rescue plan? And if they could agree to that, what other damaging schemes might they grab for in some future crisis?

Europe urgently needs to ask itself these questions. This month’s close call was hardly its first brush with self-inflicted disaster in the three-year-old euro crisis; in 2010, loose and premature talk by French and German leaders about involuntary loan write-downs of private-sector loans needlessly scared off potential lenders. And unless some drastic, though politically difficult, changes are made in Europe’s outdated decision-making machinery, it probably won’t be the last.

The basic problem is that the E.U. is not a true union but more a collection of states that have not in any real sense ceded decision-making power to a central authority. The result is chaos fed by conflicting national objectives. In the Cyprus case, German politicians wanted to minimize bailout costs to German taxpayers in an election year. Cyprus’s president hoped to keep the island an attractive haven for foreign depositors. The I.M.F. insisted that Cyprus not be lent more than it could pay back. And the new leader of Europe’s finance ministers, a tough-talking, austerity-preaching Dutch finance minister, wanted to make a point about debtors paying for their own bailouts. All of them somehow initially settled on the lowest common denominator: a bizarre scheme pinning much of the responsibility and most of the pain on small, insured depositors in Cyprus’s banks.