Sound incentives are indispensable for countering the biases inherent in the euro area’s architecture. Some burden sharing is necessary, and it is implemented via the rescue mechanisms that grant financial assistance. But if burdens are shared in a manner that distorts incentives even further, no lasting resolution of the crisis will be possible.
By the time the interest rates on government bonds started to rise, the horse – in this case, the Greek minotaur – had already bolted. And, once the horse has bolted, the no-bail-out principle is gone with it. As I’m sure you will remember, no member state is allowed to assume liability for another’s debts.