The incentive structure is flawed because it can lead to unsustainable fiscal policies of individual member states which in turn would generate negative spill over effects to the monetary union as a whole.
The founding fathers of the euro area were aware that the management of a single currency in a union of sovereign states would be challenging and that effective rules were required to safeguard the credibility of the currency. At the very core of that framework the no-bail-out clause and the Stability and Growth Pact were installed.