in collaboration with Thomas Mayer Chief Economist with Deutsche Bank Group, London RESPONSIBLE ADMINISTRATOR

The turmoil affecting southern euro area countries (notably Greece) has ushered in the second phase of the financial crisis: that of sovereign default. It is now time to look for a new framework that allows the Euro zone to deal with the failure of one of its members. The solution would be the creation of a Euro(pean) Monetary Fund (EMF). The two key advantages of the EMF proposed by us are that its financing mechanism should give clear incentives for countries to keep their fiscal house in order at all times and, perhaps even more important, it could provide for an orderly sovereign bankruptcy procedure. Both these features would decisively lower the moral hazard problem that pervades the present situation in which both the markets and the Greek government assume that, in the end, they can count on a bailout because the EU could not contemplate the bankruptcy of one of its members