(*) Further institutional, juridical and technical details on this proposal will be provided in a future ISPI publication. The current crisis in Greek sovereign debt markets has made two things clear. First, any default by the Greek government would be bad for the eurozone as a whole because it would hurt the balance sheets of large banks that are already struggling to raise capital and because it would threaten the liquidity of bond markets for countries that may be in a similar situation. Hence a timely bailout of the Greek government would do a lot to shore up the stability and liquidity of European financial markets. Never- theless, and this is the second point, no-one is particularly eager to (be seen to) bail out the Greeks. Of course everyone is eager to prevent another major financial crisis but the idea of pumping money into a country that has so obviously lived beyond its means while at the same time cooking the books and conniving with banks to cover its tracks is hard to swallow. Even under the most generous of circumstances, such an action would be seen to create a “moral hazard” – encouraging future governments in Greece and elsewhere to engage in similar behavior. The current situation in Greece presents precisely the sort damned-if-you-do, damned-if-you-don’t dilemma that the Maastricht Treaty and the Stability and Growth Pact were designed to prevent. The multilateral sur- veillance, excessive deficits, and early warning pro- cedures were meant to spot and correct these situations in a timely manner; ESA 95 and the newly empowered Eurostat were meant to ensure that fiscal accounting was easy for all to read; the escalating ladder of sanctions provided the incentives for corrective action; and the no bailout clause showed that there was no net on the other side of the precipice. Unfortunately, however, few economic commentators re- cognized that the Greek situation was a real possibility. Instead they worried that the provisions for macro- economic policy coordination would leave too little room for fiscal stimulus or policy flexibility. Hence it is hardly surprising that politicians would use this concern to set the stability and growth N. 180 - MARCH 2010 Abstract No-one is particularly eager to bail out the Greeks. Of course everyone would like to prevent another major financial crisis but the idea of pumping money into a country that has so obviously lived beyond its means while providing incorrect information and conniving with banks to cover its tracks is hard to swallow. Even under the most generous of circumstances, such an action would be seen to create a “moral hazard” – encouraging future governments in Greece and elsewhere to engage in similar behaviour. The solution could be a dual bond structure for government financing (including Eurobonds). This would not eliminate the Greek crisis but would help mitigate its systemic importance. Erik Jones is Professor of European Studies at the SAIS Bologna Center of the Johns Hopkins University and author of, inter alia, The Politics of Economic and Monetary Union, Rowman & Littlefield, 2002. Erik Jones A Eurobond Proposal to Promote Stability and Liquidity while Preventing Moral Hazard*