The current crisis calls for concerted action at both the European and the international level. The EU has taken a series of bold measures to restore confidence, stability and sustainability in the financial markets.
Monetary union has led to a strengthening of financial relations between euro-area Member States. As the recent financial crisis has demonstrated, this means that financial distress in one Member State can have a serious impact on the macro-financial stability of the euro-area as a whole. So helping to stabilise the finances of one Member State helps to stabilise the finances of other countries in the euro area as well. Financial assistance is provided as a last resort, to counter any risk of contagion and to safeguard financial stability in the euro-area. It should be underlined that the financial assistance provided to euro area Member States in distress is not a fiscal transfer, but a loan to be repaid fully with interest. Taxpayers will not pay anything.
Furthermore, it comes with strict conditions and detailed and demanding policy programmes, which ensure that, while assistance is being provided, the proper fiscal and structural adjustments are being set in place to ensure solvency in the long run.
Some observers have expressed concerns that granting (comparatively) easy access to common funds to a Member State might undermine its efforts to put its public finances—and more generally its economy - back on a healthy footing. It might even act as a disincentive.
TThe argument goes that instead of taking possibly unpopular or painful measures to ensure its autonomous funding, a Member State would simply use up the funds provided by others and not change its behavior because it is now shielded from the consequences. In economics, such behavior is called “moral hazard”.
In the case of euro-area assistance, however, the risk of moral hazard is limited by the strict conditions that are placed on assistance.
Firstly, a Member State calling for financial assistance receives loans, not grants. This means that it is obliged to repay the borrowed amount with interest. The interest rate is set in a way that provides both effective relief and-at the same time-an incentive to return to market funding as soon as possible.
Secondly, before receiving a loan, any Member State seeking assistance has to reach an agreement with the lenders on a wide-ranging set of policy measures that must be put into place to restore its fiscal viability.
Thirdly, the way that the Member State implements the agreed adjustment measures is closely monitored by the lenders. Loans are disbursed in tranches, which means that the programme could be suspended or terminated at any time if the beneficiary country fails to comply with the agreed programme.
Each programme for a beneficiary Member State has a built-in system of incentives which obliges it to go back to the financial markets to raise funding after a certain period.