The idea of a European bailout fund has emerged in discussions, but as always with such funds, it is likely to send the wrong incentives unless carefully crafted. As an example, if the amount to be paid by each country was a function of GDP, it would penalize states that so far have been relatively wise in their spending, which happen to be the large states in this crisis, creating an incentive for smaller states to overspend and not have to pay anywhere near the true cost of their actions.

A much more interesting proposal, but one that is likely to never see the light of day and also carries much danger is the idea that a European Monetary Fund would have the power to setup an sort of bankruptcy procedure where creditors would take losses, just like is done for personal bankruptcy in the US. Of course the issue here is that this would lead to a skyrocketing of interest rates charged by lenders as the perceived risk increases exponentially, and that before the procedure is even tested for the first time. It might also be seen as a dangerous precedent to be set for the rest of the world.

A much better idea, one that would address the issue of moral hazard, would be that the Fund's financing be a function of the deficit and yearly debt as a percentage of GDP (or another aggregate output measure), thus penalizing those states that are on the wrong path much before they hit the guardrail. If such state does hit the guardrail, they will have been paying large sums for much time and thus will not find it advantageous.

Yet this in itself isn't sufficient in my opinion, as there needs to be teeth to enforce the payments, and also continuous monitoring of the governments' budgets and debt in order to prevent a country from gamming the system by overspending all at once and never having to pay for it. But these teeth have to be carefully crafted. Trade restrictions for example are likely to further hurt the country in trouble and slow its recovery, and also go against the spirit of the EU.

A better mechanism would be holding back EU subsidies and just like for personal bankruptcy in the US currently, a major hit on the ability to borrow at all, along with suspension of EU government privileges and say on any legislations for a set period of at least several years.

A funny but potentially effective mechanism might rely on suspension of the country's participation to World Cup and Euro tournaments. This would surely strike at the heart of the voters as they take football seriously and as a question of national honor, but wouldn't affect all countries equally.

Some might suggest this would be mixing football and politics, but that would be naive, as it's been politicized for decades...