The key monetary policy requirement in the sovereign debt crisis is that no additional risks spill over to the Eurosystem and that the dividing line between monetary policy and fiscal policy is not blurred any further. Solvent counterparties and sufficient collateral are crucial for the Eurosystem’s refinancing operations. To that extent we expressly welcome the Council’s announced intent, within a new support programme for Greece, to ensure sufficiently capitalised banks and adequate collateral, thereby addressing concerns held by the Deutsche Bundesbank and the Eurosystem.

The European Council has decided to grant Greece considerable relief. Private sector creditors are to contribute to the financing measures, although they will be partly protected by the donor member states. The support programme notably includes measures to significantly expand the flexibility of the European Financial Stability Facility (EFSF) and to make it a considerably more attractive option for all countries receiving assistance.

The combined effect of these decisions might reduce the acute tension in the financial markets. However, by shifting extensive additional risks to the countries providing assistance and to their taxpayers, the euro area has taken a major step towards communitising risks arising from unsound public finances and misdirected macroeconomic policies. This weakens the underlying principle of national fiscal responsibility on which European monetary union is founded.  It will make it more difficult in future to maintain the incentives to pursue a sound fiscal policy.

This makes it all the more important to decisively tackle the root-causes of the crisis. The adopted adjustment programmes must now be implemented. Greece remains in need of extensive consolidation and reform. It is now all the more imperative to firmly stick to the goals of rigorously consolidating government finances throughout the euro area and strengthening the overall fiscal framework of monetary union.