FRANKFURT (MNI) – Fiscally irresponsible states should bear more of
the burden for funding a European crisis mechanism so that moral hazard
is minimized and countries gain an incentive to follow sound fiscal
policies, Swedish Finance Minister Anders Borg wrote in the Financial
Times.

“A crisis mechanism needs resources to lend to member states that
have run into trouble,” Borg said in a comment piece published in
Wednesday’s edition of the business daily. “An important question is how
to mobilise these resources in a way that minimizes moral hazard.”

The finance minister noted the current crisis mechanisms already in
place, including the European Financial Stability Facility (EFSF) and
the European finance stability mechanism for euro countries, as well as
the balance of payments support for non-euro area countries.

“All are financed in a way that neither reflects risk nor provides
incentives for sound fiscal policies,” Borg noted.

“This is most unfortunate, since experience has shown that
irresponsible fiscal behaviour has adverse effects not only on the
sinner but also on the euro area and the EU as a whole,” he said. “The
costs of this externality should be borne, to a much higher degree than
is the case today, by those members that act irresponsibly.”

Borg drew a parallel with environmental economics, where the
polluter bears the burden of clean-up costs. “In this case, however, it
is risky fiscal behaviour that should be made more costly,” he said.

“Another way to make the point is to look at a crisis resolution
arrangement as an insurance system,” Borg added. “Those who are more
likely to draw on the insurance should also pay higher fees.”

Borg stressed the need to consider private sector involvement,
economic policy conditionality, and a role for the International
Monetary Fund.

The minister said that he had sent a letter to Olli Rehn, the
European Commissioner for Economic and Monetary Affairs, as well as to
European Council President Herman Van Rompuy, European Central Bank
President Jean-Claude Trichet and other members of the Ecofin council,
outlining a proposal to fund a mechanism that would reflect risk and
provide “the right incentives.”

“I look forward to discussing this at Wednesday’s Ecofin council
meeting in Brussels,” Borg said.

“Europe must build a culture of stability-oriented economic
policies,” Borg continued. “We should ensure that the rules of the
economic governance system we are now renewing and strengthening provide
the right incentives.”

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