Limited liability government debt for the Eurozone

The Maastricht treaty, notably the article 103 prohibition on 'bail-outs', gave a prominent role to market disciplines on fiscal policy. These were not effective, failing to prevent the Euro area government debt crisis. This article suggests that these market disciplines can be made effective through issue of 'limited liability' debt (debt with a maximum debt service obligation as a proportion of GDP), together with rules constraining bank holdings of government debt and maturity structure, and a senior liquidity facility. This proposal is supported by analysis of fiscal arrangements within single currency areas and of emerging market sovereign debt restructuring.