Jeffrey Frankel: Ever since 1841, the market requires that US states running up questionable levels of debt pay an interest-rate premium to compensate for the default risk. By contrast, Greece and the eurozone’s other heavy borrowers were able to borrow at interest rates that had fallen to virtually the same level as German Bunds. Had the ECB operated from the outset under a rule prohibiting it from accepting SGP-noncompliant countries’ debt as collateral, the entire eurozone sovereign-debt problem might have been avoided….
The version of Eurobonds that might work as the missing long-term enforcement mechanism is almost the reverse of the Germans’ ERF proposal: the “blue bonds” proposed two years ago by Jacques Delpla and Jakob von Weizsäcker. Under this plan, only debt issued by national authorities below the 60%-of-GDP threshold could receive eurozone backing and seniority. When a country issued debt above the threshold, the resulting “red bonds” would lose this status……market interest rates would provide the discipline that bureaucrats in Brussels cannot.
via "Which Eurobonds?" by Jeffrey Frankel | Project Syndicate.