The euro zone could create an optional set of stronger debt rules which financially sound countries could choose to adopt, European Central Bank Governing Council member Athanasios Orphanides said on Wednesday.

Orphanides, who heads the Cypriot central bank and is viewed as one of the top thinkers within the ECB, said a second level of stricter debt rules might be a better way to encourage fiscal good behavior than traditional sanctions.

Perhaps a better solution ... is for the euro area member states to self-select into those willing to adopt stricter rules and sanctions, and those not willing to do something, he said in a speech at the Center for Financial Studies.

Any member state that wishes to join a well designed mutual stability insurance mechanism would have to entirely agree to the adoption of strong fiscal rules and meaningful sanctions.

Such a scheme would be intended to pressurize governments into signing up to the tougher rules by harnessing the fear that if they did not, financial markets would take a dim view and penalize them by bumping up borrowing costs.

EU governments are expected to finalize new debt rules at a meeting in Brussels this week. The ECB has criticized the proposals after its calls for near-automatic punishments for debt sinners were jettisoned in October.

In a question and answer session after his speech, Orphanides played down the suggestion that a two-tier system would be a damaging move, dividing the euro zone into weak and strong countries.

During the speech he said a disjointed approach from governments during the debt crisis had been part of the problem.

In my view an important reason for the doubts in the euro area is a perception of the failure in European solidarity.

The process of reaching agreements over the sovereign crisis of the euro area over the past months have raised questions over solidarity among member states, also over trust among governments of the member states, Orphanides said.

He called for greater cooperation and coordination by member states, going forward and said fears of the euro zone becoming a fiscal union, where richer countries pay for weaker ones, were being exaggerated.

The crisis had also proved the euro zone needed an insurance policy to prevent it getting overly squeezed by markets, Orphanides said.

The insurance in this case would involve making loans available to a member state that risks (suffering) a sudden stop in market financing. Loans are not gifts.

(Reporting by Marc Jones; Editing by Catherine Evans)

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