Can the ECB get out of fiscal dominance?

There is now clear fiscal dominance in the euro zone: Long-term interest rates that are much lower than the growth rate ensure public debt sustainability overall; The guarantee that the ECB would intervene prevents yield spreads between countries from widening. Can the ECB get out of fiscal dominance, i.e. , from a situation where monetary policy is forced to ensure debt sustainability? We do not believe so: with a high level of public debt ratios, reducing the primary fiscal deficits needed to ensure public debt sustainability if the ECB no longer does so would be unsustainable. Moreover, the countries’ heterogeneity would lead to a marked widening of their yield spreads. Long-term interest rates in the euro zone therefore have a maximum value, which is that which ensures public debt sustainability in the medium term given the fiscal deficit outlook. Moreover, the ECB must retain the flexibility to intervene further if needed in some countries’ debts.