What would it take for euro-zone countries to freely choose their fiscal policies?

Italy’s situation leads us to ask this question: what would it take for euro-zone countries to freely choose their fiscal policies without interference from the European authorities? The following conditions would have to be met: There would have to be market discipline, i.e. an over-expansionary fiscal policy would lead to a sharp rise in interest rates, which would prompt the country to reduce the fiscal deficit; this seems to be the case for Italy; And there could not be any negative externality of an expansionary fiscal policy conducted in one country on the other euro-zone countries. However, the case of Italy shows that there is a negative externality: a rise in interest rates on one euro-zone country ’s public debt leads to a rise in yields on bank bonds and to a decline in bank share prices, and these upward and downward movements spread to banks in the other euro-zone countries. The presence of this negative externality, even if there is market discipline, prevents euro-zone countries from freely choosing their fiscal policies.