EL DILEMA IMPOSIBLE DEL BANCO CENTRAL EUROPEO: INFLACIÓN Y DEUDA SOBERANA DE ESTADOS MIEMBROS (I)

https://t.co/TpOnuJTkpW #ecb

— Guillermo Ruiz Zapatero (@ruiz_zapatero) June 22, 2022

What is happening between the markets and the central bank is not just a form of mutual miscommunication. This is a power struggle. The ECB is resisting what is known as fiscal dominance, which is when a central bank can’t follow its target because it is under pressure to bail out governments. There are no easy answers. The central bank knows it cannot ignore sovereign debt spreads, because they do affect monetary policy transmission mechanisms. The only instrument that would fix this problem is a mutualised eurobond. In other words, fiscal dominance is not so much a matter of choice, but one of a lack of alternatives. The ECB may well be stuck in this situation. Support the bond markets, and risk a permanent overshoot of the inflation target. Or don't support the bond market, and risk a sovereign-debt crisis, a financial meltdown.