The spectre of financial dominance in the eurozone

Differently from previous crises, the European institutions responded promptly to the Covid-19 pandemic by implementing an appropriate policy mix. However, this policy mix has proven to be insufficient for reducing the risks of financial instability in the EU due to the temporary horizon of the centralised fiscal policy and the persistence of adverse shocks. In fact, the pandemic’s impact was strengthened by the dramatic consequences of the war in Ukraine. The possible inefficiencies in implementing the Next Generation-EU (NG-EU) and an inadequate response to the war’s shock could trigger, at best, the revival of financial and fiscal dominance in the euro-area economies. However, as we analyse using a simple model, in the post-pandemic and war period, the overburdening of the ECB’s role would come with high costs. Hence, we argue that it is necessary to pursue sustainable development based on the successful implementation of the NG-EU and the related transformation of the on-shot centralised fiscal policy into a recurrent policy tool.