than ﬁscal dominance as described by michael woodford : “ in fact, ‘ ﬁscally dominant ’ regimes often do not involve any direct assignment of a seignorage target to the central bank, as in the textbook analysis. instead, ‘ ﬁscal dominance ’ manifests itself through pressure on the central bank to use monetary policy to maintain the market value of government debt. ” [ 10 ] if monetary policy gives in, ﬁscal policy might suddenly be left calling the shots. in the end, if monetary policy has to ensure the solvency of the government, the level of inﬂation would ultimately be determined by the requirements of ﬁscal policy. the impact on inﬂation might not be felt immediately, as some economists have pointed to the role of expectations and learning when people do not have perfect knowledge. if policymakers deviate from the “ virtuous regime ” of monetary dominance, private agents may nevertheless expect that they will return to it soon enough to preserve price stability. but over time, if agents become more and more convinced that the deviation is not short - lived, inﬂation may accelerate. the drift in beliefs might hardly be detectable initially, but can gain momentum later and might appear, to an external observer, to have come out of the blue. to safeguard price stability in the long term, monetary policy relies on a sound ﬁscal policy. this is the story told not only by economic theory but also by historical experience. just think about the united states in the 1940s and early 1950s. back then, the federal reserve and the treasury had agreed to maintain relatively stable government bond yields. the arrangement was eventually terminated, but only when it came to be seen as “ an engine of inﬂation ”. against this backdrop, mervyn king ’ s famous words might come to mind : “ central banks are often accused of being obsessed with inﬂation. this is untrue. if they are obsessed with anything, it is with ﬁscal policy. ” [ 13 ] a monetary policy geared to price stability needs a ﬁrm foundation that has to be laid by others. one cornerstone of that foundation are sound public ﬁnances. a further building block is monetary policy independence. we need that independence in order to pursue the objective of price stability even when conﬂicts with other policy goals arise. in the current environment, monetary and ﬁscal policy are working in harmony – without any coordination. their respective goals are aligned

, rapid and comprehensive ﬁscal and economic policy action staved off an even deeper slump, which would have caused serious long - term harm to the economy. with its sound public ﬁnances, germany was in a comparatively good starting position, but other european countries have less ﬁscal leeway. unfortunately, some of them were hit hard by the pandemic. they were not left on their own. european governments have acted in solidarity and agreed on various measures to help crisis - stricken member states. https : / / www. bundesbank. de / en / press / speeches / too - close - for - comfort - the - relationship - between - monetary - and - fiscal - policy - 850120 3 / 11 11 / 5 / 2020 too close for comfort? the relationship between monetary and fiscal policy | deutsche bundesbank one major component is the eu recovery fund. this assistance should go hand in hand with reforms that strengthen the resilience and competitiveness of the recipients ’ economies. such reforms are rarely popular, but they would, too, be an act of solidarity because they would contribute to the joint effort of enhancing resilience and relieve the community in the next crisis. this also includes all member states turning to ﬁscal soundness after the crisis. the eu ﬁscal rules are actually intended to ensure that this happens. up to now, however, they have lacked teeth. it will therefore be important that the necessary reforms establish a clearer and more binding framework. improved ﬁscal rules will be more important than ever. deﬁcits and debt are rising sharply this year in all member states. the european commission estimates that the euro area ’ s debt - to - gdp ratio will jump by almost 17 percentage points and exceed the 100 % mark by the end of this year. [ 8 ] while deﬁcits are likely to recede considerably next year, the crisis will leave behind perceptibly higher debt ratios. moreover, policymakers must also not lose sight of the longer - term challenges, such as the burdens presented by an ageing society or climate change. at the moment, the burden of debt is not all too heavy, since states ’ ﬁnancing conditions are very favourable. last year, governments ’ implicit interest rate, that is interest expenditure as a percentage of debt, dropped to just 1. 9 % in the euro area, down from 3. 9 % in 2009. 3 the risk of fiscal dominance monetary