By Anne-Laure Delatte, Michel Husson, Benjamin Lemoine, Éric Monnet, Raul Sampognaro, Bruno Tinel and Sébastien Villemot
About the proposal to cancel ECB-held sovereign debt
While the end of the pandemic is not yet in sight, austerity is nonetheless making a discreet comeback in the public debate. If fiscal orthodoxy tolerated that States have stood by an economy hampered by health restrictions, it claims again that newly contracted sovereign debt would have to be repaid through cuts in pensions and public services, as well as tax increases for the vast majority of the population. Nothing would be more ravaging. The deteriorating socioeconomic outlook, the urgent need for public services reconstruction and green transition require the launch without delay of a major public investment plan. Broadly speaking, States have to develop ambitious responses to social and ecological needs, as well as to future pandemics, and this course of action requires resources.
In this context, some of our colleagues, with whom we also share a great deal, propose the following solution: cancelling the governments’ debt securities held by the European Central Bank (ECB). According to them, such cancellation would significantly expand the fiscal space without harming anyone. Although this contribution has helped further the economic and monetary debate, we do not share their analysis.
This proposal amounts to fetishizing the debt to GDP ratio while most Eurozone countries’ creditworthiness are not under stress. It even empties the message of debt cancellation of its subversive strength. It also gives no new room for manoeuvre, quite the contrary. Behind the technical illusion, its radicalness is just a facade: accounting trick alone cannot shift the balance of power inside the Eurozone or between States and capital markets. So why investing so much political capital in defending a proposal that diverts from what is at stake in the current context?
The catchy motto “cancellation of the debt held by the ECB” brings a powerful symbolic significance but does not correspond to the reality of the promoted operation. This debt is not directly held by the ECB, but by the national central banks (through the Eurosystem). This would imply that, for instance, the Banque de France would write off its claim on the French State. However, the capital of the Banque de France is 100% owned by the State: it would therefore amount to cancelling a debt that we owe to ourselves. How can we believe that such an accounting gimmickry could have a real, positive and lasting impact on public finances?
States have an unlimited lifespan and thus can roll over their maturing debt indefinitely: when its sovereign bonds are about to mature, a State issues new securities for repaying the expiring bonds. The central issue is therefore the conditions of sovereign debt refinancing, and particularly the level of interest rates that may vary for institutional, economic and political reasons. However, rates on French sovereign debt are negative for bonds with maturities below 20 years and close to zero beyond that.
The level of public debt is never a problem per se for an advanced economy such as Germany, France, Spain or Italy. Empirical studies have not been able to identify any significant critical debt threshold. Under these conditions, it makes no sense to cancel the debt in order to return to a supposedly sustainable level.
In addition, a debt to GDP ratio of 60% in the 2000s – close to the Maastricht Eurozone treaty limit – did not stop the supporters of neo-liberal orthodoxy from carrying out their destructive austerity policies, which fuelled the pandemic crisis by weakening our public health systems. Even if it has shown its ineffectiveness, fiscal discipline is an autonomous economic policy: its implementation is not determined by quantitative data but is the product of ideologically motivated choices.
In order to neutralize potential speculative attacks on Eurozone sovereign bonds, it is necessary to break with the logic of market-based financing of States. Yet, the proposal to cancel the debt held by the Eurosystem is precisely proposing to do the opposite. It consists in cancelling the debt held outside the market, in order to replace it with a newly debt that would be “greener” but still issued in the sovereign bond market. Such operation would only reinforce the dominant role of financial markets.
The promoters of the debt cancellation put forward another argument: their proposal would certainly not be a panacea, but would have the merit of being politically easy to implement without “harming anyone”. It is based on the premise that private and public creditors would form two sealed communities, and that financial markets would approve this operation because it pertains solely to the securities held by the ECB. Sovereign debt restructuring, and more recently Greek sovereign debt case, reveals on the contrary how technocracy and finance’s interests and beliefs are entangled.
In the end, the expected fiscal space freed by the debt cancellation would very quickly be reversed by the risk premium that the markets would charge the State for borrowing. Given that the proposal’s benefit is doubtful at best, the bet is definitely not worthwhile.
However, there are other solutions for guaranteeing stable and sustainable public financing, as well as protecting our economic sovereignty. It would be important to consider re-establishing fiscal room of manoeuvre by taxing high net worth individuals and multinationals (whose taxes have been falling for the past 40 years) or by taxing the extraordinary profits made by certain activities as a result of the pandemic. Important political capital should be invested in the institutionalization of a real coordination between fiscal and monetary policy. Eurozone should enshrine in the Treaties the role of the ECB as the purchaser of last resort of States’ securities and transform these securities into so-called perpetual debt at low rate. We should imagine the introduction of an overdraft facility for national treasuries at the ECB and think about serious modes of financial markets regulation, by recreating a public banking hub and inventing a 21st-century European Treasury Circuit. Partially inspired by past experiences, this circuit would notably coordinate credit control, its channelling and allocation, and treasury financing (through for instance mandatory holding of treasury bills for private banks).
No doubt, these proposals will meet fierce opposition from defenders of the status quo; but at least they convey a real emancipatory potential.