Wednesday evening on the Champs-Élysées: Representatives of populist parties remain excluded from the network soirée of the communications agency Vae Solis, but provide plenty of conversation between appetizers and champagne. This applies not least to the demand of the left-wing presidential candidate Jean-Luc Mélenchon that the Banque de France simply remove French government bonds from its books and therefore cancel the debt.
Top Parisian political and business leaders are shaking their heads that Mélenchon is serious about this, while the markets are already having less and less confidence in France's public finances. The thermometer is off: The risk premium for ten-year French government bonds compared to German bonds reached 89 basis points this week, a 14-year high. But Mélenchon's idea cannot be killed. It has been floating around in the public eye for days, as if canceling bonds were actually a viable way to solve France's financial problems. The Banque de France holds around 18 percent of French national debt within the framework of the Eurosystem, i.e. more than 600 billion euros.
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Since the central bank is owned by the state, it is a debt that the state has to itself, argues Mélenchon. The decree is therefore problem-free. At the annual summer conference of the French employers' association MEDEF - where representatives of populist parties have no longer been excluded since last year - Mélenchon spoke last week of a "European proposal". “I expect to find allies in Europe, especially in the (Romance) countries and undoubtedly also among the Germans, who have just exceeded the three percent deficit limit,” he claimed.
The genie is out of the bottle again
The idea is not new: In the Corona year 2020, a group led by Raphaël Glucksmann, now the Social Democratic candidate for the presidential election in around eight months, called for debt relief. Left-wing economists like Thomas Piketty didn't let up after that. "Let's conclude a contract between the European states and the ECB. The latter commits to canceling the national debt it holds (or converting it into interest-free perpetual debt), while the states commit to investing the same amounts in ecological and social reconstruction," they wrote in a guest post in 2021.
The advances collapsed due to legal and economic realities. But now the genie is out of the bottle again – and has also reached Frankfurt. Bundesbank President Joachim Nagel then felt compelled to clarify. “No central bank of the Eurosystem – not even the ECB – has the right to cancel the debts of a state,” he said in an interview with the French newspaper “Le Monde” this week: “This would constitute monetary financing of governments, which is prohibited by the European treaties.”
According to Le Monde, Nagel emphasized that he was making these statements on principle, not as a direct response to Mélenchon. He warned of the ECB's loss of independence. “Monetary policy would become a mere department of the Ministry of Finance,” said Nagel, recalling the German hyperinflation of 1923. Canceling debt held by the central bank would still be a long way from such a scenario today, but it could be a first step in that direction.
ECB President Christine Lagarde emphasized in 2021 that canceling national debt was “unthinkable” and constituted a violation of the EU Treaty, which strictly prohibits the monetary financing of states. “If the energy spent on demanding debt relief from the ECB were instead channeled into a debate about the use of that debt, it would make much more sense,” Lagarde said at the time. France's Finance and Economy Minister Roland Lescure spoke last week of a "mockery of the public". Mélenchon's demand endangers France's creditworthiness.
Even if the legal and political hurdles were overcome, investors asked themselves: “If the state did it that way, then why not them too?” the newspaper “Les Echos” quoted the French economist Mathieu Plane as saying. "This opens Pandora's box. This poses a credibility risk for the central bank and for the currency," said Plane.
