Should we cancel national debt owned by the ECB ? – CADTM (2024)

Introduction

For over a decade, the European Central BankCentral BankThe establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.ECB : http://www.bankofengland.co.uk/Pages/home.aspx has implemented unconventional monetary measures known as “Quantitative Easing” in response to the 2008 crisis, the euro crisis, and the Covid-19 crisis. These measures were necessary to prevent an economic collapse and a new crisis of public debt in Europe. However, now the member states must repay significant amounts to their respective central bank. There are only two options for re- paying public debt: either by borrowing the same amount again (by rolling over the stock of debt) or by achieving a budget surplus that allows for repayment without additional borrowing. In other words, they either become increasingly dependent on financial mar- kets or implement austerity measures. Another possibility is to rely on either economic growth or inflationInflationThe cumulated rise of prices as a whole (e.g. a rise in the price of petroleum, eventually leading to a rise in salaries, then to the rise of other prices, etc.). Inflation implies a fall in the value of money since, as time goes by, larger sums are required to purchase particular items. This is the reason why corporate-driven policies seek to keep inflation down., but this would require substantial investments and wage increases, which in turn means borrowing more in order to spend more. Attempting to separate growth from debt, as desired by Bruno Le Maire[1], is like trying to fill a bathtub without turning on the tap (Giraud et al.).

However, another solution still remains: the conversion of the 2500 billion euros held by the ECBECBEuropean Central BankThe European Central Bank is a European institution based in Frankfurt, founded in 1998, to which the countries of the Eurozone have transferred their monetary powers. Its official role is to ensure price stability by combating inflation within that Zone. Its three decision-making organs (the Executive Board, the Governing Council and the General Council) are composed of governors of the central banks of the member states and/or recognized specialists. According to its statutes, it is politically ‘independent’ but it is directly influenced by the world of finance.https://www.ecb.europa.eu/ecb/html/index.en.html[2] into public investments, through a cancellation of the debts owned by the ECB. This amount represents 25% of the national debt of European countries:

Figure 1: European debt to output ratio

This radical and efficient proposal has the benefit of being harmful for nobody (as our research will demonstrate), except for the central bank, which would lose its claims, but the latter is unconcerned since it can restore the lost liquidityLiquidityThe facility with which a financial instrument can be bought or sold without a significant change in price. through a simple money creation operation, an unrestricted authority in this aspect. Indeed, as the ECB has already settled these obligations to the financiers previously involved, no household or non-institutional financial actor will be harmed by the annulment of the debt. It is worth mentioning that a petition for the annulment of the public debt held by the ECB, signed by 150 economists from various European countries, was endorsed in February.

Furthermore, the cancellation of the national debt enables us to challenge a supposedly untouchable pillar of the conventional perspective on the economy, which asserts that debt is synonymous with profitProfitThe positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. and the creation of added value. This will help us comprehend the significant role that debt plays as a potent financial tool that can assist countries in increasing their investments towards the necessary shift in climatic transition to avoid surpassing the 1.5°C threshold advocated by the IPCC (2022). In light of this, numerous questions arise: What is the function of national debt and, consequently, public spending? Should a government aim to generate profits? Should the creation of money remain independent of the control of the state? Should the ECB directly finance the European nations?

The initial section of this essay will examine the validity of the technical arguments presented by those who oppose debt cancellation. Subsequently, we will delve into the political implications of such a cancellation.

Independence and legality

Generally, in finance, a default of payment is totally legal. That is why it is provided in the loan contract terms. It is important to note that in the economy, contrary to what austerity economists may suggest, default on payment are common. For firms, banks or households, a default on payments typically leads to legal proceedings and an accounting failure or bankruptcy. However, central bank officials such as Christine Lagarde (2021)[3], state that the national debt cancellation is illegal. To make this claim, they use the 123 TFUE article[4], which stipulates:

• Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favour of Union institutions, bodies, offices or agencies, central governments, regional, local, or other public authorities, other bodies gov- erned by public law, or public undertakings of member states shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.
• Paragraph 1 shall not apply to publicly owned credit institutions which, in the con- text of the supply of reserves by central banks, shall be given the same treatment by national central banks and the European Central Bank as private credit institutions.

While it is accurate that Article 123TFEU prohibits direct funding of Member States by the ECB, the same cannot be stated about debt waivers. As a reminder, a pardon is in no way similar to monetary financing and there is no provision in the Treaties that would forbid a creditor from waiving its claims. This is the core of the principle of contractual freedom. It is not the Member States that write off their shareShareA unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. of the ECB’s debt, but the ECB that waives its claim on the Member States. The only challenge is that, due to the principle of independence, the ECB cannot be “compelled” to do so by a political authority. It will only do so in the presence of significant social and political pressure, if it undergoes it has no alternative, as it did when it established assetAssetSomething belonging to an individual or a business that has value or the power to earn money (FT). The opposite of assets are liabilities, that is the part of the balance sheet reflecting a company’s resources (the capital contributed by the partners, provisions for contingencies and charges, as well as the outstanding debts). purchase programs. It is therefore an operational independence, subject to a price stability objective, combined with a prohibition on state financing.

However, recent history has demonstrated that these principles are not unalterable and that their application can vary. The most notable example is undoubtedly the emer- gence of non-conventional monetary policies. Indeed, the financial crisis of 2007-2008 and its exacerbation in the euro area in the early 2010s led the ECB to initiate programs to repurchase public debt securities on the secondary markets. It is worth mentioning that the ECB conducted very similar policies for the COVID crisis’ recovery with its pandemic emergency purchase programme (PEPP). Such programs are a significant departure from the principle of independence, as they can be perceived as indirectly “requested” by Mem- ber States and European institutions, and many economists have viewed them as a form of “monetization of public debt” (Sinn,2014). In the same vein, and according toPen- nesi(2016), the ECB’s new non-conventional policies have led to a “hidden constitutional shift” in the ECB’s mandate.

It is important to mention that unlike a standard payment default between economic actors, which impacts the savings of these actors and occasionally even the lenders in the

event of accounting insolvency, the ECB is immune to bankruptcy (Archer and Moser- Boehm,2013)[5]. The ECB possesses the power of money creation and no entity lends it

central money, thus the ECB has no liabilitiesLiabilitiesThe part of the balance-sheet that comprises the resources available to a company (equity provided by the partners, provisions for risks and charges, debts).. This is precisely why debt cancellation is exclusively targeted towards the central bank. In this scenario, the cancellation has no accounting effect in this case.

Inflation

On the opposing side of debt cancellation, the argument of inflation is frequently employed. Cancelling debt means that the money corresponding to the national debt owned by the ECB is not destroyed. If this money is not destroyed, as is typically done in the process of credit, it leads to an increase in perpetual money balances. Let’s assume that the ECB has complete control over the amount of money in circulation and possesses the exclusive authority to print central bank money. Additionally, supposing that the ECB indirectly regulates the money printing of private banks. In this scenario, the cancellation of debt and the non-destruction of this money could potentially result in an inflation issue. On one hand, the ECB does not have control over the inflation rate, at least since 2007:

Figure 2: Inflation rate% - EURO AREA

Although the ECB may have an impact on the inflation rate, it is not on target (2%). On the other hand, there is no entity that directly regulates the money supply. It naturally fluctuates based on the behaviour of the economy. The European Central Bank does not have control over the money printing process of private banks. Private banks have a certain level of autonomy[6]. This is the main idea behind the theory of money creation. Additionally, economic agents have the freedom to take on new credit (increasing the money supply) rather than focusing on repaying their old loans (reducing the money stock). Furthermore, there are cases of firms defaulting on payment every day in our economy, which means that there is a portion of money destruction that cannot be controlled by the central bank. Therefore, the argument of losing control over the money supply is not valid.

Furthermore, an increase in the money supply does not always ensue in an increase in the inflation rate. To support this point, let’s examine the M1 money supply in the eurozone since 1996:

Figure 3: M1 money supply - EURO AREA 1996-2021

The money supply has been expanded by a ratio of 7,6 from 1996 to 2021. Conversely, the inflation increase has been multiplied by a factor of 1.5 during the corresponding timeframe. It could be argued that the rise in real estate price caused by the increase in money supply is not considered in this analysis. While that may be accurate, if we do consider it, the multiplier factor rises to 2.6, yet we are still significantly below the 7.6 factor of money supply growth. The ECB holds approximately 2500 billion euros national debt securities. If these debts were cancelled, it will render 3500 billion euros “destroy- able”[7]. There are various policies that could address this problem if the ECB wants to absorb more central money. One option could be increasing the mandatory reserve ratio, or alternatively, the ECB could impose a tax on member states.

I can already perceive those inquiring: but isn’t present inflation the result of recent monetary measures? The current inflation is mainly due to the alignment of a number of phenomena: the current energy crisis, its speculation processes, global value chains

dynamics, food system and political stakes. Let us start with its main cause: the current energy crisis.

Even prior to Russia’s invasion into Ukraine, oil prices were already climbing to high levels.

Figure 4: Higher oil prices don’t entice as much drilling as they used to

Source:https://www.employamerica.org/researchreports/ the-physical-capacity-shortage-view-of-inflation/

In the figure above, the increase of oil prices following the Covid-19 crisis was not followed by a corresponding increase in US oil production, increasing prices even further. The invasion and the continuous reduction of Russian supplies[8] has escalated market tightness to an unprecedented level. Nonetheless, significant market scarcity has not yet been accompanied by a noticeable increase in investment or rig counts[9]. The hyper financialization of the energy market can also be seen as a driver of these high prices. When it comes to gas, its price is directly reflected in electricity prices in all countries because of the operation of the European electricity market, on which countries buy a greater or lesser proportion of their electricity. Wholesale prices for this energy are set according to the marginal cost principle: they depend on the cost of starting up the last power station in Europe to meet demand. In the European energy market, gas-fired power stations set the price of energy. The energy crisis therefore has an impact on prices across the whole market. Industries therefore faces a higher price of energy, which pushes them to raise their prices, thereby increasing inflation.

Actually, one of the primary causes for the surge in food prices is the escalation in the cost of gas. Indeed, nitrogen is the primary fertiliser employed in the agricultural sector, and is manufactured utilizing gas-intensive industrial methods (ammoniac production and Haber-Bosch process). Add to this the fact that Russia is the world’s biggest exporter of fertiliser and, along with Ukraine, the world’s biggest exporter of cereals, and you get most of the explanation for the current and global food inflation.

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Another important reason for the present inflation is tied to the lockdowns caused by the Covid-19 pandemic and their negative impact on worldwide supply chains. A significant portion of the manufacturing sector is located in Asia, and even by the end of 2022, numerous nations were still experiencing strict government measures as a result of the Covid-19 emergency.[10]. On the one hand, the manufactured good consumption increased during the pandemic. On the other hand, production and logistics chains de- signed to operate on a just-in-time basis faced a lower labour availability and huge trade constraints[11], hence representing a direct cause of current inflation.

Having observed that inflation is not a direct result of monetary expansion, let’s debunk another common misunderstanding: government’s taxes are used to pay off the national debts. This assumption is incorrect, taxes are utilized to fund public services, social welfare systems, and the interestInterestAn amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. on debt. In most instances, including for businesses, debts are not completely repaid with a fiscal surplus, but rather refinanced, meaning they are exchanged for other debts. This occurrence is referred to as ’Debt rollover’.

Just by examining the debt ratios of the private sector, it becomes apparent that there is no desire to decrease debts. This is completely normal as debt is utilized for its leveraging effect. Nevertheless, the rationale is not the same for an individual. Indeed, a person cannot continuously refinance their debt, simply because their life span is limited. They must repay their debt before they pass away. Conversely, states are perpetual and that is why they can afford to roll over their debts indefinitely.

Perpetual refinancing

Another opposing argument against debt cancellation is the possibility of euro devaluationDevaluationA lowering of the exchange rate of one currency as regards others.. In reality, what truly affects price fluctuations in financial markets is not the actual events happening, but rather the interpretation of thousands of financiers. The expectations of financial marketFinancial marketThe market for long-term capital. It comprises a primary market, where new issues are sold, and a secondary market, where existing securities are traded. Aside from the regulated markets, there are over-the-counter markets which are not required to meet minimum conditions. participants are what truly impact relative prices. Therefore, price movements in financial markets are more speculative than technical. If there is a consensus in favour of cancelling national debt, then there will be no negative effect on the European currency.

However, if certain well-known figures in finance express concerns about the risk of euro depreciation following debt cancellation, then financiers may believe them and this could result in a devaluation of the euro (until their opinion changes). This speculative aspect is highly unpredictable. To prevent this, the European Central Bank (ECB) should engage in strong communication both before and after the debt cancellation.

Let’s consider a scenario where financial markets lose confidence in a country or a company. In such a case, refinancing its debt by issuing new securities becomes impossible. Market participants (such as hedge fundsHedge fundsUnlisted investment funds that exist for purposes of speculation and that seek high returns, make liberal use of derivatives, especially options, and frequently make use of leverage. The main hedge funds are independent of banks, although banks frequently have their own hedge funds. Hedge funds come under the category of shadow banking. and private banks) refuse to purchase these securities, leading to a default on the state’s payments and a crisis. This was evident in the bankruptcy of Lehman Brothers, which triggered the 2008 crisis, as well as more recently during the euro crisis in 2010 and the defaults of payment by Ireland, Greece, and Portugal. Therefore, the possibility of rolling over debt heavily relies on the financial markets’ understanding of the role of the state in an economy. This is also due to the

fact that the direct use of money printing by states has been prohibited by the European treaties.

Global Financial Markets and States

It is evident that the regulations of financial markets are tailored to meet the demands of public institutions. In this context, let us elucidate why debt cancellation still holds relevance. Firstly, governments are the most desirable clients of financial markets. In- stances of state payment defaults are extremely rare, much rarer than those of companies, especially in developed nations. As a result, governments enjoy low interest ratesInterest ratesWhen A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation. and are considered the least risky borrowers. Therefore, there is no theoretical reason to prohibit them from perpetually borrowing to refinance their debts.

However, there is a crucial distinction to be made. On one hand, companies that borrow to continuously refinance their debts must demonstrate their financial stability through a budget surplus. Financial markets are accustomed to this requirement in order to instill confidence in the companies. There is a coexistence of debts and profits, even with a growing debt. On the other hand, a government differs from a company as it does not generate profits, or hardly ever does so. Generally, governments are either in a state of equilibrium or deficit. This aspect may seem peculiar to financial markets, which are accustomed to purchasing securities with the promise of profits or future profits from the bondBondA bond is a stake in a debt issued by a company or governmental body. The holder of the bond, the creditor, is entitled to interest and reimbursem*nt of the principal. If the company is listed, the holder can also sell the bond on a stock-exchange. issuer. Companies and individuals can be seen as self-interested entities that seek to generate profits (for shareholders in the case of companies and for personal savings in the other case). It should be noted that generating profits entails taking more from other entities than giving. One entity’s expenses are another entity’s income, and one entity’s surplus of funds is another entity’s deficit. This phenomenon is known as the Profit Law Kalecki(1954).

Conversely, a government is not a private entity driven by profits. It is out of com- petition and should prioritize the interests of its citizens. Therefore, a government that seeks to make profits is morally wrong. This would mean that it contributes to the im- poverishment of other economic entities and, consequently, its own population. Instead, a government should be willing to show a deficit in its balanceBalanceEnd of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. sheet in order to maximize benefits for its population. However, governments face pressure from the global financial

markets, which urge them to avoid deficits[12]. By viewing the government as an entity

driven by profits, the global financial markets overlook the overall functioning of the econ- omy. Financial markets should not anticipate any monetary gains from governments, as this would be detrimental to the economy.

Ironically, financiers often take on the role of lenders to governments. Following is the euro aera’s national debts:

Figure 5: Total national debts - Euro Area 1990-2021

In practice, as can be observed, the financial markets are willing to lend money to governments without governments making long-term profits. From a macroeconomic per- spective, the abrupt halt of securities purchases from the financial market for Greece, Portugal, and Ireland appears irrational, as it has caused a crisis that would not have occurred otherwise. If these countries had agreed to repay the loans (which they were capable of doing), they would have been compensated as usual. The financial markets fail to comprehend the non-private macroeconomic function of the government. It is in this context that the concept of national debt cancellation becomes significant. If we believe in public spending, and especially if we believe it should be significantly increased, it is important to consider the behavior and unpredictable reactions of the financial mar- kets. Debt cancellation could therefore allow for greater public expenditure without any repercussions for financiers, while also contributing to a better understanding of the gov- ernment’s role by the financial markets.

National debt to output ratio

The financial markets are somewhat schizophrenic. They expect borrowers to demon- strate profits in order to acquire their securities, but governments rarely generate profits. In a way, financial markets acknowledge that governments are unique entities because they acquire debt securities without showcasing profits. However, there is still a misun- derstanding of the government’s role in the economy, which leaves room for uncertainty. Consequently, the possibility of halting the process of refinancing government debtGovernment debtThe total outstanding debt of the State, local authorities, publicly owned companies and organs of social security. exists. If this were to occur, it would result in an economic crisis, similar to the euro crisis.

For example, this misconception regarding macroeconomic mechanisms can be illus- trated by the fact that many private bankers are unaware that they have the ability to print money. In this context, in order to assess the financial well-being of the government, the financial markets typically rely on the national debt to output ratio. Public debt is considered sustainable if its ratio to GDPGDPGross Domestic ProductGross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another. remains constant over time. However, there is no ideal ratio between public debt and income that has been identified in the literature. If the debt to output ratio remains constant, even in the presence of a national deficit, the financial markets are willing to continue refinancing government debt. On the other

hand, if the debt to output ratio rises, it signals to the financial markets that the debt is not being used to generate value-added, which may persuade them to cease refinanc- ing government debt. This, in turn, creates the very crisis they fear, thus becoming a self-fulfilling prophecy.

One may inquire: “Why would they incite a crisis?”. And it is because they truly do not comprehend the economic dynamics, or because those who comprehend it are convinced that the majority of financiers do not comprehend it. In the financial realm, if you are in opposition with the consensus, it implies that you will lose money. Thus, being correct against too many individuals implies being incorrect, in that regard it is preferable to be incorrect. Moreover, it is even more advantageous to be among the first to be incorrect because you will lead the mass of financiers and lose less money in the event of a crisis. Essentially, it means choosing whether or not to instigate the crisis.

Examining the escalating national debt to output in the eurozone (Figure.5), it ap- pears that states are unable to generate added value with debts. However, this increase in indebtedness is primarily due to the 2008 crisis and the Covid-19 crisis, as states keep businesses afloat through fiscal policies (debts) but with less value added creation, production, and consumption. Additionally, these policies contribute to the inflation of the second-hand market, such as real estate, stock, and bond markets. We observe this phenomenon during most crises (1929 and 2008, for example). This growing indebted- ness is unlikely to change if we desire to promote more public expenditure to reduce inequalities, build hospitals, provide better salaries for nursing staff, or facilitate ecologi- cal transition (rail network compaction, building insulation, public transportation, R&D, among others). All of these investments are long-term investments without immediate financial benefits.

It is not evident that public expenditure will result in increased production and con- sumption (GDP growth). Even if these policies bring better health to the population and infrastructures better suited for the transition, leading to improved productivity, it will not be possible to realize profits immediately. It can take years from the time of investment to the time of reaping the associated benefits.

However, financial markets assess the national debts for the current year in relation to the current year’s GDP. In this regard, some might consider that cancelling the national debts held by the ECB could be a means to decrease the debt to output ratio and thus appease the financial markets. However, this is only valid in the short term. As previously mentioned, this ratio is likely to increase in the future due to factors such as exiting crisis, public spending, energy transition, and so on. Therefore, what is the purpose of cancelling national debt?

Purpose of debt cancellation

The objective of debt cancellation is two-fold. Firstly, as we will observe in the subsequent section, it intends to provide a financial benefit equivalent to the obligations held by the central bank to the states. The aim is to redirect loans that were supposed to be used for refinancing state debt towards public investment.

Secondly, the objective is educational, seeking to enlighten the global financial mar- kets about the importance of public spending, to make them understand that everything cannot be reduced to added value. Wealth is not merely a commodity, and in essence, the world does not collapse when profits are not made. Finance is an imperfect system, subject to change and modification. Solely relying on financial indicators falls short of capturing the complete economic and social reality of our society. Debt cancellation can help put these indicators into perspective.

Interests on debts

Certain doubters of debt cancellation bring up the issue of interest rates. Their reasoning is grounded in the fact that currently, governments are dealing with extremely low interest rates on bonds. A fact that isn’t entirely accurate as of the conclusion of 2022, it began to shift with the recent worldwide surge in policy rates (initially by the Federal ReserveFEDFederal ReserveOfficially, Federal Reserve System, is the United States’ central bank created in 1913 by the ’Federal Reserve Act’, also called the ’Owen-Glass Act’, after a series of banking crises, particularly the ’Bank Panic’ of 1907.FED – decentralized central bank : http://www.federalreserve.gov/ and subsequently by the ECB):

Figure 6: Long Term Interest rates (%) - Euro Area Source: OECDOECDOrganisation for Economic Co-operation and DevelopmentOECD: the Organisation for Economic Co-operation and Development, created in 1960. It includes the major industrialized countries and has 34 members as of January 2016.http://www.oecd.org/about/membersandpartners/

Leaving aside the recent rise in interest rates, one might inquire: Why should we eliminate debt if it is inexpensive to refinance it?

Therein lies a flawed argument that diverts our attention from the true discussion. The objective of debt cancellation is to enable states to allocate more funds towards

investment. To illustrate this assumption, let’s consider the situation in France. As stated by Agence France Tresor[13], France borrows approximately 200 billion euros from financial markets each year, with around 120 billion euros being used for debt refinancingDebt refinancingTaking out new loans to reimburse current debts.

(constituting 5% of the total debt), 40 billion euros for interest payments, and 40 billion euros for investments. If the French national debt owned by the ECB (500 billion euros) were to be erased (representing 20% of the current national debt), and if France were to continue borrowing 200 billion euros annually as it currently does, the figures would change as follows: 30 billion euros for interest payments, 95 billion euros for debt refinancing, and 75 billion euros for investments - nearly double the current amount. In summary, the argument of low interest rates is irrelevant to the debate. In both scenarios, whether interest rates are high or low, cancelling debt results[14]#_bookmark0in increased investment and reduced interest payments. It is important to note that the interest payments and investments correspond to the public deficit.

Financial markets may also respond favorably to debt cancellation, as there are several factors that could lead to positive reactions. For instance, consider the concerns regarding stranded assets’ risk (Giraud,2021)or the need to stay within the recommended 1.5 °C limit to prevent ecological and climate tipping points (P.R.Shukla, J. Skea, E. Calvo Buendia, V. Masson-Delmotte, et al.,2019). Additionally, to instill confidence in the

markets, we can still rely on the well-known “Whatever it takes”[15]
approach of Mario Draghi. Therefore, effective communication regarding debt forgiveness is crucial to pre- vent misguided speculative responses. The ECB must convey a strong and clear message in relation to debt cancellation.

Deficit

All this logic remains valid if the European countries utilize the debt cancellation to substantially boost their government spending, and this requires a political determination to invest. Furthermore, In a similar manner, this redirection of loans towards public spending will result in a rise in the public deficit (at least in the short run). Assuming a French GDP of 2300 billion euros, in our previous example, we obtain a deficit:

–from40 + 40 = 3.5%

2300

–to75 + 30 = 4.5%

2300

Despite the fact that the Maastricht guideline of 3% shortfall was disregarded in the previous decade because of the emergency, it is currently receiving attention. In its an- nouncement[16]#_bookmark0of the reform of European governance on 9 November 2022, the Commission proposed to:

–subtract from the calculation of the deficit contingent elements of state expenditure (expenditure linked to the fight against unemployment and interest on public debt, etc.)

–Leave out the 20 years needed to reach the 60% debt limit

The aim is to make government fiscal management rules simpler and more transparent. Nevertheless, debt sustainability remains central to this reform proposal, which will have to be debated by the Council of Ministers and the European Parliament. With the increase in public spending following the Covid-19 crisis and the increase in green investment that is inevitable if we are to achieve carbon neutrality by 2050, the Commission is proposing the use of debt sustainability trajectories. In this vein, the idea is no longer to look at current deficits, but rather their medium-term trajectory. The aim is to present a deficit trajectory that after four years would be heading towards 3%. There is therefore a clear recognition of the need for public investment to ensure sustainable growth.

If there is a cancellation of debt, it is hence uncertain whether European governments will agree to raise their public deficit. This is especially true since financial markets mon- itor this measure, and the European commission may also exert pressure on governments to adhere to the guideline. Once again, we are confronted with a problem regarding the trust of politicians and financial market participants. Debt cancellation could prove to be ineffective or even economically harmful if it is not accompanied by a change in mindset regarding the role of the State in the economy.

Debt cancellation : a political debate

In the Post-Keynesian discussions regarding debt forgiveness, certain economists stress the point that a debt cancellation can send a negative signal regarding the state’s role in the economy. Indeed, it may lead people to believe that the debts were cancelled because the state cannot sustain the burden of debt. With the assistance of austerity politicians, people are likely to understand that debt cancellation is a measure that demonstrates that the debt is unpayable. And this line of thinking may suggest that orthodox measures are necessary because the state is living beyond its means. For heterodox economists like Berr#_bookmark4et#_bookmark4al.(2021), debt cancellation is therefore not a favorable idea. According to him, it is preferable to advocate for a recalibration of state funding channels, such as direct access to money printing from the ECB, or a law that requires banks to purchase a certain percentage of the public bonds issued by the State, with an interest rate determined by the state[17].

The proponents of debt cancellation argue that all these points have already been made for a long time without any change in mindset. In fact, advocates of budgetary discipline have managed to avoid these arguments. Austerity policies have dominated European politics for more than 20 years. Therefore, for proponents of debt cancella- tion[18], it is crucial to reinvigorate the debate on state funding channels and the role of public expenditure in the economy. Furthermore, they are convinced that new sources of investment are urgently needed. Despite the intense debates within the heterodox school of economics, the objective remains the same: to promote both the financial independence of states and significant public expenditure.

Conclusion

To put it in a nutshell, the analysis has helped us to understand that technical counter arguments of debt cancellation do not hold. Regarding the second part of the essay, the debate on debt cancellation is more about political than technical aspects. These discussions may lead to a redefinition of the role of the state and public investment in the public and media space. It also raise questions about the state funding channel and the arbitrariness of its rules. Let’s conclude this analysis with quotation fromGraeber (2011), an author who has motivated us to further explore debt issues:

“If history shows anything, it is that there’s no better way to justify relations founded on violence, to make such relations seem moral, than by reframing them in the language of debt—above all, because it immediately makes it seem that it’s the victim who’s doing something wrong.”

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