French proposal to cancel central bank debt

A French economist has suggested that canceling debts held by central banks could be a key lever to finance Europe's future. This proposal, reintroduced by Jean-Luc Mélenchon and his party LFI, involves canceling the portion of French public debt held by the Eurosystem through the Bank of France.

Debate over central bank roles

The discussion highlights the importance of considering the currency in which debt is issued, the depth of financial markets, and the role of central banks. The European Central Bank (ECB) holds about a quarter of the outstanding debt in the eurozone, a figure that peaked at a third in 2022 before declining.

Central banks and public debt

Central banks, such as the Bank of Japan (BoJ), have played a significant role in purchasing public debt securities, especially during financial and health crises. The BoJ holds over half of Japan's public debt, which has helped keep interest rates low despite high debt levels. However, as the BoJ reduced its bond purchases, Japanese sovereign rates began to rise significantly.

Legal and conceptual challenges

The cancellation proposal is based on the special status of central banks as creditors and public institutions, which are not subject to the same budgetary constraints as private creditors. The ECB and the Bank of England have not participated in large-scale bond purchase programs, unlike the U.S. Federal Reserve and the BoJ. The proposal could allow eurozone states to re-borrow funds equivalent to 3,000 billion euros, which could be invested in the ecological transition and strategic autonomy.

Criticism and legal concerns

Critics argue that the proposal might not be sufficient for stabilization and that it could face legal challenges, as Christine Lagarde, president of the ECB, has stated that such a cancellation would violate Article 123 of the Treaty on the Functioning of the European Union (TFUE). However, proponents argue that the ECB could still consider the operation if it aligns with its mandates.

Alternative financing options

The proposal also opens a range of options for financing, including quantitative easing, mutualization of public debts through Eurobonds, and the issuance of monetary subsidies. These options aim to better finance the economic transformation by combining monetary and budgetary policies. The idea of monetary subsidies, in particular, suggests redirecting central bank subsidies from commercial banks to structures that finance unprofitable but necessary investments, potentially reducing inequalities and financial capitalism.