One hundred economists led by Thomas Piketty are supporting the write-off of debts held by the ECB. They argue that this would allow governments to issue new debt unencumbered by old debt to finance major projects. In doing so, the signatories also refer to the London Debt Agreement of 1953, a radical plan to cancel half of Germany’s foreign debt and create generous repayment terms for the remaining debt. The agreement boosted Germany’s economic growth by creating fiscal space for public investment, lowering borrowing costs and stabilizing inflation.
Our solution is therefore simple: let’s make a deal between the European states and the ECB. Let her cancel the debts that she holds (or transform them into perpetual debts with 0% interest rate) and let the European states commit for the same amount to a widespread social and ecological recovery plan. These amounts currently add up to almost 2.5 trillion euros, enough to finally meet the expectations of the European Parliament and, above all, to safeguard the common good.
Cancel the public debt held by the ECB and “take back control” of our destiny
It won’t make any difference
Paul de Grauwe argues that cancelling the debt will not confer any economic benefit:
As long as the government bonds are on the balance sheet of the ECB, these bonds do not exist anymore from an economic point of view. This is so because, as I argued earlier, when a government bond is on the central bank’s balance sheet, a circular flow of interest payments is organised from the national treasury to the central bank and back to the treasury. So, the burden of the debt for the national government has become zero. The central bank can cancel that debt (i.e. set the value equal to zero) thereby stopping the circular flow of interest payments. This would not make a difference for the burden of the debt. Put differently, the profit of the money creation has been transferred to the government at the moment of the purchase of the bonds by the central banks.
What if inflation rise above the 2% target:
The conclusion here is that if the ECB wants to keep inflation at 2%, it does not make a difference whether it cancels the debt or not today. In that case if inflation surges beyond 2%, it will have to reduce the amount of outstanding money base by either selling government bonds or issuing its own interest bearing bonds, thereby taking back the seigniorage it granted to the government when it bought the bonds.
Debt cancellation by the ECB: Does it make a difference?
By: Paul de Grauwe – London School of Economics
Maybe…
Sterilizing the EMU pandemics-related public debt is a medium term issue, related to future fiscal space. The question to ask is whether the exceptional stock of debt that built in the past few months will constrain EMU countries in their ordinary fiscal policies in the future. If the answer is yes (I believe it is), then sterilizing that debt is eventually going to be an issue to be dealt with. And in that case it is hard to imagine that the ECB will not be part of the solution.
The Question of Debt Sterilization is not for Today. But it Needs to be Discussed
By: Francesco Saraceno – OFCE Sciences Po
