ECB’s Lagarde says cancelling COVID debts ‘unthinkable’

President of the European Central Bank (ECB) Christine Lagarde holds her smartphone as she attends the One Planet Summit, part of World Nature Day, at the Reception Room of the Elysee Palace, in Paris, France, 11 January 2021. [EPA-EFE/LUDOVIC MARIN]

European Central Bank (ECB) chief Christine Lagarde on Sunday (7 February) rejected calls to cancel debts run up by eurozone members to buttress their economies during the COVID-19 crisis.

The ECB has taken unprecedented steps to cushion the economic blow from the pandemic in the 19-nation euro area, launching a massive bond-buying scheme that has so far totalled €1.85 trillion.

“Cancelling that debt is unthinkable,” Lagarde told France’s Le Journal du Dimanche weekly.

“It would be a violation of the European treaty which strictly forbids monetary financing of states,” she said, calling it one of the “founding pillars” of the euro single currency.

She was reacting to a call Friday by more than 100 economists for the ECB to further boost the economic recovery of eurozone members by forgiving their debts.

In the letter published in several leading European newspapers, the economists noted that a quarter of the public debt of nations that use the euro – €2.5 trillion ($3.0 trillion) – was now held by the ECB.

“In other words, we owe ourselves 25% of our debt and, if we are to reimburse that amount, we must find it elsewhere, either by borrowing it again to ‘roll the debt’ instead of borrowing to invest, or by raising taxes, or by cutting expenses,” they wrote.

The economists proposed instead that the ECB forgive the debts in exchange for the countries pledging to spend an equivalent amount on greening their economies and on social projects.

Cancel the public debt held by the ECB and 'take back control' of our destiny

It is time for the European Central Bank to cancel a large of the public debt it holds, say more than a hundred economists from across Europe including Aurore Lalucq, Nicolas Dufrêne, Jézabel Couppey-Soubeyran, and Laurence Scialom.

Lagarde, a former French finance minister, admitted that “all eurozone countries will emerge from this crisis with high levels of debt.”

But, she said, “there is no doubt that they will be able to pay it back.”

She forecast that 2021 would be a year of “recovery” but acknowledged that the eurozone would not return to pre-pandemic levels of activity “before mid-2022”.

In the meantime, she said, it would be “far more useful if the energy spent on demanding a cancellation of the debt by the ECB was spent on debating the use of the debt.”

“What will public spending be used for? In which sectors of the future should we invest? These are the key questions today,” she argued.

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