Europe’s Debt Cancellation Would Mean Recognition Of Insolvency

Economist Thomas Piketty, creator of some of the most absurd proposals embraced by the extreme left, has published an article in which he demands a cancellation of government debt in the hands of the European Central Bank “in exchange for greater public investment” … which, by the way, would be paid with more issuance of public debt. Fascinating.

Luís de Guindos, vice president of the ECB, has settled the controversy with two pieces of evidence. “Cancelling the debt (in the ECB balance sheet) is illegal and also does not make economic sense,” he was quoted in Reuters on Nov. 16, 2020. The first part is obvious. It is prohibited by the bylaws of the European Central Bank. I will explain the lack of economic logic here.

A debt write-off or cancellation is the evidence of the issuer’s insolvency. If, as Piketty repeats, the solvency and credit credibility of the Eurozone is not at stake, why ask for a cancellation? If, in addition, as Piketty and other defenders of massive state indebtedness maintain, deficits are not a problem and increasing debt is not a concern because it creates reserves, why cancel it?

Let us not forget that many of the parties that have embraced Piketty’s idea in Europe, Podemos, Syriza and other European radical parties, filed a proposal to exit the euro in 2016 that they have never subsequently eliminated or rejected. The Podemos MEPs presented a resolution in Strasbourg for the European Union to prepare the mechanisms for the “orderly dissolution of the euro system”. They also proposed to establish “the mechanisms that would allow a country integrated in the single currency to abandon it to adopt another currency.”

So basically, radical parties in Europe demand that the ECB forgives their debt and prints more while keeping the option of leaving the euro. Call that baking the cake and eating it.

Most Eurozone states finance themselves today at negative rates or extremely low yields. It would be a mistake to think that these low interest yields are the consequence of good government fiscal policy. If the Eurozone has low interest rates and low yields it is because European taxpayers keep it solvent. Mostly thanks to Germany’s financial solvency. European taxpayers uphold the credibility of the euro as a currency and with this the ECB can carry out expansionary policies.

Piketty opens a dangerous option: Direct monetization of all and any government spending Argentina-style. And does so ignoring that the euro is the only global reserve currency with redenomination risk and that its credibility is maintained only because of the widespread confidence in the euro area’s commitment to repay its debts.

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