Write off debt, win the future!

Open letter The instruments of the European Central Bank must be used to support the post-Corona reconstruction. This includes writing off sovereign debt

By Nicolas Dufrêne, Jean-Michel Servet, Thomas Piketty & others

The ECB could no doubt afford to make a cut

[This open letter published in Feb 2021 is translated from the German on the Internet, Offener Brief: Schulden abschreiben, Zukunft gewinnen! (Arbeitsgruppe Alternative Wirtschaftpolitik) (alternative-wirtschaftspolitik.de)

The debate over ECB debt write-off has recently gained momentum in France, but also in Italy, Luxembourg, Belgium, as well as in the corridors of European institutions, up to and including the European Central Bank (ECB) itself, as well as eurozone finance ministries.

This is a useful and important debate. For the first time in quite some time, money issues are once again at the center of public discussion. Money is no longer an abstract construct removed from collective deliberation and entrusted to a central bank that is independent of political power but not of the financial markets. European citizens are discovering, in part with dismay, that nearly 25 percent of European debt is now held by their own central bank. 25 percent of our debt, in other words, we owe to ourselves, and if we want to repay that amount, we have to find that money somewhere else: Either by borrowing again in a debt restructuring to pay off the old debt instead of investing, by raising taxes, or by cutting spending.

There would be another solution, however. As economists, responsible people and committed citizens of various countries, it is our duty to point out that the ECB could immediately provide European countries with the necessary funds not only to finance their ecological restructuring, but also to repair the serious social, cultural and economic damage caused by the current terrible health crisis.

There is no claim here that states have stood idly by, since protective measures have indeed been taken. However, they have remained largely inadequate. The European reconstruction plan, based on a budget of not even 300 billion euros in subsidies over three years, falls far short of the 2 trillion euros called for by the European Parliament. Is it necessary to explicitly recall that even before the health crisis in 2018, the European Court of Auditors had indicated a minimum need of 300 to 400 billion euros in additional investments per year to finance the ecological transformation in Europe? This target is already completely missed, and even more so because of the pandemic.

We do not take the write-off of public debt - even if it is held by the ECB - lightly. We are aware that debt write-offs are moments of fundamental new beginnings. This was the case with the London Debt Agreement of 1953, when Germany had two-thirds of its debt cancelled, allowing it a healthy economic trajectory toward its future prosperity while firmly anchoring its future within the European Union. But isn't the European Union today experiencing just such an extraordinary crisis, which in turn requires extraordinary measures?

Moreover, we are fortunate to have a creditor that does not have to fear losing its money: the ECB. Our proposal is therefore very simple: let us conclude an agreement between the European states and the ECB. The ECB writes off the debt it holds (or converts it into perpetual interest-free debt), and in return the European states commit to a social and environmental recovery plan of the same amount. These amounts now total nearly 2.5 trillion euros across Europe - enough to finally meet the expectations of the European Parliament and, above all, to serve the general interest.

The ECB can undoubtedly afford to do so. As many economists readily acknowledge, even among the opponents of this proposal, a central bank can easily operate with negative capital. It can even create money to offset these losses. This is provided for in Protocol 4 annexed to the Treaty on the Functioning of the European Union. Contrary to the assertions of some in authority - particularly in the ECB - debt forgiveness is not explicitly prohibited by law in the EU treaties. For one thing, all financial institutions internationally can write off debt, and the ECB is no exception. And for another, the word "write-off" does not appear in the Treaty or in the Protocol on the European System of Central Banks (ESCB). Perhaps this would be contrary to the "spirit of the Treaty," but was this not also the case with Mario Draghi's desired quantitative easing? Let us not be distracted by legal fallacies: in the end, only political will counts. Where political agreements are reached, legal difficulties also find a solution. History has shown us this time and again.

Finally, let us be clear: Of course, the write-off of public debt held by the ECB, even if conditional on massive reinvestment, cannot and should not be made the be-all and end-all of economic policy in the euro area. First, of course, the ECB would not invest itself, but only intervene to give governments financial room to maneuver. Some believe that the low or even negative interest rates across Europe are sufficient to encourage governments to pursue a policy of credit-financed investment. The steady decline in average government debt in the European Union between 2015, when negative interest rates first emerged, and the onset of the health crisis paints a different picture. In fact, despite negative interest rates, many countries have been reducing debt instead of borrowing and investing. Why should that change now? The agreement with the ECB would prevent states from avoiding their obligations. This is not enough, of course. Other measures must follow, such as reform of debt and deficit criteria, environmental and solidarity protectionism, tax reforms to reduce inequality and change behavior, promotion of public investment banks, and reform of state aid rules. A new European policy is also needed, in particular the transition to the principle of qualified majority voting in tax matters.

The European Union can no longer afford to systematically handicap itself by its own rules. Other countries in the world, such as China, Japan or the United States, are using monetary policy as much as possible to support their fiscal and budgetary policies. The Bank of Japan has even gone so far as to use its ability to create money to buy stocks directly from the market through exchange-traded index funds (ETFs), becoming the country's largest investor. We, too, need to think about using the ECB's money creation capability to finance environmental and social reconstruction. And this must be done with democratic control. Writing off the public debt held by the ECB in exchange for government investment would be a strong first signal that Europe is once again in control of its own destiny.

The signatories

On February 5, this appeal appeared in several European newspapers, including Le Monde, Irish Times, L'Avvenire, La Libre, Belgique Libre, Paperjam and El Pais. The initiators of the call are Nicolas Dufrêne, director of the French think tank "Institut Rousseau" and Jean-Michel Servet (University of Geneva). Among the 110 initial signatories (from 11 European countries so far) is Thomas Piketty