This morning, Christine Lagarde, the head of the European Central Bank was on French radio (you can listen to the interview here). She talked about the trillions of euros that would be injected into the economy to cope with the current corona virus pandemic. The ECB had already announced €750 billion of asset purchases in Pandemic Emergency Purchase Program (PEPP) on the 18 March. Two days ago, they announced that they were relaxing the conditions for making these purchases, including a waiver to accept Greek sovereign debt instruments as collateral in Eurosystem credit operations. It seems clear that the ECB is prepared to buy up a large amount of assets to help businesses and governments survive the current crisis.
But it was absolutely clear that she considers that all these loans would have to be paid back. When asked whether there was any possibility of cancelling some of that debt, her position was that it was "totally unthinkable". How long would it take to pay off the debt? Clearly, for her, it would take a very long time.
What can I say. Eurozone governments already owed over €10 trillion at the end of 2018, and despite the relatively low interest rates paid €213 billion in interest charges for 2018 alone. If that debt increases to €13 trillion, and it doesn't get paid off for decades, the total drain on taxpayers will be astronomical.
According to the ECB's own figures, the total cost of interest payments for the period 1995-2018 was €6.4 trillion, an amount that exceeds the increase in debt over the same period (€5.8 trillion). In other words, the debt problems faced by Euroezone governments are entirely due to the system of interest payments.
If Christine Lagarde seriously thinks that it is reasonable for our governments to take on a further €3 trillion (or whatever), and that debt remains in place for decades, the inevitable consequence is that all of us are commiting to increasing even further the transfer of the fruits of our work and entreprise to the banks and pension funds that hold the debt.
This has to be insane. When you realise that when the banks that lend money to our governemnts don't even need have the money they lend, and that there is no limit to the amount of "money" that they can lend, it must surely be obvious that Christine Lagarde either doesn't understand where the money comes from, or she is actually working primarilly in the interest of the banking sector.
Yesterday, Jean-Luc Melenchon, leader of the left-wing "France Insoumise" party, argued that the ECB should just buy up the debt of Eurozone governments, and simply say that they will keep that debt permanently, with an negative interest rate so that progressively, that debt would disappear. This would indeed mean that Eurozone governments would no longer have to fork out the billions in interest payments that they currently pay to banks and pension funds. That money could be used for doing useful things, like tackling the corona virus pandemic, fighting climate chang and so forth. You can see his presentation (in French) here.
I think this could indeed be a solution, but it would clearly require a change of position from Christine Lagarde.
I would note that there would be an additional advantage of Melenchon's proposal. The banks, pension funds and other wealthy people who currently receive the €213 billion of tax-payers money that our governments generously provide them for doing nothing, would be forced to find something more productive to do with their money. For instance they could use their money to help start new businesses that could do useful things like tackling climate change.
Finally, I would note that there is another way that the ECB could help cancel the debt burden of our governments. Article 123 of the Lisbon treaty prevents central banks providing funds directly to governments - it effectively forces them to borrow from commercial banks. But Paragraph 2 of that article says that those restrictions don't apply to publicly owned credit institutions. Each country could nominate such an institution that could receive direct ECB funding (in exchange for pieces of paper that would never be used). That money could be used by the governments for various activities, including fighting the corona virus pandemic, tackling climate change, funding vital public services, or even paying a basic income to citizens. But above all, it could be used to buy back government debt. Cancelling that debt is a key to releasing hundreds of billions of funds in the years to come.
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