Cancel the public debt, for or against?

The exit of the pandemic tunnel still seems far away, and yet voices are already rising to think “After”, and in particular on the economic level. At the moment, the public debt is the subjects that feed the most TV shows, radio frequencies and newspaper columns.

Because, in absolute terms, the figures are worrying. French debt * literally exploded in 2020, largely crossing the symbolic bar of 100% of GDP to stand at nearly 120%, against 98% in 2019. In forty years, the debt burden has multiplied by six , since it stood at 20% of GDP in 1980. “France is living beyond its means”, “The debt is a burden for future generations”, we are used to hearing. But the question can be asked in other words: the capacity of a country to repay depends on its capacity to be financed in future years, that is to say the possibility of borrowing again. But, behind the debate over numbers, in fact hide several visions of debt, and by extension of society.

For a new guard of economists, the Covid-19 pandemic is an opportunity to “Break through the wall of debt” and she hammers him with tribunes . For others, it’s actually a “False debate”, even a factor of “Pollution of public debate” because basically there is no debate: we must repay the debt. And the voices in this camp weigh: the Nobel laureate in economics Esther Duflo declared himself, Monday February 15 at the microphone of France Inter , opposed to the cancellation of the debt of the European Central Bank (ECB) which would cause interest rates to skyrocket while the next day the President of the ECB Christine Lagarde explained that such a cancellation was “Unthinkable because it would be a violation of the European treaty” in the columns Echoes .

But, to understand this highly technical (and almost philosophical) debate, we gave the floor to two economists, for whom money is not neutral. They are both specialists in monetary matters at the university. Mon, Baptiste Bridonneau , is a doctoral student in economics at the University of Nanterre, the other, Edwin The Heron , is a professor at Sciences po Bordeaux. Make way for arguments.

FOR – Baptiste Bridonneau, doctoral student in economics at Paris-Nanterre University, EconomiX

“Public debt is not doomed to be repaid. It can even increase. Its cancellation is possible, and perhaps even desirable. In the light of this economic debate, the very term ‘debt’ must be questioned.

First, the public debt of the states of the euro zone is not intrinsically intended to be repaid. On the one hand, because the State has a priori an infinite life span, and can therefore endlessly ‘roll out its public debt securities, that is to say borrow from the right to repay from the left. On the other hand, because the ECB is acting according to its now famous ‘whatever the cost’ to avoid a new public debt crisis, even if this policy would benefit from being explicitly authorized in the European treaties. Public debt can even increase. The only way to know that budget deficits are bad is to see that they create inflation, that is, when public demand cannot be met by production. Inflation is not the problem at the moment.

So if the level of public debt is not a problem, why cancel the public debt held by the ECB? There is a logical contradiction in saying on the one hand that public debt may not be repaid, and that it may even increase; and say on the other side that it is still a ‘debt’. Open any dictionary and you will find the following definition: a debt is an amount that must be repaid! Therefore, if the public debt does not have to be repaid, consider that it is not a debt. This is a question of terminology, which is however very important since the way we represent things to ourselves has an impact on our ways of thinking and acting.

The public debt held by the ECB is not intrinsically intended to be repaid, so why not just say that it can be canceled? This cancellation is possible because it costs the ECB nothing. It is just a bookkeeping game: a debt that the states owe to themselves is not a debt.

It is actually a debate on how we want to see the world. Canceling the public debt held by the ECB means avoiding labeling the quantity of money used in the financing of public expenditure as debt, to prevent some from demanding its repayment through austerity.

Canceling public debt also means freeing economic players from fear of a future tax increase, to encourage them to invest rather than save. It is not a populist, voodoo or utopian economy, but a symbolism that is different from the world, a vision of financing public deficits at odds with the sacrificial morality of ‘tomorrow, we will have to pay well’. “

AGAINST – Edwin Le Héron, University professor at Sciences po Bordeaux, Center Emile Durkheim

“Economist Shadock said: ‘If there is no solution, there is no problem. By calling for the cancellation of central bank ‘Covid’ public debt, economists are turning around the proposition ‘If he doesn’t have a (debt) problem, we have a solution (its cancellation)’. But I will add: ‘If we accept your solution, you will create the problem’. Because today, is there a public debt problem in France? No.

Not only is all the debt issued very heavily bought, but also at negative rates (-0.35% at ten years). The state earns money by issuing debt. The problem with the public debt is not its repayment, but its cost, which is falling sharply. The average cost of debt rose from 6.7% in 1996 to 3.3% in 2011 and 1.3% in 2020. Despite the increase in the stock from 56% of GDP to 120% over this period, the public debt costs less today than yesterday. Finally since François 1st, the debt has never been repaid, France is ‘eternal’, it is not our grandchildren who will pay it because they will repay it by issuing a new debt.

However, for this mechanism to work, there must be buyers (insurance 18%, banks 6%, rest of the world 50%), other than central banks. They must therefore have confidence to invest in French debt. Because it is 2.500 billion today with an average maturity of 8 years (us, not our grandchildren). What signal would we give them by canceling part of the titles? Confidence would drop, prompting interest rates to rise immediately. With only an increase of 2% (rate for Italy) this would quickly amount to more than 50 billion euros per year. What an economy!

And what a brilliant idea to cancel the public debt held by central banks while the Banque de France holds 25%, a bank that belongs to… the State and to which it pays its profits. The state would then have to bail it out by the same amount. What interest ?

What is the public debt for? To provide public services (health, education), therefore in front of this debt, we have public assets which exceed in value the debt. A French person is born with a net asset of 4,500 euros, not a liability. What matters is not the debt (quantity of monetary liabilities), but what we do with it (quality of real assets)!

It is contradictory to want to cancel a debt that would be a problem … in order to be able to get re-indebted for an ‘ecological transition’, which would be a ‘good debt’? Today we hibernate, the Covid debt provides the heating blanket that keeps alive – economically – businesses and households that would be doomed by the pandemic; it is to protect productive capital, human capital which will otherwise be lacking tomorrow.

It is therefore urgent not to create a problem where there is none by inventing a magic currency which, with the help of populism, will pollute the political debate. On the other hand, debating the why of our debts, the quality of the counterparts, the resulting redistribution and an economy respecting the planet, this is the real debate to be conducted. And the solution is politically and economically much more complex! “