Melenchon is right about France’s public debt

The sorry state of France’s public schools, which sparked angry demonstrations across the country, was a symptom of chronic austerity, but that did not stop the sirens of deeper austerity from rehearsing their song. Governor of the Bank of France Emmanuel Moulin is calling for large budget cuts to avert the “risk of being gradually strangled by rising interest rates.” If that happens, social tensions would be further inflamed and desperately needed investment would vanish. With Germany already confronting deindustrialization and surging support for far-right forces, France’s public debt is shaping up as Europe’s next fault line.

Against this backdrop, La France Insoumise leader and presidential contender Jean-Luc Melenchon has put forward a proposal involving about 600 billion euros (US$673 billion), or 18 percent of France’s aggregate public debt. These are French government bonds that France’s central bank owns and would hold to maturity, at which point taxpayers would have to pay more taxes, or borrow more, to repay their own central bank.

Melenchon’s point is that it is absurd for one arm of the French state to borrow 600 billion euros to pay another arm of the state. His alternative is a debt swap between the Treasury and the central bank that, in practice, retires that debt to create fiscal space for desperately needed investment.

In the interest of full disclosure, I am not a mere commentator in this debate. Melenchon’s debt plan is based on my debt-swap proposals in 2015, when I was briefly the Greek minister of finance. The idea was to short-circuit the madness that the European Commission, the European Central Bank (ECB) and the IMF were trying to impose.

Soon after moving into the finance ministry, I had to repay the ECB about 6 billion euros for maturing Greek bonds it had bought in 2011 to bail out the mainly French and German banks that had held them. As the Greek government was bankrupt, no sane investor would lend my ministry the money to repay the ECB. So, to maintain the pretense that I was repaying the ECB, the ECB and the IMF wanted the bankrupt Greek banks to issue 8 billion euros of worthless IOUs that my bankrupt ministry would guarantee. The ECB would accept them as collateral and lend the banks 6 billion euros. I would then sell the banks new bonds that no investor would touch, take “their” 6 billion euros, and hand it back to the ECB. It sounds like a Ponzi scheme, because that is what it was.

My counterproposal was simple. Swap the entire collection of Greek bonds owned by the ECB at that time for a single perpetual bond with an identical face value paying the ECB 1 percent of that value in perpetuity. Nothing novel there: At about the same time the UK chancellor of the exchequer George Osborne was retiring a perpetual bond issued by the British state in 1752. Not a euro would be written off. The ECB would save face. The Greek people would get some breathing space, and Europe would be spared a scheme that disgraced it in the eyes of anyone with a sense of decency.

That is what Melenchon is proposing today: Convert the French government bonds already held at the French central bank into perpetual bonds, then use the fiscal space this creates exclusively for investment in quality jobs, education and social housing. The only difference between his proposal and mine is that Melenchon suggests a 0 percent coupon, whereas I proposed a 1 percent interest rate that would have preempted any legalistic accusation that we were writing off the debt.

Would that be inflationary? No. The perpetual bonds would not be new debt and would not add a single euro to the money supply.

Would it amount to, as French Minister of Economy, Finance, Industrial, Energy and Digital Sovereignty Roland Lescure said: “saying we won’t repay the people we owe money to … savers, life insurance policies and banks?” No. The 600 billion euros has already been taken out of the bond market; it is not owed to savers, policyholders or banks; the bonds sit in the vaults of the state’s own central bank.

Former IMF chief economist Olivier Blanchard commented that “the net effect would be zero,” as the state would save on interest, but lose the same amount in central bank profits. This is simply untrue. Blanchard neglects to mention that refinancing the 18 percent of debt sitting at the central bank would unnecessarily raise the cost of servicing the remaining 82 percent of France’s public debt, thus increasing the pressure for more austerity, which would deepen discontent and depress investment.

Is there any valid reason for rejecting Melenchon’s proposal, other than it was proposed by Melenchon, or by me back in 2015? Former EU internal market commissioner Thierry Breton came close to an answer: The Bank of France is part of the eurosystem governed by the ECB and cannot independently cancel or erase bonds. That is true, but the ECB’s Governing Council could make this decision as long as it applied to every eurozone member state.

Just as the eurosystem purchased bonds of every eurozone member state in proportion to each country’s GDP during the euro crisis, the eurosystem can retire the debt of every eurozone member state that it holds, giving precious fiscal space to all. If it made this conditional on using the extra fiscal space to invest in the clean energy, education and social housing that Europe needs, so much the better.

However, the European Commission and the ECB would kill any such proposal, as they killed mine in 2015. They know that more austerity would reinforce Europe’s already mind-numbing levels of inequality and stagnation. They understand that it would put more wind in the sails of the surging far right, but such is their reflexive determination to press for maximal austerity that they do not flinch.

When, in the name of moderation, the centrists brand every sensible alternative to severe austerity as “nonsense,” they leave voters only one electable rebellion on offer, and the far right is happy to supply it. Zealotry in a gray suit, repeating that there is no alternative, does not look like zealotry until it fails — but then it is too late.

Yanis Varoufakis, a former Greek minister of finance, is leader of the MeRA25 party, professor of economics at the University of Athens, and a senior research fellow at Fudan University.