Lagarde considers “inconceivable” that the ECB forgives the debt linked to the pandemic

The ECB responds to the manifesto of the economists: forgiving public debt is illegal

The deep economic crisis caused by the pandemic will leave a heavy legacy of public debt in the economies of the euro zone. The massive indebtedness has been the generalized resource of the governments to face the enormous public spending that the payment of the employment protection systems or the health fight against the coronavirus supposes. And governments are getting into debt with the permanent support of the ECB, which with its extraordinary purchases of debt is responsible for guaranteeing a minimum financing cost. 

But the debate on how to face the great indebtedness that will remain for the future and on how to redirect public accounts in which deficits have soared is already served and promises a bitter controversy. The president of the European Central Bank (ECB), Christine Lagarde, considers the cancellation of the debt of the EU countries linked to Covid-19 “inconceivable” and asks the defenders of this idea to dedicate their efforts to take advantage of the European funds.

“If the energy expended in demanding the cancellation of the debt by the ECB were devoted to a debate on the use of this debt, it would be much more useful,” says Lagarde in an interview published this Sunday by the French weekly ‘Journal du Dimanche ‘.

Lagarde responds in this way to the proposal made by a hundred economists in a manifesto headed by the Frenchman Thomas Piketty and to which the president of the PSOE, Cristina Narbona, and the Secretary of State for Social Rights and economic head of Podemos have adhered. , Nacho Álvarez. The controversy broke out on Friday with the publication of the manifesto, to which the ECB Vice President Luis de Guindo already responded that day. He described as “illegal”, contrary to the EU treaties, the proposal to cancel the sovereign debt in the balance of the ECB and added that the initiative “does not make sense”. 

Lagarde insists on this idea and adds that in his opinion, this cancellation would be “a violation of the European treaty.” Furthermore, he predicts that “all the countries in the euro zone will emerge from the crisis with high levels of debt” but “there is no doubt that they will be able to repay it.”

“This rule is one of the fundamental pillars of the euro”, explains Christine Lagarde in the French weekly. “If the energy expended in demanding the cancellation of the debt by the ECB were devoted to a debate on the use of this debt, it would be much more useful. What will public spending go to? In which sectors of the future to invest? This is the essential issue today “, he emphasizes.

The president of the ECB explains that debts are managed in the long term and predicts that investments made in sectors that are crucial for the future will generate greater growth. “The recovery will generate employment. We are moving towards another economy, more digital, greener, more committed to climate change and maintaining biodiversity,” he stressed.

The president of the ECB argues her categorical opposition to the cancellation of the debt in Article 123 of the EU treaty , which establishes that “the authorization of overdrafts or any other type of credit from the ECB or the central banks of the Member States in favor of the institutions, bodies and agencies of the Union, central governments, regional, local authorities or other public authorities. “Because of this article, in 2012 the ECB did not participate in the restructuring of Greek debt, since the proposed reduction was understood as financing to the government (the ECB exchanged the bonds it had for new ones not affected by the exchange).

This same article was used by a group of German academics and politicians to denounce the bank’s debt purchases before the German Constitutional Court, in an ambiguous sentence that threatened to cause a clash of jurisdictions between Germany and the EU.

Regarding the economic situation, Lagarde believes that 2021 will be a year of recovery. “The economic recovery has been delayed, but it has not been undermined. It is clear that it is eagerly awaited.” However, he warned that “we are not immune to risks still unknown”, and “we will not recover the levels of economic activity before the pandemic before mid-2022”.

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