From an economic point of view, the resources for this investment in “economic and social reconstruction” would come from the issuance of money. On the one hand, the authors themselves point out that, if the forgiveness produces losses for the ECB, and obviously does, this can be offset by issuing money. On the other hand, the ECB has increased the money in circulation to buy the debt that it would now write off .
This means that if you want to withdraw this money in the future it would be very difficult to do so because the debt to be sold has been forgiven. For that reason, the ECB is totally opposed to this proposal because it would greatly complicate, by being soft, the work of monetary policy and the fundamental objective of the ECB: price stability.
An alternative proposed by Piketty and the other signatories is that instead of a forgiveness, an exchange of current debt for perpetual debt without interest is made. A debt security is an exchange of a payment now for payments in the future. In the market there are “zero coupon” securities in which a single payment is made in the future in exchange for the security, for example, treasury bills. There is also perpetual debt, which is never written off, but pays interest every year. But what does not exist in any market, because it would not be worth anything, is a perpetual security without interest, because it is worth nothing. Trading for this “interest-free perpetual debt” is not a restructuring, it is a forgiveness.
Keynes pointed out that inflation is also a tax. And in this case, in the end, the investments proposed by Piketty and the rest of the signatories would end up being financed, sooner or later, with this inflationary tax.
As soon as demand is reactivated, and there is a stagnant demand that cannot be met by the Pandemic, if the productive apparatus, very affected by the Pandemic, cannot meet it 100%, inflationary tensions will begin. In fact, inflation is already positive in January due to the increase in oil and gas prices.
For this reason, to prevent uncontrolled inflation and the loss of value of the common currency, the euro, Article 123 of the Treaty on the Functioning of the European Union prohibits the financing of governments by the European Central Bank.
Taking into account that the ECB is frontally against it and that the European Treaties can only be modified unanimously by the Member States, it seems that the practical and political path of the proposal is limited: we would probably lose all, but there are some States that do not have almost nothing to gain and much to lose. And this without counting that for some Germans this proposal echoes the origin of the hyperinflation of the 1920s in the Weimar Republic.
As we wrote a few months ago , Spain was greatly benefiting from the financing of the ECB in times of the Pandemic. These “forgiveness” proposals can harm us, precisely because of this, in a special way. On the one hand, some potential debt buyers may think that the “forgiveness” could be extended to them in the future and they do not want to buy. But this can also increase the reluctance of some sectors in the ECB and in Germany
Which includes its own Constitutional Court, as we also explained a few months ago, to continue acquiring not only German debt, but especially from other countries like ours. The reason is that, if the ECB were forced to write off, our public debt would become a risky asset, very risky
