The Debt We Can't Wish Away

There is a comforting fantasy that keeps resurfacing in French politics, usually when a budget looks impossible to close: what if the central bank simply made a slice of the debt disappear? Presidential hopeful Jean-Luc Mélenchon, from far-left party La France Insoumise,  has revived it once more ahead of next April's presidential election, and once again it has been slapped down by most economists. The proposal deserves to be taken seriously enough to be refuted properly, as it is simultaneously attractive and misleading. Former IMF chief economist and MIT professor Olivier Blanchard, recent Nobel prize winner Philippe Aghion, and the French economist Henri Sterdyniak have already done exposed the fallacy of this.

A continent (and a superpower) already near the ceiling

Public debt in the euro area stood at 88.9% of GDP in the first quarter of 2026, up from 87.7% just a quarter earlier. France's debt has climbed past 117% of GDP, its highest level since Eurostat records began tracking the modern series, putting it behind only Greece (143.5%) and Italy (138.9%) among large EU economies. Belgium sits above 109%, Spain above 101%.

This is a widespread issue in the EU, but also the US and UK are not immune from it, even if the US can take advantage from its  currency's reserve status and enjoy a bit more room. The Congressional Budget Office projects federal debt held by the public rising from 101% of GDP this year to a record 120% by 2036. Interest payments alone are set to nearly double as a share of GDP over the coming decade, from 3.3% to 4.6%, simply because the stock of debt is larger and refinancing it costs more.

What makes this moment different from previous debt run-ups is that the pressure to spend more is not going away. Populations across Europe are aging, which means rising pension and healthcare bills against a shrinking base of contributors. Also the median voter is aging, making it less politically viable to re-adjust spending that mostly benefits elderly people. Growth has been sluggish for years, which means the denominator in the debt ratio isn't doing its usual job of diluting the numerator. Geopolitical turmoil — the war in Ukraine, instability in the Middle East, an unpredictable American security guarantee — is forcing governments into rearmament programs that were unthinkable a decade ago. All of this is probably putting in the back burner the spending needs related to the green transition, which would require further large public investments. All four pressures point the same way: more spending is needed, right at the moment when the fiscal constraints are biting.

Against this backdrop, the possibility to just cancel some of the debt with a strike of a pen seem very tempting and politically appealing to any candidate.

Mélenchon's proposal

Mélenchon's pitch is straightforward. Roughly a fifth of France's public debt is currently held by the European Central Bank, acquired through the bond-buying programs started during the financial crisis, throughout the sovereign debt crisis and finally  expanded during the pandemic. Most developed countries outside the Euro area are in a similar situation. His proposal is to "freeze" — or in his more provocative campaign-trail phrasing, simply burn — those securities: treat them as if they no longer existed, relieving the French Treasury of the obligation to service or repay that portion. He argues this is not new legal ground, since the ECB has already bought sovereign bonds at scale without technically violating the Treaty's ban on direct monetary financing of states, a practice the European Court of Justice upheld in 2018. Germany, he notes, would benefit even more than France, since it needs to refinance a larger share of its own debt while facing a large amount of deferred infrastructure investment. He frames the whole exercise as freeing up fiscal space for the green and social investments that austerity has crowded out for years. In other words: cancel some debt so that France can… make more debt.

Legally is a no-no; economically … , too.

ECB President Christine Lagarde wasted little time dismissing it. Speaking after the central bank's latest rate announcement, she called the plan "really not a good idea" and said it would amount to a "clear violation of the treaty" governing the European Union, referring implicitly to Article 123, which bars the ECB from monetizing government debt. It is a fair legal point, though not, as it turns out, the strongest one available.

The more damaging critique of the plan is not legal but economic, and here Philippe Aghion, Olivier Blanchard, and Henri Sterdyniak — a former OFCE co-founder and one of France's most prominent heterodox-adjacent monetary economists— arrive at the same conclusion from three different starting points.

Aghion, the 2025 Nobel laureate, has been blunt in recent interviews, calling the proposal "catastrophic" and warning that unilaterally canceling debt held by the central bank would frighten off the very investors France depends on to finance the rest of its borrowing — pushing the country "toward bankruptcy and the collapse of the euro area," in his words. His broader point is about credibility: a state that treats its debt obligations as negotiable, even the portion sitting in the central bank's vault, sends a signal about how it might treat the rest. Bond markets do not price instruments in isolation; they price sovereigns.

Blanchard's argument is more technical, and more devastating, because it doesn't need to invoke investors’ beliefs, even if he acknowledges that it does indeed matter.

His method is to treat the Treasury and the central bank as a single consolidated balance sheet, which is the correct way to think about what "the state" owes. From that point, Blanchard sets out two propositions. First, any transaction that changes the claims between the Treasury and the central bank, but leaves unchanged the claims of private investors on the consolidated government — that is, private holdings of Treasury debt plus central bank liabilities such as reserves — has no economic effect whatsoever. Canceling the ECB's holdings of French debt falls squarely into this category: private investors' own holdings and their reserves at the central bank are untouched, so there is, in his words, no reason for them to care. Second, what actually moves markets is anything that changes the claims of private investors themselves — for instance, the ECB buying or selling bonds outright, which is what quantitative easing does and what can genuinely shift the yield curve. Cancellation is not that. It is bookkeeping between two arms of the same government, dressed up as relief.

Blanchard adds two further complications that cut against Mélenchon rather than for him. One is psychological: even though cancellation should be a non-event in pure accounting terms, announcing it can spook markets into fearing "fiscal dominance" — the idea that a government leaning on its central bank to erase debt might do so again, or lean on it to print money next. That fear, once triggered, produces exactly the kind of higher borrowing costs Mélenchon claims to be trying to avoid. The other is distributional and specifically European: because the debt sits on the ECB's books rather than the Banque de France's alone, any loss from cancellation would be shared across all nineteen-plus euro members. Germany, in Blanchard's characteristically terse formulation, "will not accept it, de jure or de facto." Which is to say: even setting aside whether the idea makes sense, it is politically a non-starter within a currency union France does not control alone.

Sterdyniak arrives at the same place by looking into the Banque de France's own books, and his version of the argument is, if anything, the hardest for cancellation advocates to wave away, because it doesn't rely on abstractions like "the consolidated government" — it just follows the cash. Sterdyniak points out that the Banque de France is, functionally, a financial subsidiary of the French state: it pays the state dividends, and it underwrites the financing of the public deficit. It bought the government bonds it now holds not with made-up money, but by crediting the reserve accounts commercial banks keep with it — deposits the Banque de France is obliged to remunerate at its policy rate, currently 4%. Cancel the bonds, and that obligation doesn't go away: the central bank still owes interest on those deposits, only now with no interest-bearing asset on the other side of its balance sheet to pay for it. Its operating account tips into permanent deficit, it stops paying dividends to the Treasury, and it will likely need a subsidy from that same Treasury just to balance its books. Add it up across the consolidated "État + Banque de France," and, in Sterdyniak's words, neither the interest bill nor the net debt of the two combined actually falls. What cancellation does is relocate roughly a fifth of France's debt from the Treasury's balance sheet to the central bank's — where it resurfaces, item for item, as an equivalent liability. He is equally unsparing about the idea of "money free of debt": there is no such thing, because money is always, definitionally, a claim on future output and therefore always a liability of the society that issues it.

Taken together, the three critiques reinforce each other. Aghion's is about credibility and market psychology: investors will punish a government that treats debt commitments as negotiable. Blanchard's is the general accounting argument: nothing changes unless the claims of private investors on the consolidated state change, and cancellation doesn't touch those claims. Sterdyniak's furthers this, showing exactly where the "savings" would resurface as a cost.

The uncomfortable bottom line

The pressures pushing European and American governments toward more spending — aging populations, weak growth, rearmament, decarbonization — are real, and they are not going to resolve themselves through an accounting trick. If there is a way to square higher public investment with debt sustainability, it will have to be found in growth, in credible deficit reduction, or in genuine European burden-sharing — not in creative acounting.