France and Germany reopen the clash over the euro: Mélenchon asks the ECB to freeze the debt, while Alice Weidel relaunches the exit from the single currency.
Between Iran, Ukraine and Italy which in recent years has fared a little better than its continental cousins, some may have been tempted to believe that one of the main problems of the European Union, the single currency, had disappeared. To remind us that this is not the case, and that the stability of the euro in the near future is anything but a given, none other than the main shareholders of the EU, France and Germany, have thought of it. Jean-Luc Mélenchon, left-wing candidate in the French presidential elections, has proposed canceling the French debt held by the European Central Bank, or at least that Frankfurt renounces interest. An idea that would certainly meet opposition from so-called frugal countries and, if implemented, would break one of the eurozone’s taboos, seriously calling into question the rules on which it is based. In Berlin, however, the leader of the first German AfD party, Alice Weidel, said that in the event of victory she would aim to leave the euro and Schengen. In short, those who classified criticism of the single currency as a propaganda quirk of some character in search of an author will perhaps have to think again.
From Salvini to Sassoli, the old taboo of debt cancellation
The proposal of the French radical left recalls that of the League in 2018, when it hypothesized the cancellation or at least the separation from the calculations on the debt/GDP ratio of the 250 billion in government bonds held by the ECB. When the drafts of the government contract circulated, however, that point aroused such hysterical reactions that, in the final version, it was deleted. The then secretary of the Democratic Party, Maurizio Martina, commented: «If you found a document where it was written that whoever owed you money would no longer pay it back, what would you do?
This is the question that investors around the world who hold Italian public debt securities in their hands ask themselves…”.
A few years later, however, when the late David Sassoli, tutelary deity of Piddino Europeanism, put forward a similar proposal, namely to cancel the debts contracted for the response to Covid, the reactions were jubilant. The then spokesperson of the Italian Left, Nicola Fratoaianni, spoke of a “fundamental point for the stability of European democracies”. «Far-sighted proposals», declared the former PD secretary, Maurizio Martina, so succinctly only two years earlier.
There is a substantial difference today compared to then: at the time we had inflation close to zero; now, in an inflationary context, the monetization of debt would encounter greater obstacles in macroeconomic fundamentals.
Mélenchon challenges the ECB: freeze 600 billion in French debt
The ECB and the French Central Bank hold around 600 billion in transalpine debt. During a speech given last Sunday, Mélenchon stated that “the European Central Bank can and must freeze the debt of European governments, starting from that contracted during the Covid-19 pandemic”. There are two possibilities in the field: cancellation of the debt tout court or, if it is considered too extreme, cancellation of the interest only, transforming the securities into zero-interest credit. In theory, the operation would have no direct repercussions: a central bank does not have to honor debts in the traditional sense of the term, but can continue to act even with negative net worth (its liabilities are money that it creates itself). The European treaties, however, prevent the monetary financing of states by the ECB, although over the years it has emerged that the rules are valid as long as those who count have no interest in violating them. If the idea took hold, the clash with the frugal countries, starting from Berlin, would be assured.
In Germany the AfD relaunches the exit from the euro
And speaking of Germany, elections will be held on September 6th in Saxony-Anhalt (a former Soviet region), where Afd is at 42.1% while the current local government alliance (CDU, SPD and FDP, Liberal Democratic Party) would struggle to reach 35%. On the other hand, the latest national polls see the far-right party near 30% and the conservatives led by Friedrich Merz at around 20%. The AfD leader, Alice Weidel, openly claims that Germany was “significantly better before the introduction of the euro”, a currency considered “weak” and the cause of the impoverishment of workers. True or not (the euro, weaker than the mark, has actually favored German mercantilism), the political fact is eloquent: the first party of the first European state intends to withdraw from the single currency. And a possible further push by debtor states, such as France, towards “unconventional” monetary policies could only increase this Eurosceptic sentiment.
France 2027, the euro returns to the center of the battle for the Elysée
A push that is anything but remote, however. In fact, the most probable hypothesis is that in the run-off for the Elysée in 2027, Mélenchon’s radical left and Marine Le Pen’s right (or, in the event of a step backwards, her protégé Jordan Bardella) will end up, who yesterday discussed this issue too, in the first presidential debate together with the other five candidates of the other parties. With very high probability, France will have a president who starts from strongly Eurosceptic positions. The number two of the Rassemblement national, Bardella, rejected Mélenchon’s proposal on debt cancellation, but in the past he proposed negotiating a new securities purchase program with the ECB to lower the cost of public financing, a measure that would also be disliked in Berlin. On the other hand, French ten-year bonds offer higher interests than their Italian BTP counterparts: the debate among politicians across the Alps did not arise by chance. Even the Financial Times notes that Paris has replaced Rome as the main concern of European investors.
The euro crisis that Europe thought it had archived
With all due respect to Eurofanatics, anyone who thought that the debate and tensions over the euro had been archived by history will most likely have to think again soon.
