The Dangerous Utopia of the ECB's Cancellation of Public Debts

Abstract

The main result of the quick reactions of the Federal Reserve (the Fed) and the European Central Bank (ECB) to the Covid-19 crisis are that more than 20% of their public debt is now held by these central banks and that the balance sheet of the ECB is now near 50% of GDP (33% for the Fed). Two questions arise from this situation. Is this new ECB policy of quantitative easing a monetisation policy forbidden by the EU treaty? According to the ECB this policy being exceptional and temporary isn’t. The second is more radical because some politicians call for pure cancellation of part or all of the public debts held by the ECB knowing that the capital of the bank is ultimately held by the 19 states of the Eurozone. We explain why such a policy would be clearly a breach of the UE treaty and would bring strong long term disadvantages.