Sovereign Debt Crisis: The French Left Wants To Simply Burn The Debt
Submitted by Thomas Kolbe
For economic illiterates, socialists and social-state engineers, the world consists of one fundamental problem: Where does the credit come from that is supposed to turn the visions of central planners into a new reality? Once that question has been answered and the shaky financing is in place, the work can begin.
Ideally, socialists operate in a zero-interest-rate world in which even the most nonsensical projects, from the nuclear phase-out to the construction of wind turbines in forests, debt-financed arms deliveries to the Donbas, or even billion-dollar subsidies for the NGO industry, can be financed.
It is magical: The costs of this artificial credit, this nonsensical government demand, which ultimately has to be paid for through inflation and higher taxes, are concealed behind massive state propaganda and a delayed fiscal response. Cause and effect of government demand are thus separated from one another. Citizens find it difficult to understand why their economy is no longer growing while the state apparatus, meanwhile, is assuming Kafkaesque features.
In an interview with Les Nouveaux Médias, French socialist Jean-Luc Mélenchon revealed his political secret for overcoming the debt crisis. His recipe is socialist, simple and one-dimensional. The French government should simply continue piling up debt, without any controls whatsoever. The European Central Bank could then serve as a kind of bond landfill and purchase surplus securities from the market once saturation has been reached.
This is followed by the unsubtle and predictable trick: The bonds thus neutralized could simply be burned on the balance sheet. They would virtually disappear from the memory of politicians, the public and the bond market. The debt ratio falls as well – the perfect digital money printer, a socialist paradise of unlimited possibilities.
Why has nobody thought of this before? Because the fact is: Which politician has any interest in public controversy and in recognizing that our world does not have unlimited resources, that a genuine problem of distribution exists? The credit pump could solve all problems in this simple world. Nobody would have to give anything up; prosperity would simply be printed into existence. That is how simple it is.
But haven’t we already reached this state long ago? In essence, the European Central Bank has been pursuing precisely such an infantile policy of illusion since the great sovereign debt crisis of a decade and a half ago. And now, once again, the new Transmission Protection Instrument (TPI) stands ready as a vehicle that, if necessary, is supposed to allow bond purchases without a pre-defined quantitative ceiling. Should the bond market give the thumbs-down to the mountain of debt accumulated by Europe’s club of debtors, the deficits will be closed with the credit pump.
Central-bank policy always creates the impression of extreme complexity and absolute control over market events. Bond markets are quantitatively deep, particularly at the so-called long end, the longer maturities of government bonds. It is by no means the case that a central bank could control this market even remotely. Its power unfolds at the short end, which is consequently where market manipulation is concentrated.
Mélenchon then presents his second brilliant idea: common bonds issued by the European Commission and likewise stabilized by the European Central Bank within a specific interest-rate corridor. Germany’s creditworthiness, still the anchor of the EU’s entire debt system, could also have a beneficial effect on interest rates in France, which is over-indebted at around 120 percent.
Mélenchon reveals staggering economic incompetence in an interview. Here is another sample:
Ultimately, according to his conception, this amounts to a triangular transaction: France participates in the Eurosystem through the Banque de France and is therefore indirectly involved in the European Central Bank. If the ECB purchases French government bonds, Mélenchon argues, this amounts to a kind of purchase of its own debt. France would ultimately owe itself credit and could therefore cancel these liabilities itself, provided the bonds were first parked at the ECB.
Only socialists or statists can devise such economic nonsense: borrowing without limits, then simply wiping the mountain of debt out of existence and leaving the people to deal with the inflation created in the process. This is a catastrophic breach of trust and the end of any civilized policy of government.
And consider what kind of policies are being implemented with the state credit pump: from financing the conflict in Ukraine and climate policy to the never-ending mass migration into the welfare state, which, like the pension system, must also be kept liquid with ever-increasing amounts of borrowed money.
Credit as a great political illusion. Credit that relieves the growing pressure for reform from narrow political shoulders in order to stabilize a system that has long since exceeded its economic limits.
Mélenchon is looking at new borrowing of 5.7 percent this year and knows exactly what is happening: The political stalemate in Paris prevents any form of fiscal consolidation.
The political camps are marching hand in hand toward sovereign bankruptcy. And German politics, too, apparently knows what is coming: Eurobonds, a consolidation of debt under the umbrella of the European Commission.
The first major test run: Next Generation EU, the €750 billion common-bond project that Brussels placed on the market during the COVID lockdowns – with German liability and ECB liquidity support, primarily to finance the gigantic deficits of Italy and Spain.
Common debt, known as Eurobonds, will be the inevitable next step in European integration. There can be little doubt about that. The construction of a European military sector alone will consume enormous amounts of resources, just as we have seen with the green command economy. This process is forcing German policymakers to waste seven percent of GDP on subsidies. The state is crowding out the private sector, while its bureaucracy consumes an ever-larger share of the slowly shrinking economic pie year after year: As a result, unemployment rises while private-sector investment is crowded out. The state has no other way to cope than through massive tax increases.
We are watching a financial crash in slow motion. Its final chapter will bring us the usual bailout policies, capital controls and financial repression. Thankfully, Mélenchon has given us some insight into the political mind games – and they are deeply alarming.
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About the author: Thomas Kolbe, a German graduate economist, has worked for over 25 years, he has worked as a journalist and media producer for clients from various industries and business associations. As a publicist, he focuses on economic processes and observes geopolitical events from the perspective of the capital markets. His publications follow a philosophy that focuses on the individual and their right to self-determination.