An interesting brouhaha has broken out in France, lately famous for reinvigorating the idea of wealth taxes: The French government should default on (“annul” “cancel” — the left is great at euphemisms) its debt held by the European Central Banks.
Sciences Po and ENA. There is much rot in French thinking.
Note, the proposal is not about defaulting on the French debt. It's about defaulting on French debt held by the ECB. France has tried to rule Europe since before 1648, and has not given up. Napoleon tried to conquer Europe because he needed the money.
I may be paranoid, but that doesn't mean they're not after me.
Of course, that would,in a heartbeat, also take down the entire French banking system, whose sovereign holdings would be in default immediately. Amazing that Blanchard did not mention that.
There is, however, a milder form of this: a eurozone breakup, where more fiscally responsible countries (an ever-shrinking set) would leave the euro and introduce their own (potentially common) currency, which would presumably be stronger.
That would permit the French, and whoever else wants to have a common currency with them, to run a looser fiscal policy underwritten by the now smaller ECB. And, it would in all likelihood be back-to-the-future: another currency crisis and reform in short order and another "new franc."
And do you maintain any communications with your colleague Mr Warsh? Or perhaps you know enough to know what he's probably thinking? I am staying tuned!
Isn't this a more relevant question for the Fed, since it is part of the US government? The Fed "buys" Treasury debt by writing up some bank's reserve balance. The Fed's balance sheet gets bigger and the Treasury's gets smaller, but total US obligations are unchanged. In fact the Treasury just announced something quite similar: It will "buy" long Treasury debt and pay for it by issuing more bills. Why couldn't Bessent take trillions off the Federal debt by cancelling the bonds held by the Fed and replacing them with some vague capital note that would not count as debt?
“If nobody cares, then this French Magic Money Tree really does work.”
Thank you for using this term whose acronym would also be MMT, as that is precisely what this sounds like, except perhaps slightly stupider and even more obviously wrong than what the Modern Monetary Theory-types advocate.
What I find most striking here is the confirmation of the long-lasting damage caused by the reckless madness of the Covid policy response. What too many people, like Pigasse, took away from it is "see, when we really wanted to we did suspend the standard rules of the economy and just have the government and central bank give money away (mobilize capital)" -- not, " see, when we really wanted to we did suspend the standard rules of the economy and just have the government and central bank give money away, and we got massive inflation, huge public debt, destroyed work incentives and crippled education."
Thanks for bringing some sanity and common sense to the discussion.
It's very simple, really - just no one really wants to talk about it (or fully understand it):
If France defaults on part of its debt, the TARGET-2 system already has everyone on the hook - Germany is number one on the tab due to the trade deficits (they're the biggest lender of risk in that system).
If the dominoes begin to fall you can forget the whole Eurobloc's financial stability - first and foremost the over-indebted Germans (thanks to Merz' "up to 1 T€ new debt "promise") will then also be in the Maastricht-rule-breakers' club.
The "whatever it takes bazooka" has been shot in 2012 by that Italian accountant and worked only to suppress bond repricing (and was a boon to the Gold trade) as Greece's "accounting practices" to unrightfully join the Euro club were unmasked.
Basic of a debt contract: there a willing debtor and a willing creditor with one bearing the cost of the debt and the other taking the risk of lending. there are no free lunches, you can only pass the burden to someone else, like future generations, through fiscal deficits. Yes you can default but then the onus will be on the lender. Not complicated logic but rocket solid principle.
Somehow I missed Pigasse's axiom that there are no economic constraints (if he's really an investment banker, he missed the central axiom of Econ 101 on scarcity, price signals and choices)!
Let France default to the ECB and watch the increased taxation on already high rates slowly straggle the French economy and destroy the euro...
Excellent essay, John—thank you. :) Suppose a rational, forward-looking outside investor holds A’s sovereign bonds. If cancellation makes investors think their bonds may be next, wouldn’t prices fall? And wouldn’t future lending terms reflect that risk? If external financing dries up, A might even be forced toward current-account balance. Bulow–Rogoff’s (AER, 1989) old question comes to mind: “Is to Forgive to Forget?” Importantly, in their model, repayment reputation alone cannot sustain sovereign lending.
The same logic applies in India. The RBI holds a large share of government securities, and there's a recurring debate on fiscal deficit monetization. Cancelling that debt would mean inflation or higher future taxes.
My clients planning 30-year retirements often assume the government won't default, but they ignore how sovereign debt dynamics erode purchasing power through inflation. It's a blind spot in long-term planning.
Pigasse should not be taken seriously. Look at his bio:
https://en.wikipedia.org/wiki/Matthieu_Pigasse
Sciences Po and ENA. There is much rot in French thinking.
Note, the proposal is not about defaulting on the French debt. It's about defaulting on French debt held by the ECB. France has tried to rule Europe since before 1648, and has not given up. Napoleon tried to conquer Europe because he needed the money.
I may be paranoid, but that doesn't mean they're not after me.
Of course, that would,in a heartbeat, also take down the entire French banking system, whose sovereign holdings would be in default immediately. Amazing that Blanchard did not mention that.
There is, however, a milder form of this: a eurozone breakup, where more fiscally responsible countries (an ever-shrinking set) would leave the euro and introduce their own (potentially common) currency, which would presumably be stronger.
That would permit the French, and whoever else wants to have a common currency with them, to run a looser fiscal policy underwritten by the now smaller ECB. And, it would in all likelihood be back-to-the-future: another currency crisis and reform in short order and another "new franc."
And do you maintain any communications with your colleague Mr Warsh? Or perhaps you know enough to know what he's probably thinking? I am staying tuned!
Mon dieu! Quel désastre.
Isn't this a more relevant question for the Fed, since it is part of the US government? The Fed "buys" Treasury debt by writing up some bank's reserve balance. The Fed's balance sheet gets bigger and the Treasury's gets smaller, but total US obligations are unchanged. In fact the Treasury just announced something quite similar: It will "buy" long Treasury debt and pay for it by issuing more bills. Why couldn't Bessent take trillions off the Federal debt by cancelling the bonds held by the Fed and replacing them with some vague capital note that would not count as debt?
“If nobody cares, then this French Magic Money Tree really does work.”
Thank you for using this term whose acronym would also be MMT, as that is precisely what this sounds like, except perhaps slightly stupider and even more obviously wrong than what the Modern Monetary Theory-types advocate.
FMMT
I'm glad you got the joke.
What I find most striking here is the confirmation of the long-lasting damage caused by the reckless madness of the Covid policy response. What too many people, like Pigasse, took away from it is "see, when we really wanted to we did suspend the standard rules of the economy and just have the government and central bank give money away (mobilize capital)" -- not, " see, when we really wanted to we did suspend the standard rules of the economy and just have the government and central bank give money away, and we got massive inflation, huge public debt, destroyed work incentives and crippled education."
Thanks for bringing some sanity and common sense to the discussion.
Not to diss the French left, but the far right has beaten them to it. Possible RN candidate for the presidency Bardella has said the ECB should do QE to help with the debt: https://www.bloomberg.com/news/articles/2025-11-06/france-s-far-right-eyes-ecb-easing-as-solution-to-debt-problems
It's very simple, really - just no one really wants to talk about it (or fully understand it):
If France defaults on part of its debt, the TARGET-2 system already has everyone on the hook - Germany is number one on the tab due to the trade deficits (they're the biggest lender of risk in that system).
If the dominoes begin to fall you can forget the whole Eurobloc's financial stability - first and foremost the over-indebted Germans (thanks to Merz' "up to 1 T€ new debt "promise") will then also be in the Maastricht-rule-breakers' club.
The "whatever it takes bazooka" has been shot in 2012 by that Italian accountant and worked only to suppress bond repricing (and was a boon to the Gold trade) as Greece's "accounting practices" to unrightfully join the Euro club were unmasked.
Basic of a debt contract: there a willing debtor and a willing creditor with one bearing the cost of the debt and the other taking the risk of lending. there are no free lunches, you can only pass the burden to someone else, like future generations, through fiscal deficits. Yes you can default but then the onus will be on the lender. Not complicated logic but rocket solid principle.
"The first purpose of central banks is to commit against monetizing debts."
We can do this much better without central banks. :-)
What France can't rob their African financial colonies?
Or else if France can't manage their finances why should they be responsible for the 14 African nation that use the CFA franc?
I don't think it will be very long until Warsh and the Fed do embark on another round of QE/Liquidity/Asset Management.
Somehow I missed Pigasse's axiom that there are no economic constraints (if he's really an investment banker, he missed the central axiom of Econ 101 on scarcity, price signals and choices)!
Let France default to the ECB and watch the increased taxation on already high rates slowly straggle the French economy and destroy the euro...
Excellent essay, John—thank you. :) Suppose a rational, forward-looking outside investor holds A’s sovereign bonds. If cancellation makes investors think their bonds may be next, wouldn’t prices fall? And wouldn’t future lending terms reflect that risk? If external financing dries up, A might even be forced toward current-account balance. Bulow–Rogoff’s (AER, 1989) old question comes to mind: “Is to Forgive to Forget?” Importantly, in their model, repayment reputation alone cannot sustain sovereign lending.
The same logic applies in India. The RBI holds a large share of government securities, and there's a recurring debate on fiscal deficit monetization. Cancelling that debt would mean inflation or higher future taxes.
My clients planning 30-year retirements often assume the government won't default, but they ignore how sovereign debt dynamics erode purchasing power through inflation. It's a blind spot in long-term planning.