Cancelling the €2.98tr of government debt on the ECB’s balance sheet is, on first glance, an attractive windfall for politicians to pursue.
But every month that passes, the burden of servicing that debt falls. Old, high coupon bonds mature and are refinanced at today’s historically low rates. There is simply no question of problems with market access and the ECB has in essence delivered an emphatic promise that it will not allow this state of affairs to disappear at least until growth returns.
Article 123 of the EU Treaty is also clear as far as the ECB is concerned: debt cancellation is illegal. Yes, treaties can be changed, but the ECB’s PSPP only recently escaped challenge from the German constitutional court in Karlsruhe. A step as radical as debt cancellation would spark a fight of an altogether different magnitude.
Those judges were willing to contradict a ruling of the European Court of Justice. The EU got off lightly in May, but such actions pose a serious threat to the EU’s power structures.
In today’s Europe, inflation seems a distant dream, not a clear and present danger. Accordingly, debt cancellation and modern monetary theory no longer seem as alien as they might once have.
But political solidarity is a scarce resource. The EU’s revolutionary budget just limped over the line under threat of two vetoes. The EU can ill afford to expend political capital on a fight over debt cancellation. And, while market conditions are so strong, there is no need to.