Does EUrope need a Debt Cut?

What will become of the enormous mountain of debt that the EU states are accumulating in the Corona crisis? A fundamental debate flared up this week about this question, with a hell of a lot at stake.

At stake is not only the financial stability of countries like Belgium, which reports the largest public debt in history at 35.6 billion euros. The fate of the entire eurozone is at stake.

More than a hundred economists, including prominent French economist T. Piketty, have now written an open letter to the European Central Bank calling for a massive debt cut.
At stake: 2.5 trillion euros

The ECB should write off government debt instruments totaling 2.5 trillion euros, according to a letter published in several European media, including Le Monde.

Alternatives to debt relief include new loans as part of a debt restructuring, tax increases or spending cuts, it said. The EU so far plans repayment by 2050, but does not comment on the details.

Piketti & Co. fear that after the temporary Corona reconstruction fund expires, presumably in 2024, a phase of harsh austerity policies or tax increases will begin. Both would be poison for the economy.

But the ECB rejects the demand for a debt cut. The demand contradicts the ban on government financing in the EU treaties and therefore cannot even be contemplated, Lagarde told Le Monde.

That’s a hard no. But at least a debate is taking place in France. In Germany, on the other hand, the issue is largely ignored. Yet a federal election is coming up, and politicians are warming up.

Over the weekend, Finance Minister Scholz expressed optimism that would be able to pay off the Corona debt within ten years.

Scholz told “Tagesschau” that a wealth tax could help. A possible debt cut was not even mentioned….