Jean-Luc Mélenchon has suggested he could simply wipe out a fifth of the country’s debt held by the Banque de France, sparking warnings that such an economically illiterate government would tank Paris’ credit rating and, in turn, the national economy.
The financial mismanagement of the Macron era, including the overspending and economic stagnation during the coronavirus lockdowns, the energy price surges following the war in Ukraine, and the considerable money spent on social welfare programmes, has seen French debt soar in recent years to over €3.5 trillion ($3.8tn) in the first quarter of this year. This represents 117.5 per cent of France’s Gross Domestic Product (GDP).
Public spending is likely to be a main issue in the upcoming presidential race in France, which faces potential economic sanctions from the European Union if Paris fails to bring down government deficit spending to the three per cent threshold agreed upon in the Maastricht Treaty. The 1991 EU agreement also mandated that government debt remain below 60 per cent of GDP.
Rather than getting economic affairs in order, the leader of La France Insoumise (France in Rebellion/LFI) and the party’s presidential candidate, Jean-Luc Mélenchon, has suggested a magic trick will suffice, saying that as president he would order the central bank in Paris to simply make 18 per cent of the national debt disappear.
“Where are the 18 per cent of debt securities? In the coffers of the central banks of each country… Just go there, take them and put them in the fire,” he said, according to Le Figaro, adding: “No one will ever realise that it has disappeared”.
Although Mélenchon said that he was “caricaturing a little, barely”, the suggestion is not even among his most outrageous, with the Moroccan-born leftist previously promising to withdraw France from the NATO military alliance in response to the U.S. conflict with the Mullahs in Iran.
Nevertheless, Mélenchon’s call to simply erase nearly a fifth of French debt with nothing more than a proclamation has prompted backlash among economists, including Olivier Redoulès, the director of studies at the Rexecode Institute think tank.
Redoulès noted that the move would instantly trigger inflation, given that cancelling debt is simply another form of money printing by the federal government. Similar debt cancellation moves have been attempted in countries like Turkey, resulting in double-digit price increases for average citizens, he noted.
However, the economist warned that the true risk would be a breakdown in trust among France’s other creditors, which could result in interest rates soaring and thus making it even more expensive for the state to borrow money.
Given that France would still likely have a budgetary shortfall of around 100 billion euros per year, a Mélenchon government would be forced in such a scenario to either enact a policy of austerity and budget cuts, or to significantly raise taxes to keep meeting current commitments, not even mentioning the further spending envisaged by the radical left party.
Ultimately, Redoulès warned, the move would likely put France on course to be expelled from the European Union and removed from the euro currency.
The radical proposals from the LFI presidential candidate may help reduce opposition to Marine Le Pen’s National Rally among French business leaders, who have long opposed the populist party due to their desire to limit the influx of cheap foreign labour and its tendency to back generous welfare schemes for native French. Le Pen has argued that France could reduce its debt by slashing government handouts to migrants and by cutting taxes to stimulate economic growth.
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