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In France, the debt debate has reopened with a bang since the summer, when Jean‑Luc Mélenchon and his party LFI revived in their program the proposal to cancel the portion of French public debt held by the Eurosystem via the Bank of France. Conservatives of all stripes say all they think about it. This proposal, which none of its supporters naïvely believes would alone solve the thorny equation of France’s public finances, nevertheless has several merits worth clarifying. You don’t need to be sympathetic to LFI to understand that it is a powerful conceptual tool to question and rethink the framework of public finances and that of central banks.
Moving beyond the national scale to grasp the problem of public debt
This path invites us to question how states are financed and the sustainability of their debt contracted on financial markets. It brings to light the key factors that influence it, such as the currency in which the debt is issued. Indeed, the euro is not the dollar; the 21 euro area member states each issue their own debt, whereas in the United States sovereign debt is issued by the federal government alone. We must also take into account the depth of the market where the debt is traded, or its holders, among whom the central bank is included. The European Central Bank does not own the same share as the Bank of Japan, for example. This thus invites examining these parameters, not only in relation to France, but from a European and international perspective.
The cancellation proposal is moreover not an end in itself; it is valuable mainly for the range of monetary options it is part of and invites us to open. One way or another, central banks around the world will enter the equation of public finances. Several options present themselves to them. Some will resume the asset purchases of government bonds that they conducted in response to financial and health crises. Most do so already, as the American Federal Reserve or the Bank of Japan (BoJ) do; but this is not the case, for instance, of the ECB or the Bank of England. Other central banks will choose to safeguard or abandon the receivables they still hold on states. Or, some will opt to broaden their toolbox, perhaps even to issue monetary subsidies to open a lasting source of financing for investments, which neither the market nor the state covers. To great evils, great remedies, except that neither states nor civil society have a handle on this range of options. These various scenarios thus question the power of central banks, that of the money they create from nothing and which their governance does little to put at the service of the common good.
Debt pedagogy: the central bank, a singular creditor
The first merit of the cancellation proposal is pedagogical in nature. It forces beforehand answers to questions too often kept out of democratic debate—namely, how states are financed, and the choice of markets rather than their respective central banks as a source of financing. It also prompts us to question the usefulness of public debt—does it enable investment or repayment of past debt?—and who holds it. Or, the management of claims depending on the actors—do central banks manage their claims the way private investors would?
It is on the financial markets that states finance their deficits. What is called sovereign debt corresponds to the outstanding stock of borrowings used to finance public deficits. In Europe, it was in 1993 with the Maastricht Treaty that the prohibition of monetary financing of states by central banks was enshrined, on the grounds that it would make them spendthrift and would induce an inflationary risk. Since then, they finance themselves by issuing debt securities that investors buy, weighing the risk and the return they would incur in their portfolios. These investors accept that a government bond yields little if it appears sufficiently safe. And otherwise, they demand a higher interest rate. The issuing states are rated as companies are, and they continuously strive to make their “debt” attractive from the market’s point of view, which implies pursuing policies that investors appreciate. The fiscal policy of states and the resulting expenditures are thus under market pressure.
The states “roll over their debt,” meaning they repay their old borrowings with new borrowings. Since the market is not bottomless: the larger the debt to roll over, the more the new borrowings serve primarily to repay the accumulated debt rather than to invest in the future. Ordinarily, buyers of sovereign debt are mainly banks, and their saver households are insurers, funds or asset managers. However, in the wake of crises— the 2007-2008 financial crisis, followed by the health crisis of 2020-2021—central banks massively bought public debt securities. They have thus become creditors to the states. The central banks of the Eurosystem held up to about one third of the debt stock. There was a peak in 2022, then a gradual decline from 2023 onward, to about a quarter. They have been careful not to present these operations as state aid—the Article 123 of the Treaty on the Functioning of the European Union (TFEU) obliges. These operations did, however, help push sovereign yields down to near zero or even negative during the health crisis. States, unfortunately, did not take much advantage to invest—in particular, in the ecological transition.
Yet, the central bank is not an ordinary creditor; it is patient and pragmatic. It holds its securities for long periods, often until maturity. It does not sell them at the first sign of uncertainty; on the contrary, because it is the guardian of monetary and financial stability. The debt on a central bank’s balance sheet is thus protected. This yields an immunity effect on the interest burden, which rises less with the level of debt the larger the central bank’s stake is.
If Japan’s debt could reach up to 250% of GDP without calling its sustainability into question, it was precisely because the BoJ held more than half of the outstanding debt (up to 53% in 2023). Thanks to this high share, the interest rate on Japanese government debt remained for a long time insensitive to debt growth. It was precisely when the BoJ began to reduce its purchases of government bonds from August 2024 (its share in debt holdings receding below 50%) that the rise in Japanese sovereign yields began. In two years, Japan moved from decades of near-zero rates to long-term yields at levels unseen since the mid-1990s. In September 2026, the 10-year rate reached 3.06%— the highest since 1996— and the 30-year at 4.12%. Under pressure from this rise in long rates and to avoid eroding market confidence, the BoJ announced in June 2026 to suspend the reduction of its purchases from April 2027, stabilizing them around 2,000 billion yen per month. This, however, did not immediately prevent long rates from rising. Patience is required. This aura of immunity created by the BoJ’s large hold of the debt for sustainability will likely take time to rebuild.
On the United States side, the U.S. Treasury market also suffered from the fact that foreign central banks now hold only about 23% of the U.S. debt, versus more than 34% in the mid-2010s. This erosion, reflecting chiefly the choices of the Chinese, Russian, and Japanese central banks, makes them more sensitive to the growth of the debt stock, and thus contributes to the rise of long rates— 5.24% in September 2026, the highest since 2007.
The cancellation proposal—which, it should be recalled, concerns only the portion of public debt held by the Eurosystem’s central banks—thus draws its justification from the central bank’s special status as creditor and public institution. It does not bear the budget constraint of an ordinary creditor: it finances its purchases by creating central money. And even when the state is its shareholder, accounting-wise and institutionally, the central bank differs from it since it belongs to the financial sector, and not to the public administration sector. Let us also note that there is no consolidated balance sheet between the state and the central bank. Nothing obliges the state to bail out the central bank in case of losses (unless a specific legal provision), because the central bank can operate with negative equity.
These provisions technically at least make possible the cancellation of all or part of the claims central banks in the Eurosystem hold on euro area states. The resulting loss would not prevent them from functioning and would not obligate them to recapitalize. Admittedly, shareholder states would no longer receive dividends if there were no profits, but that situation already exists since central banks have posted losses on their balance sheets in recent years. Also, the lost income would be smaller for states since they would no longer have to pay interest on the canceled debts. And above all, the canceled sums would allow euro area states to re-borrow the equivalent amount to invest in the ecological transition and the reduction of strategic dependencies (renewables, digital, defense, etc.). Extended to the entire euro area, the operation would amount to around 3 trillion euros, enough to plan at least six years of public investments to fill the gap highlighted in the Draghi report. The investment gap is estimated at about 5% of GDP, with only half of it sufficiently profitable to be financed by the private sector.
Debt management and investment: two intertwined questions
This is where a second merit of the cancellation proposal appears, in the articulation of two questions often treated separately: debt management and financing the investments required by ecological and strategic transformation. This challenge arises here in France as much as in its European partners, and even more so wherever the pressure on public finances is as great as the investment needs. The cancellation proposal does not aim to provide a tool for fiscal stabilization—it would obviously not suffice for that—but to kick-start the investments Europe needs.
Rather than dredging up demeaning labels in the realm of futility (“it’s illusory,” “it makes no sense,” “it’s stupid,” “irresponsible”) or unfounded counterarguments, critics of the proposal could more rightly point to its exceptional and non-permanent nature. For it is not market panic that should be feared, since private creditors would not be affected. Nor inflation risk, since debt relief does not create money; it prevents monetary destruction—a subtle but important distinction. And even in the case of monetary creation, the empirical link between the amount of central money (“base money”) and inflation is not mechanical. As for the more subtle argument about the lack of resources that would result for the central bank and prevent it from remunerating banks’ reserves—which some say would harm monetary policy steering—it is just as unfounded. This justification overlooks the fact that it is not from pre-existing resources that the central bank pays bank reserves, but by creating central money. And that would amount to central money creation without an enforceable claim in return; in other words, it is a monetary subsidy that does not say so outright. Finally, on legality, as long as the central bank judges the operation useful and in line with its mandates of monetary and financial stability, nothing would prevent it from renouncing its claim, according to proponents of the proposal. This reading has, however, been rejected by the institutions concerned: the president of the ECB, Christine Lagarde, argued that such cancellation would violate Article 123 of the TFEU, and the governor of the Bank of France called it illegal.
The cancellation proposal is not a panacea, but its weakest point does not lie in these counterarguments that hinder analytical thinking. It lies elsewhere. First, in the configuration of interest rate levels, quite different from those of the 2020-2021 pandemic. Reborrowing the canceled sums at current sovereign rates— around 4% for euro-area states, with wide spreads, up to 146 basis points as of early October 2026, between France’s 10-year OAT and Germany’s Bund—would certainly be more difficult than at the floor rate that prevailed for all during the health crisis, the moment when this proposal was ardently defended. It should not be forgotten, however, that it is at this higher rate level that euro-area states will roll their debt anyway. Better to borrow to invest in the future via the cancellation mechanism than to borrow mainly to repay past debt.
But, if the cancellation measure would only kick-start investment, and not open a lasting source of financing—that may be the most serious counter-argument against this operation—still, it is not the only monetary option available. There are other options with which it can be combined.
Opening a range of options through cancellation
This then yields a third merit of the cancellation proposal, which matters less for what it is in itself than for what it allows to reveal. It opens a range of options, blending monetary and fiscal policy in varying degrees to better finance the economic transformation.
Quantitative easing, already widely experimented by central banks, sits at the start of this spectrum. Purchases of public debt securities facilitated the funding of states after the financial crisis and during the health crisis, by pushing down sovereign yields. They could be reactivated within programs linking central-bank–backed purchases to public borrowing conducted to invest in the ecological transition and strategic autonomy. The programs could also cover private securities, not just public. A positive note: public and private investments would thus increase. But it also carries two risks: first, widening inequalities, since holders of securities are the main beneficiaries of these operations; and a second, increased financial instability, as these operations push asset prices higher and contribute to the formation of bubbles.
Like the BoJ, most central banks could not renounce asset-purchase programs for long. Since December 2025, the American Federal Reserve even relaunched firm purchases of Treasury bonds shorter than one year (“Reserve Management Purchases”) to help banks rebuild their central-bank reserves and ease the U.S. debt market. The Fed’s balance sheet thus rose again after the end of its quantitative tightening, on December 1, 2025.
Only the ECB and the Bank of England are exceptions; they remain in a phase of balance-sheet reduction and no longer support the debt market through firm purchases. But probably not for long: lacking orders from states (central banks are independent) and without justifying their bond-purchasing actions as such, central banks will turn to them again if the rise in sovereign yields continues. If so far the revival of such operations followed a defensive strategy to limit tensions in the debt market, this could fit into a more offensive strategy to facilitate the public and private investments needed for the ecological transition and strategic autonomy.
Other options are also part of this spectrum, such as debt mutualisation via eurobonds, inflation-indexing of sovereign bonds, or debt-maturity management—i.e., extending maturities when long rates are low. However, these have their limits. They would indeed make the existing debt cheaper to carry but would not create new investment capacity.
Among these options, the issuance of euro-obligations or “eurobonds” still faces reluctance from countries in the euro area attached to budgetary stability. Germany, for example—which reformed its debt brake in March 2025 to finance several investment plans in defense, energy, and infrastructure—could eventually find an interest in borrowing jointly with its partners. But it is hard to see how, in Europe, debt markets could integrate and deepen as the European Commission envisions in its Union of Savings and Investment strategy, if the twenty-one euro-area states continue to issue their own securities.
Yet an eurobond would provide investors with an asset comparable to the U.S. Treasury and would strengthen the international role of the euro. The exorbitant privilege that has long allowed the United States to borrow cheaply has indeed begun to erode. But the advantage remains certain: if the U.S. sovereign debt market remains the deepest in the world, it is because only the federal government issues it, not each of the fifty states. Without this federal fiscal structure, neither the U.S. Treasury would have become a quasi-international currency, nor would the dollar be the key currency in all international portfolios.
Let us broaden the range further. Freezing or cancelling central-bank-held public claims lies a little further along. The claims central banks hold on states are already “cooled” in a sense, because central banks typically hold them to maturity. Freezing would transform them into perpetual zero-interest debt—which in a sense is no longer debt but remains in name. States would gain leeway, since they would neither have to roll over this part of the debt nor pay interest. However, this would be a priori less advantageous than cancellation because freezing does not erase the claim (and thus does not change the debt-to-GDP ratio). Not conditioning the freeze on the realization of necessary investments would make the move more uncertain than conditional cancellation in terms of its investment-stimulating effect. For these reasons, cancellation sits a notch further along the spectrum.
Further still in the spectrum is financing states by advances from the central bank. What is prohibited in the statutes of most major central banks has long been the main mode of financing states. This remains active or activatable in some places, notably the United Kingdom where the financial link between the Treasury and the Bank of England is stronger than elsewhere. Reestablishing, where forbidden, this possibility of central-bank advances to the state would have the advantage of reducing states’ dependence on markets. But again, caution is warranted: the impact on investment would not be guaranteed; and in fragile democracies where power grows more autocratic, granting this monetary facility to states would not be without danger.
Monetary subsidy: a durable option?
At the very end of the spectrum lies another proposal that would open a lasting source of public investment funding: a monetary subsidy. This proposal rests on a somewhat controversial observation: commercial banks are heavily subsidized by the Eurosystem central banks, which pay interest on excess reserves held there at the rate of the deposit facility. Central banks justify this by the role currently played by the deposit facility rate in steering market rates. But more fundamentally, the growth in banks’ reserves at the central bank has, on the one hand, reduced their need to borrow from the central bank, and on the other, shifted monetary-policy steering from the main refinancing rate (REFI) to the deposit facility rate. As excess reserves decline, the REFI will revert to the policy instrument it was. A way to achieve this would be to raise reserve requirements. In the meantime, banks gain, the public loses.
On the other hand, nothing would technically prevent using this same subsidy power in a radically fairer way, by directing it toward dedicated financial structures. These would in turn subsidize essential but unprofitable investments that the market will never finance. We would thus move part of public financing out of the debt-market logic: the central bank would establish a supplementary and permanent mode of issuing public money, enabling investments at a constant debt level—without waiting, as with cancellation, for a more favorable rate configuration to be activated.
Macro economically, investment would rise as much as possible, including with public debt, if the borrowings were used to invest rather than to repay past debt. This increase would occur, however, without the anti-redistributive effects of market debt that primarily benefits those who hold it—the wealthiest. A monetary subsidy would avoid this bias: with equivalent financing effect, it would not deepen inequalities, would not intensify financial capitalism, and would help transform it, even to surpass it.
Would such monetary subsidy creation be inflationary? The objection is common. Yet one can argue the opposite for several reasons. First, the causal link between the money stock and inflation that monetarists claim to exist “everywhere and always” does not hold up to empirical testing. From the early 2000s to today, the money stock quadrupled in Europe and quintupled in the United States, without inflation following. On the contrary, the 1990s-2000s were years of substantial inflation moderation; the post-2007-2008 crisis years raised fears of deflation. Inflation only returned after the health crisis. This is not so much explained by an excess of money in the real economy as by lasting disruptions to production chains after the health crisis, and by higher gas and oil prices linked to the war in Ukraine. More fundamentally, with the financialization of capitalism, movements in financial asset prices reflect monetary variations more than the general price level.
Therefore, more money in circulation does not mechanically cause more inflation unless one assumes that monetary creation serves no real economy needs—which would be a strong assumption underpinning monetarist claims. In fact, the issuance of monetary subsidies would be directed toward investments in the social, ecological, and energy transition (greening cities, flood prevention, reforestation, thermal renovation of schools, hospitals, and nursing homes, etc.). This would support both supply and demand, help adapt to climate change, and mitigate it by reducing our dependence on fossil fuels, thereby reducing one current source of inflation: climate-related factors.
Finally, if one cannot rule out that this debt-free money created might overshoot the economy’s needs as it circulates, one must consider potential monetary withdrawal. On the one hand, there is withdrawal or monetary destruction produced spontaneously by tax payments, as well as by inflation. And on the other hand, the possibility of increasing this withdrawal through microtaxes—financial or environmental—to regulate this portion of the money stock. This also involves pursuing an active monetary policy to reduce the rest of the money stock.
Undoubtedly, if central banks judged it necessary and compatible with their mandate, they could seize this monetary spectrum and select measures from it. Among all the options discussed, with the exception of central-bank advances to the state explicitly prohibited by Article 123 of the TFEU, none are explicitly forbidden by the treaty text. Of course, that does not mean adopting them would not trigger fierce discussions with Eurosystem jurists. The point is that in the current governance framework of the Eurosystem’s central banks (and this also applies worldwide, as central banks are nearly all independent), no one can compel them to adopt a policy. Indeed, even though central-bank independence does not mean “full autonomy or political neutrality,” political power has little leverage over the choice of their instruments. Civil society even less so. And if central banks decided to bring some of these measures into their toolkit, governance questions would immediately arise, and at a minimum, a coordination question with public authorities. More broadly, it would immediately raise governance-sharing questions, opening it up to civil society or its parliamentary representatives, so that the decision guiding the orientation of these measures truly reflects a democratic choice.