Debt cancellation to avert fiscal austerity: helpful beyond controversy?

Abstract

In 2021, a group of economists launched a proposal asking for the write-off of the public debt built-up in the ECB’s balance sheet and an increase in public spending for a similar amount. This proposal generated strong criticism, which can be organized into three blocks: (i) debt relief occurs when a central bank purchases public debt, and its cancellation does not improve the situation faced by governments; (ii) the proposal is grounded in an erroneous concept of ‘fiscal space’, and there are better alternatives for the financing of public spending; (iii) the proposal would be counterproductive or illegal. This article rebuts those criticisms, finding the plan helpful to avoid a return to fiscal austerity. More specifically, debt cancellation makes quantitative easing, the unconventional monetary policy that justified the purchase of public debt, irreversible whilst simultaneously increasing the fiscal space of Eurozone Member States. Finally, and most relevant, the proposal includes a specific commitment to an increase in public spending.