Italy and France are at loggerheads over monetary policy after the governor of the Bank of France hit back at Italian demands to cancel trillions of euros in bonds bought by the European Central Bank (ECB) this year as part of stimulus efforts designed to mitigate the impact of the coronavirus on eurozone economies.
Governor of the Bank of France Francois Villeroy de Galhau said that plans to cancel the debt could backfire in an interview with Ouest France.
“To consider debt cancellation would be a very dangerous path,” he told the outlet.
“When the euro was introduced, France, like the other states, undertook by treaty to always reimburse the central bank. It is an absolutely essential pact of confidence,” he added.
ECB president Christine Lagarde is also strongly opposed to any such move. “I don’t even ask myself the question – it’s as simple as that – because anything along those lines would simply be a violation” of the law.
Speaking in Rome on Thursday, French Finance Minister Bruno Le Maire, standing alongside his Italian counterpart Roberto Gualtieri noted that "a debt is paid back, that is the principle of debt".
— Roberto Gualtieri (@gualtierieurope) November 26, 2020
The ECB has already bought bonds worth €1.35 trillion under its Pandemic Emergency Purchase Programme (PEPP). Ongoing lockdowns across Europe mean that the bank is set to buy up to a further €500 billion worth of bonds within the next few weeks.
Proposals to cancel the debt have gained some traction with French politicians.
Arnaud Montebourg, a minister in former President Francois Hollande's government, has said the ECB could cancel debt.
"My proposition is a concerted cancellation of all the Covid debts of euro are nations and a massive purchase by the ECB that would ruin nobody," Montebourg told Europe 1 radio this week.
— ☰ Arnaud Montebourg (@montebourg) November 22, 2020
Jean-Luc Melenchon, a former presidential candidate who plans to run again in 2022, proposed in June to transform debts held on the central bank’s balance sheet into perpetual debt.