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ECB boss Lagarde rejects calls to nix EU nations' COVID-19 debts

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BERLIN, GERMANY - SEPTEMBER 11: President of the European Central Bank Christine Lagarde holds a press conference during the informal meeting of European Union ministers for economic and financial affairs on September 11, 2020 in Berlin, Germany. The meeting is taking place under the current German presidency of the European Council. (Photo by Hayoung Jeon - Pool/Getty Images)
President of the European Central Bank Christine Lagarde called on the countries to think about what to with the debt instead of focussing on its cancellation. Photo: Hayoung Jeon - Pool/Getty Images

The president of the European Central Bank (ECB) Christine Lagarde has rejected calls to scratch debts of eurozone member states who used the money to support their economies amid COVID-19.

Responding to calls made on Friday, Lagarde told France's Le Journal du Dimanche weekly, that cancelling that debt is “unthinkable.”

She said that it would “violate” the EU treaty which strictly prohibits “monetary financing of states," she said, calling it one of the "founding pillars" of the euro single currency.

The ECB has so far cushioned the economic blow from the coronavirus pandemic.

Governments in the zone have racked up €1.8tn ($2.1tn, £1.6tn) of extra debt through the ECB’s bond-buying scheme. This pushed the eurozone’s sovereign debt above the size of the continent’s economy this year for the first time in 2020.

Several economists noted in a letter that a quarter (€2.5tn) of the public debt of countries that use the euro is held by the ECB.

"In other words, we owe ourselves 25 percent of our debt and, if we are to reimburse that amount, we must find it elsewhere, either by borrowing it again to 'roll the debt' instead of borrowing to invest, or by raising taxes, or by cutting expenses,” the letter said.

As such the economists have urged the ECB to forgive the accumulated debt in exchange for the 19-nations vowing to spend an equivalent amount on social projects and making their economies green.

READ MORE: UK businesses get more time to repay COVID-19 loans

The former French finance minister, who previously forecast that this year would be a year of “recovery” acknowledged that while the region won’t return to pre-pandemic levels of activity “before mid-2022” the countries can afford to repay the debts.

She called on the countries to think about what to with the debt instead of focussing on its cancellation.

“What will public spending be used for? In which sectors of the future should we invest? These are the key questions today,” she said.

Government borrowing in the Eurozone has skyrocketed and its not the first time, its members have called on the ECB to ease debt burdens and forgive the sovereign bonds it owns.

Economist previously floated the proposal as a resolution to the single-currency zone’s debt problem in 2012.

In November last year, senior Italian once again mentioned the idea, suggesting that the central bank could forgive debts through its asset purchase programme or swap out for perpetual bonds, which are never repaid.

WATCH: Why can’t governments just print more money?

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