Introduction
As the 2027 presidential election approaches, French public debt is gradually becoming one of the main issues of the campaign. With public debt reaching 117.5% of GDP in the first quarter of 2026, the question of fiscal room for manoeuvre is taking an increasingly important place in the economic debate.
It is in this context that Jean-Luc Mélenchon, leader of La France insoumise (LFI), has brought back to the centre of the debate a proposal he has defended for several years: cancelling, or more precisely transforming into a zero-interest perpetual debt, the share of French public debt held by the Banque de France within the Eurosystem. The stated objective is to free up fiscal space to finance investment, reindustrialisation and the ecological transition in particular.
This proposal has sparked debate over its legality, economic usefulness, monetary risks and effectiveness. Nicolas Dufrêne, a senior civil servant, economist and director of the Rousseau Institute, who has defended the idea for several years, challenges the claim that such an operation would necessarily be illegal or useless. He points out that Article 123 of the TFEU prohibits direct monetary financing of states and the direct purchase of their securities, but does not explicitly mention the cancellation of securities acquired on the secondary market.
Before examining these arguments, however, it is necessary to understand how such a large amount of public debt ended up on the central bank’s balance sheet.
How did the ECB and the Banque de France accumulate this debt?
To understand the cancellation proposal, we must first understand why the Banque de France currently holds several hundred billion euros of French public debt. This debt was not directly lent by the central bank to the state. It was acquired through the Eurosystem’s asset purchase programmes, mainly the Asset Purchase Programme (APP), launched in 2015, and the Pandemic Emergency Purchase Programme (PEPP), launched in 2020.
The mechanism is relatively simple. When the French state issues a bond, it is first purchased on the primary market by investors, including banks, funds and insurance companies. The Banque de France therefore does not purchase these bonds directly from the Treasury. Under quantitative easing, it can subsequently purchase these securities on the secondary market from investors who already hold them.
To finance these purchases, the central bank credits the banking system with reserves. Its balance sheet then expands on both sides: on the asset side, it holds more government bonds; on the liability side, there are more bank reserves. The mechanism therefore allows the central bank to ease monetary and financial conditions without constituting direct deficit financing at the time the debt is issued.
The pandemic crisis then led the Eurosystem to sharply increase its purchases through the PEPP. A significant share of French public debt therefore ended up on the Banque de France’s balance sheet. As of 30 June 2026, it held approximately €488 billion of French public debt acquired under the APP and PEPP.
This distinction is essential to the cancellation debate. The debt held by the Banque de France is therefore not debt that the central bank directly 'lent' to the state. It consists of securities initially issued by the Treasury and subsequently purchased on the secondary market as part of the Eurosystem’s monetary policy.
What is Jean-Luc Mélenchon actually proposing?
The term 'cancellation' first needs to be clarified. In its current formulation, Jean-Luc Mélenchon proposes transforming the public debt held by the central bank into zero-interest perpetual debt. The state would then no longer be required to repay the principal on a given maturity date and would no longer pay interest on the securities concerned.
This debt is on the Banque de France’s balance sheet because it purchased French bonds on the secondary market under the ECB’s asset purchase programmes. As of 30 June 2026, it held €488 billion of public debt under the APP and PEPP.
Among the economists who defend the possibility of such an operation is Jézabel Couppey-Soubeyran, an associate professor of economics at Université Paris 1 Panthéon-Sorbonne and scientific director of the Energy and Prosperity Chair. She stresses that a central bank is not an ordinary creditor: it can hold securities until maturity, operate with negative equity, and does not necessarily need to be recapitalised by the state. In her view, cancellation could therefore free up capacity to finance long-term investment, without constituting a permanent source of financing. She also argues that cancellation would not, in itself, create additional money: rather, it would prevent the destruction of reserves that would gradually occur as the securities matured.
From this perspective, debt held by the central bank could be treated differently from debt held by private investors. Cancellation, or freezing the debt in the form of zero-interest perpetual debt, could therefore create additional capacity to finance certain long-term investments. But even this approach acknowledges that the operation would not constitute a permanent source of financing and would not, by itself, resolve the situation of the public finances.
What cancellation actually changes: the central bank’s balance sheet
To assess this proposal, we need to look simultaneously at the central bank’s assets and liabilities.
When the Banque de France purchased bonds under quantitative easing, it created bank reserves to settle those purchases. Its balance sheet therefore contains, among other things, the government securities acquired on the asset side. On the liability side are the reserves held by commercial banks.
As explained by Jean-Olivier Hairault, professor of economics at Université Paris 1 Panthéon-Sorbonne, cancelling the bonds would not make the reserves created at the time of their acquisition disappear. The securities would disappear from the central bank’s assets, while their monetary counterpart would remain in the banking system.
The issue is therefore not new money creation at the time of cancellation. The reserves were already created during QE. The issue is that cancellation would prevent the securities concerned from reaching maturity and contributing, under the normal functioning of the programme, to the gradual reduction of the central bank’s balance sheet and the associated reserves.
The operation must therefore be analysed at the level of the consolidated public sector. From the Treasury’s perspective, part of the debt disappears. But from a consolidated perspective, the monetary counterpart of that debt remains on the central bank’s liabilities.
The fiscal gain is not equal to the amount of debt cancelled
The argument that cancellation would allow the state to save interest payments on several hundred billion euros of debt also needs to be qualified.
When the Banque de France holds a French government bond, the Treasury does indeed pay it the interest specified by the security. But the Banque de France belongs to the French public sector, and its results can, under certain conditions, be transferred to the state. The transfer of interest between the Treasury and the central bank therefore does not necessarily represent a net cost of the same amount for the public sector as a whole.
Conversely, the reserves created during QE are now a remunerated liability of the Eurosystem. When policy rates rise, the cost of this remuneration can increase. QE has therefore transformed part of long-term public debt into a central bank asset financed by liabilities whose remuneration depends on monetary policy.
It would therefore be misleading to present cancellation as a fiscal saving equal to the nominal amount of the securities removed. The relevant calculation must compare, over several years, the interest that would have been paid on the securities, the cost of the reserves kept on the central bank’s liabilities, any transfers of profits or losses between the central bank and the state, and the macroeconomic effects of the operation.
Cancellation does not solve the public deficit
Another limitation concerns the distinction between the stock of debt and the deficit that continues to add to it.
Even if several hundred billion euros of debt were removed from the state’s balance sheet, the operation would not automatically change the annual gap between public expenditure and revenue. If the primary deficit persists, the state will continue to issue new securities to finance its spending.
Cancellation would therefore reduce the initial level of debt without necessarily changing its dynamics. If the fiscal space created were used to finance new spending and that spending did not generate sufficient growth or was not accompanied by a lasting improvement in the primary balance, debt would begin to rise again.
This is why cancellation cannot, by itself, turn a difficult fiscal trajectory into a sustainable one.
Credibility, confidence and the boundary between monetary and fiscal policy
The most important issue then appears at the institutional level. Quantitative easing was designed as a monetary policy instrument. Government bond purchases were intended in particular to ease financial conditions when inflation was too low and policy rates were close to their lower bound. They were not intended to permanently take over the financing of public deficits.
This question is connected to the position expressed by Christine Lagarde, president of the European Central Bank. Asked about Jean-Luc Mélenchon’s proposal, she described it as 'financially dangerous', 'legally impossible under European Union law' and a 'considerable waste of time'. This position illustrates the main institutional issue of the operation: preventing the central bank’s balance sheet from becoming a permanent instrument for financing states.
A one-off cancellation would not, however, mechanically cause a loss of credibility or higher inflation. The issue is rather the regime it could establish. If economic actors anticipate that, whenever public finances become difficult, government securities held by the central bank can again be transformed into zero-interest perpetual debt, the boundary between monetary policy and support for public finances becomes less clear.
This is where the risk of fiscal dominance arises. The question is not whether the central bank can purchase government bonds. It already does so as part of its monetary policy instruments. The question is who determines these interventions and for what purpose.
When the central bank intervenes because economic conditions require it and within its price-stability mandate, this is monetary policy. If its balance sheet instead becomes an instrument for permanently reducing the cost of government financing, the logic changes.
This distinction also matters for investors’ expectations. One should not assume that cancellation would automatically lead to higher sovereign yields. If investors were certain that the central bank would permanently guarantee the government’s financing conditions, that guarantee could instead reduce their perception of short-term refinancing risk. The risk arises if this guarantee becomes a permanent dependence: investors could then question the central bank’s ability to raise rates when inflation requires it, independently of the state’s financing needs.
The credibility issue therefore concerns less a mechanical market reaction to cancellation than expectations about future rules. A loss of confidence in the separation between monetary and fiscal policy could, under certain circumstances, increase the risk premium demanded on French sovereign assets and raise the state’s financing costs. This effect is neither automatic nor quantifiable without additional assumptions.
The inflation risk should also be presented cautiously. The reserves that would remain in the system would not mechanically cause an acceleration in inflation. In a system with abundant reserves, their effect depends in particular on demand, their remuneration, policy rates and the ECB’s response. The real issue is therefore the central bank’s ability to retain control over its monetary policy independently of the state’s fiscal needs.
Conclusion
Jean-Luc Mélenchon’s proposal is based on a reality: a significant share of French public debt is held by a central bank, which is not an ordinary private creditor. This feature justifies analysing its treatment differently from debt held by private investors.
It does not, however, allow us to conclude that cancellation would create several hundred billion euros of new fiscal resources. The reserves created during quantitative easing would remain in the banking system. Their remuneration would continue to have consequences for the central bank’s balance sheet. Cancellation would also not eliminate the public deficit that generates new debt issuance.
Beyond accounting, the central issue is institutional. If the central bank’s balance sheet becomes a permanent instrument for reducing the cost of public debt, the separation between monetary and fiscal policy becomes harder to preserve.
The risk is not necessarily an immediate increase in inflation or interest rates, but a change in expectations concerning the future independence of monetary policy.
Cancellation can therefore change the stock of debt and, depending on the arrangements adopted, certain financial costs. But it does not constitute, by itself, a solution to France’s fiscal imbalances. Its economic value must be assessed on a consolidated basis, taking into account the central bank’s balance sheet, the dynamics of the deficit, the cost of reserves and the credibility of the monetary framework in which the operation would take place.