Christine Lagarde has dismissed Jean-Luc Mélenchon’s proposal to cancel part of France’s public debt as illegal, ineffective and financially dangerous. The dispute comes as rising borrowing costs and weak growth strengthen political challenges to established eurozone policy in France and Germany.

“It’s not because you repeat something that doesn’t make any sense, either legally, technically or financially, that it becomes something valid,” the European Central Bank president said after Thursday’s interest-rate decision.

Mélenchon wants France to negotiate the cancellation of government debt held by the Banque de France through the ECB’s bond-purchasing programmes. The far-left presidential candidate argues that removing this portion, amounting to approximately 18% of French public debt, would release money for social spending.

Ms Lagarde rejected that reasoning. Moving the liability within the public sector would not make it disappear, she argued. “It’s not by taking from one pocket to put in the other pocket that you actually cancel a debt. You don’t.”

Cancellation could make future borrowing more expensive

Ms Lagarde said the proposal would breach Article 123 of the EU treaty, which prohibits the ECB and national central banks from directly financing governments. She described the rule as fundamental to the eurozone’s financial stability.

She also warned that cancelling debt would damage France’s credibility with investors. A lender whose money had not been repaid would either refuse to provide another loan or demand a substantially higher interest rate, she said.

“Legally, technically, financially, [it is] really not a good idea and a large waste of time,” Ms Lagarde concluded in the ECB’s press conference.

The warning carries particular weight as France struggles with high debt, weak growth and an excessive budget deficit. As EU Perspectives reported in August, its political parties disagree sharply over whether to reduce spending, raise revenue or challenge existing European fiscal rules.

AfD and Mélenchon raise wider questions for the euro

The confrontation is not limited to France. A Bloomberg commentary argued that Mélenchon and Germany’s AfD were preparing the ground for a larger political battle over the euro. Both challenge established monetary policy, although from opposite ends of the political spectrum.

Legally, technically, financially, [it is] really not a good idea and a large waste of time.
— Christine Lagarde, European Central Bank president

The AfD has advocated Germany’s departure from the eurozone and opposes support for heavily indebted member states. Bundesbank President Joachim Nagel said he was concerned by growing support for such policies following the party’s victory in Saxony-Anhalt. Leaving the EU and restricting immigration could deter investment and harm Germany’s economy, he warned, according to Reuters.

These political pressures are growing as the ECB faces a difficult economic choice. Eurozone inflation reached 3.3% in August, well above its 2% target. However, underlying inflation declined to 2.4%, suggesting that energy costs drove much of the increase. The ECB nevertheless raised its deposit rate to 2.5% on Thursday, increasing borrowing costs for households and businesses. France could also pay more when issuing new debt or refinancing existing bonds.