France's Gold Reserves: A Risky Proposition in Addressing Public Debt

The French presidential election has brought forth various proposals to tackle the country's public debt. One idea gaining attention is canceling the portion of the national debt held by the European Central Bank (ECB), particularly by the Bank of France (20% of the total debt). This debt was acquired during quantitative easing policies in response to the COVID-19 pandemic and earlier crises.

From an accounting standpoint, writing off this debt might be tempting since it's essentially money owed to the government itself. However, central banks can operate with negative equity, so this wouldn't necessarily cause financial instability. The real concern lies elsewhere, trust.

If the French government were to write off a significant portion of its debt and then create new debt for the Bank of France to buy up, it could set a troubling precedent. This would allow politicians to continuously print money and write off debts as needed, potentially leading to inflation and foreign investors fleeing French debt.

Another proposal has emerged: selling the Bank of France's gold reserves to partially repay the public debt. At current prices, these 2,437 metric tons of gold are worth approximately €300 billion, less than one-tenth of the public debt. Selling the gold would have a limited impact on total debt but could send a worrying signal to international investors.

The government does not have the right to 'dip into the central bank's balance sheet to cover its deficits.' This would be direct financing of the government by the central bank, strictly prohibited by Article 123 of the Treaty on the Functioning of the European Union. A sale of gold reserves would also likely raise the French risk premium and increase interest payments.

Physical gold is a sovereign asset with no counterparty risk. It does not depend on foreign governments or banking systems. Selling the Bank of France's gold reserves would essentially amount to liquidating strategic assets, which could harm France's creditworthiness abroad and its safety net in times of global financial upheavals.