Lagarde Slams Mélenchon's Debt Cancellation Plan as 'Financially Dangerous'

European Central Bank President Christine Lagarde has voiced strong opposition to a proposal by French far-left leader Jean-Luc Mélenchon to cancel part of France's debt held by the Eurosystem. The plan aims to erase roughly €600 to €636 billion in French sovereign debt, which accounts for approximately 18% of France's total debt stock.

Lagarde argues that this move would be financially dangerous and fundamentally incompatible with how the Eurozone works. She points out that canceling debt held by the central bank would effectively amount to monetary financing of governments, violating Article 123 of the Treaty on the Functioning of the European Union.

Mélenchon's proposal is designed to reduce France's debt-to-GDP ratio and create room for expanded public spending. However, Lagarde warns that if investors begin pricing in even a small probability of debt cancellation, borrowing costs would rise, deficits would widen, and the debt ratio would worsen.

Bundesbank President Joachim Nagel echoed Lagarde's concerns, warning about the potential for hyperinflation and the erosion of central bank independence. He notes that if central banks can be pressured into canceling government debt once, markets will assume it can happen again, leading to inflation expectations and higher interest rates.

France plans to issue a record €310 billion in medium- and long-term debt in 2026, and any serious momentum behind debt cancellation would likely accelerate the trend of widening spreads between French and German government bond yields.