The concept of “helicopter money” where the European Central Bank would print and hand out cash directly to eurozone citizens “is not currently part of the discussion” on the ECB’s governing council, a top official said yesterday.
“As an economist, of course I find the academic discussion exciting. It is good that academics force us to think outside the box. But as a policymaker, as interesting as it may be, helicopter money is not currently part of the discussion in the governing council,” executive board member Benoit Coeure told the magazine Politico.
“Helicopter money” was originally posited by US economist Milton Friedman in 1969 when he suggested in a thought game that a helicopter fly over a community and drop bills from the sky in the hope that by putting more money directly into consumers’ pockets, they would scurry to the shops to spend their windfalls.
The ensuing surge in demand would revitalise the economy and avert the threat of deflation by persuading retailers to raise their prices, Friedman argued.
It is a concept that has never been tried out in real life by any major central bank.
But with growing concern that quantitative easing and zero or even negative interest rates may have lost their power to kickstart the economy, ECB president Mario Draghi recently described it as an “interesting concept.”
Helicopter money need not take the form of air-dropping cash.
It could also be implemented by cutting taxes or healthcare payments, all financed by money printed by the ECB.
Nevertheless, implementing such financial relief in an area as big as the 19 countries that share the euro would encounter a number of technical and ethical hurdles, not to mention legal ones.
Under the ECB’s own statutes, it is expressly forbidden from financing governments, even if there appears to be nothing to stop it from handing cash out to citizens. “If we decided to get into that discussion, we would have to deal with many questions, such as: how exactly would it work in practice?
How would ‘helicopter money’ fit within our monetary policy? And finally and most importantly, how do we make sure it doesn’t cross the line between monetary and fiscal policy,” Coeure said.
“To be honest, I don’t see how it could work without some kind of risk-sharing with governments, which could be practically and legally problematic. So whatever my own intellectual interest in helicopter money, as a governing council member I have a fair deal of scepticism and circumspection,” he said.
Coeure also said that it was “ironic” that some of the harshest criticism against the ECB at the moment was coming from Germany.
“I would say there is a certain irony in them taking us to task because we are focusing on our inflation target, since it is at Germany’s insistence that the ECB was given that mandate — and that mandate only — in the euro’s founding treaties, and in my view rightly so,” Coeure said.
In its battle to kickstart inflation in the single currency area, the ECB recently slashed its key interest rates to zero, a move heavily criticised in Germany because it squeezes savers.
“We will keep explaining to our critics in Germany — and also to German savers — that their country is one of the main beneficiaries of the euro. A stronger euro area, with inflation of below but close to two%, would be good for Germany,” Coeure said.