As bond purchases and negative interest rates are reaching their limits, helicopter money is increasingly brought into play as a new option. In its original concept, the central bank prints money and directly distributes it to private households. In the euro area, however, the technical implementation is particularly difficult, and the ECB would infringe upon the EU Treaty.
The possibility cannot be entirely excluded though that a new form of helicopter money is used as an entry to monetary state financing. Helicopter money has direct effects Despite large-scale bond purchases and a negative deposit rate, lending is barely rising in the euro area. In the euro periphery, in particular, commercial banks are still struggling with many bad loans, corporate and private household debt is declining only slowly, and heightened uncertainty is leaving its mark, currently due to the crisis in the emerging markets.
As a consequence, the idea of helicopter money is becoming more and more popular: If the credit channel is blocked, the central bank should – according to this idea – bypass the commercial banks and credit money directly to the households. The money would go where it is needed. Demand and prices would rise, instead of falling as in a deflation.1 The devil is in the detail At a first glance, the idea appears to be simple and self-evident. When taking a closer look, however, it becomes complicated, starting from the technical implementation.
The ECB cannot transfer money to the citizens, as these do not have accounts at the euro central banks. The only institution which could assume transactions to all citizens is the government. Accordingly, current suggestions on how to put helicopter money into practice are for the most part based on the experience in other countries, where the government – for different reasons – distributed money to its citizens. In a monetary union, however, it is difficult to implement these suggestions:
• In the US, private households received tax rebate checks in 2001 and 2008, via their tax identification numbers. In the euro area, however, the money would have to be distributed not only to households in one country, but in 19 countries, which do not have a common system of tax identification numbers. Moreover, tax numbers would have to be compared across countries in order to avoid duplicate payments if a citizen of one state works in another euro country, and could thus have two tax identification numbers.
• The economist John Muellbauer proposed using the electoral register to distribute the money
.2 According to Muellbauer, some 90% of the adults in the euro zone are on this register. However, this idea would be hard to swallow for the remaining 10%, who would not receive any money if this proposal were implemented – and probably also for the ECB which is certainly seeking to achieve the fairest possible distribution of the money. • Proposals for Switzerland aim at a distribution via the basic coverage in health insurance, as every Swiss citizen has such coverage.
3 Given the manifold differences of health insurances within and across the euro countries, however, this suggestion is not applicable. Only the government can plug the hole in the ECB’s balance sheet Although the technical implementation of helicopter money is complex, the ECB would probably accept this, if it were convinced of the concept. However, ECB President Draghi stressed that helicopter money “clearly involves complexities, both accounting-wise and legal-wise”.
The decisive difference between monetary measures to date and this concept is that the ECB would move from lending central bank money to giving it away as a present. Like the ECB’s bond purchases, helicopter money also increases the liability side of the central bank’s balance sheet. There is no item on the asset side though, as, in contrast to the bond purchases, the ECB does not, in return, acquire assets. Instead, the citizens are granted unrequited payments.
This leaves the ECB with a net loss, which needs to be offset. There are several options to achieve this goal, all of which are involving the government:
4 • The ECB resp. the national central banks are not distributing profits to their governments until the net loss is offset. This approach would probably meet with strong criticism from the states, as in the final analysis they would have to shoulder the payments to their citizens.
• The governments take out loans at the euro national banks resp. receive money from them via direct bond purchases. This solution is favoured by economists who call for an active and closer cooperation between central bank and government, which means they are generally sceptical about the concept of an independent central bank and hence actually also oppose the prohibition of monetary state financing. For them, direct ECB loans to the government are therefore unproblematic.
It is, however, very unlikely that the ECB will take up these proposals, as suggested by ECB Vice President Constancio, who stressed in late 2015 that the „original idea“ of helicopter money refers to the direct financing of governments and is not an option for the ECB. • The governments plug the hole torn in the balance sheet by the helicopter money by transferring assets to the ECB, such as zero bonds with unlimited maturity.5 From an economic perspective, the result is the same, as this, like the previous option, is a form of monetary state financing. From a legal point of view, however, it could be argued that these are two independent processes:
The ECB prints money and distributes it to its citizens, and the governments subsequently plug the resulting hole in the central bank’s balance sheet by “giving away” assets. At least officially, the ECB would not infringe upon the EU Treaty by purchasing bonds in the primary market. And the states should be willing to „give away“ this money due to the infinite repayment and zero interest rates.
As ECB President Draghi called helicopter money „a very interesting concept“ that is „now being discussed by academic economists“, the ECB now appears to be more open to such ideas
1 The term „helicopter money“ was coined by the American economist Milton Friedman. In one of his oeuvres, he described a hypothetical example in which a helicopter drop of money leads to rising prices. For him, helicopter money was only a thought experiment. In an analysis of Japanese monetary policy published in 1999, Fed Chairman Ben Bernanke subsequently discussed the advantages of a direct distribution of money in a serious manner. 2 „Combatting Eurozone deflation: QE for the people”, John Muellbauer, 23 December 2014, www.voxeu.org. 3 This procedure was applied in Switzerland when redistributing a CO2 tax. „Die Nationalbank soll ihr Geld direkt an die Bürger verteilen”, Neue Zürcher Zeitung, 17/2/2015.