Europe can choose "helicopter money"
This has yet to be implemented in the eurozone, but eventually the European Central Bank (ECB) may reach the point where so-called "helicopter money" is the best option in the economic crisis due to the coronavirus epidemic, two analysts told CNBC..
A term coined by a 20th century economist Milton Friedman, refers to unconventional monetary policy, in which the central bank prints additional money and distributes it directly to its citizens. The idea that gives rise to the idea that money is tossed to people from a helicopter is to boost consumer spending and, therefore, restore the economy during a recession. However, there are a number of ideas about how central bankers can go this route..
European countries hit hardest by Covid-19, International Monetary Fund predicts 7.5% GDP contraction in eurozone this year.
The ECB has taken various steps to mitigate some of these impacts, including a pledge to buy 750 billion euros ($ 815 billion) of sovereign bonds this year. However, data released earlier this week showed that the ECB's response to the pandemic could end by October if the central bank continues to buy sovereign bonds at its current pace..
Experts told CNBC that "helicopter money" raise concerns about central bank independence, foreign investment (as this would devalue the currency), and it is unclear how people will use the additional cash. However, they also stated that if the ECB is struggling to ensure price stability, then it is «efficient» option.
John Wraith, the head of the UK strategy for UK rates at UBS bank, told CNBC on Tuesday that if the ECB continues to buy sovereign bonds still for 6 – 12 months with little results, then «what will we do? We might have to try helicopter money».
Dario Perkins, Managing Director of Global Macroeconomic Research at TS Lombard, also said that "helicopter money" might be a good option. «ECB doesn't need to do it now», – he said. At the same time, the expert added: «Can you imagine another crisis as big as this?»
The ECB has so far avoided considering "helicopter money" as a real opportunity. In a letter signed by the President of the ECB Christine Lagarde on Wednesday, the bank said that «The Board of Governors has never discussed the issue of helicopter money. Consequently, the ECB did not take an official position on this issue.».
«When the ECB states that they have never discussed this topic, it probably means that they have discussed», – told CNBC on Wednesday Frederic Ducroset, Pictet Wealth Management strategist.
The main question, however, is how to potentially provide these very "helicopter money".
Earlier this month, France's central bank governor Francois Villière de Gallu suggested that if exists «serious risk to price stability», then the central bank can choose the option "helicopter money" for corporations that directly support business, not citizens.
Helicopter Money Can Boost Euro-Area Economy: Acreditus’s Kraemer
Some analysts have also suggested that the ECB may have negative rates on its long-term financing of banks through its TLRO (targeted long-term refinancing operations) program. This will mean that the central bank will pay commercial banks for capital replenishment, which in turn should allow citizens and businesses to receive loans on more favorable terms..
«Extreme examples of this can be cited, including a 10-year TLTRO at -1% with money offered to banks on the condition that they provide 0% loans to their clients», – said Dukroset of Pictet Wealth Management.
This option could stimulate economic growth and overcome some criticism of the original concept "helicopter money". Even if citizens have to end up paying off their loans (albeit without additional interest), this will allow the central bank to overcome fears about its independence. This is because commercial banks will follow lending rules, instead of having governments tell central banks who should receive money and how much..
Despite their problems, some countries have adopted the idea "helicopter money" Milton Friedman.
In February, Hong Kong decided to provide about $ 1,200 in cash to its permanent residents. These measures are intended to support the economy in the aftermath of the pandemic, as well as after numerous protests in 2019. Macau, Singapore and the United States also announced similar schemes..
«For those considering helicopter money, it is reassuring that we are all in the same boat.», – said UBS's Reith. He added: «You are unlikely to see dire consequences (from helicopter money) if everyone does it».