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Interview: “If helicopter money is not an option, there are not many other tools left in the toolkit”

Positive Money Europe is calling on the European Central Bank to make debt-free payments to every eurozone resident to combat the economic crisis caused by Covid-19.
Interview: “If helicopter money is not an option, there are not many other tools left in the toolkit”


Positive Money Europe is calling on the European Central Bank to make debt-free payments to every eurozone resident to combat the economic crisis caused by Covid-19. In this article translated from Alternatives Economiques, our Executive Director Stanislas Jourdan explains the concept in full.

Hémisphère gauche: What do you think about the monetary policy that the ECB has adopted since the beginning of the crisis? 

Stanislas Jourdan:
I see three pieces of good news and one piece of bad news. Firstly, the ECB was able to avoid the mistakes of the previous crisis. After the 2010 Eurozone crisis, the ECB did not properly intervene until 2015, with the launch of the Quantitative Easing programme. This time, and despite a misstep on 12 March, Christine Lagarde was able to convince the Governing Council to take preventive action and avoid the reemergence of old fears of contagion in Eurozone sovereign bond markets

Secondly, by taking this action, the ECB has – for the time being – avoided the temptation of some political leaders to adopt the age-old use of austerity to cover the costs of this crisis.

By taking these measures, the ECB will not only protect the budgetary capacity of the Member States, but it will also directly support the EU Recovery Fund, since the debt securities issued by the European Commission will be logically eligible for the PEPP.

Thirdly, the ECB has freed itself from the straitjacket it put on during the Eurozone crisis, which dictated that a direct intervention from the bank (through the Outright Monetary Transactions programme) would require an assistance programme through the European Stability Mechanism. With the PEPP, the ECB has totally freed itself from its previous restraints in terms of conditioning financial assistance to toxic structural reforms, which lead to heated debates in Europe. Thanks to the PEPP, the ESM has largely become useless.

The bad news is that the PEPP is not really innovative. It operates just like previous QE programmes, by purchasing debt. The ECB has been doing this since 2015, and we have seen very limited effects on the real economy – the inflation rate has been anchored around one percent for six consecutive years!

Of course, this monetary policy supports member states with extremely low interest rates, but this does not guarantee that economic actors will take advantage of this to borrow more and then boost aggregate demand. The effect of the ECB policy is very indirect, and the ECB is not even trying to change this.

Hémisphère gauche:
In that context, why do you think additional measures are needed to complement the ECB’s current monetary policies?

Stanislas Jourdan:
The ECB is injecting increasing amounts of money in the economy, but always using the same old intellectual logic. This framework centres on the idea that the only way for ECB policy to influence the real economy is by affecting the rates on financial markets and by influencing investor expectations in the medium-term. This way of working relies way too much on the actions of the banks (and the companies and households who are willing to borrow!).

To compensate for the inability of the markets to transmit monetary policy to the real economy, the ECB is now calling for budgetary policy to take over. This change of rhetoric by the ECB seems quite spectacular given how much it used to alarm people about the sustainability of public debt, but in reality does little to hide the impotence of monetary policy tools.

Despite all good intentions, the budgetary response to Covid-19 is doomed to disappoint, as countries facing financial difficulties have to avoid spending money in order to maintain their credibility vis à vis financial markets. At the European level, the EU Recovery Fund is also doomed to be insufficient in size and timing.

Anyhow, the ECB still needs to find a way to fulfil its mandate, even though the current tools it is using have shown their limits. This is where helicopter money comes into play. The ECB’s capacity to inject liquidity directly into the real economy, without depending on financial intermediaries or on hypothetical budgetary action, is a prerequisite condition for the bank to independently achieve its inflation target.

Hémisphère gauche:
Can you explain the helicopter money concept in more detail?

Stanislas Jourdan:
Our proposal is deliberately less specific than what others have proposed. This is because Positive Money Europe wants to ensure the ECB is ready to deploy a form of helicopter money as soon as possible. Our priority is to build a political consensus around the concept of a direct payment made by the ECB to citizens, so the ECB has the political legitimacy to take action. Positive Money Europe’s recommendations solely aim to ensure the technical, legal and political feasibility of the concept.

Having said that, we put forward in a paper published in April the proposal of a €1,000-€2,000 cash transfer to all Eurozone residents. This amount is indicative – it is equivalent to about three percent of Eurozone GDP. The ECB should obviously commit to renew the payment as soon as it detects that inflation is too low and a risk of deflation is present, according to a rule to be defined in advance to anchor market expectations.

The money transfer could be made through commercial banks in coordination with Eurozone Members States. Another idea would be for the central bank to create a “digital euro” system, which would be more simple to technically implement in the long term.

In any case, the implementation of helicopter money must not be delayed because of discussions on the technical setup. To avoid this, a solution would be to oblige banks to offer an unconditional and free-of-charge bank overdraft to households, which would be compensated in a second phase by the actual payment of helicopter money itself. Obviously, only less wealthy citizens would need and use this overdraft, which would in effect make the transfer more beneficial for them.

In my opinion, the most thorny issue is the question of the eligibility criteria for beneficiaries. Who should receive the money? Everyone, equally? Or should it be targeted to low-income households? Under which threshold? And what should be the amount? Should it be the same for single people and parents with children? And should it be the same amount in all Eurozone countries?

In theory, it would be simpler and more legitimate to distribute the money in a perfectly universal way, almost like a basic income. But in practice, targeting the less well-off households (who are more likely to spend the money) would have a direct effect on the real economy.

These issues are very political and this is why central bankers keep arguing that helicopter money is a “fiscal measure” – to avoid entering this minefield. As former ECB Executive Board member Benoit Coeuré recently said, the introduction of helicopter money “implies writing a cheque to each household according to criteria that are a matter of political choice”.

But unlike Cœuré, I think there is a fairly simple solution to this problem. The European Parliament – to which the ECB is accountable – could define the eligibility criteria through the adoption of a motion for a resolution. Such a parliamentary process would greatly support the ECB, which would gladly follow the EP’s recommendations because it would serve as a democratic backing for the implementation of helicopter money. Positive Money Europe has been lobbying the European Parliament since 2015 to resolve this dilemma, by making MEPs take a position on this issue.

Hémisphère gauche: Will helicopter money enable the ECB to achieve its mandate objective? 

Stanislas Jourdan:

This is the primary and main goal of helicopter money! We can not give the ECB complete independence, and at the same time impose a very specific objective on it without equipping the bank with the tools to accomplish that objective. Without the possibility of resorting to helicopter money, we see the central bank becomes totally dependent on the markets, banks or on euro area Member States to provide fiscal stimulus. If helicopter money is not an option, there are not many other tools left in the toolkit.

Having said that, I would not be surprised if the inflationary effect of the helicopter money payments does not meet the expectations, given the structural phenomena of current under-inflation – notably due to technological deflation, the loss of trade union bargaining power, and globalisation. These issues have been systematically underestimated in the past by central bank forecast models. But this would not be a reason to avoid using helicopter money, but will be a problem of fine-tuning.

In that respect, the advantage of helicopter money is that it can be directly, transparently and immediately injected into the real economy. While a change of interest rates may take several months to affect wider society, helicopter payments would be immediate and their impact easier to anticipate and understand for consumers. Once helicopter money is deployed, its effects would also be easier to measure and adjust if necessary. Achieving the right monetary policy mix would be easier than it is when using current policies. 

Hémisphère gauche: How do you deal with the accounting problem of helicopter money, namely the mismatch between the ECB issuing money as liabilities and the lack of a corresponding asset on the ECB’s balance sheet?

SJ:
There is indeed a fear in some orthodox thinkers that a hypothetical ECB bankruptcy could lead to a loss of confidence in the ECB, which would lead to hyperinflation. But this is a very theoretical problem!

In practice, we know that central banks can operate with an impaired balance sheet – what economists call “negative equity”. I also think that the idea that citizens’ trust in the currency is determined by the quality of the central bank’s balance sheet is an unproven and untested hypothesis. I personally find it very unlikely that people would agree that the very institution that creates money would need a bailout. This is nonsense and many central bankers know it.

Nevertheless, to satisfy possibly stubborn ECB accountants, several solutions are possible to avoid a dead loss on the ECB’s balance sheet. The most promising solution would consist in recording a perpetual debt at zero interest rate on the assets side that will never be repaid.

Opponents will not hesitate to point out that according to its statutes, the ECB can only create money in return for “adequate collateral”. On this point, we need to remember that the notion of “adequacy” is very vague. In practice, this notion depends on the financial conditions of the economy. By continuously relaxing asset quality requirements in its collateral framework since 2008, the ECB has very clearly confirmed this. Undoubtedly, the introduction of helicopter money is also justified by an unprecedented deterioration in economic conditions.

Hémisphère gauche:
How does your proposal fit into the European legal framework?

SJ:
It is true that there is a legal vacuum, as the EU Treaties do not refer to a policy like this. But unless citizens are considered as part of the government’s balance sheet, the transfer of money to individuals does not constitute a government financing measure as defined in Article 123 of the Treaty on the Functioning of the European Union. On the contrary, helicopter money is a strong policy precisely because it circumvents government budgets in order to avoid “fiscal dominance”, which would undermine the objective of price stability and contradict the spirit of the Treaties.

Despite both repeated questions and legal uncertainty around the issue, the ECB has never ruled out the possibility of using helicopter money. For example, in a letter to MEP Jonas Fernandez, Mario Draghi wrote that the only legal constraint would be a “perception” of confusion between monetary and budgetary policy, but nothing more.

Hemisphère gauche:
How does your proposal fit into the political game being played within the Governing Council? There is a high risk that helicopter money will be blocked by countries such as Germany who favour conservative monetary policy due to fears of over inflation. The ghost of the 1920s is back. Do you think you can break these ideological barriers down?

SJ:
Beyond the technical issues highlighted above, there are two major deadlocks.

First, the helicopter money measure could be seen as a fiscal policy, which actually raises the question of the legitimacy of the central bank to make transfers of wealth. As I have already mentioned, we believe that a political validation by the European Parliament would solve this problem.

The second objection is the fear of a “slippery slope” towards fiscal dominance and the risk of the erosion of central bank independence, which could theoretically lead to hyperinflation. Opponents of helicopter money think that once we start implementing it, there will be no limit to popular and political pressure forcing the central bank to print money again. This vision is overly dismissive of the democratic institutions and existing safeguards designed to prevent this.

In the end, it all depends on how the measure will be designed and implemented. A deeper debate is necessary at this point.

Secondly, I think the opposition of monetary orthodox economists is irrational and self-defeating. They prefer to postpone radical ideas such as helicopter money to avoid breaking economic taboos, but by doing so are fuelling populism against an independent central bank. Without alternatives, the ECB is forced to go ever further into negative rates and asset purchases without achieving its inflation target. This will cause the ECB to hold very large portfolios of private and public debt for the coming decades – exactly what orthodox economists dislike. However, if we implement helicopter money now, we could consider a rise in rates and a gradual exit from quantitative easing.

Hémisphère Gauche: How does your proposal connect with budgetary policy? Do you fear the return of austerity policies like those implemented after the 2008 crisis?

SJ:
The threat of a return to austerity is real. As tensions between the Netherlands and southern European countries have shown, a whole section of the European political elite has failed to understand that the low interest rate policy is the consequence of a permanent regime of under-inflation linked to a clear lack of demand. In reality, the low interest rate policy is an opportunity to fund public expenditure and investment in the low-carbon transition at a reduced cost. But after several decades of propaganda about the risk of a public accounts crisis, it is not surprising that a large part of the population and politicians have not yet understood this. To avoid this danger, the ECB needs to be able to introduce helicopter money.

Hémisphère Gauche:
How does your proposal fit into the environmental transition?

SJ:
Alongside our campaign for helicopter money, Positive Money Europe has been campaigning since 2015 for the ECB to tackle climate change. In 2019, we achieved part of our goal when Christine Lagarde announced the launch of a review process of the ECB’s strategic framework, including climate issues. As part of this review, we propose that environmental factors be taken into account in all ECB tools, from the quantitative easing programme to TLTROs.

The environmental debate is quite distinct from the debate on helicopter money, because the objectives are different. The objective of helicopter money is to boost consumption in order to meet the ECB’s inflation target, while we have another debate on whether green monetary policy could steer investments towards sustainable activities. If we want to steer consumption towards certain greener goods and services, then a carbon price policy would be much more effective in influencing consumption habits.

Hémisphère gauche:
How can citizens get engaged to support your proposal? 

SJ:

The concept of helicopter money remains taboo in central bank circles, but also with many politicians. With Positive Money Europe, we are trying to overcome this obstacle by mobilising European citizens to apply pressure on their elected representatives. It is important for us to show that we are the voice of a growing number of citizens who understand these financial and technical issues, because they affect us all.

Central banks are not used to communicating to the general public. But things are changing since they realise that their legitimacy has been weakened by recent financial crises. Now they have to explain their policies to citizens. For instance, the ECB has launched a public consultation on its website. These communication initiatives are an opportunity for citizens to bring helicopter money into the debate. Citizen participation is essential to reach out to the general public and make policymakers pay attention to the benefits of helicopter money.

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