MONETARY POLICY VIEWED FROM ABOVE: HELICOPTER MONEY AS THE NEXT BAZOOKA?
The need for exploring policy options. Given that a renewed recession would be very costly, Jean Pisani-Ferry (Project Syndicate) looks at the option available to the ECB to act further, including helicopter money to boost both domestic demand and the price level. He writes that it would be functionally equivalent to a direct government transfer to households, financed by central banks’ permanent issuance of money—would an explicitly fiscal option be a better choice, for example through a beefed-up Juncker plan and regional borrowing. All options are politically difficult, but worth examining.
Going beyond recent unconventional measures (including quantitative easing and credit easing, forward guidance) is in the current debate, and Nouriel Roubini (Project Syndicate) sees three potential components: (i) taxing cash to prevent banks from attempting to avoid the negative-rate tax on excess reserves, (ii) a “helicopter drop” of money or direct monetary financing by central banks of larger fiscal deficits, and (iii) broadening credit easing by central banks, or purchases of private assets.
Helicopter money enters the discussion. MainlyMacro notes that helicopter money is another way of doing textbook demand management, by moving around current institutional boundaries according to institutional and political constraints. Nordea calculates that the ECB could provide €1,300 in helicopter money to each individual euro zone citizen.
A policy criticized by many, notably German (for example, Jens Weidmann, Otmar Issing, Holger Steltzner, quoted by EuroIntelligence adding to what Wolfgang Munchau refers to Germany's alienation from the ECB (EuroIntelligence). Hans-Werner Sinn (opinion piece in FAZ) writes that the ECB already provided helicopter money in form of its bond buying program, with no success and high potential side effects, and yet causes asset bubbles, notably in Germany (see his other Project Syndicate article). Satyajit Das (EconoMonitor) warms that in addition to problems of ineffectiveness and toxic side effects, exit from non conventional policies will be very difficult—reversing expansionary fiscal policies and ZIRP and QE policies. Satyajit Das (EconoMonitor) adds that the low rates, mispricing of risk and excessive debt levels that were the causes of the crisis are now considered the ‘solution’. The ECB itself quells the 'helicopter money' debate, from Mario Draghi (in Lisbon and March press conference), Vitor Constancio (EP hearing) to Peter Praet (event) and Benoit Coeure (FAZ). The latter argues that it blurs the line between monetary and fiscal policies, and requires shared risk taking of governments.
Germany’s nervousness on monetary policy. Erik Nielsen (UniCredit) summarizes German criticism of ECB policies, in roughly four areas: (i) very low interest rates hurt savers, and Germans get hurt disproportionately (but that is the purpose of easy monetary policy), (ii) worry that ECB policies delay much needed policy reforms in the periphery (but quid of central bank independence?), (iii) easy monetary policy fuels bubbles (but data is actually mixed), and (iv) QE is quasi-fiscal with the risk of hidden transfers (but governments are not stepping up to their tasks).
Wolfgang Schäuble seeks a coordinated global effort for higher interest rates (FAZ), i.e., a careful exit from cheap money, and sharply criticized the ECB’s monetary policy. In a joint article in FAZ, leading German economists, including Marcel Fratzscher, Christian Odendahl and Guntram Wolff, criticize the strong German opposition to the ECB’s monetary policy, arguing that the central bank would violate its mandate and lose its credibility if it did not use all instruments to reach its inflation target—they point to two main mistakes Germans make: overlooking the consequences of inaction and offering no constructive alternatives.
The missing fiscal policy complement. The ECB is expanding its toolbox and has more to do but Biagio Bossone and Stefano Sylos Labin (EconoMonitor) recall that monetary policy alone can hardly be up to the task and that fiscal policy must be supportive. Narayana Kocherlakota writes that it is preferable for governments to raise fiscal spending than for the central bank to do a money drop, though in Europe, governments cannot or will not act. He argues that, technically, it makes no difference whether governments issue debt, or whether the central bank creates helicopter money.
Agnès Bénassy-Quéré and Guntram Wolff (Bruegel) stress the importance of a proper fiscal union to stabilize the economy and inflation and see four main avenues: (i) a new European Stability Mechanism (ESM) to reduce unsustainable public debt burdens with a soft restructuring in case of trouble, and breaking the negative feedback loop between banks and governments, (ii) in exceptional times, governments must coordinate national fiscal policies to achieve a euro-area wide fiscal stance, (iii) national fiscal policies need to be more stabilizing and more sustainable, and (iv) the euro area needs to build an additional (non-political) risk-sharing mechanism for large shocks. The creation of a European unemployment re-insurance model would complement existing risk-sharing structures.
The Short View… Greece Negotiations still on the Table—Tensions between the IMF and Greece, after a wikileaks (transcript, well reported by The Independent) that appeared to suggest the Fund wanted to push Greece into default, were reflected in Christine Lagarde’s letter to Alexis Tsipras (DW). According to EuroIntelligence, the IMF is making the case for Greece by looking for how to get a lower deficit target and debt relief. Allianz’s Mohamed El-Erian also weighed in the debate on debt forgiveness.
The Short View (2)… Moving towards Maastricht 2.0—The German Council of Economic Experts (VoxEU) look at what needs to be done for moving the Eurozone towards ‘Maastricht 2.0’, after progress in recent years—on all three pillars (financial regulation, the crisis mechanism, and the fiscal framework): a further strengthening of the resolution mechanism, a removal of regulatory privileges for sovereign debt, the introduction of an insolvency mechanism for sovereigns and an enforcement of existing fiscal rules, accompanied by further structural reforms at the national level.
