With the ECB failing to meet its inflation target, and a serious possibility that another slowdown may make deflation an even greater risk, it is worrying and disappointing that Draghi is so evasive on the question of helicopter money.
Last month, ECB President Mario Draghi raised eyebrows when he declared that helicopter money was a “very interesting concept”. German Member of European Parliament Fabio de Masi submitted a written question, seeking clarity on the Bank’s position.
Draghi’s response, which was published yesterday, is less than enlightening.
With the outlook for the eurozone economy looking increasingly uncertain, and interest rates already at record-low levels, it’s a matter of urgency that the Bank considers what alternative monetary policy tools it might deploy in the event of another crisis. Faced with this question, many analysts are concluding that Helicopter Money presents the best available option.
To this end, MEP Fabio de Masi asked the Governor three very specific questions:
Is the ECB considering unconventional policy measures, such as ‘helicopter money’ or a citizens’ dividend, i.e. where the ECB would directly pay money to residents of eurozone Member States to stimulate private demand?
Are such measures in accordance with the ECB’s mandate (regardless of whether or not they are currently being considered)?
Would such measures provide a sufficient economic boost to push inflation rates towards the ECB’s target?
In Draghi’s page-long response, only a short paragraph addresses the question at hand:
Helicopter money means different things to different people, but all these schemes are fraught with complexities from accounting, operational, and legal perspectives, especially as regards compatibility with Article 123 of the Treaty on the Functioning of the European Union.
Draghi devotes the rest of the letter to defending the monetary policy measures adopted by the ECB since mid-2014. But he confesses that these measures would not bring inflation back to 2% before the end of 2018. In other words, the European Central Bank is satisfied by a policy which will not fulfill its mandate for another 2 years.
With the ECB failing to meet its inflation target, and a serious possibility that another slowdown may make deflation an even greater risk, it is worrying that Draghi is so evasive on the question of helicopter money.
Helicopter money still an option
But despite the vagueness of the letter, it’s significant that Draghi doesn’t rule out using bolder options such as a form of helicopter money in the future. The letter insists that the ECB is “willing and able to act by using all the instruments available within its mandate in order to maintain an appropriate degree of monetary accommodation.” and it does not say the current ‘complexities’ would ultimately prevent the ECB from using helicopter money.
We hope the ECB is truly sincere when it says that it will do ‘whatever it takes’ to achieve its mandate and save the euro. If that is so, all options should be carefully studied and contingency plans should be prepared in case the European Central Bank needs to resort to them very quickly.
Picture CC European Parliament