Europe needs helicopter money to cope with the severe upcoming recession while avoiding a massive unsustainable debt burden. As soon as the economic recovery phase starts, the ECB should boost consumption in a fair way by sending money directly to all citizens.
The coronavirus crisis only unfolded in Europe a few weeks ago, but its effects on the economy are already certain to lead to a major global recession. The lockdowns imposed on citizens have caused dramatic reductions in household consumption and dramatically decreased the production of goods and services.
Governments and European institutions should implement measures so that this temporary health crisis does not turn into a long-lasting recession which would result in millions becoming unemployed and make the poorest amongst us even poorer.
Against this backdrop, the idea of “helicopter money” is once again making headlines, with even the White House floating the idea of sending checks to all American households.
Helicopter Money is a policy under which the central bank would create new money and send it directly to the public. It is a gift, rather than a loan that has to be paid back later. Positive Money Europe has been campaigning for the ECB to implement Helicopter Money since 2015 – or as we termed it “QE for People”.
How could Helicopter Money help fight the recession?
The first obvious advantage of helicopter money is that it puts money directly where it is most needed and where it would be easily spent from: people’s pockets.
How much would this boost the economy?
With our proposed amount of 1000 euros per citizen, the total cost of this helicopter drop across the Eurozone would be 340 billion euro. While difficult to forecast exactly, under current conditions, we’d expect this kind of drop to boost the GDP by at least 1.2%, due to increased consumption. In fact, people’s propensity to consume might be even higher after a few weeks or even months of confinement, since they have had to refrain from usual levels of consumption.
Secondly, as Adair Turner pointed out, Helicopter Money “would provide strong stimulus without increasing the public debt burden.” This is extremely important: as we highlighted in our previous blog, because financially vulnerable countries, such as Italy, fear that, despite the flexibility granted, a measure like this would increase its already enormous debt.
In fact, Helicopter Money may even reduce private debt, since vulnerable households could use it to pay off debts, bills, rent or mortgages arrears that they have accrued because of the containment measures and subsequent temporary losses in salaries and incomes.
Helicopter money does, however, break a big taboo for orthodox economists who have been debating for years how this new money would be accounted for in the central bank’s balance sheet. Would helicopter money incur a financial loss for the ECB? No. In fact, the proposed amount would still be below the amount of the Eurosystem’s consolidated loss absorption capacity. So, even if it did cause a loss, it wouldn’t prevent the central bank from fully operating.
The impact of coronavirus has revealed stark inequalities in the way that citizens are protected when they suddenly lose their income. For example, freelancers, artists, and small business owners are less protected by unemployment schemes and the newly established state guarantees for companies.
Whilst helicopter money shouldn’t be regarded as a permanent social policy (unlike basic income), it would nonetheless contribute to filling the gaps in targeted income-support and social policies that are being put in place by national governments right now.
Timing is key: when is the best moment?
Choosing the right moment to act is vital to get the most out of this policy. Transferring millions of euros to citizens through helicopter money at this moment would send a contradictory message to current health warnings, as people are currently advised not to go out, and so would be unable to spend it. Some argue that consumers could still shop online, but then the policy would mainly benefit the big tech companies, to the expense of their already overstretched army of precarious workers.
So does this mean the ECB should just sit and wait?
Given the above, we recommend waiting and activating helicopter money at a later stage once the medical crisis has been overcome, and when authorities can begin taking measures to kickstart a speedy – and green – recovery.
(But of course, the ECB should not sit and wait. They have lots of work to do to prepare the Helicopter Money program and make it work when the time has come, so they can use the time between now and then to prepare it.)
Waiting until after the immediate crisis to activate helicopter money, would mean it would boost demand at a key moment when governments will likely start phasing out their temporary subsidies and other moratoriums on bills and mortgages payments. It would then enable people to pay back their bill arrears and other payments which governments have rightly suspended during the heat of the Coronavirus crisis.
The impact of helicopter money could be further increased by pre-announcing the measure, in order to create a confidence effect on businesses and markets. For example, if the ECB pre-announced that lump sum transfers would be made at a certain point in the future, this would encourage businesses to increase their productive capacity (or at least not lay off employees) in anticipation of a foreseeable boost in consumption. In any case, vulnerable people wouldn’t be left out as we also suggest the provision of a bank overdraft for the time in between the ECB’s announcement of the scheme is made, and time the actual payment arrives.
The ECB’s prompt intervention to combat the shock on speculation markets caused by Covid-19 was a sensible short-term measure, however, it now needs to start taking a long-term approach. Helicopter Money is exactly what we need in the long-term to give the right boost to the eurozone economy when this health crisis is over.
Not acting now would dramatically worsen the recession we’ve already been thrown into, and may result in an economic crisis the likes of which Europe has not experienced since 2008.