So, everybody and their grandmas are discussing something so absurdly wacko, that just a few years earlier, even mentioning it could very well cost you your professional reputation. But in times of QE and negative rates, the perception of “throwing money off a helicopter” is relatively less crazy. In absolute terms of course, it is still nuts.
There are different concepts of helicopter money (HM), depending on the recipient. If it is the governments, we call this monetary state financing and this is forbidden by the statutes of the ECB – and by common sense as well, given the historic experiences. No matter, how fancy a term you use for this kind of HM, it just is printing money to finance deficits. Ask Argentina or Venezuela how this worked out.
Then there is the option to give the money directly to firms. While this should be technically allowed, I think this is utterly useless. Money is not scarce, but given the dire profit prospects, firms are reluctant to invest. Hence the effect of giving freshly printed money to firms would not have that much of an effect. German firms are in no need of windfall financing, but maybe Italian and Spanish firms are. But even if they were to make good use of the windfall, why should this compel anyone into buying their goods, when people still don’t have jobs or only low-paying ones?
Then, why not give it to the citizens directly? Let’s see, we are roughly 337 million people in the euro area. If the ECB were to decide to have a helicopter stimulus of the size of one month’s worth of QE, i.e. €80b, then this would amount to about €237 per person. Even if we leave aside the redistributional aspects due to different purchasing powers across the euro area, the additional demand would be probably much less than €80b, since people save and – more crucially – may not buy Europe-made products, but maybe Korean smartphones, Japanese cameras and the like. When we assume that some of the money is spent on city trips within Europe, then again it will only benefit the service industries in big cities, but not the industrial backbone. And, as a final note, this is then a one-off benefit, that does not solve the structural problems altogether, e.g. inadequate pension system in Germany, high labour costs in France and Spain, non-performing loans in Italy, governmental dysfunction in Greece, and so on.
There is only one way to deal with Europe’s plight, and that is fiscal policy. Governments must work to rid their countries of the structural problems. Only then confidence, investments, profits, jobs and recovery will follow. Too little money is not our problem, too little confidence in the economic prospects is. And frankly I doubt that resorting to desperate measures like HM will do confidence any good.
Update, March 24, 2016, 11:12 am:
This Tweet just fits too perfectly.
Too much pessimism on GenY in developed world. Can’t fix this w QE, NIRP or helicopter money. Need new state of mind pic.twitter.com/fCOAdylZmJ
— Yannis Koutsomitis (@YanniKouts) March 24, 2016