It’s a concept that conjures up images of European Central Bank chief Mario Draghi donning his flying suit, starting his helicopter and flying out over the Eurozone to throw money to the crowds below.
In the question-and-answer session of his traditional post-meeting press conference last week, Draghi was asked whether “helicopter money” was part of the ECB’s toolbox in its long — and so far largely ineffectual — fight against the spectre of deflation in the euro area.
But the Italian central banker replied that the ECB had not “really thought or talked about helicopter money” at this stage.
“We haven’t really studied [it] yet,” he said, but added: “It’s a very interesting concept that is now being discussed by academic economists and in various environments.”
“Helicopter money” was originally posited by US economist Milton Friedman in 1969 when he suggested in a thought game that a helicopter fly over a community and drop bills from the sky in the hope that by putting more money directly into consumers’ pockets, they would scurry to the shops to spend their windfalls.
The ensuing surge in demand would revitalise the economy and avert the threat of deflation by persuading retailers to raise their prices, Friedman argued.
It is a concept that has never been tried out in real life by any major central bank.
But with growing concern that quantitative easing and zero or even negative interest rates have lost their power to kick-start the economy, it is clear that Draghi, however terse his remarks were, is not dismissing the idea entirely out of hand.
It would “clearly involve complexities, both accounting-wise and legal-wise, for our view,” he said, but conceded it could “mean many different things, and so we have to see.”
“Helicopter money is currently the object of intense reflection in academic and central bank circles,” said Marcel Fratzcher, head of the German DIW economic think tank.
But “it would really be an instrument of last resort, if nothing else worked,” he said.
Over the past two years, the ECB has pulled out all the stops to prevent the single currency area from slipping into deflation — a dangerous downward spiral of falling prices.
It has slashed interest rates to zero and lower, pumped unprecedented amounts of liquidity into the financial system, made an unlimited amount of cheap loans available to banks, and bought up massive quantities of bonds via its quantitative easing (QE) programme.
The idea is to kick-start lending — the financial lubricant that keeps the economy up and running smoothly — and by extension boost growth and recovery.
But for all the ECB’s efforts, Eurozone inflation is still a long way short of the level of “close to but just below 2.0 per cent” that the central bank believes is conducive to healthy economic growth.
In fact, falling oil prices pushed Eurozone inflation back into negative territory in February.
Lending is still sluggish and the hundreds of billions the ECB has pumped into the system are still not reaching households and businesses.
A campaign coalition calling itself “QE for People” has calculated that if the amount pumped into the economy so far were shared out among all the citizens of the Eurozone, it would amount to 175 euros per month for everyone.
But helicopter money need not take the form of airdropping cash.
It could also be implemented by cutting taxes or health care payments, all financed by money printed by the ECB.
Michael Malquarti, economist at Swiss bank SYZ, has argued for years that the Swiss National Bank should pay money directly to citizens via the country’s health care system.
“I’d like to see Switzerland be a pioneer in this area. That could break down a psychological barrier,” he said.
But implementing such financial relief in an area as big as the 19 countries that share the euro would encounter a number of technical and ethical hurdles, not to mention legal ones.
Under the ECB’s own statutes, it is expressly forbidden from financing governments, even if there appears to be nothing to stop it from handing cash out to citizens.
“Until now, in order to have money, you have to earn it. If the ECB started handing out money for nothing, that would turn economic thinking on its head and even jeopardise the market economy,” said Commerzbank economist Joerg Kraemer.
Nevertheless, “if everything else fails, the discussion about helicopter money will move up to the next level,” said a fellow Commerzbank economist, Christophe Rieger.
Jonathan Loynes of Capital Economics said that “the lesson of the past few years is that policies previously considered to be unimaginable can become reality”.