Central Banks

Europe could opt for 'helicopter money' as the coronavirus destroys economic growth, experts predict

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Key Points
  • The term, coined by 20th century economist Milton Friedman, refers to an unconventional monetary policy, where a central bank prints additional money and distributes it directly to its citizens.
  • European nations have been some of the hardest hit by Covid-19, with the International Monetary Fund projecting a GDP contraction of 7.5% for the euro area this year. 
European Central Bank (ECB) President Christine Lagarde addresses a news conference on the outcome of the meeting of the Governing Council in Frankfurt, Germany, January 23, 2020.
Ralph Orlowski | Reuters

It has never been implemented in the euro zone, but ultimately the European Central Bank (ECB) could reach a point where so-called "helicopter money" is its best option amid the coronavirus crisis, two analysts told CNBC.

The term, coined by 20th century economist Milton Friedman, refers to an unconventional monetary policy, where a central bank prints additional money and distributes it directly to its citizens. The idea — which evokes the image of money being thrown out of a helicopter to the people below — is to boost consumer spending, and thus an economic recovery, during a recession. However, there are a range of ideas as to how central bankers could go about this.

European nations have been some of the hardest hit by Covid-19, with the International Monetary Fund projecting a GDP contraction of 7.5% for the euro area this year. 

The ECB has taken different steps to alleviate some of this impact, including pledging to buy 750 billion euros ($815 billion) in sovereign bonds this year. However, data released earlier this week showed that the ECB's pandemic program could expire by October if the central bank keeps buying sovereign bonds at the current pace.

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What is helicopter money?

Experts told CNBC that helicopter money raises concerns over central bank independence, foreign investment (as it will devalue the currency), and it is unclear how people would use the extra cash. However, they have also said that if the ECB struggles to ensure price stability — its core mandate — then it's a "valid" option.

John Wraith, head of U.K. rates strategy at UBS, told CNBC Tuesday that if the ECB continues to buy sovereign bonds for another six to 12 months with little results, "what are we going to do? We might have to try helicopter money."

Dario Perkins, managing director at global macro research firm TS Lombard, also said that helicopter money could be an option. "There is no need for the ECB to do it now," he said, but added: "Can you think of another crisis as big as this one?"

The ECB has so far avoided looking at helicopter money as a real possibility. In a letter, signed by ECB President Christine Lagarde Wednesday, the bank said "the Governing Council has never discussed the issue of helicopter money. Hence, the ECB has not adopted a formal position on the matter."

"When the ECB says they never discussed it, it probably means that they did," Frederik Ducrozet, strategist at Pictet Wealth Management, told CNBC Wednesday.

The overarching question though is how to potentially provide helicopter money. "You can be creative with these things," Perkins, from TS Lombard, told CNBC.

How to do it?

The French central bank governor, François Villeroy de Galhau, suggested earlier this month that if there was a "major risk to price stability" then a central bank could opt for helicopter money for corporates, supporting businesses directly, rather than citizens.

Some analysts have also proposed that the ECB could have negative rates on its long-term funding to banks via its TLROs program (targeted longer-term refinancing operations). This would mean that the central bank would be paying commercial lenders to get new capital, which in turn should allow citizens and businesses to get credit with more favorable conditions.

"One can think of extreme examples of this, including a 10-year TLTRO at -1% with money offered to banks under the condition that they grant 0% loans to their customers," Ducrozet, from Pictet Wealth Management, said. 

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This option could boost economic growth and overcome some of the criticism around the original helicopter drop concept. Even though citizens would have to eventually repay their loans (though with no additional interest), it would allow the central bank to overcome concerns over its independence. This is because commercial lenders would follow the rules to provide credit, rather than having governments telling central bankers who should get the money and how much.

Despite its challenges, some nations have adopted Friedman's idea. 

Hong Kong decided in February to give its permanent residents a cash handout of about $1,200. This is meant to support the economy in the aftermath of the pandemic, as well as after the many protests of 2019. Macau and Singapore, and the United States, have also announced similar schemes. 

"For anyone considering helicopter money what is reassuring is that we are all in the same boat," Wraith from UBS said. He added: "You're less likely to see dire consequences (from helicopter money) if everyone is doing it."