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Helicopter money could be both the best and worst options for the European Central Bank if the euro-area slowdown morphed into a recession, according to a Peterson Institute paper.
With monetary and fiscal policy limited -- the former by a depleted toolbox, the latter by budget rules -- handing out cash to the public could be an appealing alternative measure to combat a downturn, former IMF chief economist Olivier Blanchard wrote in the paper with Jean Pisani-Ferry.
However, such a dramatic step is fraught with hurdles, as well as major risks, including compromising the ECB’s independence.
It would require the blessing of the bloc’s member states, including typical naysayers like Germany, and would also face hurdles, such as whether payments should be equal across the 19-country region or weighted by economic might. Such decisions on how to distribute funds would put the central bank in a very difficult position.
“In a way, helicopter money can be seen as a replacement for the still missing common fiscal capacity,” Blanchard and Pisani-Ferry said. “Its implementation, however, would raise operational, legal, and political challenges.”
The idea of throwing money to households reemerged earlier this year amid signs the European economy was heading into a major slump. Former Federal Reserve Vice-Chairman Stanley Fischer and ex-Swiss central bank chief Philipp Hildebrand made the case in a paper over the summer, arguing that other levers wouldn’t be enough.
While there’s no case for helicopter money in the euro area just yet, one “scary” scenario outlined by Blanchard is a serious recession coupled with limits on fiscal expenditure, prompting the ECB to take action on its own. But nothing is simple and even this dramatic case could have other side-effects.
“If this very unlikely scenario were to occur, then there may be a silver lining,” they said. “It might spur the members of the euro area to either change the fiscal rules or build a central fiscal capacity.”
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