• Lack of explicit prohibition could make cash drops feasible
  • EU law an obstacle to government financing, research shows

The European Central Bank may have the freedom to pursue the most extreme forms of monetary financing should the economic situation warrant, Deutsche Bank AG said.

“The ECB at face value faces the strictest legal obstacle to monetary financing, not least due to the historical inflation traumas experienced by member states,” analysts including London-based George Saravelos said in a research paper published Thursday, citing Article 123 of the European Union’s governing treaty. “These restrictions notwithstanding, the treaties leave considerable more leeway than first meets the eye.”

So-called helicopter money involves using a central bank’s power to create money to directly inject funds either into government coffers or straight into the pockets of the public -- a radical step rebuffed by ECB officials as even a remote policy choice. Still, with central banks globally facing diminishing returns on their existing instruments, a debate about monetary financing is now flourishing.

Article 123 forbids the ECB from giving governments or public bodies overdraft accounts or from purchasing sovereign debt on the primary market. The ECB’s 2012 Outright Monetary Transactions program, credited with helping stem the sovereign debt crisis through a promise to buy unlimited quantities of government bonds on the secondary market if needed, was seen by Germany’s Bundesbank as being perilously close to contravening the spirit of Article 123.

Legal Avenues

ECB President Mario Draghi said in March that helicopter money is a “very interesting concept” which deserves some research. The central bank’s chief economist, Executive Board member Peter Praet, said this month that it isn’t an idea that’s on the table for discussion now in any form.

Even so, Deutsche Bank sees some legal avenues that could one day be explored.

“Article 20 of the ECB statute gives wide-ranging leeway for the central bank to decide on ‘such other operational methods of monetary control as it sees fit’ subject to Article 123,” the report’s authors argue. “A view can be taken that the monetary policy prohibition does not cover pure monetary stimulus taking the form of ‘helicopter drops’ directly to households and corporates bypassing governments. ”

Other, less-extreme, forms of monetary financing, such as buying perpetual government bonds or agreeing to write down the value of assets already on the central-bank balance sheet, may pose greater obstacles because they would be more obviously covered by the treaty’s prohibition, the authors write.

“The ECB somewhat ironically has greater potential to pursue the most unconventional forms of ‘helicopter drops’ in the form of direct transfers to households,” the report says. “The more conservative options of transfer to governments or unilateral restructuring appear more restricted.”

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