Monetary stimulus on board?

Photographer: Carl Court/AFP/Getty Images

ECB Should Fire Up Its Helicopters

Clive Crook is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was chief Washington commentator for the Financial Times, a correspondent and editor for the Economist and a senior editor at the Atlantic. He previously served as an official in the British finance ministry and the Government Economic Service.
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European Central Bank President Mario Draghi and his colleagues are ready to do whatever it takes to rescue Europe's economy from deflation. This must be true because they keep on saying it. They've been ready now for as long as anybody can remember -- yet inflation in Europe stays dangerously low and very little ever seems to happen.

Last week, a senior ECB official said the central bank will wait until the beginning of next year before deciding whether to start buying government debt -- that is, adopt quantitative easing in the style of the U.S. Federal Reserve. The ECB apparently still hopes that the small-bore measures it's announced so far (purchases of private bonds and asset-backed securities) will deliver enough stimulus. That's doubtful at best. Deflation in the euro area is a clear and present danger. More aggressive QE is needed, the sooner the better.

Two questions arise. Exactly what form should it take? And, relatedly, how can the program be steered around the political and legal obstacles in its way? Those obstacles are never plainly acknowledged, but they, rather than any consensus that Fed-style QE isn't needed, are what actually lie behind the ECB's perpetual dithering.

One of these obstacles -- the split on the ECB's policy-making council -- really ought to pose no difficulty. The members most trenchantly opposed to more forceful action are a small minority. They can simply be voted down. It's been done before: The vote to cut interest rates last September wasn't unanimous. In contrast, the whole council endorsed last month's vague promise to do something else, sometime, maybe.

There's a lesson in that: Draghi cares too much about getting the whole panel to agree -- or anyway say they agree. This effort to secure bogus unanimity inhibits the central bank's actions and clogs its announcements with ambiguity, defeating their whole purpose.

What about the legality of QE? A decision from the European Court of Justice on whether the ECB can buy sovereign debt is pending. However, that case's focus is the ECB's existing Outright Monetary Transactions program, which isn't QE proper. The ruling, when it comes, is unlikely to settle the matter. Draghi and those who agree that Fed-style QE is necessary would be well-advised to go ahead and do it, and deal with any legal challenges after the fact.

Once that decision is made, large-scale QE could be undertaken in different ways -- and some would be more immune to subsequent legal challenge than others.

Purchases of sovereign debt on the secondary market might pass muster more easily than buying debt directly from governments. (The latter would be more readily construed as "direct monetary financing" of governments, which may be illegal.) If the ECB said it was willing to buy securitized packages of public debt for QE purposes, it would create a market for an instrument that the euro area needs but currently lacks.

Another approach, which I've mentioned before, has been suggested by Harvard's Jeffrey Frankel: The ECB could buy large volumes of U.S. government debt, with the aim of driving down the euro. The currency has already dropped a lot this year, but it could stand to fall further. This could deliver a strong monetary stimulus -- and the method isn't expressly disallowed.

Yanis Varoufakis of the University of Athens has another idea. Let the European Investment Bank and the allied European Investment Fund embark on a large-scale program of investment in infrastructure and other projects. Cover the cost -- the whole cost, not the customary 50 percent -- by issuing bonds, and have the ECB buy the bonds. This could plausibly deliver 1 trillion euros of stimulus over two or three years. And, strictly speaking, it may not constitute direct monetary financing of governments, even though it's direct monetary financing of public spending.

A further benefit of this approach to QE is that it provides stimulus by directly inducing spending, rather than through moving long-term interest rates. In Europe, the capital market plays a smaller role in financing investment than it does in the U.S., so the long-term interest-rate channel is less effective. Spurring spending directly is likely to work better.

Taking that logic one step further, you have so-called helicopter money -- named after Milton Friedman's example of executing monetary stimulus by dropping cash from helicopters. Classically, in practical terms, this would again take the form of direct monetary financing: Governments cut taxes or increase their spending, and the ECB pays for it by printing money. That is presumably verboten. But Oxford University's John Muellbauer suggests an interesting variant. What's to stop the ECB from simply mailing out checks?

QE for the people, he calls it:

Of the roughly 275 million adults with social-security numbers in the eurozone, some 90 percent are on the electoral register. Extrapolating from America’s experience in 2001, when a $300 per person social-security rebate boosted spending by about 25 percent of the total amount distributed, a €500 ($640) check from the ECB could increase spending by about €34 billion, or 1.4% of GDP. The extra tax revenue that such a rebate would produce would reduce government deficits significantly.

Beyond lifting the eurozone economy out of deflation, such an initiative would have massive political benefits, as it would reduce resentment toward European institutions, especially in struggling countries like Greece and Portugal, where an extra €500 would have a particularly strong impact on spending. In this way, the ECB could prove to disgruntled citizens and investors that it is serious about meeting its inflation target, and even help to stem the rise of nationalist parties.

Nobody is saying that this would be uncontroversial. Jens Weidmann, the Bundesbank's representative on the ECB governing council, would probably have a stroke. On the face of it, though, this approach would be legal. It would make Milton Friedman proud. Best of all, it's a good idea. Fire up the helicopters!

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Clive Crook at ccrook5@bloomberg.net

To contact the editor on this story:
James Gibney at jgibney5@bloomberg.net