The head of the French central bank has floated the idea of printing money and giving it directly to companies, saying such measures could be conceivable if needed to combat severe deflation as eurozone policymakers seek to tackle the economic impact of coronavirus.
François Villeroy de Galhau, who is also a member of the European Central Bank’s governing council, said in a speech on Wednesday that if there was “a major risk to price stability” then it would be possible to consider that a “central bank would create money on a lasting basis to finance businesses directly” — a tactic that has been dubbed ‘helicopter money’.
While the ECB has massively increased its purchases of both sovereign and corporate bonds in response to the coronavirus crisis, it has shied away from discussing the possibility of “helicopter drops” that hand central bank money directly to businesses or individuals. The idea is likely to meet resistance from more conservative members of the ECB governing council, such as Germany’s Bundesbank boss Jens Weidmann, who have previously complained that it blurs the line between monetary and fiscal policy.
Some governments have launched schemes to distribute money directly to citizens to cushion the impact of the coronavirus crisis, including those in the US and Hong Kong, but so far no major central banks have followed their lead.
Mr Villeroy said the recent fall in inflation — which recently dropped to 0.7 per cent in the eurozone, far below the ECB’s target of close to 2 per cent — was “fuelling some much more speculative and complex thinking on post-crisis monetary policy”.
“If monetary financing of public authorities is prohibited by the European treaties, it would, for example, be possible, according to these theories, to imagine that the central bank would create money on a lasting basis to finance businesses directly,” he said. “In principle, nothing is ruled out in an intellectual debate. However, only a major risk to price stability from the bottom up could lead to such decisions being considered.”
Mr Villeroy’s move came after the ECB provided much of the eurozone’s initial response to the economic downturn by launching a €750bn bond-buying programme, while EU politicians are still bickering on what joint action to take.
Some economists are calling on the ECB to launch a programme of helicopter money, arguing that central banks should directly fund government deficits which are expected to expand rapidly because of the extra spending needed to mitigate the impact of the economic slowdown.
Gilles Moec, chief economist at French insurer Axa, said: “I think allowing central banks to ‘vacuum out’ the emergency loans granted to SMEs and de facto extinguish them . . . would be an elegant solution since it would circumvent the prohibition of monetary funding of governments.”
However other economists fear the ECB is running short of options for further action, having already slashed interest rates deep into negative territory, promised a “no limits” asset purchase programme and injected vast amounts of cheap funds into the banking system.
“Now we are in a situation there is not much more the ECB can do, beyond a potential deflationary scenario,” said Frederik Ducrozet, strategist at Pictet Wealth Management. “But even then I think it is more likely they will do more with their existing tools [than launch further policies such as direct payments to individuals].”
