Legal helicopter drops in the Eurozone

Helicopter drops in the Eurozone may be a legal obligation of the European Central Bank (ECB).

The laws governing the ECB are extremely clear, and repeat three features which policy must comply with:

1. The overriding objective of the ECB is price stability, which has been defined by the ECB, under the intellectual guidance of the German economist, Otmar Issing, as ‘below but close to 2%’.

2. The ECB must act independently.

3. Policies aimed at financing the budgetary policies of governments are prohibited.

Subject to 1-3 the ECB can use whatever monetary operations it “sees fit” (see article 20).

It is immediately clear that the policies suggested by Adair Turner are illegal. As would be any permanent commitments, whatever “permanent” means in this context.

Properly defined helicopter drops, however, are not a problem. Here’s the European version:

The ECB announces a TLTRO programme, where it provides perpetual, zero coupon loans to banks. Banks, in turn, must extend these loans on the same terms to any EZ citizen who applies for a loan up to a specified maximum per adult, say €600. The banks administering the program would be paid an admin fee, say 10bps. Banks could provide the loan in the form of a deposit at their bank, a cheque, or in physical cash.

At zero interest rates, this process has no net impact on the ECB’s balance sheet. Accounting ‘liabilities’ – ie bank reserves – rise by the same amount as assets – perpetual loans. Net income is unaffected. With negative interest rates on reserves, the net income of the ECB in fact rises, although this may change in future.

This process is clearly legal under EZ law. It would be done with the sole objective of meeting price stability. It preserves ECB independence, there is no involvement of governments, national treasuries, taxation or government spending.

This method of implementing helicopter drops in Europe has the further advantage that it is the extension of an existing programme (TLTROs), and puts the burden of administration on an existing, relatively efficient, infrastructure – the banks.

Now, why might this be a legal obligation of the ECB? If it provides the highest probability that they will meet their mandate of price stability.

About The Author

Eric Lonergan is a macro hedge fund manager, economist, and writer. His most recent book is Supercharge Me, co-authored with Corinne Sawers. He is also author of the international bestseller, Angrynomics, co-written with Mark Blyth, and published by Agenda. It was listed on the Financial Times must reads for Summer 2020. Prior to Angrynomics, he has written Money (2nd ed) published by Routledge. He has written for Foreign AffairsThe Financial Times, and The Economist. He also advises governments and policymakers. He first advocated expanding the tools of central banks to including cash transfers to households in the Financial Times in 2002. In December 2008, he advocated the policy as the most efficient way out of recession post-financial crisis, contributing to a growing debate over the need for ‘helicopter money’.

16 Responses

    • Robert Searle

      Re Transfinancial Economics

      The idea of a QE for the people is an excellent one, but it is only the beginning. The greatest revolution in economics will probably come about via a New Paradigm known as Transfinancial Economics, or TFE. It can be seen as a form of Cybernetic Economics, but one which would work within the present Capitalist System.

      Anyway, TFE involves the electronic creation of new money which could be gradually phased into the economy without serious inflation, or hyperinflation. In Advanced Stage TFE, changes in the Free Market Price could be monitored, and controlled in ways that would not damage businesses. Such controls are similar to the “old” price controls but they are infinitely more advanced, and super-flexible….

      TFE is a huge subject, and could even be key to the survival of the human race itself if it is successfully phased into the world.

      Ref link

  1. JKH

    ” although this may change in future ”

    I’m afraid that is the problem.

    That is a contingent, marginal, fiscal expense in the future.

    It is better for the monetary authority to present a strategy to manage that risk directly – rather than deny or hide the fact that the risk exists – however benign that risk is judged to be. It is certainly manageable. But that is the problem with central banking everywhere – a failure to manage risk reasonably in the context of an obvious asymmetry in the inflation threat.

    • Eric Lonergan

      JKH – the contingent liability associated with balance sheet losses of the central bank always exists. There is nothing special regarding helicopter drops – buying bonds under a QE programme at negative rates, for example, might prove more costly. Also, the central bank can easily “reverse” this by raising required reserves and charging banks for holding them.

      • Marco Saba

        As fiat money is a net wealth (Buiter, 2015), maybe the best for a democracy is to have the banks record money creation as an asset with a corresponding liability to the Treasury labelled “seigniorage due for the exercise of the sovereign right of money issuance”…

  2. KA

    All central banks can only lend against collateral. Thus the proposed scheme would be an exchange of private-sector interest-bearing assets against a zero-interest loan. This is not helicopter money and I don’t see how it differs from QE.

    • Eric Lonergan

      Thanks for the comment Katrin. There is no need for colateral if a loan is perpetual at zero interest, because there is no credit risk. This is different V different to QE: under QE the central bank buys interest-bearing assets from the private sector and funds this with banks reserves on which it is paying lower, or negative, rates of interest. Helicopter drops from the ECB give households money to spend and create a technical liability, but one which bears no interest and requires no repayment. In practical terms, QE does not raise the net assets of the private sector, but helicopter drops do.

      • Eric Lonergan

        I would just add that I think it is technically debateable whether or not interest-free perpetual loans are assets of the central bank. Conventional accounting might treat them as such – personally I think it probably depends on the equilibrium IOR. However, households would be unlikely to perceive them as liabilities, because they have no repayment commitments. So from the household’s perspective they are receiving an asset – a bank deposit/check/cash – but have no corresponding liability. Therefore household net assets rise. By constrast, with QE, household net assets are unchanged. I do not know how the ECB would treat these loans, I would only observe that issuing these loans and paying negative interest rates on reserves raises the net income of the CB – albeit at the expense of banks. Through time, if the IOR rises, the central bank’s profits will decline. This of course is also true of QE.

  3. Helicopter drops reloaded | Bruegel

    […] Lonergan sees the case quite differently, and states that helicopter drops in the euro area may be a legal obligation of the European Central Bank (ECB). The trick lies in the proper construction of helicopter drops. The euro-area version of it would be cash transfers from the ECB to households, which could take the form of perpetual zero coupon loans, intermediated by banks (TLTRO). This is not fiscal policy as defined by EU law. It involves the monetary base and would be implemented independently of national treasuries and budgetary policies, and would therefore count as monetary policy. This would protect the independence of the ECB and fall within the price stability mandate. […]


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