Economists Say Handing Out Cash Could Help Euro Zone Economy

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[url]http://www.spiegel.de/international/business/economists-say-handing-out-cash-could-help-euro-zone-economy-a-1011352.html[/url]
[QUOTE]It sounds at first like a crazy thought experiment: One morning, every resident of the euro zone comes home to find a check in their mailbox worth over €500 euros ($597) and possibly as much as €3,000. A gift, just like that, sent by the European Central Bank (ECB) in Frankfurt.

The scenario is less absurd than it may sound. Indeed, many serious academics and financial experts are demanding exactly that. They want ECB chief Mario Draghi to fire up the printing presses and hand out money directly to the people.
The logic behind the idea is that recipients of the money will head to the shops, helping to turn around a paralyzed economy in the common currency area. In response, companies would have to increase production and hire more workers, leading to both economic growth and a needed increase in prices because of the surge in demand.

ECB Has Lost Control

Currently, the inflation rate is barely above zero and fears of a horror deflation scenario of the kind seen during the Great Depression in the United States are haunting the euro zone. The ECB, whose main task is euro stability, has lost control.

In this desperate situation, an increasing number of economists and finance professionals are promoting the concept of "helicopter money," tantamount to dispersing cash across the country by way of helicopter. The idea, which even Nobel Prize-winning economist Milton Friedman once found attractive, has triggered ferocious debates between central bank officials in Europe and academics. For backers, there's more to this than just a new instrument. They are questioning cast-iron doctrines of monetary policy.

One thing, after all, is becoming increasingly clear: Draghi and his fellow central bank leaders have exhausted all traditional means for combatting deflation.

The failure of these efforts can be easily explained. Thus far, central banks have primarily provided funding to financial institutions. The ECB provided banks with loans at low interest rates or purchased risky securities from them in the hope that they would in turn issue more loans to companies and consumers. The problem is that many households and firms are so far in debt already that they are eschewing any new credit, meaning the money isn't ultimately making its way to the real economy as hoped.

In response to this development, Sylvain Broyer, the chief European economist for French investment bank Natixis, says, "It would make much more sense to take the money the ECB wants to deploy in the fight against deflation and distribute it directly to the people." Draghi has calculated expenditures of a trillion euros for his emergency program, funds that would be sufficient to provide each euro zone citizen with a gift of around €3,000.

Daniel Stelter, founder of the Berlin-based think tank Beyond the Obvious and a former corporate consultant at Boston Consulting, has even called for giving €5,000 to €10,000 to each citizen. "It has to be massive if it is going to have any effect," he says.

Many academics have based their calculations on experiences in the United States, where the government has in the past provided cash gifts to taxpayers in the form of rebates in order to shore up the economy.

Oxford economist John Muellbauer, for one, looks back to 2001. After the Dot.com crash, the US gave all taxpayers a $300 rebate. On the basis of the experience at the time, Muellbauer calculates that €500 per capita would be sufficient to spur the euro zone. "It (the helicopter money) would even be much cheaper for the ECB than the current programs," the academic says.

And yet European central bankers and conservative economists still shudder when asked about the concept. "It would be the ultimate sin," warns Jörg Krämer, the chief economist at Commerzbank, Germany's second largest private bank. "If the central bank gives away money one time, there's no way it will remain an isolated case. Politicians will demand even more the next time around."

Muellbauer counters such fears by noting that central banks have a clear target: inflation of close to 2 percent. Once that target is achieved, the money handouts would cease. But the problem is that monetary policy often cannot be adjusted to that degree of precision. Many experts say that inflation is like a bottle of ketchup: when you whack on the bottom, nothing happens at first -- but then it all comes out in a gush.

The fundamental factor which determines the value of money is the trust of those who spend it -- the belief that a €10 or €20 bill will be enough to buy lunch for the foreseeable future and that a medium-sized car won't cost €100,000 five years from now. Should this trust evaporate, the entire monetary system begins to crumble.[/QUOTE]