Skip to content

Is it Time for Europe to Call in the Helicopter?

By Dr. Pierre Canac–


“Let us suppose now that one day a helicopter flies over this community

and drops an additional $1000 in bills from the sky, …. Let us suppose

further that everyone is convinced that this is a unique event which will

never be repeated,” (Friedman 1969, pp 4–5).

In one of my earlier blogs, I discussed negative interest rates as currently experienced in many European countries. As explained, the excess demand for safe and liquid assets, due to extreme risk aversion, is responsible for the lack of consumption and investment spending in spite of negative interest rates.   This lack of demand associated with deflation and negative interest rates is mainly responsible for a condition referred as “Secular Stagnation” by Larry Summers back in 2013. How can the European countries extricate themselves from this “safety trap” and thus secular stagnation?

Is Quantitative Easing likely to work in the Eurozone?

The European Central Bank started its Quantitative Easing program in March 2015 whereby it will purchase €60bn of securities each month until September 2016. Unfortunately it is very doubtful whether QE will succeed in stimulating Aggregate Demand. QE was somewhat successful in the U.S. to the extent that it stimulated the mortgage market; this is unlikely to happen in Europe for various reasons. First, bank lending is still dominant over bond financing in Europe, and banks are not going to be any less reluctant to lend because of QE. Second, QE works by increasing bond prices (and lowering interest rates); however bond prices are already very high and cannot increase much more. Third, the two remaining channels through which QE can work, the exchange rate and the portfolio rebalancing effect, may not be effective in Europe. The exchange rate channel may not work because the Eurozone is a large economy which is fairly closed; most Eurozone trade occurs between the member countries and thus a weak euro is not going to provide much stimulus except perhaps for Germany, which is the country that needs it the least. The portfolio re-balancing effect refers to the possibility that those who sell bonds to the ECB will need to invest their money elsewhere, hopefully in the real economy; however this presupposes that there will be a high enough demand for the goods and services produced by such investment in plant and equipment. Thus I would expect any stimulus through this channel to be quite weak. In conclusion, it is doubtful that money created by QE will end up in the hands of those who will spend it immediately. Instead, QE is likely to further weaken the euro while increasing somewhat more asset prices and pushing interest rates further down, but little else.

What about using fiscal policy?

Fiscal policy could be used by those European countries that have a low budget deficit or a surplus and a low ratio of public debt to GDP, such as Germany. As a matter of fact, in a well-functioning monetary union some kind of fiscal rule should be applied symmetrically; the countries experiencing budget deficits should cut government spending and increase taxes, while the countries experiencing budget surpluses should do the opposite. Such a fiscal rule would prevent aggregate demand from collapsing in Europe while the deficit countries implement the necessary corrective measures. However Eurozone fiscal rules do not include provisions for such fiscal actions; while deficit countries are theoretically not allowed to run budget deficits higher than 3% of GDP (the so called Growth and Stability Pact), there are no limits to the size of budget surpluses.   Thus Southern European countries such as Greece have been forced to run primary budget surpluses (which exclude the costs of servicing the government debt). Moreover, even if Southern European countries had been allowed to run an expansionary fiscal policy, rather than decreasing government spending and raising taxes, to stimulate their depressed economies, it is doubtful that this would have worked as it would have been offset by potential increases in interest rates, especially in those countries whose debt sustainability is highly questionable.

How does Helicopter Money work?

Helicopter money combines both Quantitative Easing and fiscal policy. The term “helicopter drop” was first mentioned by Milton Friedman (see above quote) and became more popular when Ben Bernanke, the former Fed chairman, used the term in a speech he made in 2002 thereby receiving the nickname “helicopter ben”. Helicopter money involves the creation of money to support public spending or tax cuts in such a way as to put the money directly into the hands of those who are most likely to spend it immediately. For example the government could issue interest bearing bonds to finance infrastructure spending. The central bank would purchase those bonds and hold them in perpetuity while it would return the interest payments to the government, in the same manner that a central bank returns its profit to the Treasury. Thus the government would face no debt servicing costs. Likewise the government could instead issue non-interest bearing and non-redeemable bonds that the central bank would hold forever. Helicopter money would likely work because it increases the total net wealth of the economy since the additional money constitutes an asset for the holder while it is not a liability of the issuer (central banks are unlike commercial banks). As long as the money created is needed to achieve the central bank’s inflation target, which is certainly the case today, it will not be redeemed and thus would truly constitute wealth. As a matter of fact, this helicopter money should be increased as long as the inflation rate remains below the central bank’s inflation target. As this new money is spent immediately and does not require an increase in future taxes or a decrease in future government spending (the intertemporal budget constraint of the government is relaxed, so the Ricardian Equivalence proposition does not hold), demand is instantly stimulated.

The main obstacle to such a plan is mainly legal and political. The European Central Bank is not authorized to engage in the conduct of fiscal policy, which is basically what it would be doing, and is supposed to act independently of national governments. This implies that central banks and national governments cannot cooperate even when such cooperation is needed, as in today’s exceptional circumstances. Moreover such financing of government spending by the European Central Bank would be anathema to many Northern European governments, which insist that austerity will eventually succeed in restoring economic growth once the sinners have repented for their depravity. In other words they claim that austerity will eventually work to the same extent that a drunk will eventually be clearheaded once the effect of the alcohol fades away.

Thus, despite the objections of these naysayers, the answer to the question in the title is “yes”. Unfortunately Deutsche Telekom controls the access to the telephone line, so the word “yes” will never be heard on European telephone lines!


Pierre Canac, Ph.D.
Associate Professor of Economics

See more posts by this author



Buiter, Willem H. (2014). The Simple Analytics of Helicopter Money: Why Does it Work – Always. Economics, Vol. 8, 2014-28. August 21, 2014.

Friedman, Milton (1969). The Optimum Quantity of Money, in Milton Friedman, The Optimum Quantity of Money and Other Essays, Chapter 1. Adline Publishing Company, Chicago.


Summers, Lawrence H. (2013).

share this post





Never miss an update...

Subscribe to the CSB Blog!