It’s All About Demand: Two Unconventional Ways to Reset European Economy

Amid the sluggish economic growth in European Union, now there is a growing number of politicians and economists who support the concept of monetary financing of stimulus measures.

The idea of the European Central Bank using so-called "helicopter money" is a significant shift in policy, placing focus on stimulating demand in the European economy. After years of stagnant growth and unemployment, all options should be discussed, an article on the analytical website Project Syndicate read.

The authors of the article, economists Laura Tyson, a professor at the Hass School of Business at the University of California, and Eric Labaye, Chairman of the McKinsey Global Institute wrote: "The United Kingdom’s referendum decision to leave the European Union only strengthens the case for more stimulus and unconventional measures in Europe. If a large majority of EU citizens is to support continued political integration, strong economic growth is critical."

According to a research by MGI, despite quantitative easing measures and record low interest rates, sluggish demands is slowing down GDP growth in Europe. In some countries, more than 25 percent of the population has been unemployed for nearly 10 years. Uncertainty and volatility in financial markets sparked by Brexit would only weaken demand.

Another problem is that European companies decreased annual investment by over €100 billion ($113) per year from 2008 to 2015. Businesses invest only if they are confident about future demand and manufacturing growth. However, Brexit has only deepened uncertainty and creates the possibility that the United Kingdom and the EU may collapse, the article read.

According to the economists, current monetary policy is ineffective. It should be revised, including alternatives to quantitative easing and extremely low interest rates.

The first possible option is helicopter money – directly crediting citizens with central bank funds, or crediting national treasuries to fund projects stimulating demand. An appropriately sized helicopter-money program would have a number of advantages, including raising demand in a measured way, the article read.

At the same time, such a program would require an "abundance of caution about citizen and investor perception, confidence, and solid governance structures," the authors warned.

"And such an approach would cement the notion that central bank policy is 'the only game in town,' relieving elected government leaders of their responsibility for pro-growth policies and the fiscal decisions they control," the article read.

Another, a less risky way for stimulating demand would be a significant increase in public infrastructure investment funded by government debt, according to the article.

"From a macroeconomic perspective, infrastructure investment is a 'twofer' — it strengthens productivity and competitiveness in the long run and, where there is unused capacity, it boosts demand, output, and employment with significant multiplier effects in the short run," the authors explained.

However, they noted, Western governments have clamped down on infrastructure spending for years, giving precedence to austerity measures and debt reduction.

The authors added that these new tools would require structural reforms and a new approach to economic policy, including efforts to bolster demand.

"Europe needs a larger set of policy options. Quantitative easing and ultra-low interest rates should no longer be the only arrows in the macroeconomic policy quiver. These tools, along with excessive fiscal austerity, may have higher costs in terms of foregone employment and growth — and rising political discontent — than 'risky' alternative options," they concluded.