March 19, 2016 / 4:16 AM / 4 years ago

'Helicopter money' is not manna from heaven, Bundesbank chief says

BERLIN (Reuters) - “Helicopter money”, or free cash dished out to citizens in a bid to stimulate spending and inflation, would end up costing euro zone states and therefore taxpayers, the head of Germany’s central bank said in an interview with German newspapers.

German Bundesbank President Jens Weidmann in Shanghai, China February 27, 2016. REUTERS/Aly Song

After years of increasingly desperate attempts to kick-start growth, some bankers and finance officials fear policymakers are running out of effective ammunition and future stimulus efforts could even be harmful. Economists say “helicopter money” would be a last resort.

“Helicopter money is not manna that falls from heaven - it would actually rip huge holes in central bank balance sheets,” Bundesbank President Jens Weidmann told German media group Funke’s regional newspapers.

“Ultimately euro zone states and therefore taxpayers would end up having to bear the costs because there wouldn’t be central bank profits for a long time,” said Weidmann, who is also on the European Central Bank’s (ECB) decision-making Governing Council.

The central bank’s chief economist Peter Praet had said in a newspaper interview published on Friday that, under extreme circumstances, such a policy could be considered by the euro zone central bank.

Weidmann, who has long been critical of some of the ECB’s extraordinary policy moves, said a decision on giving money to citizens was highly politicized and should be handled by governments and parliaments.

“That would be nothing other than completely mixing monetary policy and fiscal policy and would not be compatible with central bank independence,” he said.

Monetary policy is not a panacea or a substitute for necessary reforms in individual countries and does not solve Europe’s growth problems, Weidmann added.

On the ECB’s decision last week to cut its main interest rate to zero, Weidmann said: “I have repeatedly pointed out that the effect of ultra-loose monetary policy gets weaker the longer it lasts. At the same time it’s true that the more you accelerate, the bigger the risks and side effects become.”

The ECB has dropped the rate on its deposit facility to -0.4 percent from -0.3 percent, increasing the amount banks are charged to deposit funds with the central bank. Weidmann said he did not expect normal savers to have to pay interest on deposits despite this being increasingly the case for big customers.

Asked about the option of a joint European deposit guarantee scheme, Weidmann said it would likely only gloss over economic problems in the euro zone rather than solve them.

Weidmann said the risks on bank balance sheets would first need to be reduced. Lenders should also no longer load up on bonds from their home countries so much because the link between banks and states had acted like a “fire accelerant” during the bloc’s crisis.

Asked whether Germany was doing enough to maintain its strong economic position, Weidmann said an aging and declining population meant more women and older people should work, while there should be investment in education and infrastructure - but not at the expense of solid public finances.

“In general, the growth trend in Germany is low and will decrease further. This is where smart economic policy is called for,” he said.

Reporting by Michelle Martin; Editing by Toby Chopra

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