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What economic policy response if growth falls in the euro zone?
It is possible (probable) that growth in the euro zone will be zero or negative in the second quarter of 2020 due to the coronavirus crisis ( because of the slump in exports to China and problems in a number of sectors). How might economic policy react in the euro zone? Cutting interest rates or increasing the size of quantitative easing could only have a muted effect on long-term interest rates and credit spreads and therefore on real activity; Should helicopter money be considered (the direct distribution of money to economic agents)? It is very unlikely that the ECB would accept it, but it is important to remember that the combination of an increase in the fiscal deficit and an increase in the size of quantitative easing is equivalent to helicopter money (from a macroeconomic viewpoint if not a redistributive one).
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Patrick Artus
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