SPECIAL REPORT

ECONOMIC RESEARCH
January 22, 2015 - No. 7
Sylvain Broyer, Alan Lemangnen

Further easing of budgetary rules and the ECBs QE: Helicopter money
"through the back door"?
The term "helicopter money" is used for a measure where the central bank creates money ex nihilo (without
buying assets in return) to distribute it directly to economic agents, which increases their wealth. While this is
not really the case here, the combination of a further easing of European budgetary rules and the ECBs
imminent QE can be considered helicopter money "through the back door": the ECB will create money to buy
government bonds in the secondary market, which will keep interest rates very low. At the same time,
governments will run up larger deficits and debt than they would without an easing of the budgetary rules,
mainly to directly finance infrastructure investments through the EFSI. The wealth of euro-zone economic
agents will therefore clearly be increased. In any case, the combination of the two measures is in line with the
scenario Mario Draghi presented at Jackson Hole: a stimulus of the European economy through concerted
action by fiscal and monetary authorities. As a result, the growth outlook for the euro zone has improved particularly for 2016, the year when the investments under the Juncker plan can be expected to start
producing their effects.

As we had expected for several months (see in

particular Special Report No. 100-2014: Postponement of
budgetary targets: Will history repeat itself? and Special
Report No. 116-2014: Its not Frankfurt, its Brussels, stupid!),
the European Commission has recently announced a further
easing of the European budgetary rules. This revised
interpretation of the Stability and Growth Pact (SGP) is
applicable immediately and applies to three main areas: (i)
The taking into account of the economic cycle when setting
national budgetary targets to reduce the pro-cyclical nature of
the current rules; (ii) The way national contributions to the
Juncker fund will be recorded in the fiscal deficit to boost the
incentive given to countries to increase the initial size of the
fund; (iii) The easing of certain budgetary flexibility clauses to
secure a favourable compromise between fiscal consolidation
and implementation of structural reforms.
In this paper we will review these developments, especially
from the viewpoint of the advantages they could give France
and Italy, which for several months have been in contact with
Brussels on the budgetary issues and which are the suitable
candidates for these different easing measures. We will then
look at the main implications of these measures for the policy
mix and our scenario.

Taking into account of the economic cycle when

setting budgetary targets

This is definitely the greatest amount of flexibility granted by

the Commission. Until now, governments had to make a
structural effort of at least 0.5 percentage point of GDP each
1
year with a view to reach their medium-term objective . From

1
The medium-term objective (MTO) is the main instrument the
Commission uses in its assessment of countries fiscal paths. It

now on, in the context of the preventive arm of the SGP,

governments will be able to adjust this effort according to the
expected performances of their economies: less austerity
when the outlook is poor, more when the economic situation
is improving. So according to the new matrix provided by
Brussels (Tables 1 and 2), which aims to reduce the procyclicality of the European budgetary rules, a government
whose economy is mired in recession during the whole year
would be exempt from fiscal consolidation. Conversely, a
government whose economy is clearly growing faster than its
potential and whose public debt is above the 60% of GDP
threshold would have to make a structural effort potentially in
excess of 1 percentage point of GDP.
This flexibility does not apply to countries that are subject to
an excessive deficit procedure (EDP), e.g. France. The
minimum target of 0.5 percentage point of GDP will still apply
to these countries. The Commission does acknowledge that
in the event of a difficult economic environment, achievement
of this medium-term target can be spread over a longer time.
But Brussels does not provide any explicit evaluation scale
and has therefore reserved the right to make this decision at
its sole discretion (and that of the Ecofin). So there is nothing
really new here for countries subject to an EDP since, in
practice, this form of flexibility was already more or less
available. Italy, which exited from its EDP in 2013, will
therefore emerge as the winner from this change: according
to the new rules, the Italian government would not have to
carry out any fiscal consolidation this year (a structural effort
2
of 0.25 percentage point was included in the 2014 budget).

involves a plan to return to structurally balanced public accounts

(structural deficit limited to 1% of GDP) at a 3- to 4-year horizon.
2
In 2014, Brussels exempted Rome from the rule requiring an annual
structural adjustment of 0.5 percentage point.

SP EC I AL R EP OR T

Table 1
European Commission: Matrix for specifying the annual fiscal adjustment towards the
medium-term objective (MTO) un the preventive arm of the Pact
Required annual fiscal adjustment*
Public debt < 60% PIB
Public debt > 60% PIB
Conditions
< 0% or output gap < -4

No adjustment needed

No adjustment needed

0,25

-4 output gap < -3

- 0 if growth below potential

-3 output gap < -1,5

- 0,25 if growth below potential

- 0,25 if growth above potential - 0,5 if growth above potential

-1,5 output gap < 1,5

0,5

Output gap 1,5

> 0,5

- > 0,5 if growth below

potential

- 0,75 if growth below

potential

- 0,75 if growth above

potential

- 1 if growth above potential

Sources: Commission, Natixis

* All figures are in percentage point of GDP

Table 2
Main countries under the preventive arm of the Pact: forecasts of the European Commission
Real GDP growth, %
Austria
Belgium
Finland
Germany
Italie
Netherlands

2014
0,7
0,9
-0,4
1,3
-0,4
0,9

2015
1,2
0,9
0,6
1,1
0,6
1,4

2016
1,5
1,1
1,1
1,8
1,1
1,7

Output gap (% potential GDP)

2014
-1,1
-1,1
-3,1
-0,8
-4,5
-3

2015
-0,9
-1,1
-2,7
-1
-3,4
-2,1

2016
-0,7
-0,9
-1,7
-0,6
-2,1
-1,1

Public debt (% GDP)

2014
87
106
60
75
132
70

2015
86
107
62
72
134
70

2016
84
108
62
70
133
70

Sources: Commission, Natixis

Favourable treatment of national contributions

to the Juncker plan fund

The European Fund for Strategic Investments (EFSI)

(see Special Report No. 2014-147: Juncker investment plan:
A new acronym!), which will probably be set up in the middle
of the year, will be launched with EUR 21 bn in funds
reallocated from the European budget and made available by
the EIB. But the Juncker plan also provides for national
contributions that can come on top of this common budget.
However, one question has remained unanswered until now:
how would this spending be taken into account in the various
countries deficits? Brussels decision is very favourable:
contributions to the EFSI will be recorded as exceptional
measures and excluded from the structural budget balance,
the main instrument used to assess countries fiscal path.
This favourable interpretation will apply to all governments,
including to those subject to an EDP. France will therefore be
able to contribute to the EFSI in 2015 without this spending
being taken into account in the structural effort it will have to
make this year. The contributions will be included in the
calculation of the total deficit and the public debt (if the
government were to borrow to finance this spending).
Brussels has nevertheless stated that if, as a result of such a
contribution, the country were to become unable to comply
with the thresholds of 3% fiscal deficit and/or 60% public
debt, the EDP would not be triggered.

A marginal easing of the "investment clause"

According to the "investment clause", applicable only in the

preventive part of the SGP, public investments equivalent to
a structural reform can lead a government to temporarily
deviate from its fiscal adjustment path. Such a deviation can
be tolerated, albeit with conditions that are extremely difficult
to meet: 1/ The beneficiary country must post growth that is
negative or far lower than its potential; 2/ The overrun must
th
not lead to a fiscal deficit in excess of 3%; 3/ The "1/20
3
rule of public debt reduction must be complied with; 4/ The
overrun must be linked to spending on projects that are cofinanced with the European structural funds.
In 2013, Italy made an initial request to benefit from this
clause, but this was rejected on the grounds that the country
th
was not in compliance with the 1/20 rule. In 2014, the
country reiterated its request, which was again rejected for
the same reason. Although the easing provided by the
Commission is marginal, it could clearly benefit Italy. In their
new version, the conditions of application remain more or
th
less similar, with the exception of the 1/20 rule, which simply
seems to have disappeared. As France is not covered by the
preventive arm, it will not be able to benefit from this clause.

According to this rule introduced by the Fiscal Compact, the

countries must, in the context of the preventive arm, reduce their
debt that exceeds 60% of GDP by 1/20th per year on average over
three years.
N 7 I 2

SP EC I AL R EP OR T

granted by Brussels, it now seems difficult to imagine

penalties against the two countries, a scenario that could not
be ruled out only a few months ago.

Structural reforms: Postponements of budgetary

targets granted ex ante

Since 2005, the Commission has acknowledged the

existence of a trade-off between consolidation of public
accounts and implementation of structural reforms, as the
latter often have a budgetary cost in the short term. This
explains the introduction of a clause of budgetary flexibility for
governments that launch structural reforms, provided that
they are "major", that they have a "positive long-term
budgetary impact" and that they are "fully implemented".

Table 3
Who will benefit from these new rules?
Italie
France
(Preventive arm) (Corrective arm)

In its new interpretation of the budgetary rules, the

Commission has eased the conditions for the activation of
this clause while formalising the degree of flexibility allowed.
Until now, governments that required a postponement of their
budgetary targets on the basis thereof (like France in 20122013) previously had to adopt and implement said reform
before obtaining any postponement. From now on, Brussels
will be able to grant flexibility ex ante (i.e. before the reforms
are adopted) by basing its decision on a detailed mediumterm structural reform programme which will be given an
implementation schedule. This programme will be submitted
to the Commission at the same time as the Stability
Programmes are transmitted each year by the governments
for assessment. In the preventive as well as in the corrective
arms, the beneficiary governments will obtain a
postponement of their budgetary targets. In the context of the
preventive arm, a deviation from the path defined at the
outset cannot exceed 0.5 percentage point of GDP and/or
lead the government to break the 3% rule. Countries in an
EDP remain obliged to make an annual structural effort of 0.5
percentage point of GDP, even if a postponement has been
granted. In both cases, the failure of a government to carry
out the promised reforms can lead the Commission to
recommend sanctions against it.

Taking into account of the

economic cycle when setting
budgetary targets

++

Treatment of national
contributions to the EFSI

++

++

Easing of the "investment

clause"

Easing of the "structural

reforms clause"

++

Sources: Commission, Natixis

* = excessive deficit procedure (EDP)

Legend:
- = changes nothing
+ = rather positive
++ = positive

What implications?

Proponents of fiscal austerity will in all likelihood see this

easing as another manoeuvre to cover up the fiscal deficit an argument that cannot be dismissed out of hand since the
output gaps calculated by the Commission (the new main
criterion to determine the annual structural effort that has to
be made) are probably overestimated (see Flash No. 2013798: France: An estimation of structural unemployment based
on the trend in potential GDP). The opposite argument,
according to which this easing will merely formalise the
flexibility that Brussels has already accepted - and that it is
therefore insufficient - is just as valid. The Commission
actually showed flexibility already in 2013-2014, as shown by
the recent slowdown in fiscal consolidation almost
everywhere in the euro zone (Chart 1) - so much so that to
maintain the positive impact of the budgetary easing on
activity, it will no longer be "easing" the governments will
need in the near future, but a green light to increase the
structural deficits.

France vs. Italy: Who will benefit from these new

rules?

Out of France and Italy, the latter will definitely benefit the
most from this new interpretation of the budgetary rules.
Rome actually exited the EDP in 2013 and the easing is far
more favourable for countries in the preventive arm - which
Brussels has undoubtedly wanted (under pressure from
Berlin?) to retain more discretion in the flexibility granted to
countries subject to an EDP. Nevertheless, the practical
results of the application of these new rules remain to be
seen. More will be known in this respect in March this year
when the Commission has assessed the structural reform
programmes recently transmitted by the two countries. In any
case, two things seem certain: first, these measures can
definitely not be combined; second, in view of the easing

Chart 1
Eurozone: structural budget balances (% GDP)
2

2009

2010

2011

2012

2013

2014

0
-2
-4
-6
-8
-10
-12
Sources: Commission, DBP 2015, Natixis

-14
EZ

DE

NL

AT
"North"

FI

BE

FR

IT

ES

GR

IE

PT

"South"

N 7 I 3

SP EC I AL R EP OR T

In our opinion, these new rules will nevertheless offer two

obvious advantages. First, they will prevent other countries
from automatically becoming subject to an EDP because of
the context of persistently sluggish growth in European
economies. Second, they will allow all member countries to
contribute to the Juncker plans investment fund regardless of
their budgetary targets.
We can therefore expect the investment in infrastructures to
be larger than what we expected until now. The national
contributions to the EFSI will be voluntary. Accordingly, it is
not possible to estimate the impact on euro-zone growth for
the time being, but there are reasons to believe it will be
significant in 2016. In addition, it is well known that
investments in infrastructure have a high multiplier effect on
economic activity. So this is good news for euro-zone growth,
especially as governments will have no problem in debtfinancing these contributions since the ECB is set to launch,
at the same time, a programme of government bond
purchases that will keep interest rates very low.

Helicopter money "through the back door"?

The combination of these two measures (easing of budgetary

rules and ECB quantitative easing) could be considered a
measure of helicopter money through the back door. In this

type of measure, the central bank (ECB) distributes money

(banknotes, or bank deposits financed by the credit of the
banks reserve accounts at the central bank) to economic
agents without buying assets in return: there is monetary
creation ex nihilo. Economic agents hold a larger quantity of
money (M2): their wealth is increased, which may encourage
them to spend more, especially the economic agents with the
lowest incomes. In this case we will probably have the
following cause-and-effect mechanism: the ECB will create
money to buy government bonds in the secondary market,
which will drive down interest rates. At the same time,
governments will run up more deficits and debt than at the
outset, thanks to the easing of the rules, to finance
infrastructure investments through the EFSI. All in all,
economic agents actually become richer than before. The
combination of the two measures could therefore be
considered helicopter money through the back door (it is not
the central bank that will distribute the money it creates, but
the governments). In any case, the combination of the two
measures is in line with the scenario Mario Draghi presented
at Jackson Hole of stimulus through concerted fiscal and
monetary action. From this point of view, there is no doubt
that growth in the euro zone has just embarked on a more
promising path.

N 7 I 4

SP EC I AL R EP OR T

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