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26 March 2020
Once the current quarantine periods are over, public financial institutions will try everything to save businesses. Liquidity injections and credit easing have already been announced to limit bankruptcies and negative effects on the financial sector. But how will private and professional consumers and buyers get out of this unexpected slowdown? Beyond public policies that will attempt to stimulate an economic recovery, what measures and instruments could encourage citizens and businesses to aim their orders in a meaningful direction? In other words, how can public policies ensure that part of the orders and purchases are well oriented to assist the much-hoped economic rebound?
As the development potential digital solutions is likely to intensify, a crypto-euro could designed to serve as a measure to boost certain key or strategic economic sectors. More broadly, the adoption of differentiated trading instruments for economic and societal purposes could contribute to the rebound of tomorrow's economy and society.
The impact of the new coronavirus epidemic on the global economy could be major and, although it is still too early to predict the effects on many sectors that this sudden, temporary and unanticipated shutdown of part of the economy will have, most major French and European public financial institutions have already announced various support, rescue and recovery plans to avoid the worst.
Amongst the implemented or pledged measures for the support of businesses, the priority is to contain the crisis that has already begun on an industrial scale, and within a limited timeframe, so that it does not evolve too quickly, and too abruptly, into a generalised financial crisis.
The announced policies aim first and foremost to provide companies with the appropriate cash-flow and financing tools to enable them to withstand the shock and help anticipate the recovery and possible reorganisation of their activities.
Every attempt will therefore be made to ensure that those companies that were sufficiently resilient can bounce back, at least financially.
On the supply side, the general temporary halt in global production could be followed by a “catch up” acceleration in overall production. Stocks should therefore be replenished.
As regards demand… Considering the unprecedented context, and following long-term confinement that private professional consumers were not prepared for, how will they behave?
Whether they fuel BtoB or BtoC markets, how will private or professional buyers behave once they have emerged (perhaps even partially) from this major health crisis?
"The next day... will not be a return to the previous day ". Although the economy has finally adjusted to economic cycles, will consumption return to “pre-crisis” levels? The shock to society was immense and unprecedented, and could potentially repeat itself in the future.
Bearing in mind an increasingly cautious behaviour, an exceptional increase in cash reserve levels, and a form of wait-and-see attitude towards future decisions by companies and health authorities, consumption and purchasing habits could certainly slow down.
This "day after" attitude, which would be deemed as a societal post-traumatic shock, could reduce, for a certain period of rehabilitation, a number purchases and orders that are nonetheless necessary for the much-desired rebound.
Recovery may therefore not be optimal without certain incentives and other instruments to guide consumption and facilitate the monitoring of economic flows when activity returns to normal.
It could nevertheless be supported and increased by digital innovations that have recently undoubtedly proved indispensable, particularly by contributing to the availability of "remote" work.
If supply is boosted by public policies and a massive injection of liquidity, demand could be expressed differently and reduce the effectiveness of the considered recovery plans.
This fear of sustained under-consumption and the relative unpredictability of order books has recently given rise to the "helicopter money" school of thought inherited from economist Milton Friedman. This concept is based on the causal relationship between the central bank's injection of liquidity in the form of money freely distributed to individuals, and the stimulation of consumer spending.
Even if considered relevant from a macroeconomic point of view by some, this concept has often been considered theoretical and too difficult to implement, especially given the mechanisms that exist between central banks and financial institutions, and the direct access to citizens that central banks require in order to distribute this money.
Nevertheless, it seems that the concept of helicopter money is gaining traction in the current context, and may even be reinvented in the context of the various monetary policy scenarios likely to have a positive impact on the economy.
Indeed, this "currency", which can take several forms and used as a stimulus instrument, seems to be looming over ongoing discussions at European level.
The ECB's announcement of the new EUR 750 billion bond purchase programme, made on 18-19 March, aimed at protecting the Eurozone economy from the repercussions of a crisis that is likely to grow as a result of the new coronavirus pandemic, is a signal for possible future developments in monetary policy, which to some extent could enter a new era of ECB action.
Given the ECB's efforts to intervene in the current crisis, its creative innovation in terms of monetary policy, helicopter money could be one of the possible options for recovery, among the other potential solutions, such as "coronabonds" that would pool European debt by issuing pan-European bonds within the Eurozone.
The legal form and mechanism of neo-currency helicopter money could move away from the initial concept imagined by Friedman. It would however pursue the economist's founding purpose, i.e. to reduce the time of transfer between the central bank's currency and businesses, and/or between the central bank's currency and citizens.
Conditions for implementing such a recovery currency, as well as its legal contours, remain to be defined. Several mechanisms could be invented, as the European Parliament specified in a note analysing the concept of helicopter money in April 2016.
Public authorities have begun to express their intention to provide the best means possible to ensure a rebound of the European economy over the next few years.
The tools involved in implementing these monetary stimulus policies could still be improved and clarified.
Indeed, the question of demand remains central and has not been answered. How can we ensure that liquidity injected into the European economy will be used for the right purposes, i.e. directed towards an economic recovery?
In this respect, the digital sector, more specifically digital assets, might contribute to the institutional economic recovery programmes. Such digital assets are upheld by the French legislator, in particular through the recent Loi Pacte that specifies a legal framework for digital assets and their providers.
Given their technical characteristics that allow for traceability, and their robust legal grounding (a number of supporting legislative works and developments have already been implemented), certain categories of digital assets could contribute to the effective implementation of economic stimulus policies.
For instance, drawing inspiration from the way managed money works , the distribution by a central bank of helicopter money "oriented" towards specific sectors of the economy, and therefore technically designed not to be used otherwise, could be examined.
The mechanism would amount to digital assets called "stablecoins" being issued by central banks (representing a legal tender value). These assets are technically designed to be used for specific purposes (e.g. the acquisition of certain designated consumption products). This issuance would mean this form of stablecoin is injected directly back into the economy, thereby making it a new form of "helicopter money".
In this example, through the issuance of "crypto-euros" - helicopter, technically designed to be used for specific economic purposes, the ECB would to boost consumption in certain economic sectors that have been identified as essential and strategic within each jurisdiction or the single market.
The conditions for receiving such "orientated crypto-euros" as a means of stimulus payments would have to be defined, as well as the priority economic sectors requiring support.
Similarly, the legislation for the use and acceptance of these crypto-euros will have to be analysed in the light of current payment infrastructures.
In any event, the characteristics and usefulness of a "digital central bank currency", which has already been the subject of discussions and specific work within national central banks and the ECB before the current Covid-19 pandemic, should be re-examined with a view to optimise the chances of the European economy bouncing back.
The legal qualification of such instruments will have to be precisely defined, as well as the legal framework within which exchanging on specific networks will have to take place.
Service providers that could quickly allow their deployment and use will be subject to a body of rules. Among them, certain providers of existing digital assets could already take part in discussions on the implementation of such solutions, which would be useful both for the emergence of the digital ecosystem and for the post-coronavirus rebirth of the European economy.
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[1] French government has implemented an exceptional guarantee scheme to support bank financing for businesses, amounting to EUR 300 billion https://www.economie.gouv.fr/coronavirus-soutien-entreprises.
[2] The European Central Bank’s initiative, announced by C. Lagarde on 19/03/20 : "(…) the ECB’s Governing Council announced a new Pandemic Emergency Purchase Programme with an envelope of EUR750 billion until the end of the year, in addition to the EUR120 billion we decided on 12 March (…)".
[3] Speech by French President E. Macron on 16 March 2020.
[4] Pandemic Emergency Purchase Programme, PEPP | https://www.ecb.europa.eu/press/pr/date/2020/html/ecb.pr200318_1~3949d6f266.en.html.
[5] "…in practical terms, there are different proposals for distributing helicopter money, which may entail fiscal policy measures, such as government bonds, or printed-money financed tax relief for private households …".
[6] https://www.legifrance.gouv.fr/affichTexte.do?cidTexte=JORFTEXT000039407517&categorieLien=id.
[7] Generic concept defining a form of "special payment order" accepted by a network of service providers provided for by law (e.g. lunch vouchers and their acceptance network).
[8] https://publications.banque-france.fr/sites/default/files/media/2020/01/14/la_monnaie_digitale_de_banque_centrale.pdf.
This legal update is not intended to be and should not be construed as providing legal advice. The addressee is solely liable for any use of the information contained herein and the Law Firm shall not be held responsible for any damages, direct, indirect or otherwise, arising from the use of the information by the addressee.
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