The Case of Finland and the EMU: stabilizing a small economy

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The Case of Finland and the EMUstabilizing a
small economy

• Reykjavik 2 April 2009
• Ilkka Mytty
• Financial Counselor

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Contents

• Characteristics of the Finnish economy
• Objectives of economic policy
• Optimal currency area
• EMU -system
• single currency
• coordinated fiscal policy
• SGP
• Lisbon strategy
• Finland versus Sweden
• EMU _at_ 10 - experiences

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Characteristics of the Finnish economy

• Free movement of capital, commodities and labour
• Exports 44 of GDP (2008)
• Exports 0.6 of World trade (2007)

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EUROPE 1988 - EEC, EFTA, SEV
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Objectives of economic policy

• Universally prosperity
• 1917 Safeguarding of the independency by
  restoring order and legal base
• 1918 Food supplies
• 1932 Enhancement of the economy
• 1936 Improvement of living standard
• 1948 Better living standard by growth of
  production
• 1957 Recovery of production and employment
• 1968 Removal of unemployment by accelerating
  growth
• 1972 Focus in increase of living standard -
  especially citizens with low income
• 1987 Modern and egalitarian welfare state
• 1991 ETA - correction of economic imbalances
• 1995 EMU sustainable growth, more jobs

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International Alliances

• IMF(1948), GATT(1950), OECD(1969)
• 1948 Treaty of Friendship, Co-operation and
  Mutual Assistance with Soviet Union
• 1955 United nation and Nordic Council
• 1961 Associate member of the European Free Trade
  Association EFTA
• 1986 Full member of EFTA
• 1973 Free trade agreement with EEC
• 1992 Member of the European Union
• 2002 Euro

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Phase of Economic Growth in Finland

• From the middle of 1890s up to the WWII
• Few regulatory elements before WWI
• Trade unions weak
• Prices elastic
• Adjustment to business cycles market-based
• From the WWII until the end of 1980s
• Regulation in central role
• Cooperation between government and business
  sector
• Bilateral trade with Soviet Union
• Trade unions strong
• Government involvement with wage bargaining
• Post-1990 crisis
• Return to market driven economy

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The Road from Boom to Bust

• Macro economic development
• During the second half of 1980s strong upswing
  and overheating
• Volume of GDP dropped about 14 percent from peak
  in 1990 to the through in 1993
• Unemployment rose from 3 percent in 1990 to
  almost 20 percent in the beginning of 1994

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Road from Boom to Bust

• Monetary and exchange rate policy
• Deregulation of financial markets
• Interest rate regulation lifted
• Private sector allowed to borrow freely from
  abroad
• Deregulation not connected with other measures
  like bank supervision
• Authorities indicate their desire to stick to the
  fixed exchange rate
• Deregulation led to lending boom
• Private sector became highly indebted both in
  domestic and foreign currency terms
• Very vulnerable to changes in the domestic
  interest rates and in the exchange rate.

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Road from Boom to Bust

• Fiscal policy
• Central government financed balanced through a
  number of savings measures.
• Heaviest on transfers to local governments and
  households
• New employment pension contribution and
  unemployment contribution
• Efforts to cut state aid to industries
• Savings measures between 1991-1995 6.5 per cent
  of GDP, between 1995-1999 additional 3.5 per cent
  of GDP -total appr. 10 per cent of GDP

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Road from Boom to Bust
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Optimal currency area

• Mundell 1961
• labour mobility
• Product diversification
• Openness capital mobility, price and wage
  flexibility
• Automatic fiscal transfers, fiscal federalism

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EMU -system

• single currency
• coordinated fiscal policy
• SGP
• Lisbon strategy

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Main characteristics

• 1990s
• Local financial crisis
• Collapse of the SU
• Debt in foreign currencies
• High interest rates
• Fiscal consolidation, expenditure ceilings

• 2009
• Global financial crisis
• Global depression
• Debt in own currency
• Low interest rate
• Fiscal stimulus, SGP, national budget rule