“Fixit” is unlikely to happen

Every once in a while there are opinion piees that state that Finland would be much better off outside the Eurozone. This is most likely true, most importantly because of the freedom a currency sovereign has. Finland probably shouldn’t have joined the Euro – although it is rather difficult to do a counterfactual analysis here. The example of Sweden is often pointed to as proof for the wrong decision of Finland to join the Euro (which was probably more based on (geo)politics than on economics). But there are significant differences nonetheless (which I will not discuss here in too much detail – this is just a thinkpiece on why Fixit is not going to happen).

To start with the obvious: suppose that Finland somehow manages to break loose of the Euro – what could we expect? Will the new currency appreciate or depreciate? There is no way to say. At some point I would have been fairly certain the currency would have greatly appreciated, but that was before the eurocrisis hit Finland hard. At present, I’d say it depends. In any case a devaluation of the new currency is also not necessary good for Finnish consumption. The final effect of a floating currency depends in particular on European and world demand for Finnish products. This leads to the second bit.

Suppose Finland is outside the Euro, what would change for the Finnish economy? I’d say: not much. At least, in the sense that a floating currency is not going to help with a quite undiverse industrial base, of which the traditional paper industry is not going to save the day due to ongoing decreases in paper demand. Pulp and cardboard may be growing product categories within a floating currency regime, but that really depends on world demand for boxes, for instance, from China. The biofuel industry could be a potential big player. Regarding the metal industry – this is also very dependent on outside demand, since it produces mainly investment goods. This means that economies elswhere have to run well to provide a boost to this sector. Given the mismanagement of the Euro-area, and almost-growth, this is not a likely driver of growth. Finland has of course a great reserve of IT experts and many smaller and bigger firms are using those – but Finland should be wary of putting all eggs in one basket. I’d say, that for all reasonable purposes, export-led growth is not a very likely possibility even if Finland managed to get out of the Euro. (maybe a dairy-led export boom to Russia?!)

The core problem – also in the context of domestic consumption – is that Finland does not produce all that many consumer products (unlike Sweden). Liberalization has made domestic electronics producers uncompetitive, so in case of devaluation, there is no easy import substitution anymore. This, by the way, is very similar to the Greek problem.

But the biggest problem is simply the technical side of getting out of the Euro. The episode with Greece has shown that the ECB is playing hardball, and probably it simply is not possible to get out of the Euro in a controlled way. If you think about the introduction of the Euro, then it should be clear why Fixit is not going to happen (even with the great Finnish engineering capacities): it took at least three years to convert all systems to use euros, and it was an open and transparent system in the sense that everybody knew when the euro would be introduced. With a Fixit, or Grexit, or whatever kind of exit, the date of introduction of the new currency will not be known and I suppose that even in Finland such a big process could not be pulled off quickly, smoothly and secretly. In that sense, outside forces could enact the breaking up of the whole Euro-area, but a single country won’t/can’t exit.

Concludingly, I’d say that the chance of Finland exiting the Euro is about the same as Germany giving up its fetish for balanced budgets. Not zero, but extremely low.

 

 

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One response to ““Fixit” is unlikely to happen

  1. Reblogged this on Finland Politics and commented:
    Very interesting views

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