Tag Archives: Eurozone

“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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Greece, Grexit and IT issues

This post is a bit tongue-in-cheek but meant to provoke discussion. Recently, especially Naked Capitalism.com has spent attention to the practical, IT issues of a Grexit. See e.g. here and here.

Here’s a thought: with the collapse of Nokia and the withdrawal of Microsoft from some of its remains in Finland and the resulting unemployment among highly skilled IT people in Finland, why not set up a Finnish-German IT task-force to engineer a controlled exit for Greece from the Eurozone ? We could include Estonia as well, so we have two countries with very advanced netbanking society and structure. This could also include reforms of tax collection (I am very happy with the Finnish tax system, as opposed to e.g. the Dutch tax system, from a user perspective that is.)

Furthermore, Estonia has experience with cybersecurity and Finland has F-Secure, which I think is a very solid company regarding virus protection and malware detection.

Just think of it: Greece could regain freedom in a hopefully non-destructive way and Finnish IT professionals get a very complicated multiyear project. Rather than Finland exiting the Eurozone, WE CAN FIXIT!

Link

‘Single banking union doomed to fail’

‘Single banking union doomed to fail’

‘The discussions to date about the latter [common banking system] tell me that the political masters in Europe heavily controlled by Germany are making the same type of errors that they made back in 1992 and after in relation to the currency.

They just cannot get it sorted that a federation can only work if there are certain characteristics present. The very characteristics that the Germans will never allow to exist.

That tells you why the Eurozone is a recipe for stagnation and periodic crisis among at least several of its member-states.’

‘Nuff said.

Neil Fligstein and the disintegration of suppport for the EU in the Eurocrisis

I am currently reading Neil Fligstein’s ‘Euroclash: The EU, European Identity, and the Future of Europe‘ in relation to a project I am hopefully starting next year. I am still in the beginning of the book but it has clarified a lot of phenomena already which have happened since the start of the Eurocrisis. One thing that struck me in particular was that Fligstein awarded a high probability of a scenario of ‘muddling through’. This is in the context of the creation of an European society, but it sounds extremely familiar:

Here, governments continue to be ineffective in combating slow growth and inflation, but keep the EU at its current institutional level. This could happen without increased cooperation across Europe. In this version, each welfare state decides to follow its own path toward economic and social reform.

The kicker, of course, is that due to the EMU (and policies invented since 2008) countries do not have the freedom to follow their own paths. Just the other day the European Commission revealed which countries are up for in-depth reviews (16 out of 17 eurozone members!) which may or may not have rather far reaching consequences (ranging from ‘Recommendations’ to placement under the Excessive Imbalances Procedure).

But my main point is actually that Fligstein probably correctly analysed the basis of EU support prior to 2008 (when the book came out). He argues, in short, that support for the EU is largely clustered around support for trade. This is also a conscious choice by governments – they have wanted to keep control of non-trade policy fields at the national level (pensions, social security, education etc.) So, the original support for the EU, according to Fligstein, comes from those social groups that have interests in issues of trade – business owners, professionals, lawyers etc. Through international interaction also research, higher education and such became more represented through associations. Fligstein argues that in these processes benefits from trade also ‘trickled down’ to the middle classes in the form of the possibility of relatively cheap holidays and the possibility to work  and study elsewhere. He argues that one could make a three-fold distinction between ‘classes’ – upper-class, ‘cosmopolitan’ people who have benefited greatly from trade and intra-European social interaction, a middle class which has benefited from the trade but is not so active in terms of social interactions (e.g. in trans-national associations) an finally a ‘lower’ class which has been actually been harmed by the opening of trade – whether through displacement of jobs or unavailability of means to travel and study (simply put).

The developments in the Eurocrisis, and in particular the economic policy components of this, look like the EU (or the EC in combination with the so-called core members who call the shots) is actively breaking down the support it had. Blue-collar workers (within a country) have usually had few reasons to especially like opening of trade, but the citizens which in Fligstein’s argument are the kind of middle class used to be quite important for increasing European integration.

It is an entirely correct observation (e.g. by Yanis Varoufakis) that the EU has been very much an elite project – to which there have been both winners and losers. Current economic policies (e.g. austerity, Macro-economic Imbalances Procedure) do very much to touch upon the issues that the less-engaged groups of society wanted to keep at the national level (broadly the welfare state). But, in contrast to earlier, these policies actively harm the ‘middle groups’ that previously have been instrumental in making the EU palatable in the first place. Why? The economy of many European countries is down the drain, which makes unemployment also a daily reality for those with previously safe jobs (relatively highly educated, salaried employees). The current economic policies are aimed at ‘structural reforms’ and ‘labour market flexibility’ – which are never fully explicated but amount to dismantling many achievements of the welfare state and labour market institutions.

Thus, the groups that previously found benefit from the EU are now also in the category that experiences mostly harm. Therefore it is absolutely no surprise that in many European countries one can observe a surge in anti-European parties, and more on the right than on the left. The EU has, through the back-door, found ways to directly impact on the policy fields that anti-EU groups (i.e. citizens) had wanted to keep out of the European scope. It is very understandable that citizens in many countries are enraged about the EU – which has never been an object of direct love in any case.

 

Maybe the political implications of current economic policies will dawn on the elites that make these policies before it is too late and the EU disintegrates even before the Eurozone disintegrates.

Eurozone choices

“Klaus Kastner gives up on the Eurozone (and Greece’s prospects of recovering within) | Yanis Varoufakis” http://yanisvaroufakis.eu/2013/08/02/klaus-kastner-gives-up-on-the-eurozone-and-greeces-prospects-of-recovering-within/

Either the Modest Proposal (preferably) or else the dissolution of the eurozone as a solution to the eurocrisis…

Guardian live-blog: Eurozone recession continues as GDP falls by 0.2% – Finland, Netherlands, Germany, Austria weak.

Over here. Key points:

• French economy shrinks 0.2% in first three months of 2013
• Italy in longest recession on record
• Germany barely grows
• Czech Republic and Netherlands also in recession

I might add that according to these Eurostat data, Finland is equally much in recession as the Czech Republic, Spain and more than the Netherlands. Is another core Euromember going down slowly?

Now, what was that talk about again that the Eurozone is recovering? Where is growth supposed to come from*?

Finnish and Catalonian similar thoughts on the Eurocrisis – to some extent

Via Ambrose Evans-Pritchard:

If the countries of the periphery were on a gold standard, they would have already been forced out of it. The euro-induced depression is a breeding ground for populism, anti-politics, extremism and bad-blood in general; it is a toxic environment for dreams of an ever closer Union.

The course of events demands a lifting of the taboo surrounding the dissolution of the euro zone. If solidarity cannot be achieved through a progressive reform of Europe’s economic institutions, then perhaps it is time to consider taking them apart. Perhaps the only way to save the Union is to ditch the euro.

This was written by a Left-wing Catalan economist, here, and in Finnish I wrote something very similar, although I did not explicitly say any one country should leave the euro (although it starts to look like a risk worth taken, in the light of years of recession, hysteresis and political unrest).