Tag Archives: export-led growth

“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.

 

 

“Competitive Structural Reforms”

“Competitive Structural Reforms” http://fsaraceno.wordpress.com/2013/12/16/competitive-structural-reforms/

It seems that the EU policy elite (and also national policy elites for that mattet) are still not able to get around the fallacy of composition in the advocacy of the German model we should all emulate.

Why Germany (Mistakenly) Thinks it Can Kill Its Export Markets Through Austerity and Still Prosperll

http://www.nakedcapitalism.com/2013/04/why-germany-mistakenly-thinks-it-can-kill-its-export-markets-through-austerity-and-still-prosperll.html No further comments. Same also goes for the Netherlands, Finland and Austria to some extent.

German ‘growth’

UPDATE, see this.

http://www.project-syndicate.org/commentary/the-eurozone-s-struggling-core-economies-by-ashoka-modyThe talk of the day is the decline of the German economy last quarter. Who knows if it will be revised even more, or if the expected growth of 0,4% will even shrink more than expected. As I have said, like many, many others, the German model is based on export-led growth, and given that Germany’s main export partners are the Eurozone countries, the German economy was bound to take a hit sooner or later. With Southern Europe almost beyond hope, and even the Netherlands and Finland in a fairly bad situation, Germany has no hope other than China and the USA. That is, unless it starts to acknowledge that austerity is so totally the wrong policy for the EU, especially now. Bill Black has the goods otherwise on this issue (and the role of the media):

Germany’s export-based strategy cannot work for the world. We cannot all be net exporters. Indeed, the more that Germany exports the harder it is for other nations to export their way out of recession. The journalists also fail to note the tremendous loss that the German export strategy imposes on German workers. Unemployment is low, but German workers’ wages have been reduced materially in real terms as productivity has grown. The result is very large corporate profits and ever higher inequality.

Germany is kind of operating on the basis of a compositional fallacy – we cannot all export our way out of the crisis (unless, as per Paul Krugman, we find a star system to export to).

It is a big catastrophe that European (and especially German, Finnish and Dutch) policymakers still don’t get this crisis, and the structural problems of the euro system (only shared currency, no shared fiscal regime, banking union etc). The policy making of the Euro’s designers AND current policy makers is the great failure of our time and already millions suffer from their delusions!