Tag Archives: Fixit

“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.



Interviewed for Investment Perspectives on Share Radio

On Wednesday, I was interviewed by Robert van Egghen of Investment Prespectives on Share Radio. It was my first radio interview ever, and probably as a result of my overly winding answers, only a small section of the material was used. But I think the whole section, which considers the state of the Finnish economy and whether Finland would leave the Euro is very interesting.

You can listen to the segment here.

Below I have copied the answers I actually prepared based on the questions I received. Note that while many economists seem to think Finland has structural problems (as in neoliberal structural i.e. labour market negotiations, unions, collective agreements, welfare state..) I think the decline in (labour) productivity signifies another kind of structural issue: the Finnish economy has been changing rapidly, in that there has been a significant decline in industrial output. So in my view, this lower productivity level shows more a change towards services than any kind of “structural” problem like too high labour costs.

– Why is Finland’s economy struggling?
A combination of deficient demand in the Eurozone, sanctions on Russia and austerity politics domestically which squeeze purchasing power and increase unemployment. Nonetheless, there are export sectors which perform well, such as the board and pulp industries and recently the shipbuilding industry has gained important new orders. Also companies like Kone, escalators and elevators and Wärtsilä, ship engines and other marine technology perform well. The impact of the sanctions on Russia is fairly recent and affects mostly food and dairy producers.

– Problems in export market:
Demand for Finnish goods. The story of Nokia is well-known and as a result many jobs were lost in the IT sector and related sector, although many ex-Nokia employees are regrouping into new small companies. As for the pulp and paper industry: demand for paper is declining for a long time already but demand for pulp and board is still booming, thanks to the Asian markets.

On a more basic level, the problems relate to the construction of the EMU and in particular the policies of Germany. German wage repression has led to a large gap in e.g. unit labour costs and relative competitiveness, which the Finnish economy can’t repair. The German policy has been clearly deflationary and Germany has undershot the inflation norm of 2% for many years. This has harmed many countries in Europe, not only Greece and Spain, but also the Netherlands and Finland. If Germany hadn’t been so obsessed with a trade surplus, the current problems of “healthy” European countries would have been far less. Here you can see that the Euro is very much a fixed exchange rate system, with all the problems that follow from it.

– Productivity levels in Finland
Many sides to this question. On the one hand, you can see the effects of deficient demand – after all, if companies sell less with the same personnel, productivity declines. On the other hand you can observe in the declining or low average productivity a restructuring of the economy. Labour productivity in industry is always much higher than in services and for example in the Finnish paper industry labour productivity is nothing short of astonishing. But with a decline in industry and also slight decline in services sector the average productivity will get lower. Especially since construction is still fairly strong in Finland for the moment, which is a low productivity sector. However, that may change because the application for building permits seems to be on the decline.

– Finland under the radar in the Eurocrisis
Finland has slipped under the radar because until recently it had a triple-A rating and also consistently scores highly on competitiveness indexes. Furthermore, Finland has been rather tough on Greece. So people may get the idea that if only Greece is more like Finland, than it would be in a better shape. Most importantly, Finland, as a Nordic country, simply doesn’t fit in the ‘lazy Southern Europeans’ -explanation of the eurocrisis.

– Fixit?
One politician is campaigning a so-called citizen’s initiative for a referendum on Finnish Euro membership. That apparently has collected many signatories already. The question is who would benefit from Fixit. The export industries may benefit although it is not quite clear cut that a new Finnish currency would devalue against the Euro. That is perhaps the idea. But like Greece, a devaluation of the currency would trash the purchasing power of citizens, which is problematic because Finland does import a lot of food products. Also, it would eliminate the AA-status of Finland in all likelyhood. It is clear that the Euro is not working for Finland, but that is also partly domestic politics – Finnish politics insists on austerity as the recipe to get the economy going. But I think the Finnish economy and Finnish citizens will have to endure a lot more hardship before exit is considered. One advantage Finland has relative to Greece is that its banks are in good shape (perhaps thanks to Finland’s banking crisis of the early 1990s).

– Scandinavian union
In a way, a currency union between the Scandinavian or Nordic countries sounds sensible, since e.g. Sweden and Finland are main trade partners in many sectors. They are potentially close to being an optimal currency area, as even labour mobility between the Nordic countries is quite good. But I think it can only work if there is also fiscal and political union, otherwise it probably will end up like the original Scandinavian Currency Union of 1873, which failed because of politics and, in the end, WW I.

– Further growth of the Finns party?
Timo Soini’s party is now in the government, and in my opinion, Soini has achieved a very big tactical win in Finnish politics by becoming Foreign Minister. It is a topic he is interested in, but most importantly, he can’t be accused (by the media or his own party-base) as implementing policies that harm the Finns Party’s voters (seeing as these are by and large the exact people who may be dependend  on social security and/or dislike austerity politics aimed at curbing the welfare state.). There are many things that may influence the future of the Finns party, but I do see potential for further growth, as long as Soini keeps the rabidly anti-immigrant wing of its party under control.

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!