Tag Archives: Macroeconomics

“Yanis Varoufakis: Why Asymmetrical Monetary Unions Are Bound to Fail”

“Yanis Varoufakis: Why Asymmetrical Monetary Unions Are Bound to Fail” http://feedly.com/k/1eh37Mx

UPDATED: Greece, Eurocrisis and the on-going discourse of pain – Jutta Urpilainen edition

A few days ago, Jutta Urpilainen stated (in Finnish) that ‘the passionate budget cutters have crawled back in their holes’. She states that it is good that the Finnish government has agreed that ‘adaptive policy’ should be 50% cuts and 50% tax increases. Also she is proud of the Finnish contribution to the Eurocrisis-debate – ‘Finland has been the toughest.’

It is not clear to me if she prefers this 50-50 rule for distressed Eurozone members as well. Finland has been tough with Portugal, Greece and Spain (collateral for support for bailouts). If I have time I will try to find the answers the goverment gave to these questions. But it seems that the answer broadly speaking was ‘Trust us, we know what we are doing and there are no credible alternatives.’

So I don’t know what is the current state of Finnish official thought on the Eurocrisis is – there is curiously little news in the web!

Via the NY Times:

Finance ministers had been seen as likely to give tentative approval for the next tranche on Tuesday though the money is unlikely to be disbursed before December and a deal on debt reduction may require further talks.

Urpilainen repeated that Finland was ready to give Greece more time to reach its financing programme targets but said a restructuring of its debt was out of the question.

Who is she fooling? Who are the Germans, Dutch and Finnish governments fooling, and the ECB?

Yes – Greece should never have been in the eurozone, but neither should probably Italy have been. In the video in this post Yanis Varoufakis explains how Greece cheated itself into the eurozone – by imitating Italy. And seen from the other end, why is the goal for Greece a debt-to-GDP ratio of 120%? Because Italy has been there, and trying to set a stricter standard would cast doubts on Italy as well (and quite possibly, Belgium, although I haven’t seen much news on that country recently).

But why do European finance ministers insist on doubling down on the failed austerity policy? The IMF has by now admitted that the multipliers for the effects of contractionary fiscal policy are far greater than assumed, and there is no way austerity is going to a) reduce the deficit in the short OR long term and b) is no way to restore growth (see e.g. this important post on Spain by Edward Hugh).

So Jutta Urpilainen wants to give Greece more time. Great. What does it matter? Greece will never achieve its goals under current policy. Giving more time is akin to trying yet another round of blood-letting while the patient actually needs nourishing food and medicine. Giving more time to Greece increases the probability that Golden Dawn will grown in all-too-sure elections. With this policy road, Greece is on its way to becoming a failed state. A friend of mine was as a trainee in the Technical University of Athens, and nobody can do any research anymore because there is simply no money for reagents and equipment. How do you expect a country to recover when it is sucked dry?

The main problem lies in the refusal for debt restructuring. Urpilainen and other ‘strict’ masters of European finance still refuse to acknowledge that it is as much the fault of the banks who borrowed money to Greece (and Portugal, Spain) and caused bubbles to inflate, inflation to rise and wages to become uncompetitive relative to Germany. Where is the rule that when investing/borrowing money, you should assess the risk? Where have the German, Dutch and Finnish risk assessors been? The periphery did not suddenly become financially safe because they had the euro or the ECB set the interest rates!

The continuing refusal of debt restructuring will sooner or later spell the end for Greece in the Euro. Either through changes in politics in Greece (Golden Dawn as a major party) or simple economics there will come a sudden and expectedly unexpected default of Greece (ok, Greece has actually already defaulted once).

[UPDATE: see this transcript of the state of the Greek society]

When this moment comes, the question voters should ask their governments is:

Why did goverments cover up the bad risk assessments of banks? Germany borrowing money to Greece to buy German products is akin to a car salesman borrowing you money to buy his shiny car. This is risky and banks should have known better.

Anyway, the Urpilainen Road of Pain (Urpilaisen kipukatu, which is built also by Merkel, Rutte and Draghi) will just lead to more destruction. Greece is already a total wreck – what do you expect to still get out of it?

Oh and by the way – the new Dutch government has been scared the **** out of itself by calculations indicating that its austerity policies will affect the purchasing power of nearly all income groups up to 5 percent per year.   Given the export dependency of the Dutch economy and its totally calcified real estate market this is not a good development. Maybe they finally start to understand that austerity is just simply self-defeating?

Updated – The state of Finland in the Eurocrisis

UPDATE: these graphs are already outdated, I have to see what Eurostat can give in terms of newer data. A year is a long time in economies! And maybe in particular the stuff about the housing bubble is not accurate – I have a newer post about that here.


Something slightly different this time. In a reaction to this news, which says that Finnish exports suffer from the eurocrisis, I would like to present some data (all from Eurostat) on how Finland has fared since around 2007. The idea came from posts like this one by Edward Hugh, most recently about Slovenia. I haven’t managed to get completely similar data graphs, but these will do.

First of all, Finland is one of the few Eurocountries left with a triple-A status, which apparently gives it some clout regarding its wished in the ongoing resolution of the crisis (recall the demands for collateral on Greece, now repeated for Spain?). The triple-A status derives ostensibly from Finland’s low government debt, which is show below since 2007.

Finnish and German Government Debt

Although it is still much lower than Germany’s level, it is creeping upwards. But Finland is clearly one of the ‘good boys’.

Does the low interest rate of the ECB fuel a housing bubble in Finland? It does not appear to be so, at least for the aggregate, it is nonetheless a slowly upwards trend which has its own problems. But there might be a distinction between the capital area around Helsinki and the rest of Finland. I will try to figure that out using Eurostat data.

Also construction output is remarkably stable, not much affected by the eurocrisis. or showing signs of a bubble. One reason for this might be the pull of the Helsinki area, where there is a shortage of affordable housing.

But the low rates of the ECB may seem to lead to increasing inflation in Finland. This is in itself not so surprising at this moment, but it is part of the explanation of Finnish reluctance to go ‘all-in’ regarding interest rates, because these would lead to increasing inflationary pressure. A more detailed investigation of the various components of Eurostat’s inflation indicator will give a hint of the sources for the inflation, but I expect that these are mostly related to imported products (but that is an educated guess, will follow up).

This may also be seen in Finland’s worsening position on exporting goods:

As can be seen, this is a long term trend, although the crisis from 2007 onwards may have worsened this position. In a different graph, exports and imports to the EU show nonetheless that the balance is more positive, but barely so.

Finally, the primary balance of government budget shows that things have been slightly bad, but with the current government’s focus on getting the budget balanced, the budget deficit will probably soon disappear.

All in all, this is a very quick and dirty post about the current status of the Finnish economy- There are two things in particular that are worrying: inflation and the trade balance. The first has to do with the interest rate set by the ECB at a very low level, and the second with (presumably) declining demand in especially Germany and the rest of the world. Considering retail, domestic demand seems to be holding up quite well.

At least after the worst of the initial economic crisis, retail has recovered to its 2007 peak.

Many aspects of the economy are left outside this post, especially concerning unemployment and various export sectors, but the Finnish economy seems to be doing quite well still. It remains to be seen what happens to inflation and the balance of trade, though. For a small export-oriented economy it is not a good development that it might be importing more than it is exporting.


I toyed around with Eurostat some more and I extracted more statistical information. First up is GDP per head, which does look good still for Finland:

Source: Eurostat

Two things do stand out however: the financial crisis in the early 1990s was indeed very severe and not unlike the present one (a lot could be learned from how Finland and Sweden dealt with their banking crises). Second, although the path of growth has been resumed it nonetheless looks like the Finnish economy is performing under its full potential (if we’d extrapolate the trend from pre-2007, it is clear the current growth track is at a lower level). But not bad at all.

Unemployment then. Finland has a union-managed system of unemployment funds, which means there is a large incentive to belong to a union (you get up to 500 days of a certain percentage of your last salary, more or less). This does not affect the level of unemployment, but it does reduces the human suffering.

Source: Eurostat

As can be seen, in the early 1990s the unemployment rate reached very high levels, not unlike what is seen in Spain or Greece (although those are worse in the present time). But although the unemployment rate has dropped since then, it is still quite high and seems to have stabilized around 7-8 %. Furthermore, the present crisis has again sent the rate upwards, at least temporarily. Behind this relatively high unemployment rate lies a complex story of economic restructuring which has to be told elsewhere, but basically it is from manufacturing to high-tech services (think Nokia, F-Secure). This has led to a large proportion of long-term unemployed, that is unable to find work since their jobs don’t exist anymore.

Source: Eurostat

This graph, which also shows the seasonal variation, shows that in Finland, even nowadays some 20% of unemployment is long-term unemployment. This is a potential problem in terms of the welfare-state but also politically, because these people are not so likely to have confidence in the current political parties, which, after all, haven’t managed to create policies that get them back to work.