The Case of Finland and the EMU: stabilizing a small economy

2. The Case of Finland and the EMU:stabilizing a small economy Reykjavik 2 April 2009 Ilkka Mytty Financial Counselor

3. Contents • Characteristics of the Finnish economy • Objectives of economic policy • Optimal currency area • EMU -system • single currency • coordinated fiscal policy • SGP • Lisbon strategy • Finland versus Sweden • EMU @ 10 - experiences

4. Characteristics of the Finnish economy • Free movement of capital, commodities and labour • Exports 44 % of GDP (2008) • Exports 0.6 % of World trade (2007)

7. EUROPE 1988 - EEC, EFTA, SEV

8. Objectives of economic policy • Universally prosperity • 1917 Safeguarding of the independency by restoring order and legal base • 1918 Food supplies • 1932 Enhancement of the economy • 1936 Improvement of living standard • 1948 Better living standard by growth of production • 1957 Recovery of production and employment • 1968 Removal of unemployment by accelerating growth • 1972 Focus in increase of living standard - especially citizens with low income • 1987 Modern and egalitarian welfare state • 1991 ETA - correction of economic imbalances • 1995 EMU – sustainable growth, more jobs

9. International Alliances • IMF(1948), GATT(1950), OECD(1969) • 1948 Treaty of Friendship, Co-operation and Mutual Assistance with Soviet Union • 1955 United nation and Nordic Council • 1961 Associate member of the European Free Trade Association EFTA • 1986 Full member of EFTA • 1973 Free trade agreement with EEC • 1992 Member of the European Union • 2002 Euro

10. Phase of Economic Growth in Finland • From the middle of 1890’s up to the WWII • Few regulatory elements before WWI • Trade unions weak • Prices elastic • Adjustment to business cycles market-based • From the WWII until the end of 1980’s • Regulation in central role • Cooperation between government and business sector • Bilateral trade with Soviet Union • Trade unions strong • Government involvement with wage bargaining • Post-1990 crisis • Return to market driven economy

11. The Road from Boom to Bust • Macro economic development • During the second half of 1980’s strong upswing and overheating • Volume of GDP dropped about 14 percent from peak in 1990 to the through in 1993 • Unemployment rose from 3 percent in 1990 to almost 20 percent in the beginning of 1994

12. Road from Boom to Bust • Monetary and exchange rate policy • Deregulation of financial markets • Interest rate regulation lifted • Private sector allowed to borrow freely from abroad • Deregulation not connected with other measures like bank supervision • Authorities indicate their desire to stick to the fixed exchange rate • Deregulation led to lending boom • Private sector became highly indebted both in domestic and foreign currency terms • Very vulnerable to changes in the domestic interest rates and in the exchange rate.

13. Road from Boom to Bust • Fiscal policy • Central government financed balanced through a number of savings measures. • Heaviest on transfers to local governments and households • New employment pension contribution and unemployment contribution • Efforts to cut state aid to industries • Savings measures between 1991-1995 6.5 per cent of GDP, between 1995-1999 additional 3.5 per cent of GDP -total appr. 10 per cent of GDP

14. Road from Boom to Bust

16. Optimal currency area • Mundell 1961 • labour mobility • Product diversification • Openness; capital mobility, price and wage flexibility • Automatic fiscal transfers, fiscal federalism

17. EMU -system • single currency • coordinated fiscal policy • SGP • Lisbon strategy

18. 1990’s Local financial crisis Collapse of the SU Debt in foreign currencies High interest rates Fiscal consolidation, expenditure ceilings 2009 Global financial crisis Global depression Debt in own currency Low interest rate Fiscal stimulus, SGP, national budget rule Main characteristics