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Finland should exit the euro

I think the progressive side of politics has a real problem when it is increasingly gazumped in policy insights by politicians and/or commentators from the populist, xenophobic, racist, homophobic, far right-wing. Whether Finland’s Foreign Minister Timo Soini is all of those things or just nationalistic and far right (one of the members of his Finns party wants homosexuals and some foreigners rounded up and sent to some remote Baltic Sea island), he is certainly correct when he told the press yesterday that “Finland should never have signed up to the single currency union” and “could have resorted to devaluations had it not been for its Euro membership” (Source). Earlier this month (December 4, 2015), Statistics Finland published the latest National Accounts data for the third-quarter 2015, which showed that real GDP declined by 0.5 per cent in that quarter and by 0.2 per cent over the previous 12 months. In the past 12 months, both exports and imports declined by 3.4 per cent, the former signalling declining markets and the latter declining domestic income – both bad. Investment spending fell by 3.9 per cent in the year to September, which will further undermine the nation’s potential growth. It is now becoming the basket case of advanced Europe.

After that rather sobering introduction to the basket case of advanced Europe, consider the following third-quarter real GDP results (Source):

In real terms, non-seasonally adjusted Gross Domestic Product (GDP) for the first three quarters of 2015 increased by 4.5% compared with the same period of 2014. Total domestic final expenditure increased by 6.2%. Private final consumption increased by 4.4%, government final consumption by 0.9% and gross fixed capital formation by 15.8%. While the balance of trade in goods and services improved in nominal terms, the contribution to growth of foreign trade was negative as exports grew by 7.4% and imports grew by 10.9%.

That doesn’t sound as though it is describing a basket case economy.

What country do you think this data belongs to (and don’t check the Source link before you have a guess)?

I will come back to discussing this data soon.

Since my visit to Finland in October of this year I have been increasingly studying various reports and thinking about what an exit from the euro would mean for the nation. My conclusion is that it would be unambiguously better for Finland to immediately exit the Eurozone, restore its own currency and floated on international markets.

Over the next several months, I will write more about that thinking.

For reference and background, my most recent blogs on Finland are:

1. Finland – more austerity is not the answer

2. The Unit Labour Costs obsession in Finland

3. Full video – University of Helsinki lecture, October 9, 2015

I don’t intend traversing again the issues relating to the demise of Nokia and the loss of export capacity in its forest products sector as a result of structural shift in the media (newspaper) industry.

I mentioned recently that the Finnish parliament will soon debate whether the nation should exit the euro and restore its own currency.

A petition has gathered at least 50,000 votes, which means the parliament is required to formally debate the issue.

So will follow that parliamentary debate (when it happens) with some interest, although the latest euro barometer poll suggests that around 60 per cent of Finns still wish to remain in the common currency. However, that proportion has fallen from around 70 per cent in the last 12 months and continues to point south.

As the economic situation declines further on the back of the austerity intent of the current coalition government, one would expect the degree of dissatisfaction with the nation’s membership of the EMU to increase further.

There are also conservative forces (for example, the EuroThinkTank), which are providing analysis to show that Finland would be better off if it abandoned the common currency and floated its own currency, like Sweden.

For example, earlier this month (December 7, 2015), an economist from the EuroThinkTank, argued – Why Finland would be better off without the euro.

Given the conservative background of this economist, it is no surprise that his argument is based upon the rigidity of elevated labour costs in the face of declining industrial prosperity and the inability of Finland to alter its exchange rate to restore international competitiveness.

But, one thing that the article does get right is that when Finland last encountered a major economic downturn – the Great Depression between 1990 and 1994 – which was driven by the massive over expansion of a deregulated banking system (which it shared with Sweden) and the impacts of the collapse of the Soviet Union (given Finland’s particular exposure to the old Soviet system) – it adjusted through a large exchange rate depreciation.

I don’t intend to add to the voluminous literature on the 1990s collapse in this blog. But while real GDP growth in Finland fell by 10.4 per cent between March 1990 and December 1993 (the trough), something else of significance happened.

The following graph shows the evolution of the Finnish Markka, the currency in use before they abandon their currency sovereignty to enter the Eurozone, from January 1971 to December 2001.The parity is expressed in terms of the amount of Markka per US dollar.

So a rise in the graph indicates a depreciation and vice versa.

The first thing to note is the large swings in the currency, which allowed Finland to adjust to its external situation without having to cut domestic wages.

Once the Great Depression ensued after a sustained period of exchange rate appreciation driven by a massive investment boom, the currency depreciated by some 40 per cent between July 1991 and March 1993.


The following graph shows the Bank of International Settlements (BIS) measure of real effective exchange rates for Finland, Germany and Iceland between January 2005 and November 2015.

You can learn about this data from their publication – The new BIS effective exchange rate indices – which appeared in the BIS Quarterly Review, March 2006.

There was an earlier publication – Measuring international price and cost competitiveness – which appeared in the BIS Economic Papers, No 39, November 1993.

Real effective exchange rates provide a measure on international competitiveness and are based on information pertaining movements in relative prices and costs, expressed in a common currency. Economists started computing effective exchange rates after the Bretton Woods system collapsed in the early 1970s because that ended the “simple bilateral dollar rate” (Source).

The BIS ‘real effective exchange rate indices’ (REER) adjust nominal exchange rates with other data on domestic inflation and production costs.

The BIS say that:

An effective exchange rate (EER) provides a better indicator of the macroeconomic effects of exchange rates than any single bilateral rate. A nominal effective exchange rate (NEER) is an index of some weighted average of bilateral exchange rates. A real effective exchange rate (REER) is the NEER adjusted by some measure of relative prices or costs; changes in the REER thus take into account both nominal exchange rate developments and the inflation differential vis-à-vis trading partners. In both policy and market analysis, EERs serve various purposes: as a measure of international competitiveness …

If the REER rises (falls) then we conclude that the nation is less (more) internationally competitive.


It is clear that Finland and Germany are moving in lock step and so gains from measures that might be taken internally are lost.

Please read my blog – Eurozone unemployment – little to do with international competitiveness – for more discussion on this point.

But Iceland is the interesting case. It had a huge collapse in 2008-09. But its government did not engage in widespread internal devaluation. Instead, the exchange rate fell sharply which gave the nation instance gains in international competitiveness.

Once the crisis subsided, you can see that the exchange rate increase has seen the REER for Iceland rise again somewhat.

The point is that gains to international competitiveness (if that matters) are much better achieved by allowing the exchange rate to move in response to external imbalances that the markets want to redress than attacking the local wages and conditions.

First, depreciation impacts on all import prices. The nation as a whole has to take a real income loss and then the question is how is that shared.

Notwithstanding the fact that exports then become more attractive to foreigners, the depreciation also gives domestic residents and firms an incentive to substitute away from those goods where possible.

So when the Australian dollar, for example, is weaker, we travel less overseas and take holidays within Australia. This boosts domestic demand and sustains employment.

Firms have an incentive to alter production or engage in new product innovations. I have noted before that Greece, for example, exports its world class olives to Germany and Italy for processing into olive oil. If their exchange rate depreciated somewhat, then it would provide incentives to local processors to start up and investment would be attractive in that sector.

There are many examples such as that.

Second, depreciation does not alter nominal incomes within the domestic economy, whereas internal devaluation does. This is quite a significant difference.

Most liabilities are specified in nominal terms (for example, mortgages). If real income levels are being reduced, people who hold nominal liabilities have to reduce expenditure on some items to ensure their nominal incomes can meet their liabilities.

Depreciation of the currency in international markets provides scope for domestic residents to make those sorts of shifts in spending.

But internal devaluation directly reduces nominal incomes and makes it much harder to rearrange household spending patterns to ensure all nominal liabilities can be serviced.

It is therefore a much more damaging path to improving competitiveness.

Finally, it is clear that increasing productivity will also reduce ULCs. The Finnish government is facing an on-going recession which needs more spending to redress.

Private spending (particularly capital formation) is weak. Internal devaluation will suppress domestic consumption growth even further.

Now consider the following graph, which shows the Bank of International Settlements (BIS) measure of real effective exchange rates for Finland between March 1990 in February 1998 (blue line), Finland between December 2007 and November 2015 (red line), and Iceland between December 2007 and November 2015 (green line).

The numbers on the horizontal axes refer to the months after the peak in real GDP corresponding to each period.

The results are rather stunning. The graph should also be understood in terms of the initial graph I presented showing the post 1970 history of the Finnish markka (see above).

Before Finland entered the Eurozone its exchange rate was clearly able to adjust to provide stimulus to the economy as noted above. The adjustment for Finland in the early 1990s was not as rapid as it was for Iceland in 2008, but the ultimate depreciation (the sustained change) was clearly similar.

Conversely, within the Euro, Finland has had no room to move in this regard, which means that a key adjustment process for a sovereign currency is deliberately excluded.


The article cited above notes that:

The period of the floating markka was described by monetary calm and very fast economic growth. During this period, Finland also made a qualitative leap from resource-based economy to knowledge-based one with the ICT as the leading sector.

That point is obvious and demonstrates this sort of structural shifts that occur when exchange rates are flexible rather than fixed.

In that sense, I agree with the article’s conclusion that:

All historical facts point to the same conclusion: Finland should never have joined the euro. If Finland would have its own (floating) currency, it would depreciate against other currencies when there would be fall in global demand, the exchange rate of her main export partners would depreciate or when there would be an increase in the domestic production costs (e.g., wages). When Finland joined the euro, it gave up this instrument …

In the history, monetary unions have always broken down (either partially or completely) without a functional federal structure.

Even if I have serious misgivings about some of the analysis presented in that article, the statements above are clearly correct.

To see why this matters, consider the following graph, which shows indexed real GDP growth (100 = peak) for Finland between the March-quarter 1990 and the December-quarter 1997 (that is, the Great Depression period), and for Finland and Iceland between the December-quarter 2007 and the September-quarter 2015.

The horizontal axis indicates quarters after the peak real GDP was reached.


The results are fairly obvious. Each episode was severe in its magnitude. The adjustments in the aftermath of the crises were drawn out.

You can see how took for real GDP in Finland to cross the 100 line again – December-quarter 1996 – 28 quarters. Iceland took the same number of quarters (28) before its real GDP index once again crossed the hundred mark.

However, in the current crisis, real GDP in Finland is continuing to diverge from its December 2007 peak and is now 7.3 per cent below that Mark and continuing to decline.

Two significant things were different in 1990 in Finland and in 2008 in Iceland relative to 2008-2015 in Finland.

1. Finland has been constrained by the unworkable fiscal austerity imposed by the European Commission in the current episode. While Iceland didn’t embark on a fiscal splurge it did alternate fiscal policy in such a way that household disposable income was increased.

2. The exchange rate can no longer adjust for Finland.

I also remind readers that the official unemployment rate in Iceland is currently 3.5 per cent as at November 2015, whereas the unemployment rate in Finland is 8.2 per cent with a sharply declining participation rate further holding that rate down somewhat.


I will write more about these matters in further blogs. But it is a shame that it has to be left to the Finns party and some mainstream conservative economists to articulate the case for euro exit in Finland.

The progressive politicians are stuck in there world of glorious Europe and can’t see the reality that that political dream is crumbling around them and major two-party systems are falling apart (checkout the Spanish election results as an example).

The data quiz at the outset – obviously the real GDP data was the latest release for Iceland.

That is enough for today!

(c) Copyright 2015 William Mitchell. All Rights Reserved.

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    This Post Has 16 Comments
    1. Yes. “left wingers” need to grasp that there is nothing wrong with left wing populism. Straightforward arguments on right to work, to decent work, to a sustainable world should not be difficult to articulate simply. Right wing populism is everywhere but the “left” seems to feel it has to remain po-faced and “deep”. meanwhile the right just keep getting away with more and more.

    2. Dear Bill

      In 2., just before the conclusion, you state that unemployment in Finland is 3.5% and 8.2%. Obviously, there is a typo in there. The 3.5 figure probably refers to Iceland.

      If Podemos had won the election in Spain, their performance would probably be just as disappointing as that of Syriza in Greece. If the True Finns were to come power in Finland, they would quite likely make good on their promise to abandon the euro. The extreme right may be stained by racism and xenophobia, they aren’t handicapped by anti-nationalism, as the left is. As long as the left believes just as fervently as the neo-liberals that European unity is just wonderful, that nation-states are obsolete, and that nationalism is evil, we can’t rely on them to effectively reverse current economic policies.

      Regards. James

    3. Oddly it is a grave sin to support restrictive immigration policy in Europe, while at the same time we have many countries in the world that have very restrictive immigration policy. For example how open is Japan, an rapidly aging country, to immigrants?

    4. I think that world’s population is in unstable equilibrium, numbers are only going to go up and every place is going to fill up with people. No amount of population movements are going to change that. Only thing that helps is population control in the long run.

      So free movement of people is not going to be an answer. Meanwhile you would have to be practically blind not to see the downsides, not to see ethnic strife that runs ripe in many multicultural nations. Why is united states so right-wing for example, why does the tea party who’s platform is pure social darwinism get so much support?

      It would be better to help people where they are, to bring jobs to the people and not people to the jobs (not that there are any in euroland right now, anyway).

    5. Good blog. A quick comment or two.

      First, lately quite a few economists and politicians of various persuasions have made comments basically variating on the theme that Finland would have been better off without the euro. Fair enough! However, the corollary is almost always that this does not imply that exiting is a viable option, since no one can know what might transpire were the country to actually go for it.

      When it comes to the euro the true Finns party is all talk and no walk. Soini in particular. His goal is to be a minister. There is no promise to abandon the euro!

      I would be quite surprised if the true Finns started to campaign for a U-turn in europolitics, given that the party basically made one in 2012 – towards a more pro euro position so as to become viable to be part of the government. So Soini’s line has been that even if the euro has been a mistake, at this hour there are “only bad options available”, meaning we will play nicely along the neoliberals. He says as much in the piece linked in the blog, the reality is that Finland is a menmber. Same story as with many commentators, then.

      In my view there is thus no trade off between the true Finns’ very regressive and thus objectionable societal policies and a “sound” euro policy as implied in James Schipper’s reply. Economically they are yet another neoliberal party but resort to anti european rants now and again for PR purposes.

      On that note I would add to bill’s analysis that along with rediscovering the fiscal space openly up by monetary sovereignty one of the most urgent tasks to the european left would be posing the euro question in terms of class and not nationality. Austerity rains on the working classes mainly. And the institutional setup of the euro translates the basic capital labour antagonism into antagonisms obtaining between nationalities via the export led growth model. Beggar ones workers to beggar ones neighbours is in the DNA of the emu.

      The nationalist right would not mind the export led race to the bottom and doing away with what is left of the universalist welfare states. The true Finns are very much part of the problem, at least from where I stand.


    6. The left had better start allying itself with small to medium sized businesses because their interests dove tail with that of the individual, i.e. a supplementary income serves both of their purposes. Just drop all of the reactive orthodoxy on both sides of the political aisle. If one values power, control or being right in their own mind more than individual freedom and systemic free flowingness they are part of the problem not the solution. The alliance of the individual and the vast majority of business entities is exactly the prescription for the political fight that is inevitable and necessary.

    7. I don’t know Bill. If we applied your logic above to Australia, WA should have its own currency because of the low iron ore prices and NSW and Vic would have been better off with their own currencies during the mining boom. You could take it further and suggest that NSW should have two currencies, one for Sydney and one for regional areas, given the disparities is unemployment rates between the two areas.

      There is high unemployment in Finland, low unemployment in Germany, why don’t the Finnish go where the jobs are, just as people did here in Australia during the mining boom? Nobody suggested that people in NSW shouldn’t move to WA for work or that NSW should have its own currency when the AUD went parity with the USD.

      In fact, I suspect Germany knows they need more workers and other Europeans wouldn’t shift, so they took in a million Syrians to do the work.

    8. “If we applied your logic above to Australia, WA should have its own currency because of the low iron ore prices and NSW and Vic would have been better off with their own currencies during the mining boom. You could take it further and suggest that NSW should have two currencies, one for Sydney and one for regional areas, given the disparities is unemployment rates between the two areas.”

      But Australia has a national government that can sort out regional disparities and create full employment via a Job Guarantee.

    9. But they could become elected if the system was put in place to elect their central government instead of letting banks run the show.

    10. Hey Bill, another fascinating read.

      I am starting to now understand specifically why MMT reinforces the desire and need for flexible/floating exchange rates, in terms of the mechanics involved with allowing (real) adjustments within the country’s internal economy, without triggering debt deflation due to nominal cuts.

      This does make me wonder though, would it make sense for Venezuala to float its currency? Now I know the situation there is far more complicated, and I’ve been told by a more knowledgable friend of mine that the fixed currency controls are imposed to ensure food imports are affordable for the domestic people. Though I would’ve thought if oil is the single biggest export and factoring it being nationalised, it’d make more sense to float, let the oil exports grow and then use the dividends to compensate for rising food costs. It’s obviously a very complicated political and economic situation there, though I’m curious as to what you’d recommend for their currency, monetary and fiscal policy in their situation.

    11. Further to Jesse Hermans’ last point, I’ve often wondered if any scholars have performed an analysis/evaluation of the economic policies of the Latin American Left administrations through an MMT lense. It’s always seemed odd to me that even some of the more radical governments have decided to apparently shackle themselves and restrict their domestic room for fiscal manoeuvre through avoiding floating exchange rates. Venezuela has its fixed exchange rate policy, Ecuador is dollarized – as in, uses the US dollar domestically (if I recall correctly); even Bolivia has a managed float. I have to assume, since the Ecuadorean President Correa has previously demonstrated knowledge of Sectoral Balances in a public talk he was giving, that Ecuador’s continuing dollarization results from the perceived domestic political difficulties of adopting an independent currency (there is probably an association in public perception between Ecuadors dollarization and low inflation, or something like that) rather than an ideal preference on Correa’s part.

    12. In the past 12 months, both exports and imports declined by 3.4 per cent, the former signalling declining markets and the latter declining domestic income – both bad.

      I believe Finland is a rather modern export industrial country integrated in the globalized supply chain. As most other countries export and import curves did take of upwards in the late 80s. Probably as many other countries the export industry is the dominant importer in Finland. Probably is the decline in import almost in all due to the decline in export.
      There is a need to separate the export industries import to get an idea of import consumption and not least to get an idea of how big the real size of the export industry is, how much value is added. The export figure maybe say nn in export but with export industries import deducted it maybe is only 20-25% real value added in the country.

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