Euro Is Strangling the Finnish Economy
Although Finland’s problems have many explanations, the euro is increasingly cited as one factor.
Finland was among the European Union countries that adopted the euro when the monetary union was established at the turn of the last century. The euro was presented as a means of increasing stability and economic coordination within the union, and Finland emphasized from the beginning to participate fully in that cooperation.
Much has changed since then, and the past decade and a half has shown that various problems can accompany the loss of the economic policy instrument of its own currency and independent monetary policy, especially when faced with economic hardship.
Finland’s economic problems have multiple causes. The collapse of Nokia had a significant impact on the country’s export earnings, the closure of the Russian market and changes in the forest industry due to digitalization have also led to a decline in exports. The age structure of the population has also changed with an increase in the number of senior citizens and a decrease in the number of people of working age, which has increased the need for welfare spending and thus narrowed the scope for the public sector.
The housing market has become tight and unemployment has reached around 11%, even over 20% among the youngest age groups. Public debt has increased significantly and is now approaching 90% of GDP. The country is in a position to exceed the European Union’s debt standards, where debt should not exceed 60% of GDP and the deficit should not exceed 3%. In such circumstances, a process begins in which the government must submit improvement plans and take austerity measures, which have included cuts in public spending, including in the welfare system.
Independent Monetary Policy Is an Important Economic Policy Tool
As a member of the eurozone, Finland does not have its own currency or an independent monetary policy. Adjustment to such shocks therefore has to be carried out differently than in countries with such room for maneuver, and is generally slower. Compared with Sweden, which is outside the eurozone, economic growth has been lower and investment and employment trends have been weaker.
According to recent surveys, around half of Finns believe that the economic situation will worsen next year, while only around 14% expect an improvement. This is reflected in household investment and behavior. Interest in property purchases is at its lowest level in decades and investment has declined. As economic uncertainty increases, both households and businesses hold back, especially when balance sheets are tight.
The social impact is more pronounced. The number of people below the poverty line has increased, and the proportion of children in Finland living in poverty or at risk of poverty has risen from around 14% to over 17% in a short period of time.
Leaving the Euro Is Not an Option
Although Finland’s problems have many explanations, the euro is increasingly cited as one of the factors limiting adaptation to changing circumstances.
A comparison with Sweden makes this clear. There, economic growth has been higher and there has been greater flexibility in economic policy, partly due to its own currency.
But although voices are occasionally heard saying that it would be right to reintroduce the Finnish markka, that discussion does not go far. It is difficult to leave the EU, as the British have experienced, and it would be much more complicated to also adopt a new currency. This is a thought-provoking contribution to the discussion in this country.
Finland’s experience thus shows that membership in a monetary union not only has advantages but also limitations. When economic conditions change, the lack of its own monetary policy can make a significant difference in how an economy adjusts.
Source: VB (in Icelandic)