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

3. 2.4.2009 Ilkka Mytty 2.4.2009 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. 2.4.2009 Ilkka Mytty 2.4.2009 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)

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7. Ilkka Mytty 2.4.2009 7 EUROPE 1988 - EEC, EFTA, SEV

8. 2.4.2009 Ilkka Mytty 2.4.2009 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. 2.4.2009 Ilkka Mytty 2.4.2009 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. 2.4.2009 Ilkka Mytty 2.4.2009 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. 2.4.2009 Ilkka Mytty 2.4.2009 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. 2.4.2009 Ilkka Mytty 2.4.2009 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. 2.4.2009 Ilkka Mytty 2.4.2009 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. 2.4.2009 Ilkka Mytty 2.4.2009 14 Road from Boom to Bust

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16. 2.4.2009 Ilkka Mytty 2.4.2009 16 Optimal currency area  Mundell 1961  labour mobility  Product diversification  Openness; capital mobility, price and wage flexibility  Automatic fiscal transfers, fiscal federalism

17. 2.4.2009 Ilkka Mytty 2.4.2009 17 EMU -system  single currency  coordinated fiscal policy  SGP  Lisbon strategy

18. 2.4.2009 Ilkka Mytty 2.4.2009 18 Main characteristics  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