Finnish Euro Doubts Hide Business Plea to Commit to Currency

Roubini Global Economics Chairman Nouriel Roubini
Nouriel Roubini, co-founder and chairman of Roubini Global Economics LLC. Photographer: Simon Dawson/Bloomberg

As a growing number of Finnish voters say they regret joining the euro 13 years ago, business leaders in the Nordic country warn that exiting the currency bloc would devastate Finland’s economy.

“Before the euro, we had to use the markka, the ruble and the dollar,” said Veli Vento, the manager of Well Finland Oy, a food company based northeast of Helsinki that sells to the Russian market. “We constantly bumped into unfavorable exchange rates, whether we were buying or selling. Whenever we tried to speculate on the rates, we’d always take a loss.”

Finland’s resistance to backing more euro-zone bailouts and the ascent of the euro-skeptic “The Finns” to become parliament’s third-biggest party in 2011 elections has prompted economists such as Nouriel Roubini to suggest the nation may one day quit the currency bloc. About a quarter of voters want to restore the Finnish markka amid growing taxpayer disgruntlement with Europe’s crisis response, according to a July poll commissioned by newspaper Kaleva.

Yet those figures don’t tell the whole story. Finland, one of the 11 founding euro nations, exports about 40 percent of its output, a third of which goes to the euro area. Trade would suffer a severe blow if the Nordic country, which unlike Norway doesn’t have oil wealth to fall back on, restored its own currency, said Prime Minister Jyrki Katainen.

Speculative Attacks

“The euro helps companies function in the European markets as well as global ones,” Katainen said in a July 31 interview. “Euro membership brings stability to Finland’s economy.”

Finland still bears the scars of the economic hardship it endured following speculative attacks against the markka two decades ago, according to Markku Kuisma, professor of history at the University of Helsinki.

“Finland is committed to the euro -- at its core -- and wants to develop the economic and monetary union in a constructive spirit,” European Affairs Minister Alexander Stubb said in a statement in Helsinki today. “There are no wavering or hidden agendas here. The euro is an irreversible choice for Finland.”

The yield on Finland’s 10-year bonds rose seven basis points to 1.70 percent today, with the spread to similar-maturity German notes little changed at 13.6 basis points. One basis point is 0.01 percentage point.

Carry Trade

In the late 1980s, money flowed into Finland in a so-called carry trade that was made attractive because of the Nordic country’s higher interest rates. The Bank of Finland’s base rate reached 8.5 percent in 1991, compared with 2.75 percent at the Frankfurt-based Bundesbank at the beginning of that year.

“The abundance of money created both a real estate bubble and a stock exchange bubble,” Kuisma said in an interview.

When those bubbles burst, which coincided with the collapse of trade with the former Soviet Union after the 1989 fall of the iron curtain, it triggered a wave of bankruptcies that killed jobs. Finland started hemorrhaging capital.

“Foreign investors began speculating on the collapse of the markka while export companies hedged their positions,” Kuisma said.

Black Wednesday

In the following years, a broader onslaught against European currencies that had sought to track the Deutschmark through the Exchange Rate Mechanism turned into an outright currency crisis. On Sept. 16, 1992 -- Black Wednesday -- the Bank of England came under a speculative attack so intense it was forced to exit ERM. Finland resorted to a free-floating exchange rate the same month after devaluing the markka.

“The attacks against the markka started in 1991,” Antti Suvanto, head of the general secretariat at the Bank of Finland, said in an interview. “The second, more international, wave came in 1992, which led to flotation.”

Before resorting to devaluation, the Bank of Finland had sought to defend its currency regime by raising the benchmark interest rate as high as 18.45 percent in September 1992. The years of economic decline that ensued sent Finland into a deep recession that pushed joblessness close to 20 percent in 1994.

Greek Drama

“Unemployment never went back to the levels of the 1980s, not to mention the tens of thousands of small enterprises that never recovered from their foreign debts,” Kuisma said. “That was the Greek drama of Finland in the early 1990s.”

Between 1984 and 1990, Finnish unemployment had averaged 5 percent, compared with 12.3 percent in the decade that followed. Since joining the euro, joblessness has averaged 8.3 percent, according to calculations based on Statistics Finland data.

Finland is one of the few euro members to have complied with the bloc’s fiscal rules, keeping its budget within a 3 percent deficit limit of gross domestic product every year since 1996. Even in 2009, when the economy contracted 8.5 percent, the government managed to uphold the budget rule.

Finland is the only Aaa rated euro member with a stable outlook at Moody’s Investors Service, thanks to its fiscal discipline and the government’s insistence on getting collateral to cover its commitments to euro-zone bailouts. Finland’s ability to comply with the EU’s budget rules while countries such as Greece continue to negotiate laxer bailout terms has enraged some voters and weakened support for euro membership.

Clearest Case

Finland would have the “clearest case” for leaving the bloc, Jim O’Neill, chairman of Goldman Sachs Asset Management, wrote in a note to clients today.

Twenty-three percent of Finns want the markka back, according to a poll commissioned by newspaper Kaleva and five other regional papers at the end of July. About 65 percent support staying in the monetary union, down from 74 percent two years ago, the poll conducted by Taloustutkimus Oy shows.

“For us Finns, the issue with the euro crisis is based on emotion,” Vento at Well Finland said. “It’s based on fears of how much we need to spend on bailouts and how much of our money will disappear into southern Europe.”

The potential losses are far outweighed by the benefits, according to Timo Korkeamaeki, a professor of finance at the Hanken School of Economics in Helsinki. Exiting the bloc would open Finland to speculative attacks again, he said.

“The foreign exchange risk inside the euro area has been de facto eliminated,” Korkeamaeki said in an interview. “With a small currency, external pressure and external markets would make the decisions on monetary policy.”

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