Blog Post

Finland and asymmetric shocks

What’s at stake: Finland exemplifies the difficulty of dealing with asymmetric shocks within a Monetary Union as the Finnish economy has struggled to recover from a series of idiosyncratic shocks – the decline of Nokia, the obsolescence of the timber industry, and the fallout of the Russian crisis.

By: Date: December 21, 2015 European Macroeconomics & Governance Tags & Topics

Adjustment in the euro: Not a one-time problem

Paul Krugman writes that this is a reminder that the euro system creates huge problems for adjustment everywhere, that this isn’t a one-time problem. Adjustment can take place even with a single currency; but it’s a very slow and painful process. The single currency isn’t totally unworkable. It’s just extremely costly.

Paul Krugman writes that we’re increasingly seeing that the problems of the euro extend well beyond the troubles of southern European debtors. Economic performance has also been very bad in several northern nations with good credit ratings and low borrowing costs — Finland, Denmark (which isn’t on the euro but shadows it), the Netherlands. We’re seeing the classic problems of asymmetric shocks in a currency area that isn’t optimal. The problems of the euro, in other words, weren’t caused by an outbreak of fiscal irresponsibility that won’t recur if the Greeks can be brought to heel; they weren’t even, in a deep sense, the result of big capital flows that won’t come back again. The whole single currency project was flawed from the start, and will keep generating new crises even if Europe somehow gets through this one.

Lars Christensen writes that when the euro was set-up the general assumption was that asymmetrical supply shocks were rare and economically not important. However, the economic development in Finland over the past decade shows that asymmetrical supply shocks indeed can be very important economically.

Bad luck in Finland: Nokia, timber, Russia

Matt O’Brien writes that Finland has had some bad luck. It started when Apple made Nokia go from being synonymous with smartphones to being synonymous with old smartphones. As Finland found out, it isn’t easy to replace a company that, at its peak, made up 4 percent of your economy.  Obsolescence came for the timber companies next. There was nothing they could do to make people need as much paper, which until now had been a major export, in a post-paper world. And, on top of that, Finland has felt the effects of Russia, one of its biggest trading partners, staggering under the weight of low oil prices and Western sanctions.

BEBR 21 12 15 2

Source: Bank of Finland

Erkki Liikanen says that “four shocks” hit at the same time: the decline of Nokia and the country’s paper industry, the retirement of a generation of baby boomers, high labor costs, which have made the economy uncompetitive, and the fallout from the Russian crisis. Simon Nixon writes that the cumulative result is that Finland’s export market share has shrunk by a third since 2008, wiping out what was a large current-account surplus and accounting for much of the decline in growth. Lars Christensen writes that for Finland there is indeed a “New Normal” – real GDP growth looks set to be permanently lower than it was in the 1990s and 2000s.

Three Finnish Depressions

Marko Amnell writes that before it adopted the Euro Finland faced two severe recessions during its years of independence after 1917. The first was the Great Depression of the 1930s and the second was during the early 1990s (the causes of which included the collapse of the Soviet Union in 1991 and a banking crisis in the Nordic countries). Finland recovered from its economic downturns in the 1930s and the early 1990s, at least partially as a result of devaluing its currency, the Markka. Finland gave up the gold standard in October 1931, which was followed by a very strong economic recovery. Similarly, during the early 1990s, Finland followed a “strong Markka” policy of high interest rates, tying the Markka’s exchange rate to the ECU currency basket (in the lead up to the launch of the Euro in 1999). This policy was abandoned in September 1992, allowing the Markka to float freely and devalue, which was followed by a strong economic recovery.

BEBR 18 12 15

Simon Nixon writes that it is easy to exaggerate the role devaluation played in recoveries during the Great Recession. The U.K. recovery began only as its substantial post crisis devaluation started to reverse. In a world of increasingly open economies and interconnected supply chains, the benefits of devaluations aren’t clear-cut, potentially pushing up manufacturing costs and depressing consumer demand. Conversely, two of the fastest-growing economies in the EU now are Ireland and Spain, both of which are in the eurozone. It is also an open question what would have happened to Finland’s funding costs had it retained its own currency and tried to devalue and spend its way back to growth.

Erkki Liikanen writes that our challenges are based on structural facts. An adjustment of our currency would not make up for those challenges. If we had a little weaker Finnish markka, Nokia would still not beat iPhones and young people would not suddenly start to read printed books and newspapers and create demand for the products of Finnish paper mills.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article More on this topic More by this author

Blog Post

Silvia Merler

Big data and first-degree price discrimination

What’s at stake: first-degree price discrimination - or person-specific pricing, had until recently been considered a theoretical case with unlikely real-world application. Yet the increasing availability of big data could make this possible. We review recent contributions on this issue.

By: Silvia Merler Topic: Innovation & Competition Policy Date: February 20, 2017
Read article More on this topic More by this author

Blog Post

Pia Hüttl

Inflation's comeback

What at stake: After years of deflationary pressures and anaemic economic performance, inflation seems to be on the rise again, both in the US and the euro area. Does this comeback mark a return to target? Will it be sustained, and what should central banks be thinking? These are among the questions raised in the blogosphere.

By: Pia Hüttl Topic: Global Economics & Governance Date: February 13, 2017
Read article More on this topic More by this author

Blog Post

Silvia Merler

Is Germany a currency manipulator?

What’s at stake: the Financial Times reports that Peter Navarro, head of the US’s National Trade Council, has accused Germany of currency manipulation. He claims that the country uses a 'grossly undervalued' Euro to 'exploit' its trading partners. Angela Merkel replied that the Euro is managed by the European Central Bank, on which Germany does not exert influence. We review what the economic blogosphere thinks of this.

By: Silvia Merler Topic: Global Economics & Governance Date: February 6, 2017
Read article More by this author

Blog Post

Silvia Merler

Climate change and financial markets

What’s at stake: Ever since the 2016 Paris Agreement to reduce emissions was signed, researchers have been looking at the impact that moves towards a low-carbon economy might have on financial markets and financial stability. We review these contributions here. 

By: Silvia Merler Topic: Energy & Climate, Finance & Financial Regulation Date: January 30, 2017
Read article More on this topic More by this author

Blog Post

Silvia Merler

Tariffs and the American poor

What’s at stake: much has been said and debated — during the US election and beyond — about the distributional impact of free trade on the disadvantaged. But what would be the distributional impact of a new protectionism instead?

By: Silvia Merler Topic: Global Economics & Governance Date: January 23, 2017
Read article More on this topic More by this author

Blog Post

Silvia Merler

The economic effects of migration

What’s at stake: migration is currently a very hot topic in both the US and the EU. Immigration issues have come to the forefront due to the problem of rapidly ageing populations, the refugee crisis, and growing anti-immigration political rhetoric. But what do we know about the economic effects of migration?

By: Silvia Merler Topic: European Macroeconomics & Governance Date: January 16, 2017
Read article More on this topic More by this author

Blog Post

Silvia Merler

Compensating the “losers” of globalisation

What’s at stake: According to some, 2016’s political turmoil shows that the so-called “losers” of globalisation are striking back. There is, however, little agreement on how government should respond to this challenge.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: January 9, 2017
Read article More on this topic More by this author

Blog Post

Silvia Merler

2016: The end

What’s at stake: 2016 is coming to an end. It will be remembered as an annus mirabilis and horribilis, at the same time. 2016 brought us some previously unthinkable political shocks, and admittedly took away some of our finest musicians. It also couldn’t help taking away Willy Wonka and Princess Leia, making this a much sadder Galaxy. This raises an obvious question: what are we in for, in 2017?

By: Silvia Merler Topic: European Macroeconomics & Governance Date: December 31, 2016
Read article More on this topic More by this author

Blog Post

Silvia Merler

The American dream

What’s at stake: historian James Truslow Adams, in his 1931 book The Epic of America, stated that the American dream is "that dream of a land in which life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement”. Few ideas have ever been as powerful as the “American Dream”, and many recent political events hinge on the fear that this “dream” may be dead. Meanwhile, researchers have been trying to measure the reality behind the dream.

By: Silvia Merler Topic: Global Economics & Governance Date: December 19, 2016
Read article More on this topic More by this author

Blog Post

Silvia Merler

The political economy of macroprudential policy

What’s at stake: the emergence of renewed interest in macroprudential policy has characterised the aftermath of the great recession. There is not yet full agreement on what the tasks of macroprudential policy is or how it should be carried out, but there is a clear understanding that there is an important political economy dimension to it. We review some of the recent contribution on this.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: December 12, 2016
Read article More on this topic More by this author

Blog Post

Pia Hüttl

Macroeconomics in the crossfire (again)

What’s at stake: After a first go at macroeconomics and its flaws a year ago, Paul Romer kicked off the debate again with a recent essay on how macroeconomics has gone backwards. The way that this debate, along with the debate of the role of economics in general, feeds into today's election woes, has also attracted attention in the blogosphere.

By: Pia Hüttl Topic: European Macroeconomics & Governance Date: December 5, 2016
Read article More on this topic More by this author

Blog Post

Silvia Merler

The Italian referendum

What’s at stake: on 4 December, Italy will hold a referendum on a proposed constitutional reform approved by Parliament in April. The reform, which was designed in tandem with a new electoral law, aims to overcome Italy’s “perfect bicameralism” by changing the structure and role of the Italian Senate. It also changes the distribution of competences between the state and regions. After the shocks of Brexit and the US election, polls are now drifting towards a defeat of the government’s position in Italy.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: November 28, 2016
Load more posts