The Euro strangling its own "Poster Child"" ?

Thursday 19th November 2015

The Euro strangling its own "Poster Child"" ?

Ref : "Suffering inside the Euro, Finland shows up failings of single currency", The Daily Telegraph, Business p.2

There can be few, even amongst its supporters, who would deny that the Euro project comes with a few inherent problems. But, they say, these should be managed and overcome in striving for the greater good. Whether that goal is an entirely practical one or one driven by political ideology is an open question, but the Euro's detractors would argue that from either standpoint the whole concept of a single currency across such a broad scope of nations has always been fatally flawed. Their stance would be that you can't have a common currency, and therefore monetary union, without fiscal union ...... and you cant have fiscal union without ever-closer political union. Fiscal union across such an economically diverse collection of member states is not practical, and ever-closer political union is not necessarily what everybody signed up for in the first place.

Strictly speaking, the detractors are probably correct in principle but may underestimate the amount of political capital invested in the project, and the political will to make it work come what may. The Euro is here to stay for a long time yet, though it's not impossible that  some nations could withdraw (willingly or otherwise). Nevertheless, the recent history of Finland makes difficult reading for those committed to the cause of the Euro, particularly when one remembers that until recently Finland was one of the shining stars of the Eurozone firmament.

6 1/2 years into the cycle of global expansion since the financial crisis, Finland's GDP is 6% below its previous peak  --  Q3 GDP has just shrunk by 0.6%, September industrial orders fell by a whopping 31% and the country looks to be heading into a fourth year of recession, a slump deeper than those of the early 1990's or even the Great Depression of the 1930's. To quote Ambrose Evans-Pritchard, all this is happening despite the fact that :

"Nobody can accuse Finland of being spendthrift, or undisciplined, or technologically backward, or corrupt, or captive of an entrenched oligarchy, the sort of accusations levelled against the Greco-Latins."

Some of the southern European nations may justifiably object to still being tarnished by that kind of stereotype after enduring some tough years of austerity, but the point about Finland is well made. Its ratio of public debt to GDP is less than that of Germany, and it ranked No. 1 in the world for competitiveness by the World Economic Forum. It also tops any number of surveys of educational and legal frameworks that should point to enhanced economic performance. Finland would certainly seem to give the lie to assertions made by Eurozone officials that if keep your own house in order, monetary union will work for you. So why has it faltered so badly ?

Undeniably, Finland was hit by the kind of triple-whammy that would knock back any nation : the collapse of Nokia , such a huge element of the economy; the rout in commodity prices that has so damaged all commodity producing economies; and the recession in Russia, such an important trading partner for Finland. The point is that Finland is powerless to do anything about it, trapped by an exchange rate that is too high for a country in its position and unable to provide fiscal stimulus due to the constraints of the Stability Pact. Compare Finland with Sweden, its neighbour with whom it has so much in common. Faced with similar difficulties, Sweden was able to let its currency take the strain ..... and its GDP is now 8% higher than its pre-Lehman level.

The problems are mounting for the Finns ..... during the commodity boom (when the Finns needed them HIGHER), low Eurozone interest rates allowed  the Finnish economy to overheat and sparked large and repeated rounds of wage rises. Now the government is at loggerheads with labour unions as it tries to maintain its credentials as an arch proponent of austerity and sticking rigidly to fiscal rules. The IMF has warned against "overdoing the austerity", but Finland's strict interpretation of those rules makes it almost inevitable, it seems.

Politically, this has stirred up a good deal of anti-Euro feeling form both left and right. On its own that might not be such a worry for Brussels and Berlin, but taken in context with what has happened in Greece, what is happening in Portugal and what might happen in places like Spain, the long-term viability of the single currency looks a little less clear-cut. And politics aside, the point is being made that if the Euro cannot be made to work for the most competitive country in the EU, who exactly is it meant to work for ?