Single currency means welfare loss for all other countries but Germany
Euro membership has cost an average of 10 % of GDP for member countries, claims a new report called The Future of the Euro – The Options for Finland, by a group of Finnish economists led by economics professor Vesa Kanniainen from the University of Helsinki. The study is published by Finland’s leading independent and politically unaffiliated think tank Libera.
It identifies several design faults in the euro system, some of which are being addressed by the euro area’s evolution into a fiscal and political union. But some factors will remain unresolved for the foreseeable future, such as the size of public debt, lack of labour mobility, current account imbalances and the fragile banking system.
”The evolution into federalism will only happen over the course of decades. We need to raise general awareness of the economic problems the euro members will face during the coming years, while the union will still be operating as a suboptimal currency area,” states Vesa Kanniainen, a well-known commentator in Finland.
The euro zone is lagging the US in several aspects: labour movement within and especially across national borders is significantly weaker, there is no common language and no federal unemployment system. On the other hand, the eurozone has violated its no-bailout policy, a standard respected in the US since 1840.
Euro membership means welfare loss for all other countries but Germany
The economists have calculated that, since the euro crisis started in 2008, euro area GDP has fallen 10 % behind of its potential when compared with post-crisis growth in the US. This cumulative welfare loss varies from country to country, with Finland standing out with a loss of nearly 25% of GDP. The greater-than-average collapse in Finnish GDP can largely be attributed to industrial restructuring, most notably the decline of Nokia and the country’s mobile phone industry.
”A fixed FX rate requires flexibility from the labour market. If the price and availability of labour does not adjust, the economy will adjust through unemployment,” Kanniainen states.
During euro membership, Finland’s labour costs have risen rapidly; in the crisis years 2007 to 2012 by 22 %, compared with 12 % in Germany. The Finnish labour market system is still overly centralised, even by European standards, with the widespread organization of employees and employers, a strong tradition of bargaining, as well as national incomes policy settlements between the government and industry.
The study points out that world history does not show examples of successful currency unions between independent states. All successful common currency mechanisms have been confederations or unions of states.
Periods of economic crisis increase the likelihood of so-called sudden stops, where private capital flows suddenly reverse out of the weakest countries of the currency zone. Sudden stops in a country with a floating currency lead to the rapid external depreciation of the currency, reducing imports, increasing exports and making the country a more attractive site for investment. This adjustment mechanism is lacking in the common currency area.
”Neighbouring Sweden has benefited from its floating rate currency regime, which has assisted the economy in adjusting in the face of outside shocks. Finland has been hostile towards a freely floating currency, despite the positive experience it had in the six year period before joining the euro,” says Elina Lepomäki, one of the authors, a financial markets professional and research director at the think tank Libera.
Three possible futures: passive membership, say no to bailouts or ’Fixit’
Finland has a history of a managed FX rate for its markka, which it let freely float in 1992, six years before joining the euro area. The Finnish markka became part of the European Exchange Rate Mechanism (ERM) in October 1996, but it remained freely floating until December 31, 1998. Finland has been a member in the EU since 1995.
For the future, the group identifies three options for Finland’s euro membership: First, become a passive member of the European federation, or second, stay in the euro, adhere to the Maastricht treaty but remain outside of further bailouts or third, leave the euro (Fixit).
The economists are positive towards Finland’s EU membership, especially with regards to free trade and free movement in the region as well as the voluntary advancement of common practices in trade and economic policies. The group highlights the fact that the euro area and the European Union are currently separate organizations; a distinction that will grow in the future, with the euro area advancing more rapidly towards a federal architecture.
The economists authoring the report are a group of recognized experts with a variety of career paths: academics, former department heads of the Bank of Finland and the Ministry of Finance, economists from leading Finnish research organizations as well as individuals with several years of international investment banking and capital markets experience. Finland is currently the euro area’s only stable AAA-rated member.