Finns find food for thought in theorised exit strategy
IN THE past couple of years, as the euro zone woes have unfolded, international investors have been transfixed by one small country on the edge of the region: Greece. They would do well to keep watching another tiddler: Finland.
For while Finland has not created much drama, precisely because it is one of the strongest euro zone members, some fascinating discussions are under way. Most notably, as the euro zone crisis rumbles on, some Finnish business and government officials are quietly mulling the logistics of leaving the currency union.
Nobody in Finland expects this to happen soon, if ever; indeed, most policymakers are strongly opposed to the idea.
But as Heikki Neimelainen, chief executive of the Municipal Guarantee Board, says: “We have started openly discussing the mechanism of euro exiting, without indicating that we will initiate such a process.” And this, in turn, is sparking some curious economic debates.
Take a look, for example, at a recent research paper from Nordea, the Nordic bank. This paper looks at the question of what might happen if Finland ever decided to run a so-called “parallel currency” system. The idea behind this, as Nordea explains, is that at times of stress it can sometimes seem beneficial for countries to maintain more than one currency unit. Most notably, if a country is trying to leave one currency, keeping that as legal tender alongside a second currency for a period can ensure a country honours its old contracts – and avoids a technical default.
In the case of Greece, the idea of maintaining the euro as legal tender alongside the drachma has been floated as one technique for leaving the euro, without formal default. This concept has been used in the past, in the Weimar Republic (1923), the Soviet Union (when it broke up in the early 1990s), and, recently, in emerging markets.
But for Finland the concept is different. If a country such as Greece were to adopt its own currency, alongside the euro, it would act from a position of weakness, and probably need to force its citizens to hold drachma. However, says Nordea, “Finland’s exit of its own accord would differ from a Greek exit, because a balanced national economy may, theoretically speaking, have two currencies even for a long transition period, and peg the new markka to the euro at a rate of 1:1 during the transition period.”
Most notably, under that scenario – of strength – the Finnish central bank could effectively let consumers and customers choose which currency they use. “Euro will not automatically be converted into markka; all deposits, debt and agreements will remain in euro until the depositors transfer their deposits to markka-denominated accounts and the parties to the agreements amend their contracts,” Nordea writes. It adds that, “during the transition period, the Bank of Finland will offer to exchange euro and markkas at a rate of 1:1 both ways”.