NIB President: Despite challenges, the euro is Europe's best option

According to NIB’s President and CEO Johnny Åkerholm, the euro will not offer the EU member states the same stability in the next few years as it did in the early 2000s, but the single currency remains Europe’s best option.

The euro area was the result of an attempt to create more stability and enhance the functioning of the European single market. The euro was also very much a political project; it was hoped that European integration could be increased in other areas as well.

The adaptation to the Maastricht criteria also produced good results. In fact, a long and stable period of growth occurred in the early 2000s. The United Kingdom, Denmark and Sweden remained outside the euro area by their own choice. Greece did not meet the criteria, but the country was allowed to join from the beginning of 2001.

However, a basic conflict remained. The member states have a single currency, yet they decide on their economic policies independently. In order to avoid individual countries from becoming what are known as free riders, the system attempted to ensure that each country would have to solve its own problems without any help from the Community. Hence the Treaty stipulated a no-bail-out clause and prevented the European Central Bank from financing the public sector. In addition, exact rules on what to do should someone break the common rules were recorded in the Stability and Growth Pact.

If credible, one would have expected that larger public sector deficits would have been associated with higher financial risks and offending member states would have had to pay risk premia on their borrowing. However, interest rates became nearly uniform for all countries and a free rider problem did indeed materialise, some countries could not resist the temptation to loosen discipline in public finance.

The financial and economic crisis revealed the vulnerability of public finance and the EU’s fiscal policy-related coordination. The crisis culminated when it was revealed that some countries had even deceived themselves and others by manipulating their statistics. Financing costs increased drastically and access to financing was also limited. At this point, both the Union and the ECB intervened in order to support countries, and while the measures are no doubt within the existing legal framework, the functioning of the monetary union was altered in a fundamental way.

Now, the EU Commission and the member states are aiming to re-build credibility by tightening the old rules of the game. However, experience shows that regulatory rules are difficult to impose and the member states relinquish control of their budgets only when they have no other alternative. Markets seem to provide a much stronger guide to stability-oriented behaviour than any bureaucratic agreements.

Ultimately, investors always identify risks, and they will not be willing to finance unsustainable budget policy in the long run. Currently, member states are balancing their public finances due to increasing interest rates, not for fear of Brussels. The EU is attempting to reduce the market’s impact, but changing the rules in the middle of the game also hampers credibility building. This is currently evidenced by the still high interest rates in some countries. However, volatility of the market is a problem. If and when the market believes that risks have decreased, the cost of the financing of offending member states may fall “too low”.

In these circumstances, the euro will not offer the same stability in the next few years as it did in the early 2000s, but nevertheless, it remains Europe’s best option.

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The Finnish economy is once again on the verge of a transformation. The approaching changes will constitute the economy’s fourth major transformation in the post-war period.

First, Finland paid off its war reparations, which created an industrial basis for the country’s economy. The investments were sizeable, but not necessarily very efficient. The second transformation was the entrance of baby boomers into the labour market and the move from an agrarian economy to an industrial one in the late 1960s and the subsequent labour-oriented migration to Sweden. The move to a market economy in the 1980s generated debt and a bubble economy. The subsequent depression in the early 1990s was a high-cost consultant, but the measures introduced to rebuild credibility provided an excellent foundation for the reorientation of the economy and good growth later in the decade.

Now, Finland is adapting to the globalisation of business and a significant change in the structure of the population. These changes have been widely discussed for some time now, but the scale of the challenges is still not widely understood.

What is needed? First and foremost, Finland needs to be able to generate more output. This can only succeed by increasing work input and improving productivity. The former means longer careers and the latter a structural change in production. Both measures face fierce opposition, but we must be able to abandon the old and create something new. This move requires the willingness to change and take risks. At the same time, welfare services must be produced more efficiently than now.

During the approaching learning process, it is likely that we see different kinds of short-term measures, such as tax increases, even if these might contradict the need to increase the size of the pie. Also economic activities which are not viable on their own will be supported. Some sort of a crisis will probably be the result of all this, but solving it will create the foundation for the next rise.

The Nordic Investment Bank is the common international financial institution of the eight Nordic and Baltic countries (Iceland, Latvia, Lithuania, Norway, Sweden, Finland, Estonia and Denmark). NIB provides long-term financing to private and public investment projects in its member states and elsewhere. NIB has the highest possible credit rating, AAA/aaa, with the leading rating agencies Standard & Poor’s and Moody’s.

For further information, please contact:

Johnny Åkerholm, President and CEO, tel. +358 10 618 001,

Jukka Ahonen, Director of Communications, tel. +358 10 618 0295,