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Returning to the Finnish markka - is it feasible?

In mid-July veteran Finnish politician and MEP Paavo Väyrynen started a citizen’s initiative demanding a referendum on Finland’s membership in the eurozone. After quickly gathering over half of the 50,000 signatures required for parliamentary consideration, the initiative has since lost momentum. A discussion of the pros and cons of a Finnish exit or ‘Fixit’ from the euro and the possibility of a parallel currency is nevertheless ongoing.

Henkilö pitelee markkaseteleitä.
Image: Seppo Sarkkinen / Yle

The idea of leaving the European currency union is hardly a new one in Finland, as several political groups have been actively campaigning to leave the euro ever since Finland first joined the common currency in January 1999. Last year a Helsinki University working group led by economics professor Vesa Kanniainen published a book exploring Finland’s alternatives with regard to the euro’s future.

One option explored is a flat-out euro breakup, while another is the introduction of parallel currencies. The book explains the transition to a parallel currency, whereby national currencies whose value would be determined by daily markets would be adopted alongside the euro, which could gradually be phased out if necessary.

“All euro-based agreements would continue without change, but in the future they could also be negotiated in the national currency. The euro would continue as a weighted basket currency, much like the European Currency Unit (ECU) that preceded the euro,” explains Kanniainen.

A failed experiment?

The working group points out what it feels are the inherent weaknesses of the euro system. They reach the sceptical conclusion that the common currency cannot function among the unequal conditions of today’s loose European Union federation. The faltering Greek economy is a prime example.

The same conclusion has been reached outside Finland’s borders, even with the EU administration itself. A June report prepared by EU Commission President Jean-Claude Juncker and his team of experts proposes a stronger economic and banking union and a new advisory fiscal board in the EU. 

“Europe’s Economic and Monetary Union (EMU) today is like a house that was built over decades but only partially finished. When the storm hit, its walls and roof had to be stabilised quickly. It is now high time to reinforce its foundations and turn it into what EMU was meant to be: a place of prosperity based on balanced economic growth and price stability, a competitive social market economy, aiming at full employment and social progress. To achieve this, we will need to take further steps to complete EMU,” the report reads.

This view has been backed up Nobel prizewinner Paul Krugman, an American economist who writes a regular column for the New York Times. In a late May op-ed piece, he said 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, like Finland.

“Finland’s two main export sectors, forest products and Nokia, have tanked; this creates the need for a sharp fall in relative wages to make up for the lost markets, but because Finland doesn’t have its own currency anymore this adjustment must take the form of a slow, grinding internal devaluation.”

Krugman makes the argument that the whole single currency project was flawed from the start and said Greece likely had a plan for a parallel currency in its back pocket during the bailout negotiations.

Strong euro is strangling Finland

According to Kanniainen, Germany is currently keeping the value of the euro too strong for the other euro member states. Parallel national currencies floating in a free market would devalue each of these national economies according to their capacity to make payments.

He warns that the start of such a parallel system could be harsh for many euro area citizens at first. In Greece for example, the value of the drachma could drop by up to 50 percent. How much Finnish purchasing power would be affected should wages be suddenly switched from euros to markka is anyone’s guess:

“While we were writing our book, we estimated that Finland’s parallel currency would probably be devalued by about six percent. I believe that Finland’s competitive ability has fallen even further since that time however, so its a good bet the markka would become even weaker. But the point is that a freely floating currency value would eventually reflect its true value. A Finnish labourer would finally have the purchasing power he is entitled to, in other words an amount equivalent to the Finnish national economy’s performance in export markets,” says Kanniainen.

Unleashing a monumental mess

Finnish economist Roger Wessman doesn’t share Kanniainen’s optimism that reintroducing the markka would solve Finland’s problems. He says a Finnish exit from the euro, whether absolute or gradual via a parallel currency, would likely spawn an economic crisis.

“It is easy to sit in the ivory tower of academia and say that the Finnish markka would work better than the euro and forget what kinds of problems the transition process would bring. The worst-case scenario would be a monumental mess,” he says.

Wessman says it is highly likely that if news broke that Finland was leaving the eurozone, it would cause a run on the Finnish banks, with everyone clambering to withdraw their savings.

“During the long transition period, there may even be a need to impose limits on withdrawals, like the kind we saw in Greece this summer,” he says.

Technically, Wessman agrees that the transition would be relatively painless if the European Central Bank (ECB) would be willing to finance the national banking systems of the eurozone-exiting member countries during the transition. Unfortunately, he says, this is not likely to happen:

“If Finnish banks fell into trouble because they left the euro, at that point it would be too late to ask for ECB help.”

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