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Finland
1. What did Finland really believe it would gain by pegging the value of the Finnish
Markka to the ECU?
First of all, Finland had already participated in Western Europe’s integration for decades, both
politically and by opening up its markets. With the exception of key agricultural goods,
Finland’s foreign trade had already been liberalised with the dismantling of controls in the
1950’s.
The linkage between the Markka to the ECU constituted a “cross section” to enter more in the
foreign trade. Basically, the Finish economy had already become highly integrated with the
international economy, although most of the larger companies were still operating primarily in
Finland. Finnish industry developed a competitive edge, particularly in the forestry sector and
metal and engineering industries, and these, in turn, were able to engage extensively in
foreign trade. The concentration of this foreign trade was centred on Western Europe,
Sweden, Britain and Germany.
With the breakup of the East Bloc and the newfound growth of the countries of the European
Community, Finland believed to the increase of economy by entrance of country of the East
bloc and to be considered as an EC country, countries had to stabilize their currency.
The move aroused intense interest despite its modest economic impact, as ECU countries
accounted for over 85% of the trade –weighted index. All the European currencies were now
linked, and were in practice pegged to the Deutschmark, which served to fix the system.
Capital flows of Finland were completely unrestricted, and the feeling at the Bank of Finland
was that a small devaluation would be impossible to control, as it would only add to exchange
rate pressures. A switch to a floating exchange rate regime under these conditions was totally
excluded if only for political reasons. The government not agreed to turn over to the Bank of
Finland the policymaking power inherent in a floating exchange rate. Exchange rate policy
was also strongly affected by the above-mentioned European fixed rate environment, and
Finland was not willing to be the weak link in the system.
2. How is the repeated cycle of devaluation and depreciation likely to alter Finland’s
access to the international capital markets?
Conditions in the foreign exchange market remained turbulent after the devaluation in
November 1991. There were serious problems in the financial markets of Finland. Despite
the recession, Finland’s interest rates had to keep at a high level (over 10%) due to
pressures from the foreign exchange market.
In 1992, the Markka was the first European currency to fail with the second devaluation
since November 1991. The economic and banking crisis had by that time resulted in a
considerable lowering of Finland’s international credit rating. Banks foreign funding was
limited to short-term borrowing and spring 1993 saw a further reduction of the central
government’s credit rating, just as its financing needs were particularly pronounced. On
the other hand, the position of export companies had strengthened considerably, having so
far enjoyed a devaluation of about 30%, and these companies were able to quickly pay off
their foreign loans. After a brief but critical period, the central government’s foreign
financing sources became more readily accessible, and this fostered high levels of
borrowing from abroad in the following years. The foreign currency situation was eased,
partly due to foreign investors increased interest in Finish shares, which were relatively
cheap and could now be purchased freely by foreigners.