South-Western College Publishing - Economics  
The Euro & Politics: A Finnish View
Subject Monetary Policy
Topic International Trade
Key Words Currency Union, Monetary Policy, Unemployment
News Story

Eleven European countries have opted to give up their national currencies and replace it with the euro. The transition from their national currencies to the euro is to start on January 1, 1999, and be completely implemented by July 2002. The first stage in the transition is supposed to be the use of the euro for paperless transactions. While the move to the euro is still viewed with skepticism in some countries, that is not the case in Finland, which has embraced the euro. The Finnish government has started to mint euro currency, retail stores are posting prices in euros, and workers are asking to be paid in the new currency.

While there are strong economic arguments for a currency union, there are perhaps even stronger political arguments. Germany views the euro as a way to avoid another war with France. The euro gives Ireland more independence from Britain. Adoption of the euro is a chance for Finland to escape from the domination of Russia and strengthen economic ties to the West.

Finland was an autonomous grand duchy under the Russian czar from 1809 to 1917. Although Finland became independent in 1917, ties to Russia -- especially economic ties -- were strong,. Finland's economy was based upon barter with Russia; Finland would trade its manufactured goods for Soviet oil and gas. Political ties to Russia were also strong. Finland did not become part of NATO and was considered neutral during the Cold War. The collapse of the Soviet Union had a devastating effect on the Finnish economy. Exports plummeted and unemployment rose to 20 percent. Finland's response was to restructure its economy. Telecommunications and high-technology industries were developed, and trade with the West was encouraged.

While it is in Finland's political interest to support the euro, economically there are risks. Finland will lose control over its monetary policy -- the European Central Bank in Frankfurt will establish policy for the economic union. Finland's economy is export-dependent and concentrated in just a few industries. An external economic shock affects its economy differently than the rest of Europe and therefore the loss of control over its monetary policy will hamper Finland's ability to mange its economy. Also, if the euro is a stronger currency than the markka, Finland's current currency, its export sector could decline.

(Updated January 1, 1999)

Questions

1. What is a currency union?
2. What are the primary instruments of monetary policy in the U.S.?
3. If a European central bank were to determine that interest rates should decrease, how could the bank accomplish this? (Hint: How can the Fed lower interest rates?)
4. Under the euro system, why can't Finland independently lower its interest rate?

Source Helene Cooper, "Finns See the Euro As a Way to Cement Their Ties to the West", The Wall Street Journal, December 17, 1998

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