Governor of the Bank of Finland
Olli Rehn
The European Monetary Union is not yet complete
Published in Helsingin Sanomat, 31 Dec 2018.
The European Monetary Union is not yet complete
As the euro turns twenty, we should work towards strengthening the monetary union and ensuring its smooth operation.
Finland’s decision to be among the first countries to join the European Monetary Union was a choice based on economic as well as political considerations.
For us, the deep economic recession in the early 1990s had left in its wake the desire for economic stability. Meanwhile, we had participated in the political unification of Europe through special arrangements and associate memberships until the 1990s, when we wanted to have an equal seat at the table deciding issues that affected us, together with the other Member States of the European Union.
The Finnish people value the single currency. According to a fresh Eurobarometer survey, as many as 80% of Finns support the Monetary Union and the euro. Only 16% feel the contrary.
The single monetary policy has proved a good fit for Finland’s economic situation. For example, the euro area’s recovery in recent years — which has been supported by low interest rate levels and the European Central Bank’s expanded asset purchase programme — has bolstered economic conditions in Finland as well.
The vision for a unified Europe after the Second World War was predicated on the goals of sustained peace and economic recovery to safeguard democracy. Today, these two facets of the European Union — the political and the economic — are still intimately related. This has become all the more apparent recently with Europe’s growing role as standard bearer for open international trade and liberal democracy.
Nationalism has re-emerged on the world stage as global powers pursue their self-interest with short-sighted policies, much to the detriment of international cooperation. Ownership of the multilateral rules-based order has been lost. Amid this turbulence, the European Union is representative of its Enlightenment values, where the relationship between two nations and peoples is defined by rules-based cooperation, not brute force. For us, might is not the only right.
As the international system currently wobbles, the foundation for trade policy that the EU offers its Member States has proved its worth. For a small country like Finland, whose economy is readily exposed to the headwinds and tailwinds of the world economy, the viability of the EU’s trading system is of central importance. A rules-based approach to international trade will continue to underpin the Finnish economic development.
The ongoing reforms to the euro area are also part of broader efforts to strengthen Europe’s international standing. Above all else, we need a monetary union that is capable of delivering on the promises made to our citizens — promises of financial stability, sustainable growth, and opportunity for employment.
The most critical lesson of the two decades past is how important financial stability is for the real economy and employment. This was neglected when the euro was given birth. It was not until the tribulations of financial crisis that the reforms comprising the banking union were put into place, with measures including the single supervisory mechanism and single resolution mechanism.
More remains to be done with the banking union — implementing a common deposit insurance scheme, for example — but the European banking system is already much more resilient than it was twenty years ago.
Finland and the entire Northern Europe would stand to benefit if all the Nordic countries — to which the Finnish banking sector is deeply integrated— chose to adopt the euro area banking union framework, such as the supervisory and resolution mechanisms.
While the strong economic growth of recent years shows signs of moderating, there are still challenges concerning fiscal sustainability. The pressure on public finances is on, mostly notably in Italy and France.
Over the long term, the European Union fiscal framework needs to be amended to emphasise national ownership of fiscal rules and counter-cyclical fiscal policy – that is, to better protect against the exuberant highs and abysmal lows of the economic cycle, and support economic reforms. At the same time, the European Stability Mechanism should be better equipped to prevent against sudden shocks to sovereign debt markets, similar to those experienced during the crisis, which can even jeopardise the flow of funding to clearly solvent countries.
In this context, Finland would do well to lend its support to reforms that contribute to stability, growth and employment in the euro area. This might be kept in mind when eyeing the springtime parliamentary elections and coalition talks for the next government.
Instead of using political energy in drawing red lines that supposedly play well with the home audience, we’d do better by pursuing positive goals and focusing on building bridges across Europe.