The world economy has performed better than expected in the early part of 2010. The sovereign debt crisis has, however, increased the downside risks to the growth forecast.
‘It is still too soon to say how far-reaching and long-lasting the effects of the crisis will be. However, a sustainable return to growth will require restoration of confidence in governments’ ability to service their debt,’ said Bank of Finland Governor Erkki Liikanen at the press conference marking the release of the latest edition of the journal Euro & talous.
Despite large-scale intervention, the markets continue to be nervous and there is increased tension on the interbank market. As well as the effects of the current heightened uncertainty, faster-than-expected consolidation of public finances, too, could contribute to slower short-term growth. The longer-term impact will, however, be positive. Sustainable growth is not possible without healthy public finances.
‘Adjustment of the public finances is an essential prerequisite for cutting the trajectory of debt. But, on its own, it will not be enough. We must also ensure the economy is equipped to grow. Governments must undertake broadly based reforms to improve competitiveness and the bases of growth,’ Governor Liikanen pointed out.
The ECB’s primary objective is price stability, and it is inflexibly attached to this objective under all circumstances. The non-standard measures adopted during the financial crisis do not conflict with the objective of price stability. The aim is to secure efficient transmission of monetary policy and the stability of financial markets in the euro area. These are essential preconditions of economic growth.
‘The Securities Markets Programme does not represent a relaxation of monetary policy. The liquidity added to the market through the programme will be removed in full. The current monetary policy stance remains appropriate,’ Governor Liikanen added.
The Finnish economy has been slow to come out of recession. Both GDP and exports continued to decline in the first quarter of 2010. On the brighter side, the employment situation has stabilised during the course of the spring, and the seasonally adjusted unemployment rate has actually fallen slightly. On the other hand, the recent rapid rise in house prices contains some risks.
‘When deciding on a loan in Finland, both households and banks should assess the borrower’s ability to service the debt beyond the current low interest rate environment,’ Governor Liikanen emphasised.
Finland’s financial system has been spared the crisis, and the capital adequacy of Finnish banks is on average strong. Even so, the Finnish financial system is not immune to the international turbulence.
‘In order to preserve the banks’ lending capacity even in the event of a worse economic situation than previously anticipated, banks should secure their profitability and concentrate on strengthening their liquidity and capital buffers,’ Governor Liikanen said.
Finland’s general government finances are this year deeply in deficit, which means rapid growth in government debt. Although confidence in Finland’s public finances has survived the crisis, continued confidence will require determined action to consolidate the finances.
‘Strong growth will require reinforcement of the financial position of general government. From the point of view of investments and other long-term commitments, it is important to put together a long-term plan for general government consolidation lasting longer than one electoral cycle,’ Governor Liikanen added.
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In addition to the regular articles ‘Rahapolitiikka ja taloudellinen tilanne’ (‘Monetary policy and economic outlook) and ‘Rahoitusjärjestelmän vakaus’ (‘Financial stability in Finland’), Euro & talous 2/2010 also contains two other articles:
– Heli Huhtala and Mikko Spolander’s ‘Julkisen sektorin rahoituksen haasteet euroalueella’ (‘Public sector funding challenges in the euro area’) and
– Miika Syrjänen and Kari Takala’s ‘Keskuspankin rooli rahahuollossa’ (‘The role of central banks in the cash cycle’).