Be warned that I am not neutral or unbiased on the subject of the euro. I think the very idea was a bad one, as I do the existence of the European Union at all. But even given that Finland is currently finding out what is wrong with both the euro and the economic management of the eurozone. The Finnish economy is not doing well:
At the height of the European sovereign debt crisis, internal devaluation -- economists’ jargon for "cutting wages" -- was the recipe of choice for addressing the woes of the euro zone’s periphery.
Several years on, governments with a view of the Mediterranean or the Atlantic have tried to boost competitiveness with mixed results. Crucially, those efforts have come at a high political price. Just ask the leaders of mainstream parties in Greece, Spain Portugal or Italy.
Now, Finland is having a go.
After three years of recession, and with little scope for maneuver on the spending front (the government is holding talks Tuesday on how to find extra savings worth 400 million euros, or 456 million dollars), the ruling coalition says Finland must lower labor costs or face more credit rating downgrades.
As Keynes pointed out the solution here is for wages to fall relative to output. And the most difficult method possible is that internal devaluation. For, in the jargon, wages are "sticky" downwards. What is meant here is that we humans are not entirely rational about money (please note, this is not the economic meaning of "rational" which is really just "consistent", this is the more general meaning of properly calculating). We really, really, don't like our nominal incomes to fall. We'll put up with, much more easily, our real incomes falling if our nominal incomes stay static. Thus one way out of this problem is to engineer a little burst of inflation. And we can do that through traditional monetary or fiscal policy. Another way is to try and raise output, which can again be done through fiscal or monetary policy (although people will argue bitterly about which works better of even at all. I'm unconvinced by fiscal policy on the grounds that allowing politicians to waste more of our money rarely works well).
Or, of course, we could just devalue the currency, thus making export output worth more in local currency, or the same thing, make wages lower in relation to export values.
At which point the euro-bind becomes apparent. The various Maastricht and convergence criteria mean that Finland cannot run a larger budget deficit and thus cannot use fiscal policy. Finland does not control interest rates, that's done by the ECB, so monetary policy cannot be varied for Finland's situation. And of course being in a currency union means that devaluation is not an option either. Thus the country is left with just that one option, attempting to force down real and nominal wages, that very thing which Keynes said is the most difficult way of doing it.
Do note that this is entirely mainstream analysis. Along that ideological spectrum from Paul Krugman to Milton Friedman (and that's quite a long stretch of spectrum) you'll find economists stating that fiscal and or monetary policy are going to work better. And the standard
The euro just isn't a good idea: not when allied with the very strange rules governing the eurozone and economic management. The sooner it falls, the more people who leave it earlier, the better the European economies will do. But then you could probably guess I'd say that from the second sentence onwards, couldn't you?
