Research guide to European Monetary Union This, coupled with the favourable fundamentals, has pushed interest rates down and stabilized the currency. The government is convinced about the virtue of Emu and only legal technicalities separate Finland from joining from the beginning. Ironically, the biggest threat lies in the year 2000. Finland became a member of the EU on January 1 1995. This decision has proven to have profound consequences for the Finnish Emu approach. Two essential issues stand out, both of which would be rejected today. One, the public was asked in a referendum whether Finland should join the EU. Two, the Parliament took the membership decision by the required two/three majority. According to the government the referendum included the acceptance of the Maastricht criteria and was passed by an overwhelming majority in the Parliament. Hence, in theory Finland will automatically become an Emu member once meeting the criteria. As Finland fulfilled the criteria already last year the practical decision to join in 1999 can be taken any time and by a simple majority. True, the Maastricht criteria were baked in the referendum, but in a manner that the voters did not recognize. Strictly speaking the government is right, but definitely against the spirit of the vote. Due to the formulation of the questionnaire the people could not vote for EU without accepting the preparations that result in the third phase of Emu. The consequences were felt last year when Finland chose its euro-MPs. Candidates opposing Emu received a landslide victory. Despite this, public opinion is against Emu, the government is destined to take Finland into Emu in the first round in 1999. Both the previous and the current government have pursued extremely strict fiscal policy in order to curb public finances. Expenditure cuts in the 90s cumulate to more than 10% of 1997 nominal GDP. As a consequence public sector deficit has fallen sharply and also debt is on a declining trend. In the midst of the deepest recession Finland got its act together. Tight fiscal policy was coupled with a long and moderate wage deal. This centralized pay deal extends to January 1998 and has secured on one hand low inflation and on the other hand the competitiveness of the industry. Bond yields have fallen dramatically and stand only some 50bp higher than in Germany. The Finnish markka has gained ground and stabilized. The Bank of Finland has cut the tender rate to the German level. Only unemployment stands at an intolerable level, but Finland's vigorous GDP growth rates bode well also for employment. With this kind of a track record the government will not budge from its Emu approach. The government-nominated expert group will publish its Emu study in May. This study will highlight the pros and cons of Emu without any final verdict. The government holds the view that positive factors outweigh the negative, despite the fact that variations in the Finnish industrial production correlate poorly with those of the Continent. This, of course, violates strongly against the idea that Europe would be an optimal currency area for Finland. The Finnish Emu debate has been fairly modest compared with other countries, for example Sweden. In addition, in Finland the Emu discussion has been heavily intertwined with security and defence policy. Finnish EU membership must be seen above all as integration with the west. The geopolitical position of Finland between east and west has long served as the basis for the pursued neutrality policy. Recently the Emu debate has been characterized by calls for NATO membership. It has become evident that Emu membership cannot replace NATO-membership in security policy. Therefore Emu membership has begun to look like a less attractive substitute for NATO. Earlier also Sweden's approach to Emu was reflected in the Finnish discussion, but this link has faded as it is believed that Sweden will join later, perhaps before 2002. The labour market organizations have supported the official Emu drive. Employers have seen membership as a definite necessity, while labour unions have adopted a more conditional support stance. According to the unions, nominal wages may under no circumstances fall in Emu, and furthermore, special buffer funds must be established to alleviate the strain that changes in the business cycle put on the companies. This issue will definitely be baked into the pay talks next autumn, but should not prove a stumbling block. The only stumbling block so far has been the law proposal governing the Bank of Finland. According to the Constitutional committee a five/six majority is required when handing over the remainders of monetary policy from the Parliamentary Supervisory Board to the Board of the Bank of Finland. The same majority is needed to exchange the Finnish markka into the Euro as the only legal tender. These propositions can and would be easily blocked by the opposition. An alternative route to pass these laws is by a two/three majority twice with elections in between. The government is likely to adopt the latter approach. Early next year the government will make the decision to join (simple majority required) in a vote of confidence. Later in 1998 the government will put the money act to vote and it is to be assumed that a two/three majority will be achieved (no slippage in government votes may occur). The second two/three majority vote could then be taken well after the next elections in March 1999 and after joining Emu, for instance in late 2000. If the government does not vote (and win) on this issue before elections, the Finnish membership could be endangered. The outcome would depend totally on the mind-set of the opposition. Another interesting issue could be the fixing of conversion exchange rates. The Finnish markka was linked to the ERM in October 1996 at a central parity rate which translates into 3.04 against the deutschmark. This level is about the average of the last few years, which must be seen as favourable for Finland. Officially fluctuation limits of ±15% are applied, but the markets tested the assumed narrow bands of ±2.25% already in January. The Bank of Finland claimed that no unofficial bands existed, but intervened heavily as the markka steamed towards 2.97. An abrupt change of mind at the Bank of Finland resulted in a markka appreciation to 2.92, mainly driven by overseas investors. With the lack of larger domestic participation the markka has fluctuated back to the stronger half of the narrow band (around 2.97 to 3.11). This episode has two interesting consequences. One, it lends support so that the fair value of the markka could be somewhat stronger than the parity rate. Many domestic players would like to see 3.04 as the final conversion rate, which has been reflected in the markets. Two, the currency stability criterion will be interpreted in the qualification next spring. The Maastricht Treaty speaks only of normal bands which could refer to anything between ±2.25% and ±15%. In this respect the markka has broken the narrow bands. In addition, the strict interpretation of two years ERM membership is not met by spring 1998. Both of these factors could, in extreme circumstances, be used as a technical factor to exclude Finland from the first round of countries in 1999. Although this is very unlikely, the political importance of Finland is negligible when face-saving compromises are struck on the Continent. Maastricht criteria: current status
The Finnish Emu calendar
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