A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Korhonen, Tapio Working Paper Finnish monetary and foreign exchange policy and the changeover to the euro Bank of Finland Discussion Papers, No. 25/2001 Provided in Cooperation with: Bank of Finland, Helsinki Suggested Citation: Korhonen, Tapio (2001) : Finnish monetary and foreign exchange policy and the changeover to the euro, Bank of Finland Discussion Papers, No. 25/2001, ISBN 951-686-757-X, Bank of Finland, Helsinki, http://nbn-resolving.de/urn:NBN:fi:bof-20140807313 This Version is available at: http://hdl.handle.net/10419/211903 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. 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This paper is Finland’s part of a study undertaken under the aegis of the European System on Central Banks on experiences regarding the changeover to the single currency. The study is intended to provide useful information to EU applicant countries. Suomen Pankin keskustelualoitteita Finlands Banks diskussionsunderlag http://www.bof.fi ISBN 951-686-757-X ISSN 0785-3572 (print) ISBN 951-686-758-8 ISSN 1456-6184 (online) Suomen Pankin monistuskeskus Helsinki 2001 Finnish monetary and foreign exchange policy and the changeover to the euro Bank of Finland Discussion Papers 25/2001 Tapio Korhonen Economics Department Abstract This paper presents the salient aspects of Finland’s monetary and exchange rate policies during the run-up to monetary union in the 1990s. In the course of slightly more than a decade, Finland’s monetary and exchange rate policies were thoroughly revamped. The remnants of heavy regulation were removed and a market-based financial system was put in place. There were serious problems associated with the liberalisation process in the early part of the decade, the most noteworthy being an economic and banking crisis. Finland’s financial system nonetheless developed rapidly and became a more integrated part of the global system. As regards exchange rate policy, almost all varieties of exchange rate regime were tried. A fixed rate regime based on a currency index fell apart in the early part of the decade and was replaced by a floating rate system. Later, in 1993, this was combined with an inflation-targeting monetary policy strategy. At the start of 1995 Finland joined the European Union, and in October 1996 the markka was joined to the EU’s Exchange Rate Mechanism. The improvement in financial and price stability that followed the economic crisis facilitated the adjustment to the euro area’s single currency and single monetary policy at the start of 1999, which was accomplished without serious problems. Key words: monetary policy, foreign exchange policy, EMU, euro, monetary policy arrangements 3 Suomen raha- ja valuuttapolitiikka euroon siirryttäessä Suomen Pankin keskustelualoitteita 25/2001 Tapio Korhonen Kansantalousosasto Tiivistelmä Selvityksessä käydään läpi pääpiirteittäin Suomen raha- ja valuuttapolitiikka 1990-luvulla rahaliittoon valmistauduttaessa. Runsaassa kymmenessä vuodessa Suomen raha- ja valuuttamarkkinat muutuivat merkittävästi. Säännöstelyn jäänteet poistettiin ja Suomeen luotiin markkinapohjainen rahoitusjärjestelmä. Liberali- sointiin liittyi vuosikymmenen alussa suuria vaikeuksia, erityisesti vakava talous- ja pankkikriisi. Samalla Suomen rahoitusjärjestelmä kuitenkin kehittyi voimak- kaasti ja kansainvälistyi. Valuuttapolitiikassa sovellettiin lähes kaikkia valuutta- kurssijärjestelmiä. Valuuttakoriin perustunut markan kiinteä kurssi murtui vuosi- kymmenen alussa, ja vuonna 1993 kelluvan kurssin oloissa omaksuttiin inflaatio- tavoitteeseen perustuva rahapolitiikan strategia. Vuoden 1995 alusta Suomi liittyi Euroopan unioniin, ja lokakuussa 1996 markka kiinnitettiin EU:n valuuttakurssi- mekanismiin ERMiin. Talouskriisiä seurannut rahoitus- ja hintatasapainon parane- minen myötävaikutti siihen, että sopeutuminen euroalueen yhteiseen rahaan ja rahapolitiikkaan vuoden 1999 alusta sujui ilman merkittäviä ongelmia. Asiasanat: rahapolitiikka, valuuttapoliiikka, EMU, euro, rahapolitiikan välineet Tämä keskustelualoite on saatavissa suomenkielisenä Suomen Pankin kansantalous- osaston työpapereissa. 4 Contents Abstract....................................................................................................................3 1 Finnish economy already adjusted to integration pre-1990s .......................7 2 Backdrop for EU membership and monetary union – the deep economic and banking crisis of the 1990s.......................................9 3 Run-up to EU membership – markka floated (1992–1994) .......................14 4 Monetary policy arrangements and market institutions in the 1990s.......16 4.1 Monetary policy arrangements ................................................................16 4.2 Intervention in the foreign exchange market...........................................18 4.3 Changes in the banking system ...............................................................20 5 The EU-era float prior to joining the ERM.................................................22 5.1 Maastricht criteria....................................................................................22 5.2 Monetary conditions were favourable at first but unsettled in 1996 .......23 6 Membership of the EU’s Exchange Rate Mechanism (ERM) ...................25 6.1 ERM linkup in October 1996 ..................................................................25 6.2 The general government sector also met the EMU convergence criteria......................................................................................................27 6.3 Decisions in the field of incomes policy..................................................28 6.4 The last currency speculation and calmer markets..................................29 6.5 Changeover to the single currency and single monetary policy..............31 6.6 System changes and legislative reforms in the final years ......................33 7 Concluding remarks.......................................................................................36 Charts 1–11............................................................................................................38 References..............................................................................................................45 5 6 1 Finnish economy already adjusted to integration pre-1990s When the heads of the various European Community’s states agreed on the gradual transition to Economic and Monetary Union (EMU), in Maastricht on 10 December1991 (signed 7 Feb 1992), the project was not immediately seen as something that would directly affect Finland. Finland’s membership of the European Union seemed a distant possibility and the realisation of the single currency concept within the proposed timeframe was generally regarded with scepticism both in Finland and elsewhere. According to the Maastricht Treaty, detailed preparations for EMU were to begin with Stage Two, at the start of 1994, with the establishment of the European Monetary Institute (EMI) precursor of the European Central Bank (ECB). Transition to Stage Three – a single currency and a single monetary policy – was to happen by 1 January 1999 at the latest. Finland had already participated in Western Europe’s integration process for decades, both politically and by opening up its markets. With the exception of key agricultural goods, Finland’s foreign trade had already been liberalised with the dismantling of controls in the 1950s. Finland was very much involved in Western European economic organisations, despite some constraints imposed by its foreign policy of that period. Finland had already become a member of OECD (1969) and EFTA (1961, with full membership in 1986). In 1972 there had been negotiations with the European Community on a free trade agreement, and at that time, in 1991, cooperation centred on