© hanken.fi
|
Anders Löflund
Head of the Department of Finance and Professor of Finance at Hanken School of Economics, Helsinki
Dukascopy carries on interviewing the experts from Scandinavia. Today Anders Löflund, Professor of Finance at Hanken School of Economics in Helsinki, unpicks for us the economic situation in Finland, being a part of the Eurozone, and reflects on how the potential breakdown of the euro could shake the Scandinavian countries.
Finland suffers from small market periphery syndrome to larger extent than, for instance, Sweden (having the benefit of own currency). Foreign ownership has dropped strongly in Finnish equities as capital has fled from peripheral markets towards "safer havens". Finland's bond rating is still positive, political willingness to savings also pretty good. That said, Finland is a small export-heavy vulnerable market that may turn around fast. I do not think politicians have been proactive enough in launching government savings. Luckily, overall private indebtedness is moderate compared to many other countries.
Most household mortgages are tied to short-term Euro Interbank Offered Rate (Euribor) meaning that an escalating Euro area bank crisis with a hike in Euribor rates (like in Lehman episode, or worse) would be very bad for indebted households. Luckily, overall private indebtedness is moderate compared to many other countries.
Finland has a history of currency struggles with various pegs (currency basket, European Currency Unit) with the typical outcome being that Finland has been forced to devaluate its own currency. Adverse effects of those devaluation cycles was one of the positive arguments for joining European Monetary Union.
If we think given the gloomy forecasts of the Eurozone's collapse materialize in what way the Scandinavian countries will be affected, I would say quite differently because of the obvious differences between the countries.
Norway has oil, Denmark Euro peg of DKK, Sweden is a medium-size strong exporter with a robust Swedish Krona, while Finland is a small-sized strong exporter that adopted euro in 1999.
If the euro collapses it would provoke significant demand effects: it would involve a drop of GDP because of banking and sovereign debt turmoil/banking crisis ultimately spreading to the real economies. Moreover, direct financial costs to remedy the crisis would increase immensely.
Massive uncertainty regarding the future of the euro-based contracts would stall investment. Unemployment would escalate, whereas asset prices would plummet. All of this is, would impact Scandinavian countries as well. I believe that only Norway, being a debt free nation can manage well through in the case of the euro collapse, unless oil prices plunge. Even then it is short term would negatively affect the wealthy Norway.
If this happens, the countries would also suffer in terms of currency effects. Denmark might see the peg against euro broken, while the Swedish and Norwegian Kronas might find themselves appreciating against the euro, which would deteriorate those nations' competitiveness.