Vol. 9, No. 1
Growth and employment in the European perspective (pp. 6–17)
he Western European debt deflation, which induced a severe recession in 1992-93, is now giving way to a recovery for which both external and internal conditions appear favorable. The question remains, however; to know whether macroeconomic instability is not going to be more and more pronounced in the future. Faced with persistent unemployment, Western European countries ought not only to reduce rigidities in their economies but also to consider two medium-term policy proposals that were recently studied: a substantial selective decrease in the cost of unskilled labor and ambitious public investment programmes. The paper ends with a brief discussion of long-run challenges: the welfare state, European unification, the conditions for non-inflationary wage formation.
(JEL: J23, E32, E50, E60)
Giancarlo Corsetti and Nouriel Roubini:
Budget deficits, public sector solvency and political biases in fiscal policy: a case study of Finland (pp. 18–36)
The Finnish fiscal balances severely deteriorated during the deep recession of the early 1990s with large fiscal deficits and significant increases in the public debt to GDP ratio. On the external side, current account deficits led to a large accumulation of external debt. While part of the fiscal imbalance can be attributed to the cyclical conditions of the Finnish economy, this paper considers whether the size of the deficit can be explained exclusively by stabilization and/or taxsmoothing policies. The paper then highlights political and institutional factors
which have increased public debt beyond what would be desirable from the vantage point of traditional economic theory. The argument for fiscal rules against discretion is re-assessed within a simple model of political bias towards deficit spending, allowing for tax-smoothing considerations as well as for international trade in goods and assets. The analysis of the Finnish data shows that political and institutional biases contribute to explain the significant internal and external deficits during the 1990s depression. A substantial fiscal retrenchment will soon be required in order to avoid the insolvency of the public sector.
(JEL: E6, H62)
Seppo Honkapohja, Erkki Koskela and Jouko Paunio:
The depression of the 1990s in Finland: an analytic view (pp. 37–54)
This paper deals with some aspects of the Finnish economic crisis in the 1990s by starting with a quick description of the main macroeconomic features of the crisis together with some empirical evidence on price and wage as well as interest rate determination. With these as a background a theoretical analysis of fiscal and monetary policies is presented by putting a special attention on the macroeconomic implications of high foreign debt and the banking system for the effects of monetary and fiscal policies. The paper ends up by interpreting the role of economic policy during the depression and considering problems of the external balance of the Finnish economy in the near future.
(JEL: E44, E63)
Lars Jonung, Hans Tson Söderström and Joakim Stymne:
Depression in the north – boom and bust in Sweden and Finland 1985–93 (pp. 55–71)
A comparison of the boom-and-bust cycle of Sweden and Finland during 1985-93 reveals remarkable similarities. We examine macroeconomic developments during the period with a special emphasis on asset market developments. The seeds of the crisis were »traditional» Nordic problems combined with the consequences of late deregulation of financial markets. We identify five factors that were present in both countries and that account for the depth of the downturn: an »ordinaly» cyclical downturn, a real interest rate shock, asset price deflation with balance sheet consolidation, financial fragility and slow structural adjustment. Differences in policy response are analyzed.
(JEL: E63, E44)
Jaakko Kiander and Pentti Vartia:
The great depression of the 1990s in Finland (pp. 72–88)
The beginning of the 1990s witnessed the collapse ofthe Eastern European economies and a severe recession in some Western European countries. In most countries the economic difficulties have been milder than those experienced during the Great Depression of the 1930s. Finland is an exception to this rule. In Finland the current recession – if measured by output losses – has been clearly worse than the previous one 60 years ago. In this paper we discuss the relative role of foreign and domestic shocks. Was the economic policy conducted during the recession the right one? Was the crisis unavoidable after the liberalization of international capital movements? We also further review the actual developments and the economic policy discussion during the recent depression.
(JEL: E63, E44)