Financial Crisis in Finland

Financial Crisis in Finland

Introduction

This paper examines the causes and the background of the financial crisis in Finland from 1991 to 1995 (Paul G. Schmidt, 2011), which triggered the worst up to that recession in a European country after Second World War. More specifically, it deals with the analysis of the Finnish economy; their sensitivity/vulnerability to internal and external shocks; and the influence of other economies on the Finnish economy. In addition, the paper also examines the monetary and fiscal policies to overcome the crisis.

The structure of the paper is as follows, Section 2 briefly describes the economic changes in the late 80s in Finland, especially the reasons for the fast deregulation and liberalization of financial markets. Following, in Section 3 the Finnish banking sector is analyzed in terms of its market structure, its profitability and stability as well as its importance in the Finnish economy. Section 4 deals with the development of capital markets at the end of the 80s and early 90s, with studies in context of the related immediate causes of the Finnish financial crisis. Section 5 describes the measures taken by the Finnish government to deal with the effects of the financial crisis under control and restore the competitiveness of Finland.

In context with the Finnish financial crisis, economists like Böckerman/Kiander (2006), Kiander and Vartia (1996) speak of a combination of "bad luck, bad banking, and bad policy." Bad luck related to the collapse of the Soviet Union collapsed in 1991, which led to a dramatic decrease in Finnish exports. The Soviet Union was under a bilateral trade agreement until the early 90's, the most important market for the Finnish export industry. Bad banking describes the inefficient banking sector and the lack of suitable risk management of Finnish banks. The third negative factor for the Finnish economy is described as bad policy, which led to the intensified crisis. Also Conesa, Kehoe and Ruhl argue (2007) that the counter-cyclical increase in taxes on labor income and consumption worsened the financial crisis. Laeven (2008), however, sees the rise in interest rates in Germany and the subsequent adjustment of Finnish interest, the essential trigger for the economic crisis. For him, the collapse of the Soviet Union is only the catalyst for the extent of the recession.

Discussion

Historical Economic Development in Finland

While the European recession in the early 90s, Finland was hit hard in comparison to other Scandinavian countries. The Finnish economy continued until the early 20th Century, mainly from agriculture, land and timber industry. While in other European countries, the industrialization in the mid-19th Century began, Finland developing between the both World Wars, established major industry sector, the shipbuilding and mechanical engineering (Nyberg, 2007). After the Second World War, Finland Member of the International Monetary Fund (IMF) and the World Bank signed in 1948, the Bretton Woods agreement. In 1950 Finland joined the World Trade Organization (WTO) signed the General Agreement on Tariffs and Trade (GATT) and opened by the reduction in import duties and tax exemptions on ...