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    Finland adding fuel to the flames

    Fatih Özatay, PhD22 August 2012 - Okunma Sayısı: 960


    I am wondering if Finnish doesn’t have an idiom standing for “adding fuel to the flames.” I wish you all a happy Bairam, free of “bad equilibria.”

    The headline of a news story on the Daily Telegraph dated August 16th: “Finland prepares for break-up of Eurozone.” It was chosen in reference to some remarks by Finland’s foreign minister. And an interesting detail: On his desk, the minister had a copy of the Economist that had a picture of Angela Merkel, reading a fictitious report titled “How to break up the euro?”

    Here is a press release from the Central Bank of Turkey (CBT) published eleven years before the date of the abovementioned story in the Daily Telegraph: “Though imperative, restoring economic fundamentals alone is not enough to achieve desired outcomes namely, lower inflation, rapid and sustainable development and a more equitable income distribution. Depending on the direction of expectations, the same economic fundamentals can cause diverse economic outcomes.” And the following lines are from a CBT announcement dated 2 January 2002: “…similar economic fundamentals might generate much different results. This stems from the expectations of economic agents. Under similar economic fundamentals, optimistic expectations will direct the economy towards lower interest rate and exchange rate equilibrium, while pessimistic expectations will do the opposite. In technical terms, there can be more than one equilibrium to be attained at any time in an economy.”

    Expectations are distorted

    On Saturday’s column I talked about an article by Giavazzi, famous economist and an advisor to Italy’s prime minister. Giavazzi’s article explained why Italy should not meet the conditions set by the European Central Bank (ECB) for purchasing its bonds, namely bowing to and complying the terms of the stability mechanisms (the EFSF and the ESM). In response to Giavazzi, Wyplosz, a prominent expert on the European economy, wrote a rejoinder ( He pointed at the possibility of a multiple equilibria and stressed that Italy has moved to the bad equilibrium.

    Unfortunately, Europe is now going through a phase that Turkey experienced eleven years ago, as marked in the above-quoted press releases and announcements of the CBT. Here, please note that the “bad equilibrium” refers to the high interest rate-high exchange rate scenario the CBT releases denoted. As Italy is not using national currency, the bad equilibrium in their case refers to high interest rate. Remarks by Finland’s foreign minister seem to abate hopes for overcoming the bad equilibrium. Despite all their efforts, countries in turmoil are faced with substantially high interest rates as players in the financial markets are not convinced that they can repay their debt. High interest rates push up borrowing costs, aggravate problems for these countries and thus escalate adverse expectations and push up interest rates again. Remarks of this kind on top disturb expectations even further.

    Using a common language

    The European crisis has shown us that “single central bank-single currency-single monetary policy” scenario is unsustainable if there is no unity of fiscal policy and banking regulation and supervision authority. Yet it seems that economic unity has one more important requirement: “using a common language” or “telling the same story” when it comes to critical economic matters. It is quite weird that a Finnish minister stands up and says that the country prepares for the break-up of euro while Italy and Spain have been making great effort to turn their economy around. Some argue that Finnish and Turkish are of the same linguistic origin. I am wondering if Finnish doesn’t have an idiom standing for “adding fuel to the flames.” I wish you all a happy Bairam, free of “bad equilibria.”

    This commentary was published in Radikal daily on 21.08.2012