Finland keeps ERM option open

Date: 26/09/1996

By Tim Jones

MEMBERSHIP of the Exchange Rate Mechanism must be a reward for good behaviour rather than a tool for instilling economic discipline, warns the governor of Finland's central bank.

“It must be that way round because any exchange rate system is simply a framework for economic policy and cannot guarantee stability,” says Sirkka Hamalainen.

“That commitment to stability must exist in every aspect of economic policy, whether you are in a floating-rate or a fixed-rate system.”

Finnish Premier Paavo Lipponen's government is widely expected to take the Markka into the ERM - a system which allows currencies to trade 15&percent; either side of a central rate against every other member - in the coming months. This would ensure that Finland had met all the entry rules for joining a single currency zone.

This speculation turned into a frenzy last week in the run-up to the Dublin meeting of EU finance ministers and central bank governors. The Bank of Finland's intervention in the currency markets, buying deutschemarks for markka and Swiss francs, seemed to confirm the investors' hunch that it was trying to weaken the Markka before it took it into the mechanism.

But in an interview with European Voice in Dublin last weekend, Hamalainen said this had not been her bank's intention.

“We always intervene to stop big fluctuations because they can be very harmful in thin markets like ours,” she said. “We were in the market as we have always been if there is excessive weakening or strengthening, but we do not try to change the trend.”

She also declined, once again, to name the day for Finnish entry into the ERM.

“It is still an open question but, as the prime minister has said, we have to make the decision whether we will join or not very soon. Of course, the Finnish economy is improving and conditions seem better now. But we have no timetable and, even if we had, we would not reveal it.”

Nor would she be drawn on speculation that the central bank is keen on keeping the Markka close to 3 per mark.

“We do not want to give any target,” she said. “All I can say is that if you look at our history since 1994, our exchange rate against the Ecu basket and the Deutschemark has been rather stable and has fluctuated plus or minus 3.5&percent;, and this has been market-driven. We have not intervened to change the trend, so it is the markets that have kept the exchange rate stable, which shows they have confidence in the policy.”