Markka close to joining ERM grid

Date: 06/06/1996

By Tim Jones

THE Finnish markka is poised to be the first new currency to join the Exchange Rate Mechanism since Austria signed up to the system early last year.

The legislation enabling Finland's central bank and finance ministry to apply for ERM membership for the markka will be enshrined in national law tomorrow (7 June) when President Maarti Ahtisaari pens an amendment to the Money Act.

Government ministers are staying tight-lipped about when Helsinki will make its next move, but are dropping hints all the same.

“Once the legislation is complete, we will have all the elements in place to take our own decision,” said Finance Minister Sauli Niinistö this week. “It has become obvious to the Finns that a formal linking of the markka to the ERM is very important.”

The Finns have, according to opinion polls, long been the most enthusiastic of the Nordic states about membership both of the EU and economic and monetary union.

While the Swedes, for example, have joined the UK government in fighting the suggestion that any country wanting to join the single currency bloc would first have to be a member of the ERM for two years without devaluing - a rule that appears to be very clear in the Maastricht Treaty - the Finns are more keen to clear every obstacle to membership which might be strewn in their path when the assessment of which countries will be allowed to join EMU is made in early 1998.

With a budget deficit likely to dip well below 3&percent; of gross domestic product in 1997 and the lowest inflation rate in the Union, Finland is in a strong position to be part of the first wave of single currency countries.

“We are doing well on a European scale, with low inflation, low interest rates and our exchange rate is doing well at the moment,” said Niinistö. “We have all the best elements in our hands.”

However, the government is fearful that failing to be an ERM member for two years could be held against it later. Based on the latest legal advice he has received, Niinistö said, “it is now more obvious that (ERM membership) will be necessary”.

Nevertheless, during the debates on the legislation required to pave the way for ERM membership, some Finnish politicians showed that they were still reluctant to bind themselves into a system which would tie their monetary policy hands after their experiences in the currency crises of 1991-92.

Then, when the markka was voluntarily pegged against the Ecu, the authorities lost their fight with the markets and were forced to devalue the currency twice.

“You get the feeling with many of the politicians that they are more scared of the ERM than of EMU, which is a strange thing,” said a Finnish monetary official.

With all the elements now in place, the Finnish authorities are free to request ERM membership at any time and the markets are expecting a central rate of around 3.05 per deutschemark when the markka enters the grid.

Such requests are usually made after European markets close on Friday and the negotiations are conducted at weekends within the EU's monetary committee and approved by finance ministers.

Choosing the right weekend will be easier said than done. Since the law will only be passed on Friday, a meeting this weekend would prove difficult to convene at a moment's notice.

The weekend of 15-16 June may prove easier to arrange since the monetary committee is holding its annual 'informal' meeting - this time in Stockholm - but this would make a formal decision difficult.

The Florence summit falls a weekend later, which may prove an ideal moment to fortify Finland's pro-EMU credentials.

The main problem for Finland is that if it joins either the ERM or EMU without Sweden - its main competitor in forestry products - it risks jeopardising market share if the krona loses value.

“From an economic point of view, it could cause some problems,” admits Keld Holm, an economist at Lehman Brothers in London. “But in terms of satisfying the Maastricht criteria, it is difficult to see how they could keep the Finns out of the monetary union.”