Sweden vs Finland – The Currency or the Economy?


The weaker economic performance of Finland compared to Sweden has been an important discussion point – some believe that the Swedish economy has performed more strongly because it has its own currency and Finland is at a disadvantage because it is part of the EuroZone and has limited leeway with the Euro.

However, there are good reasons to believe that the difference in performance between the two countries has its roots in the aftermath of the last financial crisis and in the differences in industrial and commercial make-up two countries.

The impact of the financial crisis

Finland suffered much greater damage from the two most recent financial crisis and its effects are still evident today.

 The first two lines in the above table refer to the Nordic banking financial crisis in the late 1980’s early 1990’s, and the second involves the second big global financial crisis that came with Lehman Brothers. Both events described here hit the 4 Nordic countries around the same time and in the same manner. The economies in all 4 countries were facing a similar economic upswing or economic boom.

These figures were presented recently by Jesper Rangvid, Professor of Finance at the Copenhagen Business School, and they open up valid questions about the reasons for such huge losses and their huge variation. 

In the aftermath of each crisis Finland’s losses were more severe than the other three. Various explanations have been given but attempts to identify the precise reasons for these losses appear to vary depending on the interests of the speaker. 

Finnish bankers claim that the final losses were insignificant and state regulation and intervention was unnecessary. Regulators blamed that they did not have the necessary tools to deal effectively with the banks, and academics, many of whom were close to the banks, softened criticism of the banks and played down the impact of the crisis. Their common theme is described as follows: 

“…the final net fiscal cost of the Finnish and Swedish banking turned out to be significantly smaller than the gross costs due to resale of assets held by public asset company”, Seppo Honkapohja, The 1990’s financial crises in Nordic countries”, Bank of Finland Discussion Paper, 2009.

The impact of both financial crisis was much bigger than the just the cost of propping up the banks. The real cost was the huge fall in GDP as a result of banks’ reckless activities that caused massive losses in production and sustained high unemployment for the countries. But there are clear reasons to note that the governments also made errors of judgement.

Regulation of the banks in all the Nordics was weak in the first crisis. The governments maintained expansive monetary policy too long and inflation and asset values rose to unsustainable levels. In Finland the banks were allowed to shovel out foreign currency loans to companies and municipalities that inflicted huge losses when the Finnish markka was devalued. 

The figures also show that lessons have really not been learnt, although Sweden did show some improvement in the second round. The differences in the numbers between the four countries also show up significantly greater weakness in relative performance in handling these financial crisis by the government, but that is not discussed further here, other than mention that the government failed to regulate the banks quickly enough as well as showing an unwillingness recapitalise the banks. Profits were privatised and losses socialised in Finland because the government’s relationship with the banks was close.

Finnish GDP only achieved the 2007 level in 2018 – during that time public debt has increased and there was only a modest fall in unemployment, however youth unemployment remained relatively high as did the numbers for long-term unemployed. During the past 20 years Swedish GDP growth has ben robust – see below WORLD BANK’s and OECD’s graphs:

Industrial and Commercial Structures

There are big differences between the industrial structures of Sweden and Finland. Sweden has over double the number of large companies and all of them have a substantial global presence with factories and supply chains. Swedes have not been weakened by wars in the last century but have built up strong global networks. They also have a more diversified range corporations from retail to heavy industry, from shipping to automobile manufacturing, from telecoms to mining products. Public support for exports is also somewhat stronger than Finland.

The above strengths of Sweden are well known in Finland and the Finns have done much to develop and strengthen corporate structures but the lead achieved by the Swedes is hard to match in the short term. The case of Nokia, the former national champion, showed how vulnerable the economy can be when one of a few fails to perform as expected. 

Our close proximity to Russia also has had severe consequences when the Russia economy falters or when sanctions bite into our exports to Russia. 

Finnish exports are still dependent on a few big companies in the forestry and metal sectors, while SME’s struggle to grow and export.

A final difference can also be found in the labour markets – the Finnish labour market is somewhat less flexible than the Swedish one. The heavier influx of migrants into Sweden compared to Finland has created a larger supply of willing labour and an increased willingness to become a self-employed entrepreneur.

Finland has a large part of the economy dominated by large monopolistic companies – in retail, in banking, in dairy products, in telecoms, in forestry, in construction, in banking and insurance and pensions. This does not help develop an entrepreneurial environment but one rather lazy, cosy one where staff do not exert themselves. Global markets are filled with hard-nosed tough competitors.

A final brief word on currencies

Sweden can and has adjusted its currency to support economic activity. This has traditionally allowed the central bank to devalue the currency when the going gets tough, but the Swedes have seen a lot of volatility with housing prices and even though the Swedish Crown has been a a very low level for several years export performance and growth has not been stellar this last year.

On the other hand the EuroZone is the largest export market for Finland so the currency has not been as important as growth or the lack of growth in the Eurozone. The main determining factors are wage differentials and they can be managed by wages restraint and adjustments in taxes and social security payments. Although they are less flexible than currency devaluation, small countries seldom do well with their own currencies – Finnish history is full of the unpleasant consequence of such actions with the old Finnish markka, which should never be repeated…

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