ETLA Discussion Papers, The Research Institute of the Finnish Economy (ETLA) 1040
In this paper we study Finland’s way to the Economic and Monetary Union (EMU) and her economic development as a member of the EMU. First, we describe the economic background of the membership and the arguments presented in research and discussion for and against it. Then we describe Finland’s economic performance in the Euro zone. The main part of the paper consists of an analysis of the Finnish economy in terms of some crucial determinants for an optimal monetary union. These include differences in production structures, differences in the country composition for exports, output variations, housing sector developments, interest rate developments in comparison with the Taylor-rule based rates, labour market flexibility, and fiscal policy. Finland is analysed in the context of other EMU and EU countries, so the paper includes comparisons with them, too. Finland has performed very well until now. The analysis of the structural and cyclical factors of the economy indicates, however, that the Finnish economy continues to differ crucially from the core Euro zone countries. This means that the adjustment mechanisms, including labour market flexibility and fiscal policy, must be maintained effective and in some respects even be strengthened.