Reader Swedish Lex points out an important implication of a recent VoxEU post on the Nordic economic model and how it fared in the crisis:
The Nordic countries – Denmark, Finland, Iceland, Norway and Sweden – are champions of free trade and open markets…
The Nordics have all had different monetary regimes since the euro. Given their similarity in other respects, a comparison of Finland and Sweden is especially interesting. It is almost a laboratory experiment. Sweden has a floating exchange rate and an independent central bank geared to price stability, while Finland is part of the Eurozone. Who has made the better choice?
The krona was mostly stable and developments in Finland and Sweden were strikingly similar during the first decade of the euro. Once the crisis erupted, however, the krona fell significantly relative to the euro, thereby strengthening the price competitiveness of Sweden relative to Finland and the euro area. One might expect this to help Sweden come through the crisis at less cost than Finland, arguably benefitting at the expense of its neighbour by capturing market shares.
The decline in exports and output in 2009 was indeed smaller in Sweden than in Finland, and GDP growth is forecast to be somewhat faster. However, the differences do not seem large. Also, manufacturing output shows little response to the change in competitiveness, and unemployment is rising in parallel with developments in Finland.
Either the effects of the improved competitiveness are relatively modest or the lags are long, or a depreciation of a floating currency has less effect on export and output volumes than a devaluation of a pegged currency used to have. What is clear is that the floating exchange rate does not insulate an economy from external shocks, and the economic differences between the two exchange rate regimes seem smaller than often claimed in the heated debate about the Eurozone.
Yves here. A standard remedy for a country faced with an economic crisis, or a mere severe recession, is to break glass, trash currency, and use the resulting export boom as a way to restart growth. But as Swedish Lex notes:
The importance of the “usefulness” to the economy of the de facto devaluation of the Sterling, and of the hypothetical devaluations of Greece etc. should they leave the euro, constitutes a core issue when debating the ifs and buts, pros and cons, of different macro scenarios. This comment posted on VoxEU briefly compares Sweden and Finland, countries with similar economies, and how they have fared inside and outside the euro zone during the crisis. The tentative conclusion seems to be that Sweden, despite a rather massive de facto devaluation did not gain a massive competitive advantage.
Is the Swedish economy too intermingled with the euro economy (and the U.S.) too get the kind of adrenalin kick that the devalulations of of 20 and 30 years ago gave? If this tentative conclusion is extrapolated, it could mean that Greece etc. would not get massive boosts by going back to national currencies followed by significant drops in the vaule of their currencies.