The Nordic Experience of Financial Liberalization
Edited by Lars Jonoug, Jaakko Kiander and Pentti Vartia
Lars Jonung, Jaakko Kiander and Pentti Vartia ‘It’ – that is, a deep depression – cannot happen here. This was the general attitude among economists, policy-makers and the public in Finland and Sweden prior to the early 1990s. Why should a depression take place in an advanced Nordic welfare state with a long tradition of full employment policies and strong labour union influence on the design of economic and social policies? Indeed, the macroeconomic record of Finland and Sweden during the post-World War II period was characterized by stable growth and low unemployment. Moreover, these two countries and their Nordic neighbours, Norway and Denmark, seemed to be able to combine an egalitarian society with strong economic performance. But ‘it’ happened – to the great surprise of many.1 The picture of the successful Nordic economies was shattered at the beginning of the 1990s when Finland and Sweden faced a severe crisis, falling real income, soaring unemployment and exploding public deficits. Previously, few understood that the macroeconomic policy regimes and thus the macroeconomic stability that had evolved in Finland and Sweden after World War II rested on far-reaching external and internal financial regulations. The system of capital account (foreign exchange) controls isolated the two countries financially from the rest of the world, in this way allowing domestic credit market regulations, setting interest rates and determining the allocation of capital according to political priorities. In the early 1980s, the financial systems of the two countries underwent major deregulation. In several steps the Nordic economies became financially...