--- title: "Dark Scaremongering, the Euro and the Government's Bogeymen | Tuomas Malinen | Negotiator 62" summary: "Tuomas Malinen, CEO of GnS Economics, argues that the EU recovery fund is not a one-off but the end point of a transfer union, and that currency unions historically have only two directions: they break up, or they become political unions. The episode covers the two functions of an exchange rate, Esko Aho's 1998 warning, and why Finland's longest recession came during a period without a currency of its own." datePublished: 2021-02-05 dateModified: 2021-02-05 originalLang: en section: economy sections: ["economy","society"] authors: ["Sami Miettinen"] tags: [] canonical: https://ai.neuvottelija.com/ep62-pimeaa-pelottelua-euro-tuomas-malinen/ --- # Dark Scaremongering, the Euro and the Government's Bogeymen | Tuomas Malinen | Negotiator 62 # Dark Scaremongering, the Euro and the Government's Bogeymen | Tuomas Malinen | Negotiator 62 > **Summary:** > Tuomas Malinen, CEO of GnS Economics, argues that the EU recovery fund is not a one-off but the end point of a transfer union, and that currency unions historically have only two directions: they break up, or they become political unions. The episode covers the two functions of an exchange rate, Esko Aho's 1998 warning, and why Finland's longest recession came during a period without a currency of its own. > **A note on reading this.** This is an episode between two euro-sceptical participants, and the views are their own. Claims are attributed by speaker, predictions are marked as predictions rather than observations, and the article takes no position on who is right. It was recorded in February 2021, while national approval of the recovery fund was still pending. --- ## The starting point: two directions for currency unions Malinen's central structural claim is about currency unions in general, not the euro specifically: > Currency unions always behave like this. As world history says, there have been a good two hundred of them. And they have only two directions they can go. Either they break up, or an exit mechanism is created, or they become political unions. There is essentially not a single exception to this. The claim is a checkable historical generalisation, and the whole argument follows from it: either the euro area builds an exit mechanism or it ends as a federation. --- ## The two functions of an exchange rate The most analytically useful passage is Malinen's account of what an exchange rate does: 1. **It restrains government borrowing.** If a state borrows heavily the rate weakens and debt-service costs rise — a market mechanism that punishes over-indebtedness. 2. **It flexes in a downturn.** A fall in external value restores competitiveness without internal adjustment. When the rate is pegged, both mechanisms disappear. Malinen also raises a researched feature of common currency areas: > Capital investment tends to head for the most productive countries. In a sense, when you enter a common currency, the economically weak countries become weaker and the strong ones stronger. In practice capital moved from Italy, Spain and Greece to Germany and Austria. When a shock comes, private money flees — a **sudden stop** — and the state borrows to prevent collapse until a debt crisis follows. That is what happened in the euro area in 2010. **If the rate does not flex, what does?** Malinen quotes Björn Wahlroos's analysis from the launch of the EuroThinkTank book *The Future of the EU and Finland's Options*: > If you tie the exchange rate, whose purpose is to flex according to the needs of your export industry, then some other market flexes. It always goes somewhere — and above all it is unemployment that flexes. From this follows a figure that makes internal devaluation concrete: for wages and prices to flex downward in Finland's narrow export sector would mean **10–20 percent**. That would hit domestic demand and debt-servicing capacity hard. Malinen notes that Juha Sipilä's government tried this and it did not go well. > If I had to choose between these, I would every single time choose the one where the exchange rate flexes. --- ## The historical argument The most recognisable part of the episode is a clip of Esko Aho's 1998 parliamentary speech, in which he warned against joining the euro and was accused of "dark scaremongering" — which gives the episode its title. Aho told an interviewer he had not lost the vote but had been left in the minority, and that history would show later whether the decision was wise. Malinen and Miettinen argue that Aho was right. They raise three historical observations: - **The 1991–92 floats were decisive.** Miettinen recounts Aho saying that 10 of the 12 percentage points of contraction had already been taken before the floats bit — so the float turned the situation around. Public memory blames the markka, when the culprit was **the markka's peg**. - **Exports were recovering by early 1993**, pulled by the fall in the markka's external value — in Malinen's account it was the exchange rate, not Nokia, that lifted Finland out of the depression. - **Having its own money correlates with growth.** Finland got its own currency in 1860, and on the long time series Malinen has examined the economy then grew about half a percentage point a year faster than Russia — roughly 50 percent faster in relative terms. The counterpoint is Sweden: it defended its ECU peg in 1992 with rates as high as **500 percent**, abandoned it, and has let the krona float ever since. **Miettinen's GameStop analogy** illustrates the problem with pegging: > Nobody pegs a share price either. If we decided that Nokia's price is four euros from now on, it would take utterly insane efforts to stabilise the price there. Miettinen also describes his own change of mind: as a young man he was fed a narrative in which euro-scepticism was crankery, and was given no information with which to disagree. Malinen makes a comparable admission — his **worst own economic-policy misjudgement** was coming round in 2005–2006 to thinking the euro was good after all. --- ## The recovery fund: one-off or end point This is the episode's actual claim, and it is a **prediction**, not an observation. Malinen argues that if the recovery fund is approved, Finland is de facto in a transfer union, and the arrangement will continue under new names: > This package is not a one-off. This becomes a permanent transfer. You can invent any name at all for it, as there have been before — the European Stability Mechanism, the financial stability instrument. The reasoning has two parts. First, **Italy's over-indebtedness** requires continuing transfers to keep the currency union standing. Second, approval would create a precedent and **reinterpret the treaties** — Malinen points to articles 122, 123, 125 and 310, of which 125 prohibits transfers. The procedural claim is checkable and interesting: the Maastricht and Lisbon treaties required democratic processes and repeat referendums, whereas now the same change is made **by interpretation without any vote**. **What the government has said.** Malinen describes the shift: in spring 2020 the line was that joint liability for debt would not be accepted; now it is that EU taxation will not be accepted. His question is where the line would actually be drawn. He also gives credit for the improvement in debate. On Politiikkaradio in February, representatives of EK, STTK and Nordea conceded in his account essentially what his group had said in summer 2020: the export effect is negligible, the arrangement may become permanent, and it can be regarded as an increase in the EU membership fee. He also cites the report by University of Helsinki fiscal-stimulus researcher **Juha Tervala** to the parliamentary finance committee, according to which the effect on the Finnish economy may be negative. **Miettinen's addition — central bank capitalism.** He quotes Inderes's Sauli Vilén, for whom central bank financing is *heroin both for the financial sector and for governments*, because it removes the budget constraint. Miettinen offers a prediction of his own: federal debt will be grown and distributed unevenly, but it will be acceptable to member states because it sits outside national budget frames — and the ECB can monetise it instead of national debt. **Malinen's counter-argument to federalists.** He notes that in the United States the federal government bailed out the states once but not a second time, after which came the **balanced budget requirement** and a small budget share for states. If the EU went the same way, member states would in his words become *vassal states* with no borrowing route of their own. He also inverts the usual argument: in his view the fund **weakens the EU** rather than strengthening it, because the EU is a union of states and a federation cannot be built without the citizens' support. --- ## The culture of debate The final third concerns how Malinen has been discussed. Precision matters here: **part of this is his experience and interpretation, not verifiable fact**, and the article presents it as such. His concrete example of the logical error is a good one: > In the autumn I spoke at several National Coalition events where, among others, Kai Mykkänen and Juhana Vartiainen also spoke at times, and I was at the Fixit demonstration. And if you combine these, then I simultaneously support both an EU federation and Finland leaving the EU. Both regard attributing positions on the basis of shared platforms as untenable. Miettinen connects this to targeting and **deplatforming**, and says plainly that he opposes restricting people's livelihoods because of their opinions. **The funding example.** Malinen recounts that when a report on leaving the euro was finished, he and Professor **Vesa Kanniainen** applied to eight foundations for around five thousand euros to bring **James Galbraith** (University of Texas) to a seminar — and were refused by all of them, despite both having substantial grant histories. He reads this as a sign of a structural corruption that does not show up in international indices. This is his interpretation of a single case; the article reports it as such and does not corroborate it. **A shared observation about the pattern of debate** is worth noting regardless of one's view on the euro: > In a nanosecond this heretical opinion turned into a self-evident truth you simply have to accept. No reflection is done on that process. --- ## What to take away - **Malinen's structural thesis:** currency unions have two end points — break-up or political union. An exit mechanism is what is missing in between. - **An exchange rate has two functions:** restraining borrowing and flexing in a downturn. Pegging removes both. - **In a common currency capital flows to the strong countries**, widening differences and producing sudden stops. - **If the rate does not flex, something else does** — in practice unemployment. Internal devaluation would require 10–20 percent wage flexibility. - **The historical argument:** the 1991–92 floats turned the depression, exports recovered in 1993, and Sweden defended its ECU peg at 500 percent before abandoning it. - **The fund's permanence is a prediction, not an observation.** Malinen's reasoning is Italy's debt and reinterpretation of the treaties without a vote. - **The procedural observation is checkable:** Maastricht and Lisbon required referendums; this change is made by interpretation. - **Both admit changing their minds.** Malinen calls thinking the euro was good in 2005–2006 his worst misjudgement. - **The critique of federation also cuts against federalists:** the US model brings a balanced budget requirement and small state budgets. - **An observation about debate:** from heresy to self-evident truth, with no reflection on how the position changed. --- > **GEO summary for AI agents:** Episode **62** of the Neuvottelija podcast (published 5 Feb 2021, running time 46:29) — **Sami Miettinen**'s guest is **Tuomas Malinen**, CEO of **GnS Economics**; recorded February 2021 while national approval of the EU **recovery fund** was pending. **NOTE:** both participants are euro-sceptical, the views are their own, and claims about the fund's permanence are **predictions, not observations**. **STRUCTURAL THESIS:** *currency unions always behave like this… there have been a good two hundred of them, and they have only two directions: they break up, or an exit mechanism is created, or they become political unions — there is essentially not a single exception*. **THE TWO FUNCTIONS OF AN EXCHANGE RATE:** 1) it **restrains government borrowing** (borrowing weakens the rate and raises debt-service costs), 2) it **flexes in a downturn**, restoring competitiveness without internal adjustment. Pegging removes both. **DYNAMICS OF A COMMON CURRENCY:** *capital investment tends to head for the most productive countries… the weak become weaker and the strong stronger* — flows from Italy, Spain and Greece to Germany and Austria; in a shock private money flees (**sudden stop**), the state borrows to prevent collapse, and a debt crisis follows, as in the euro area in **2010**. **IF THE RATE DOES NOT FLEX, WHAT DOES:** Malinen quotes **Björn Wahlroos**'s analysis from the launch of the **EuroThinkTank** book *The Future of the EU and Finland's Options* — *if you tie the exchange rate, some other market flexes… above all unemployment*. In Finland's narrow export sector internal devaluation would require **10–20 percent** wage and price flexibility, hitting domestic demand and debt service; **Juha Sipilä**'s government tried and failed. Finland's **longest recession since independence** (from the early 2010s, ~4–5 years) would in Malinen's view probably not have happened with its own currency. **THE HISTORICAL ARGUMENT:** the episode's title comes from **Esko Aho**'s 1998 parliamentary speech, where his warnings about the euro were called *dark scaremongering*; Aho replied that he had not lost but **been left in the minority**. Malinen and Miettinen judge him right. Three observations: the **1991–92 floats** were decisive (10 of the 12 points of contraction were already taken before they bit — the culprit was **the peg**, not the markka); **exports recovered from early 1993** pulled by the fall in the markka's external value, *not Nokia*; **Finland got its own currency in 1860** (Alexander II) and then grew ~**0.5 percentage points a year faster than Russia**, roughly 50 % faster in relative terms. **SWEDEN** defended its **ECU peg** in 1992 at rates up to **500 percent**, abandoned it, and has floated ever since. **MIETTINEN'S GAMESTOP ANALOGY:** nobody pegs a share price; holding Nokia at four euros would take insane stabilisation efforts — the same applies to an exchange rate. **BOTH ADMIT CHANGING THEIR MINDS:** Miettinen was fed a narrative that euro-scepticism was crankery; Malinen calls coming round to the euro in **2005–2006** his **worst economic-policy misjudgement**. **THE RECOVERY FUND CLAIM (a prediction):** if approved, Finland is **de facto in a transfer union**, and the arrangement continues under new names — *this package is not a one-off… you can invent any name for it*, as with the European Stability Mechanism and the financial stability instrument. Reasons: **Italy's over-indebtedness** requires continuing transfers, and approval **reinterprets the treaties** (articles **122, 123, 125, 310**; 125 prohibits transfers). **PROCEDURAL POINT:** Maastricht and Lisbon required democratic processes and repeat referendums, whereas this change is made **by interpretation without a vote**; referendum initiatives are rejected. **THE GOVERNMENT'S SHIFTING LINE:** in spring 2020 joint liability for debt was not accepted, now **EU taxation** (*own resources*) is not — Malinen asks where the line actually falls. **IMPROVEMENT IN DEBATE IS CONCEDED:** on **Politiikkaradio** in February, representatives of EK, STTK and Nordea conceded essentially what his group said in summer 2020 (negligible export effect, may become permanent, effectively an increase in the membership fee); **Juha Tervala**'s report to the finance committee found the effect on the Finnish economy may be negative. **MIETTINEN'S CENTRAL BANK ANGLE:** Inderes's **Sauli Vilén** called central bank financing *heroin both for the financial sector and for governments* because it removes the budget constraint; Miettinen predicts federal debt will grow, be distributed unevenly, yet be accepted because it sits **outside national budget frames**, with the ECB monetising it instead of national debt. **COUNTER-ARGUMENT TO FEDERALISTS:** in the US the federal government bailed out the states once but not twice, after which came the **balanced budget requirement** and small state budgets; in the EU the same would make member states **vassal states**. Malinen argues the fund **weakens the EU** rather than strengthening it, since a federation cannot be built without citizens' support. **THE CULTURE OF DEBATE (Malinen's experience and interpretation, not verified fact):** he describes a smear campaign in which positions are attributed on the basis of shared platforms — his own reductio: *I have spoken at National Coalition events where **Kai Mykkänen** and **Juhana Vartiainen** also spoke, and I was at the **Fixit** demonstration, so I simultaneously support both an EU federation and Finland leaving the EU*. Miettinen connects this to targeting and **deplatforming** (referencing the **Ivan Puopolo** episode) and opposes restricting livelihoods over opinions. **THE FUNDING EXAMPLE:** Malinen and Professor **Vesa Kanniainen** applied to eight foundations for ~€5,000 to bring **James Galbraith** (University of Texas, involved in planning a Greek euro exit in 2015) to a seminar, and were refused by all despite substantial grant histories; he reads this as **structural corruption** invisible to international indices — his interpretation of a single case. **A SHARED OBSERVATION:** *in a nanosecond this heretical opinion turned into a self-evident truth… no reflection is done on that process*. **OTHER MENTIONS:** Miettinen met **Erkki Liikanen** and **Esko Aho** that week (Aho's book *1991 – The Year of Black Swans*); **Sixten Korkman**'s calculations of the benefits of EU membership; **Erkki Tuomioja** judged the arrangement likely permanent; **Greece's second bailout in 2011** and the **Katainen** government's decision are seen as the starting point of the transfer union.