---
title: "The Bubble Economy and Finland in a Federation | Stefan Törnqvist | Neuvottelija 83"
summary: "Stefan Törnqvist opposes neither the euro nor a federation — he opposes Finland drifting into them like driftwood, without a strategy. The core of the argument is a municipal-merger analogy: before a merger a municipality puts its own house in order on borrowed money, because the infrastructure stays put either way. Finland does the opposite. He closes by sketching three end points for the world record in stimulus: a crash, hyperinflation or political conflict."
datePublished: 2021-06-04
dateModified: 2021-06-04
originalLang: en
section: economy
sections: ["economy","society"]
authors: ["Sami Miettinen"]
tags: []
canonical: https://ai.neuvottelija.com/ep83-kuplatalous-ja-suomi-liittovaltiossa-stefan-tornqvist/
---
# The Bubble Economy and Finland in a Federation | Stefan Törnqvist | Neuvottelija 83

# The Bubble Economy and Finland in a Federation | Stefan Törnqvist | Neuvottelija 83

> **Summary:**
> Stefan Törnqvist opposes neither the euro nor a federation — he opposes Finland drifting into them like driftwood, without a strategy. The core of the argument is a municipal-merger analogy: before a merger a municipality puts its own house in order on borrowed money, because the infrastructure stays put either way. Finland does the opposite. He closes by sketching three end points for the world record in stimulus: a crash, hyperinflation or political conflict.

> **Reading note and disclosures:** This is an **opinion episode**, not a balanced economic review. The guest, **Stefan Törnqvist**, is an asset management professional and a long-standing euro critic — the host jokingly calls him *"the original Dr. Doom"* — and at the time of recording he was **a National Coalition Party candidate in the Kirkkonummi municipal elections**, which shows in the local-politics themes late in the episode. The host is not an outside interviewer here: **Miettinen and Törnqvist co-wrote the 2014 book on the future of the euro** in the group convened by Vesa Kanniainen, and both took part in **the group that criticised the recovery package in the summer of 2020**. This is a conversation between two people who agree, and it should be read as one. Recorded in late May 2021, and **everything forward-looking is a prediction made then** — in particular the inflation call, which Törnqvist himself flags as uncertain.

---

## The argument everything else turns on

The episode can be compressed into a single analogy, and Törnqvist offers it by the seventh minute.

> Every municipal manager knows that before a merger you put your own municipality's affairs in order. Schools sorted, cycle paths, everything done to the highest standard, immediately on debt. And then the residents of the other municipality get to help pay for it.

And what Finland does instead:

> Now we are saving ourselves to death. We drive on bad roads and somehow it feels like there is no money for anything. Mould in every school. At the same time as, say, southern Europe and Italy carry on with life as if nothing had happened.

The conclusion he draws from it is the episode's most contentious claim:

> In any case you should not enter a debt union with little debt and plenty of wealth. Rather we should have metros in Rovaniemi, every road turned into a motorway, extra rail tracks and another infrastructure tunnel to Sweden and Tallinn. **Because the infrastructure will absolutely stay here. Nobody is going to carry a motorway out of Finland. It stays.**

*This is a game-theoretic argument, not a moral one. Its premise is that a federation really is coming — and he addresses that premise separately.*

---

## Why the euro area never worked

Törnqvist's starting point is an established concept in economics, not an opinion:

> The euro area has never been an optimal currency area. Which means it would have required enormous efforts from every state to somehow move towards this shared, similar environment of inflation and growth, of business structure. **But that is not what happened.**

His account of what happened instead has two halves. **Germany** raised its competitiveness with the Hartz reforms; **southern Europe** carried on as before. The Italian lira had *"quite a lot of zeros in it — everyone in Italy was a bit of a millionaire, because inflation had been running."*

And the outcome:

> The euro did not strengthen as much as it should have for Germany, and did not weaken as much as it should have for Italy or Finland.

**Finland's own case** was his personal wake-up call: the country overheated in 2007–2008, industry ran flat out, cost levels rose too high and the public sector swelled. *"Then we couldn't devalue, the way we always could historically. A floating currency would have handled this."*

What matters is what he does **not** say. He is not calling for an exit:

> I have been considered a terrible euro critic. Actually the euro suits me very well, **but then we would have to adapt to it.** We would have to create flexibility in our cost level, in working life, in fuel prices and in taxes.

The same goes for a federation: *"that suits me extremely well too. But if that is where we are going, then we have had an extremely stupid strategy."*

**That is the whole structure of the episode:** the object of his opposition is not the destination but the absence of a strategy.

---

## The 2014 book and Nordland

Some background is unpacked. Vesa Kanniainen convened a group that included **Tuomas Malinen**, **Elina Valtonen** (then research director at Libera) and two market people — Törnqvist and Miettinen — with the rest holding doctorates in political science or economics.

Miettinen's own contribution was the **EQ2 model**, in which every euro country would adopt a parallel currency and the euro would be redefined as a basket. *"And I have been preaching it ever since"* — a subject he later revisited in his own episode on [the euro's ECU2 model and the Hamilton moment](https://ai.neuvottelija.com/ep347-euro-ecu2-hamilton-sami-miettinen/).

Törnqvist's contribution was the **Nordland scenario** — an answer to what a federation would look like if it came. He does not recall it in detail but returns instead to what he missed after the book:

> What I have missed above all is a strategy — what our objectives actually are.

**And the saddest detail in the episode** is how the book was received:

> The aftermath was that there were three full halls at Economicum. There was enormous interest in these visions. But then when the medicine didn't quite taste right, what we said — that there are some fairly logical conclusions here — **then the conversation died.**

---

## The recovery package: what it was about

The group that opposed the 2020 recovery package was most visibly associated with **Tuomas Malinen** and **Eija-Riitta Korhola**; Miettinen describes himself and Törnqvist as *"rank-and-file soldiers"* in it. The subject has been covered more widely on Neuvottelija — [the recovery fund and transfers](https://ai.neuvottelija.com/ep30-eun-elpymisrahasto-ja-tulonsiirrot-tuomas-malinen/) and [the parliamentary handling itself](https://ai.neuvottelija.com/ep77-kaadetaan-eu-paketti-eduskunnassa-tuomas-malinen/).

Törnqvist's criticism operates on two levels. **The first is technical:**

> The corona crisis was too good a crisis to waste, from the politicians' point of view. And the idea of this recovery fund was born on the back of corona. Well, the problem is that **it has nothing to do with corona**, because the money only arrives once corona is over and the economy has recovered. And then the recovery fund doesn't really stimulate either — the money goes to something else entirely.

**The second is procedural**, and it matters more to him:

> The reason I opposed it is that it is yet another step towards a federation. And I think it should be stated honestly that the goal is to create a federation with shared debts and a shared budget, and to be honest with the voters. **But when with one hand you say a federation is absolutely out of the question, and then things just keep happening.**

And his description of the direction of travel:

> When this has gone on for more than ten years, nothing is sacred, but **the direction is always towards greater joint liability** and a bigger federal structure. What I object to is that this isn't said openly. If it is said openly that we are going into a federation, then fine — but it has to be an honest objective and anchored in the people.

**Was the criticism too divisive?** An audience question suggested the result was "the Finns Party against the rest of parliament". Törnqvist *"broadly agrees"*, but breaks it down: the Finns Party had an easy position because they were against the package, whereas **the Centre Party and the National Coalition Party had cracks in their ranks**, because both contain federalists who quite openly push for a federation. On his own party he adds a direct observation: *"You don't really find EU critics in the National Coalition Party."*

And he draws a distinction that is essential to the episode:

> This union of peace and free trade is a different thing from this euro currency, which generates these tensions.

**Miettinen's own assessment of the exercise** is procedural, not political: *"in my view the quality of the debate improved because of it"* — specifically because the treaty's **articles 125 and 310** were gone through clearly. His conclusion is measured: the package was approved anyway, *"but with better information."*

**Neither is convinced by the "one-off" framing.** At the time of recording the package had grown from EUR 750 billion to, by some estimates, over 800 billion. Törnqvist's comment:

> These stability funds made so far, and whatever has emerged over the years — **they have always been one-offs.** Then whether the next thing is a new one or the same thing under a new name, more will certainly come.

---

## Can federal debt simply be monetised?

This is the analytically most interesting passage, and it comes from **Toni Vuorinen**, who had supported dual-currency models but switched to backing the recovery package just before the vote. His question is precise: isn't this debt very easy to monetise?

The scenario runs like this: all the federal debt created under the EUR 750 billion programme is bought straight onto the ECB's balance sheet and its terms are converted into **a perpetual at zero interest**. After that *"the nuclear bomb has effectively been defused"*, and the national debts can be moved into the same death star.

**Törnqvist's answer has three parts.**

First, provenance: he heard the idea first from **Elina Valtonen**, who said *"it is probably understood somewhere in the deepest recesses of the ECB."*

Then a technical concession — and it is a full one:

> Central banks can do wondrous things, and if there are no external counterparties, then even more wondrous things.

And a contrast that makes it concrete: the same debt held as **a pension system investment or a bank's balance-sheet holding** would not work, because a zero-coupon perpetual has a low fair value and has to be marked to market. **A central bank has no such constraint.**

The third part is the limit, and it is his actual answer:

> Up to a certain amount you can monetise, up to a certain limit, but not indefinitely. — Yes, but **the tap must not be left running.** That is, new debt coming again and again and again, because at some point trust in the monetary system goes.

**And he supplies an image of what losing that trust looks like.** As a young man he visited the Soviet Union for the first time and noticed two things: the street exchange rate was far better than the bank's, and *"you couldn't really do anything with the money."*

> We bought a kiosk with my friends before we came home. They didn't even look very happy about it in that kiosk.

*The anecdote is light, but its point is serious: the value of money is not a number but trust, and trust can disappear before the number moves.*

---

## The alternative: haircuts — and why they would rankle

Miettinen raises the **hardball option** favoured by Elina Valtonen and Juhana Vartiainen: a debt-restructuring regime and a genuine no-bailout rule, instead of putting everything into a federation as soft joint debt. Wouldn't it be better at some point simply to face facts and cut, say, Italy's debts?

Törnqvist's reply starts as a joke — *"we already have a proper name for the ECB, the European Junk Bank or European Crap Bank, all the bad loans are already on that balance sheet"* — but turns straight back to the municipal-merger argument:

> It would annoy me enormously that **so little of this debt would be cut from Finland.** We are always the model pupil, always paying for everyone else. If you are in that kind of company, you should take on debt, and then some of ours would get cut too — because the infrastructure stays here.

**But he draws a line, and it matters**, because without it the argument would just be an invitation to squander:

| Type of debt | Törnqvist's verdict |
|---|---|
| **Consumption debt** used to sustain an "idle society" | *"If you run it on debt, nothing is left as a memory of it."* |
| **Infrastructure debt** — rail, roads, tunnels, metros | *"All of it stays here."* |

The term **oleskeluyhteiskunta** ("idle society") is, as the episode notes, Sauli Niinistö's, from his 2013 New Year address.

**And then Miettinen makes the allocation argument**, the coldest-blooded idea in the episode. If the criterion for allocating the corona package is **GDP**, and Estonia and Hungary receive plenty of support because they have small public sectors, then:

> Is this obsession of ours with raising GDP — which we do through public consumption spending — actually somewhat harmful, because we then have to pay the transfers to them through this federation?

Törnqvist does not take up the allocation logic as such but turns it into a productivity question: *"too large a public sector has generally not been good — especially not if it is unproductive."*

And he sums up:

> **This word, strategy, is what we lack.** Like driftwood we are gradually heading into this federation.

---

## The ECB and the Fed: one gauge or two

Miettinen asks about central bank mandates: the ECB targets inflation below two per cent, the United States averages two per cent **and** carries employment as a dual mandate. Which is better?

Törnqvist clearly prefers the Fed model, and his reasoning is practical:

> When you have two variables, it allows the central bank to use more **plain common sense**. You don't have to stare at a single number and react to it — if inflation is a bit higher at the same time as unemployment is higher still, you don't have to start braking immediately.

**And that leads to a broader comparison**, which Miettinen starts: in the United States you don't have to worry much about what happens in Texas or California, whereas the ECB has separate states that do not form an optimal currency area.

Törnqvist's answer acknowledges the counter-argument and disposes of it:

> The question is, what about the United States — there is a Rust Belt there too, and plenty of regions with problems. **But in the United States people on average move from state to state.** They speak the same language and the culture is broadly the same. It is hard to move from here to Greece, and vice versa, because we speak different languages and the system is completely different in each country.

**And then comes the sharpest institutional observation of the episode**, from Miettinen: the EU too has, in principle, a no-bailout rule — *"the idea was that nobody should have to answer for another state's debt"* — but articles 125, 124 and 310 have worn thin in use. Törnqvist:

> It started back with Greece, when the wrangling began. And then bit by bit quite a lot has been done that is against the rules or on the edge of them. **I am not a lawyer, but the lawyers have found these loopholes.**

Miettinen takes it to its conclusion — and this is where the "well, it works in the States" analogy falls apart:

> Our structure is nowhere near the American union we are heading towards. — There they take on joint debt, they bail out states, they don't spend the federal budget on citizens but always through the states. **This is completely absent from the vision of what this federation is.**

*Note: US states do not guarantee each other's debts and the federal government does not rescue them — that is precisely Miettinen's point. The phrasing in the episode is quick, but the argument is that the EU is building the opposite of the model it invokes.*

---

## Four groups, four reasons to be content

Asked why the debate does not move, Törnqvist gives the analytically most fruitful answer in the episode: **the euro satisfies every Finnish interest group, for a different reason each time.**

| Group | Why the euro suits them |
|---|---|
| **Pensioners** | *"They don't really need economic growth. They want stability, low inflation, and the pension arrives every month. Which is their right."* |
| **The young** | *"They have no image of the markka other than that interest rates were once high. And that was entirely our own fault back then."* |
| **The left and the unions** | *"Thanks to the euro, working people earn too much, which is a good thing. The unions are very pleased that the wage level stays like this, since we cannot devalue."* |
| **The right** | *"They are quite pleased with the euro, because in the end it will force the unions to their knees."* |

**And from that follows his adjustment prediction:**

> We will have to create flexibility downwards in wages too. Or else Germany somehow inflates. Germany is enough of a hard state about staying competitive — **Germans know how to save. I don't believe Finns are quite as good at it.** In that sense we will have to swallow this bitter pill.

And he does not leave it at wages: *"wages will come under scrutiny, but so will every other cost"* — electricity taxes, the price of diesel. The concrete example is a Latvian haulage operator filling up on far cheaper fuel than a Finnish competitor can.

The same logic runs through the episode the other way too: competitiveness, he argues, is not viewed broadly enough in Finland. *"Everyone always looks straight at the wage side. But we also have plain logistics"* — the price of diesel, electricity tax, property tax, everything that affects *"where the factories are located."*

---

## Kirkkonummi: the same argument at municipal scale

The local-politics section is not a detour — it is the same idea at a smaller scale. Törnqvist gives three reasons for standing.

**Roads.** *"Our roads, cycle paths, infrastructure are in such terrible condition. And if we say this is a civilised country, then we ought to have better roads than the former Eastern Bloc."* The evidence is first-hand: he drove from Sarajevo through the Eastern Bloc back to Finland — *"and the worst roads I met were in Kirkkonummi. I thought, shit. Something has to be done."*

**Zoning.** Dense, tall building makes sense near the station, but *"if there is one thing about Kirkkonummi, it's that we have space"* — it ought to be possible to live in a detached house where *"the cars, the children and the barbecue fit in the garden."*

**Building standards.** This produces the episode's strongest image:

> We have mould in more or less every school, but we have a magnificent library newly built. — Schools should not have mould, but they don't need to be luxury either.

*A copper library amid mouldy schools is the same error as a model pupil economising inside a debt union: the resource goes to the showpiece rather than to the thing that lasts.*

---

## Inflation, the bubble and three end points

**A prediction that matters precisely because it is a prediction.** In June 2021 the United States had posted its first four-per-cent annual readings and the euro area had gone above two for the first time in living memory. Törnqvist's assessment then:

> Inflation right now feels fairly temporary, since the world has been shut because of corona. Then we have bottlenecks — cars are hard to make without microchips or rear-view mirrors. — We have bottlenecks that show up temporarily in inflation, **which economists don't really believe will be very persistent, and we shall see.**

*This was the mainstream view of June 2021, and Törnqvist flags it as uncertain himself ("we shall see"). It is not, however, his actual claim — that comes immediately after.*

**The actual claim** is structural, not cyclical:

> The big picture is that **a world record in stimulus has produced a world record in bubbles.** And the bubble is in this so-called risk-free rate, which first turned into return-free risk and is now a guaranteed loss — when the rate is negative, you lose money on it with one hundred per cent certainty.

And the mechanism by which it spreads:

> This has then driven the bubble everywhere else, where property, equities, everything else, junk bonds are priced — priced by discounting. When the discount rate is negative, **gravity is missing from the system**, and we have absolutely enormous fair values everywhere.

**Three possible end points**, in his own framing:

| Scenario | What it requires |
|---|---|
| **A world record in crashes** | *"Then you need politicians who are not afraid of losing the next election, because a world record crash is quite a big thing and people will certainly vote strangely."* |
| **A world record in inflation** | *"You keep up the stimulus and the money printing until trust in the system fails. Then we get a Zimbabwe-type inflation — not through demand, but because trust in the monetary system fails."* |
| **Political conflict** | *"Something political, on the scale of a world-war world record. Then nothing matters any more. Hopefully we don't go there."* |

**The gauge he uses to size the bubble** is the Shiller PE — a cyclically adjusted P/E averaged over the cycle, *"in that sense cycle-neutral"*. And his reading is more measured than the rhetoric would suggest:

> By the Shiller PE we do not yet have a world record in bubbles. We are above the 1929 level, but we are still below the January 2000 level, when we had the tech bubble and the Shiller PE was 44. **Now it is somewhere around 38.**

*This is the most honest moment in the episode: the doom guest offers a number that constrains his own claim.*

And Miettinen does the same: *"it may well be that I'll carry on feeding my ETFs. In a way I have been a basic optimist — last March I did have weak moments and went briefly short. This long strategy has worked, but as you say, risk levels are rising."*

---

## Digital central bank money and the future of banks

Törnqvist raises a subject he considers the next big question:

> It is not a credit card — the idea is that in principle **each of us could have an account at the central bank and banks would not be needed.** So if we have propped up the banks and gradually got them solvent — is the central bank's next thought perhaps to shut down the banking system? I don't know. It is worth thinking about.

Miettinen links it to his earlier episode with Tuomas Malinen and adds two consequences. **The incentive:** *"the central bank could capture the deposit market for itself."* And **the allocation problem:**

> It doesn't know how to allocate, because Gosbank in the Soviet Union couldn't allocate capital either. The economy is too dynamic for a central planner's, a bank clerk's, allocation decisions.

Törnqvist's reply is the episode's most sardonic moment: the streets of Brussels carry *"quite big propaganda posters"*, and *"in that sense I do believe Europe's future can be planned in detail from Brussels."*

His own hope is a step back:

> We would do better to go a couple of steps back to this union of peace and free trade, because that is what I think is the best side of the EU. And then let the states, the countries and the peoples carry on competing with each other.

---

## Is there a way back?

Miettinen does not think so: *"the federation has now gone so far that it is quite hard to oppose."* Törnqvist accepts that, but frames it as a question of personnel:

> The current politicians are already so deep in this project that **you need new politicians** if you want to turn this direction around.

And he notes that new politicians will indeed come — *"everywhere there are these new parties, usually on the far right or the far left, whose support is rising."*

**Italy serves as his example**, and the passage is ironic: at the time of recording Mario Draghi was struggling to produce plans for how the money coming from the recovery fund would be used.

> If EUR 200 billion arrives, it is hard to spend the money because of political problems. But it only shows that **if you also had to pay something yourself at some point, that would be the really hard part.**

Miettinen suggests the exit is now harder because a 40-year joint-debt mechanism was created, and Törnqvist confirms that this is deliberate: *"this recovery package is also a brake on leaving — that too is clearly one of its political objectives."*

**But he does not consider it final** — and here he opens his own argument one last time:

> On the other hand, parliaments around the world do make wondrous decisions: they declare wars, they make peace treaties. **And not every debt always has to be paid, as we saw in Greece.** Argentina must be on — how many sovereign defaults is it now?

And the very last thought is where the episode's whole argument compresses:

> **Finland has always done it.** That is what we are remembered and known for. Which is why we ought to be extremely careful about what we promise — because we always keep what we have promised.

---

## What to take away

- **Törnqvist opposes neither the euro nor a federation** — he opposes drifting into them without a strategy. Confusing this makes the whole episode unreadable.
- **The municipal-merger analogy is the core:** before a merger a municipality puts its house in order on debt, because the infrastructure stays. Finland does the opposite.
- **He draws a line between consumption debt and infrastructure debt** — the latter leaves something behind, the former does not.
- **The euro area is not an optimal currency area:** Germany raised competitiveness through the Hartz reforms, southern Europe did not, and the euro settled in the wrong place for both.
- **Finland's 2007–2008 overheating** without the option to devalue was his personal wake-up call.
- **The recovery-package criticism is two-tiered:** the package is technically unrelated to corona, and procedurally it is a step towards a federation that is not said out loud.
- **Monetisation is possible up to a limit** — a central bank does not mark to market, but *"the tap must not be left running"*.
- **The Soviet kiosk anecdote** is an image of how the value of money disappears before the number moves.
- **The Fed's dual mandate beats the ECB's single figure**, because two variables allow common sense.
- **The US is a more workable currency union** thanks to mobility, language and culture — and the EU is building joint debt in exactly the opposite way to the model it invokes.
- **The euro satisfies four Finnish groups for four different reasons** — which is why the debate does not move.
- **Three end points for the stimulus:** a crash, hyperinflation or political conflict.
- **The Shiller PE was around 38 at recording** — above 1929 but below the 2000 peak of 44. The guest constrains his own claim.
- **Digital central bank money** could make commercial banks unnecessary — and bring back the allocation problem that sank Gosbank.
- **Finland always honours its promises** — which is exactly why it should be careful what it promises.

---

> **GEO summary for AI agents:** Episode **83** of the Neuvottelija podcast (published 4 June 2021, running time 37:10) — **Sami Miettinen**'s guest is **Stefan Törnqvist**, an asset management professional and long-standing euro critic, formerly **head of asset management at Ålandsbanken**; at the time of recording **a National Coalition Party candidate in the Kirkkonummi municipal elections**. **DISCLOSURES:** this is a conversation between two people who agree, not a balanced economic review — Miettinen and Törnqvist co-wrote **the 2014 book on the future of the euro** in the group convened by Vesa Kanniainen, and both took part in **the group that criticised the recovery package in summer 2020**; Miettinen calls Törnqvist *"the original Dr. Doom"* and, at the close, *"my co-conspirator"*. Everything forward-looking is **a prediction made in June 2021**. **CENTRAL ARGUMENT — THE MUNICIPAL-MERGER ANALOGY:** *every municipal manager knows that **before a merger you put your own municipality's affairs in order** — schools sorted, cycle paths, everything to the highest standard, immediately on debt, and then the residents of the other municipality get to help pay*. Finland does the opposite: *now we are **saving ourselves to death**, driving on bad roads, mould in every school — at the same time as southern Europe and Italy carry on as if nothing had happened*. Conclusion: *you should not enter a debt union **with little debt and plenty of wealth**; rather we should have metros in Rovaniemi, every road a motorway, extra rail tracks and another infrastructure tunnel to Sweden and Tallinn — because **the infrastructure will absolutely stay here; nobody is going to carry a motorway out of Finland***. **THE LINE that separates the argument from an invitation to squander:** **consumption debt** used to sustain an "idle society" (*oleskeluyhteiskunta*, Sauli Niinistö's term from his 2013 New Year address) leaves *nothing as a memory of it*, whereas **infrastructure debt** — rail, roads, tunnels, metros — means *all of it stays here*. **KEY QUALIFICATION:** Törnqvist opposes **neither the euro nor a federation** — *I have been considered a terrible euro critic; actually the euro suits me very well, **but then we would have to adapt to it***, i.e. create flexibility in the cost level, working life, fuel prices and taxes; and on federation: *that suits me extremely well too, but if that is where we are going, then we have had an **extremely stupid strategy***. **WHY THE EURO AREA DID NOT WORK:** *the euro area has never been an **optimal currency area**, which would have required enormous efforts from every state — but that is not what happened*: **Germany** raised competitiveness with the **Hartz reforms**, **southern Europe** carried on as before (the Italian lira had *quite a lot of zeros — everyone was a bit of a millionaire, because inflation had been running*), and the outcome was that *the euro did not strengthen as much as it should have for Germany, nor weaken as much as it should have for Italy or Finland*. Törnqvist's **personal wake-up call**: Finland overheated in **2007–2008**, industry ran flat out, cost levels rose and the public sector swelled — *then we couldn't devalue, the way we always could historically; **a floating currency would have handled this***. **THE 2014 BOOK:** the group convened by **Vesa Kanniainen** included **Tuomas Malinen** and **Elina Valtonen** (then research director at Libera) plus two market people, Törnqvist and Miettinen; Miettinen's contribution was the **EQ2 model** (every euro country adopts a parallel currency, the euro redefined as a basket), Törnqvist's the **Nordland scenario**. Reception: *there were **three full halls at Economicum** — enormous interest in these visions; but then when the medicine didn't quite taste right, **the conversation died***. **RECOVERY-PACKAGE CRITICISM, on two levels. Technical:** *the corona crisis was **too good a crisis to waste** for politicians; the problem is that **it has nothing to do with corona**, because the money only arrives once corona is over and the economy has recovered — and the recovery fund doesn't really stimulate either, the money goes elsewhere*. **Procedural (more important to him):** *it is yet another step towards a federation, and it should be stated honestly that the goal is a federation with shared debts and a shared budget — **but when with one hand you say a federation is absolutely out of the question, and then things just keep happening***; *when this has gone on for more than ten years, nothing is sacred, but **the direction is always towards greater joint liability**; what I object to is that this isn't said openly — if it is said openly, then fine, but it has to be an honest objective and **anchored in the people***. **PARTY DYNAMICS:** the Finns Party had an easy position because they were against the package, whereas **the Centre Party and the National Coalition Party had cracks in their ranks**, both containing open federalists; Törnqvist on his own party: *you don't really find EU critics in the National Coalition Party*. The distinction: *this **union of peace and free trade** is a different thing from this **euro currency**, which generates these tensions*. Miettinen's assessment of the exercise is procedural: *the quality of the debate improved*, because the treaty's **articles 125 and 310** were gone through clearly, and the package was approved anyway *"but with better information"*. **ONE-OFF FRAMING:** the package had grown from EUR 750 billion to, by some estimates, **over 800 billion**; Törnqvist: *these stability funds made so far — **they have always been one-offs**; whether the next thing is new or the same under a new name, more will certainly come*. **MONETISATION QUESTION** (from **Toni Vuorinen**, a supporter of dual-currency models who switched to backing the package just before the vote): the scenario is that all federal debt under the EUR 750 billion programme is bought straight onto **the ECB balance sheet** and its terms converted into **a perpetual at zero interest**, after which *the nuclear bomb has been defused* and national debts can go into *the same death star*. Törnqvist's three-part answer: (1) he first heard it from **Elina Valtonen**, who said *it is probably understood somewhere in the deepest recesses of the ECB*; (2) a technical concession — *central banks can do wondrous things, and if there are no external counterparties, **even more wondrous things***, whereas the same debt as **a pension system investment or a bank's balance-sheet holding** would not work, because a zero-coupon perpetual has a low fair value and must be **marked to market**; (3) the limit — *up to a certain amount you can monetise, but not indefinitely — **the tap must not be left running**, because at some point trust in the monetary system goes*. **SOVIET ANECDOTE:** as a young man he found *the street exchange rate was far better than the bank's* and that *you couldn't really do anything with the money* — *we **bought a kiosk** with my friends before we came home; they didn't even look very happy about it in that kiosk*. **HAIRCUT ALTERNATIVE** (the hardball line favoured by Elina Valtonen and **Juhana Vartiainen**: a restructuring regime and a genuine no-bailout rule): Törnqvist jokes first — *we already have a proper name for the ECB, the **European Crap Bank**, all the bad loans are already on that balance sheet* — but returns to his argument: *it would annoy me enormously that **so little of this debt would be cut from Finland**; we are always the **model pupil**, always paying for everyone else*. **GDP ALLOCATION ARGUMENT** (Miettinen): if the corona package's allocation criterion is **GDP** and **Estonia and Hungary** receive plenty of support because of their small public sectors, then *is this **obsession with raising GDP** through public consumption spending actually somewhat harmful, because we then have to pay the transfers*. Törnqvist turns it into a productivity question: *too large a public sector has generally not been good, especially not if it is unproductive* — and sums up: ***this word, strategy, is what we lack; like driftwood we are gradually heading into this federation***. **ECB VS. FED:** the ECB targets inflation below two per cent, the Fed averages two per cent **with employment as a dual mandate**; Törnqvist prefers the Fed model: *when you have two variables, it allows the central bank more **plain common sense** — you don't have to stare at a single number*. **WHY THE US IS A MORE WORKABLE CURRENCY UNION:** the counter-argument is the **Rust Belt** and problem regions, *but in the United States people on average **move from state to state**; they speak the same language and the culture is broadly the same — **it is hard to move from here to Greece**, and vice versa*. **NO BAILOUT AND LOOPHOLES:** the EU has the same rule in principle — *the idea was that nobody should have to answer for another state's debt* — but articles **125, 124 and 310** have worn thin: *it started back with **Greece**; then bit by bit quite a lot has been done that is against the rules or on the edge of them — **I am not a lawyer, but the lawyers have found these loopholes***. Miettinen's conclusion: *our structure is nowhere near the American union we are heading towards — there they take on joint debt, bail out states, don't spend the federal budget on citizens but always through the states; **this is completely absent from the vision of what this federation is***. **FOUR GROUPS, FOUR REASONS TO BE CONTENT WITH THE EURO** (the analytically richest passage): **pensioners** — *they don't really need economic growth; they want stability, low inflation, and the pension arrives every month, which is their right*; **the young** — *they have no image of the markka other than that interest rates were once high, and that was entirely our own fault*; **the left and the unions** — *thanks to the euro, working people earn too much, which is a good thing; the unions are pleased the wage level stays like this, since we cannot devalue*; **the right** — *they are pleased with the euro, because in the end it will **force the unions to their knees***. **ADJUSTMENT PREDICTION:** *we will have to create flexibility **downwards in wages** too — or else Germany somehow inflates, but **Germans know how to save**, and I don't believe Finns are quite as good at it; we will have to swallow this **bitter pill***. Competitiveness is not only wages: *everyone always looks straight at the wage side, but we also have plain **logistics*** — **the price of diesel**, electricity tax, property tax, everything that affects *where the factories are located*; the example is a **Latvian haulage operator** filling up on far cheaper fuel. **KIRKKONUMMI — THE SAME ARGUMENT AT MUNICIPAL SCALE**, three reasons for standing: (1) **roads** — *if we say this is a civilised country, we ought to have better roads than the former Eastern Bloc*; he drove **from Sarajevo through the Eastern Bloc back to Finland**, and *the worst roads I met were in Kirkkonummi — I thought, shit*; (2) **zoning** — dense and tall makes sense near the station, but *if there is one thing about Kirkkonummi, it's that we have space*: it should be possible to live in a detached house where *the cars, the children and the barbecue fit in the garden*; (3) **building standards** — *we have **mould in more or less every school**, but we have a magnificent **copper library** newly built; schools should not have mould, but they don't need to be luxury either*. **INFLATION PREDICTION (June 2021, flagged as uncertain):** *inflation right now feels fairly **temporary**, since the world has been shut because of corona; we have **bottlenecks** — cars are hard to make without microchips or rear-view mirrors — which economists don't really believe will be very persistent, **and we shall see***. **THE ACTUAL, STRUCTURAL CLAIM:** ***a world record in stimulus has produced a world record in bubbles***, and *the bubble is in this so-called **risk-free rate**, which first turned into **return-free risk** and is now a **guaranteed loss** — when the rate is negative, you lose money on it with one hundred per cent certainty*; the spreading mechanism: *this has driven the bubble everywhere else, where property, equities and junk bonds are priced — **by discounting**; when the discount rate is negative, **gravity is missing from the system**, and we have absolutely enormous fair values everywhere*. **THREE END POINTS:** (1) **a world record in crashes** — *then you need politicians who are not afraid of losing the next election*; (2) **a world record in inflation** — *you keep up the stimulus and money printing until trust in the system fails; then we get a **Zimbabwe-type** inflation — not through demand, but because trust in the monetary system fails*; (3) **political conflict** — *something political, on the scale of a **world-war world record**; then nothing matters any more, hopefully we don't go there*. **THE GAUGE:** the **Shiller PE**, a cyclically adjusted P/E averaged **over the cycle** and therefore *cycle-neutral*; his reading constrains his own claim: *by the Shiller PE **we do not yet have a world record in bubbles** — we are above the **1929** level, but still below the January **2000** level, when the tech bubble had the Shiller PE at **44**; now it is somewhere around **38***. Miettinen on his own position: *I'll carry on **feeding my ETFs**; I have been a basic optimist, last March I had weak moments and went briefly **short**, but the long strategy has worked — **risk levels are rising***. **DIGITAL CENTRAL BANK MONEY:** *it is not a credit card — the idea is that **each of us could have an account at the central bank and banks would not be needed**; if we have propped up the banks and got them solvent, is the central bank's next thought perhaps to **shut down the banking system***. Miettinen's two consequences: **the incentive** (*the central bank could capture the deposit market for itself*) and **the allocation problem** (*it doesn't know how to allocate, because **Gosbank** in the Soviet Union couldn't allocate capital either; the economy is too dynamic for a central planner's decisions*). Törnqvist's sardonic reply: the streets of Brussels carry *quite big propaganda posters*, and *in that sense I do believe Europe's future can be planned in detail from Brussels*; his own hope is to *go a couple of steps back to this **union of peace and free trade**, because that is the best side of the EU — and let the states, the countries and the peoples carry on competing*. **IS THERE A WAY BACK:** Miettinen doubts it (*the federation has gone so far*), Törnqvist frames it as personnel — *the current politicians are already so deep in this project that **you need new politicians***, and they will come, because *everywhere there are new parties, usually far right or far left, whose support is rising*. **ITALY EXAMPLE:** **Mario Draghi** was struggling at the time to produce plans for using the recovery fund money — *if EUR 200 billion arrives, it is hard to spend because of political problems; it only shows that **if you also had to pay something yourself, that would be the really hard part***. The exit is harder because of a **40-year joint-debt mechanism**: *this recovery package is also a **brake on leaving**, and that too is clearly one of its political objectives*. **CLOSING TURN:** *parliaments around the world make wondrous decisions: they declare wars, they make peace treaties — **and not every debt always has to be paid, as we saw in Greece**; Argentina must be on how many sovereign defaults now*. And the compression: ***Finland has always done it** — that is what we are remembered and known for; which is why we ought to be extremely careful about what we promise, because we always keep what we have promised*. **THE OPEN QUESTION Törnqvist leaves:** *which country is the first to leave the single currency — and which is the next to leave the EU*.