Bank of Finland Governor: Situation not over, but many positive things have happened
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Bank of Finland governor Erkki Liikanen said on Monday that he believes that the various measures that were taken last week and during the weekend to deal with the crisis in the financial sectors in Europe and the United States are positive developments, and that the situation on the chaotic markets around the world can begin to calm down.
“Is the situation over? No it is not, but I believe that we will see some decline in interest rates”, he said. In his view, preconditions for the flow of cash in the financial system have improved.
Liikanen, who attended the meeting of the International Monetary Fund in Washington, also said to Finnish journalists that it remains an open question, how confidence among banks will be restored, and how the interbank market will start working again.
Liikanen was satisfied with the Sunday summit of the euro zone countries in Paris, where the leaders decided on measures to capitalise banks, by providing taxpayers’ money in return for shares in the banks, for the revival of lending. According to Liikanen, capitalisation is by far the fastest solution to the present crisis, and the same kind of thinking is emerging in the United States, at least to some degree.
Liikanen did not want to speculate on the possible impact that the upheaval of the recent weeks might have on the Finnish economy next year. He said that a new forecast would come out in December. In mid-September next year’s growth rate was estimated at 1.3 per cent.
Liikanen feels that with state funds being used to guarantee banking operations, it is very important that decisions should be transparent, and that “taxpayers and parliaments should know exactly what is happening”.
Liikanen was unwilling to comment on proposals by British Prime Minister Gordon Brown for a “new Bretton Woods meeting”, by which Brown meant a reassessment of the world’s financial order.
In his view it is clear that the way of thinking, according to which the country that regulates markets the least is the country that will win, is at an end.
“However, there is also a risk that if everything is regulated, innovation and renewal will be stifled. Let’s hope that a good balance will be found in this.”
Bank of Finland advisor and former IMF board member Olli-Pekka Lehmussaari noted that although the global economic model, referred to as the “Washington consensus” has fallen out of favour to some extent in recent weeks, it does not mean that all economic laws need to be rewritten.
“There are elements in the Washington consensus that can still be agreed upon: high inflation is bad, free trade is good, the state has to live according to what it earns, deficits are bad”, he said in an interview with Helsingin Sanomat.
The Washington-based IMF, which has promoted American economic doctrines around the world, is known for the tough conditions that it has set for countries in need of help. According to Lehmussaari, the United States cannot be seen as a model student of the IMF on the basis of its recent actions.
Last summer the IMF made a number of proposals to the United States on how to deal with the mortgage crisis, but “none of them have been implemented so far”.
Lehmussaari did not want to comment on Iceland, which might come under tight scrutiny by the IMF. However, he noted that the fund currently is able to help Iceland to the tune of 200 billion dollars, if asked to do so.
More on this subject:
 Finland to rapidly implement measures in EU crisis package
Helsingin Sanomat
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