Bank of Finland Governor emphasises limited role of central bank

Erkki Liikanen expects strong economic growth to slow down

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Erkki Liikanen, the Governor of the Bank of Finland, expects Finland's long period of strong economic growth to end in the coming years.
      Factors slowing down growth include the upcoming mass retirement of members of the postwar baby boom generation. Labour input will decline, and economic growth is primarily based on growth in productivity.
      "Even if we did all we can to promote productivity, we will not be able to achieve quite as much as we did before. Every percentile of growth will be harder to achieve from now on", Liikanen says.
     
In years past, the role of the Bank of Finland in facing this challenge was clear.
      To coin a metaphor, the Bank of Finland was a temple on the top of a hill, where the exalted leaders argued and decided directly on matters affecting Finnish well-being and employment, such as interest rates and the value of the markka - the old Finnish currency which has now been replaced by the euro.
      Times change. The Bank of Finland has become an independent part of the European Central Bank.
      Politicians decide on financial and economic policy, while the ECB deals with monetary policy - that is, the maintenance of price stability.
      Price stability, or keeping inflation under control, benefits the weakest in society, because it "gives the possibilities to enact economic policy which supports growth", Liikanen says.
      The roles of the ECB and the national central banks are clear, as ECB President Jean-Claude Trichet recently pointed out to the new French President Nicolas Sarkozy.
      Sarkozy wanted to give politicians a greater role in ECB decision-making, and demanded that the ECB take action to stop the excessive appreciation of the euro.
      Sarkozy's move did not come as a surprise to Liikanen, who sees it as typical for French politics.
      "The ECB's independence has been defended decisively, and I feel that this process has strengthened the position of the ECB and not weakened it", Liikanen says.
     
The debate in France is fed by the current role of the national central banks as defenders of the market economy.
      Liikanen sees the market economy as "the most efficient way to find a balance between supply and demand". He also sees increased competition, which is part and parcel of the market economy, to be "a choice of values, which is not in any way in conflict with demands that the weak should be taken care of".
      He also sees an important role for the public sector in matters such as education.
      "Education is important from the point of view of equal starting points, but it is also important for the economy", Liikanen says.
     
In spite of their strictly defined roles, central banks also have to comment on matters that go beyond monetary policy.
      Central banks feel that public finances need to maintain a balance. Liikanen sees sustainable public finances to be a "key question".
      "It means that the public economy does not take on debt. But a precise stand on what should be part of the public economy and what should not, is a matter for representatives chosen by the people."
      This means that the Bank of Finland has to be cautious in expressing points of view.
      For instance, the pay increases agreed for the municipal sector are seen as a dangerous phenomenon from the point of view of the central bank, as they might shake public finances and spur inflation, if wages grow faster than productivity.
      Liikanen warned about this on Monday when the Bank of Finland published its economic survey.
      However, Liikanen emphasises that the role of the Bank of Finland "does not include taking a stand on questions of an individual labour union".


Previously in HS International Edition:
  Bank of Finland predicts slower growth and rising inflation (9.10.2007)

Helsingin Sanomat