Interesting piece in FT today by Jillian Tett about musings in Finland over running a parallel currency. Notes the FT:

In the past couple of years, as the eurozone woes have unfolded, international investors have been transfixed by one small country on the edge of the region: Greece.

They would do well to keep watching another tiddler: Finland. For while Finland has not created much drama, precisely because it is one of the strongest eurozone members, some fascinating discussions are under way. Most notably, as the eurozone crisis rumbles on, some Finnish business and government officials are quietly mulling the logistics of leaving the currency union.

Nobody in Finland expects this to happen soon, if ever; indeed, most policy makers are strongly opposed to the idea. Particularly since many also hope the crisis is dying down, but as Heikki Neimelaeinen, chief executive of the Municipal Guarantee Board says: “We have started openly discussing the mechanism of euro exiting, without indicating that we will initiate such a process.” And this, in turn, is sparking some curious economic debates.

Take a look, for example, at a recent research paper from Nordea, the Nordic bank. This paper looks at the question of what might happen if Finland ever decided to run a so-called “parallel currency” system. The idea behind this, as Nordea explains, is that at times of stress it can sometimes seem beneficial for countries to maintain more than one currency unit. Most notably, if a country is trying to leave one currency, keeping that as legal tender alongside a second currency for a period can ensure a country honours its old contracts – and thus avoids a technical default.

There may seem to be some technical difficulties with parallel currencies but most countries have multiple transaction mechanisms available at any time. The idea of a formal mechanism whereby people are given the choice of a national or trans-national currency already exists in the form of precious metals such as gold or even traveller’s checks. Theoretically, I could travel to Europe with a suitcase full of gold, convert it into Euro’s at the hotel, and pay for my trip that way. That I chose instead to pay with a piece of plastic, in essence a spot liability creation mechanism, is a matter of convenience. One can imagine both Euro-cards and markka-cards in Finn’s wallets.

As Tett further notes:

High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email ftsales.support@ft.com to buy additional rights. http://www.ft.com/cms/s/0/14cbb94e-1ebb-11e2-b906-00144feabdc0.html#ixzz2APRzS6MA

Whether Finns would “choose” to convert their euros, in this theoretical scenario, would depend on where they think that markka is heading. Right now, most investors would expect it to jump. After all, during the past year Finland has been viewed as a haven.

Once again, as with the story on the Bristol Pound a few months ago, and with similar stories popping up in the US, what one senses is a deep distrust of the most basic mechanisms of daily life — perhaps the least discussed but most troubling outcome of the Wall St collapse in the last decade. Tett’s article may be nothing more than an interesting theoretical thought exercise but what it signals is certainly worth further discussion and analysis.

FT.com subscribers can read the entire article here:

http://www.ft.com/intl/cms/s/0/14cbb94e-1ebb-11e2-b906-00144feabdc0.html#axzz2APPmQ8WS

Advertisements

Posted by Carlos Alvarenga

Carlos Alvarenga is the Executive Director of World 50 ThinkLabs and an Adjunct Professor at the University of Maryland's Smith School of Business.

One Comment

  1. I was able to link to the Financial Times article with one intermediate step even though I don’t currently have a current account. When I followed the link a box popped up saying I could register online for a trial membership. It was no cost, took about a minute and didn’t ask for a credit card.

    Reply

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s