EP197 · Economy · first published 2023-06-19
The Bank of Finland Challenged the Government | Jussi Ahokas | Negotiator 197
Jussi Ahokas and Sami Miettinen go sentence by sentence through the letter the Bank of Finland, led by Olli Rehn, sent to Petteri Orpo two days after the government programme was agreed. The episode's single piece of news is the Bank of Finland confirming in its own words that a central bank can operate with negative equity — once reserves run out, a loss may be left uncovered for the time being. Of the three entries Ahokas accepts the one on systemic risk, considers the no-bailout entry pointless because Maastricht already covers it, and reads the first both ways: a government may legitimately worry about its own fiscal risk, but a central bank can read that as pressure. Also the contradiction between the constitution and the Bank of Finland Act, the Greek SMP arrangement and an Italian scenario, and a forecast for a soft landing resting on loosened fiscal policy. Published 19 June 2023.
The Bank of Finland Challenged the Government | Jussi Ahokas
Summary: In episode 197 Sami Miettinen and Jussi Ahokas — economist at the BIOS research unit, doctoral researcher and the Finnish translator of Joan Robinson’s Introduction to the Theory of Employment — go sentence by sentence through the letter the Bank of Finland, led by Olli Rehn, sent to prime-minister-designate Petteri Orpo two days after the government programme was agreed. Published 19 June 2023.
What the row is about
The government programme was agreed on 16 June 2023. The next day, 17 June, the Bank of Finland wrote to the incoming prime minister saying it considered it necessary to inform him that the programme’s entries in section 9.1, “Responsibility for the sustainability of public finances belongs to the member state” (page 169), are problematic for the central bank’s independence.
Miettinen frames it with self-deprecation: hardly anyone else cares about central bank independence and its operating limits, “but that doesn’t spoil our fun”. He also recalls an earlier episode of the same shape — that time Nalle Wahlroos sent his dissenting opinion to the Bank of Finland about monetary policy, and the pair admit they backed Rehn’s line then; Wahlroos, in their view, had “a monetarist, somewhat simplistic view of how money moves”. Ahokas is introduced as the channel’s “official Olli Rehn whisperer”.
The guest also brought a book: Joan Robinson’s Introduction to the Theory of Employment (Vastapaino 2023), which he has translated into Finnish. In it Robinson sets out John Maynard Keynes’s General Theory in the simplest possible form, so that “an ordinary citizen can understand it”. Ahokas suggests ordering before VAT on books rises.
Sentence 1: financing risk
“The government monitors and seeks to manage the financing risk arising for the state through the European Central Bank and the Bank of Finland.”
Ahokas reads this as tightly anchored to the present moment. The mechanism: first the broad asset purchase programmes, then a rapid tightening and rate rises — and central banks’ net interest income turned negative. They pay commercial banks more interest than they receive on the securities they hold. Falling securities prices are the smaller problem; the negative interest margin produces real losses, even in the short run.
If a central bank has not provided for that in its own capital, the question becomes who finances the losses — and that is where the financing risk comes from. Ahokas’s reading is that the sentence means the state’s financing risk specifically. Miettinen adds that on Rehn’s account the central bank’s risk belongs to neither the state nor to politically directing forces at all.
This is where the episode’s most important national distinction appears. The Bank of Finland has managed its risk exceptionally well: last year it posted a round zero result, where it normally pays a dividend, covering that plus its operating costs comfortably out of reserves running to several billion. Many other euro-area central banks are not so fortunate, having had no buffers or having eaten them already.
Sentence 2: no bailout — but whose?
“Finland will push for the no-bailout rule to apply at European Central Bank level too.”
Miettinen’s question is the right one: whose bailout? Ahokas infers from the previous sentence that it is still the state’s.
The mechanics here are that in the ECB’s purchase programmes each national central bank buys its own country’s debt — so the Bank of Finland holds Finnish paper, “almost triple-A stuff”, as the pair joke. When the situation turns and losses arrive, they become a fiscal burden on that state or on the state-central-bank complex.
Ahokas’s verdict on this sentence is blunter than on the first: because losses in the purchase programmes were kept national from the outset, the basic Maastricht no-bailout rule would already cover this ground. The sentence is therefore “fairly pointless”, and it would have been better not written — “then we wouldn’t have had to be clever about it either”.
The misconception the episode corrects: negative equity
This is the episode’s single piece of news and worth reading even if nothing else is.
Miettinen recounts being told over ten years ago in London by Willem Buiter, then Citi’s chief economist, that central banks can operate with negative equity. The Bank of Finland now confirms it itself. The episode reads from the bank’s own blog:
If the bank’s result is a loss, the loss must be covered from the reserve fund; to the extent the reserve fund does not suffice, the loss may be left uncovered for the time being. Profits in subsequent years must primarily be used to cover losses left uncovered. In an exceptional situation it is therefore possible for a central bank to operate with negative capital.
Ahokas confirms the BIS published a research paper to the same effect at the start of the year. Miettinen’s comment — “stop nitpicking that there has to be a positive number on a central bank’s balance sheet” — is the episode’s crispest line.
And from this follows its one openly speculative passage, which the pair label themselves: “let’s put on a light tinfoil hat”. Why is the Bank of Finland emphasising this now? Ahokas does not believe national central banks or the ECB are about to be recapitalised jointly — responsibility in the purchase programmes was deliberately kept national, and so the losses stay national too. He concedes nonetheless that if some country’s central bank gets into real trouble on its balance sheet, that political debate will certainly arise.
Miettinen raises the Bank of Finland’s own demure reminder: over the euro era it has paid the state more than three billion in dividends. That is now in question.
Sentence 3: systemic risk — the one Ahokas accepts
“Finland will push for measures limiting systemic risk in the eurosystem.”
Miettinen finds this the boldest of the three — little Finland limiting the eurosystem’s systemic risk — but for Ahokas it is the most sensible. He reads into it a change in the line on EU fiscal and economic policy coordination, and active ECOFIN work under Riikka Purra: why not try, together with other euro countries, to tame the imbalances that have lodged in the system? The phrasing is so general that many policy measures could attach to it, and in his view it does not disturb the central bank at all.
Miettinen adds an important caveat worth holding through the whole episode: a government programme is a vision, not a statute book. Nothing has been implemented, so the entries should not be over-read.
Was this interference with independence?
The letter notes that Finnish law grants the ECB full independence and forbids political manipulation — and reads the programme entry as at least an attempt to undermine it.
Ahokas comes close to the judge’s role here and declines it. His first reading favours the government: if the government is worried about fiscal consequences arriving on its own desk through the central banking system, why should it not say so out loud? He sees no direct link from the entry to anything Rehn does in meetings in Frankfurt.
The second reading is the central bank’s, and it is reasonable: if particular central bank activity creates financing risk and the government announces it is worried about that risk, can that not be read as pressure — “could you reduce that risk through your own choices”? Ahokas’s assessment is that this is exactly how it was read, which is why the letter went out so sharply.
Miettinen adds the charitable reading of the government’s intent: to limit Finnish citizens’ latent supranational liabilities and to recover some of the Maastricht spirit — which is, in his words, “quite a tough ask at this point in the game”. Ahokas confirms that reading all of section 9.1 gives exactly that picture: back to market discipline and to the no-bailout rule applying everywhere.
The constitution against the Bank of Finland Act
The episode’s most interesting institutional observation is a contradiction neither claims to resolve. The Act on the Bank of Finland states independence and the ECB linkage unambiguously. The constitution, by contrast, still carries the spirit in which the Bank sits in connection with and under the supervision of parliament — historically the link was direct and the Parliamentary Supervisory Council had real influence on what the central bank decided.
Ahokas notes the two are “of course in contradiction with each other” and that somebody could start asking which law binds more — but does not want to open that can of worms. Miettinen encourages him to open it.
The more general point both endorse: central bank independence in this form is not divine truth. In the United States the mandate has more than one pillar besides inflation. And as Ahokas says, the whole conversation has been half an hour of fiscal policy first and foremost: a central bank is ultimately one institution of the state, and the state grants it its mandate — so independence is always relative to how much of it is granted.
Could Greece happen again?
Miettinen returns to the 2010 arrangements. The ECB had bought Greek bonds under the Securities Markets Programme (SMP). When the debt restructuring came, the ECB was repaid in full — zero losses — which he suggests can be thought of as a shared recapitalisation exercise. He also recalls the era’s sterilised monetary policy, in which the risk the SMP took was neutralised by shorting the position the other way, and considers the execution primitive in hindsight. Greece’s and its central bank’s liabilities were ultimately rescued through the EFSF mechanism.
As a theoretical parallel he takes Italy: if Italian debt runs into financing trouble and the Bank of Italy’s massive domestic holdings had to be written down, how would that dent be made good?
Ahokas’s answer is stabilising: in such a situation monetary policy returns to zero rates, interest margins improve, and the system has counterbalancing forces. Miettinen adds a limit he recalls from an MMT discussion: the constraint on balance sheet expansion is not negative equity but rising inflation — and against stagflation modern central bank policy is fairly disarmed. Ahokas concedes that monetary policy does not bite on real-economy problems such as the availability of labour.
A soft landing, and why fiscal policy decides
The closing half is the most interesting as a snapshot, because it is a forecast.
Miettinen notes construction volumes have collapsed and still hopes for a soft landing: with the US tightening cycle at its peak and inflation down to four per cent, the rate cycle could ease despite the mini-recession. Both admit to having forecast rate cuts for a long time, and Ahokas recalls the episode a year earlier in which Miettinen predicted rates would already be falling sharply by midsummer.
Ahokas’s reason for thinking a soft landing more likely is specifically fiscal, and it is the episode’s best analytical point: monetary policy has tightened fast, but fiscal policy has loosened at the same time. The United States is running a larger deficit this year than last, on the order of 60 per cent of the covid-year level. When the federal government pumps aggregate demand like that, no recession arrives and the labour market does not fall far, even if private investment and construction suffer from rates.
Europe may differ: fiscal policy has been more cautious, energy subsidies and Ukraine support are ending, and governments are arriving that intend to tighten deliberately.
On Finland, though, they land on a neutral assessment. Miettinen first looked at the structural spending cuts, then noticed the programme also contains a debt-financed three billion euro infrastructure investment package (rail projects), whose quality both rate positively and which the opposition would probably accept too. When an investment is financed by selling assets, net debt still rises and shows up as deficit consumption — so the fiscal stance ends up fairly neutral.
On tax, Miettinen points directly at his previous episode with Elias Erämaja: the solidarity tax, that temporary two-point increase, was not removed, though the threshold rose. Ahokas notes half a billion of tax cuts is mildly stimulative, but that the package is distributionally one where lower earners lose and higher earners gain — which increases saving and lowers the marginal propensity to consume out of total income. His recommendation is to read Robinson’s book on what that does to aggregate demand.
The lag in translations
The funniest thread in the episode: Ahokas’s translation is decades late, but Miettinen offers worse. Juhana Torkki, with whom he wrote Uusi neuvotteluvalta, has translated texts by Seneca and Plutarch more than 2,000 years old — and even Adam Smith’s foundational work was only fully translated into Finnish about ten years ago. “Better late than never.”
Asked whether Robinson argues with Say in the book about the structure of supply, Ahokas says no: the book does not go into theoretical disputes but opens up Keynes through examples familiar from everyday life.
The forecast on a government crisis
A closing prediction. Ahokas does not expect the programme to be rewritten: it is only a programme, measures are a different matter, and neither side wants a loss of face. Miettinen agrees the debate will be buried — and announces he will not let it be until Rehn, Orpo and Purra argue it out on A-studio.
Both consider the debate necessary precisely because the eurosystem was not born perfect, and it is worth asking where the limits of changing it run. Ahokas adds the dry observation that when a debate gets far enough for letters to leave the Bank of Finland, you are at least pointed in the right direction.
A note on the source
There are no gaps in the transcription. The episode was transcribed with MacWhisper and the transcript carries no speaker labels; with a single guest the speakers are reliably distinguishable. The cleaned cue file corrects proper names and technical terms the automatic transcription mangled — among them Olli Rehn, Nalle Wahlroos, Joan Robinson, Willem Buiter, Juhana Torkki, and the ECB’s Securities Markets Programme (SMP), which had been transcribed as “S&P”. A few unclear expressions were not guessed at; in particular the figure given for the book’s age was garbled in the transcript and is not repeated here.
Watch
The recording lives on the Neuvottelija channel: Suomen Pankki haastoi hallituksen | Jussi Ahokas | Neuvottelija 197.