1991, the Year of Black Swans: Finland's Deep Recession | Esko Aho

Summary

Esko Aho was Prime Minister of Finland from 1991 to 1995, taking office at nearly the same age Sanna Marin was when she became PM. In 1991 Finland was hit by a deep recession, worsened by the collapse of the Soviet Union and Eastern trade, the near-dogmatic rigidity of a fixed exchange-rate policy combined with oversized union-negotiated wage increases, and the outgoing government’s pre-election budget. Nokia itself was nearly sold to Ericsson, with the deal collapsing when Ericsson’s board decided against also acquiring the consumer-electronics business. Aho and Sami Miettinen discuss how the recession was already about 80% over by the time of the first exchange-rate correction at the end of 1991; how the internal devaluation package known as the Sorsa agreement, despite SAK’s approval, ultimately fell apart in union wage talks; how wage increases nonetheless stayed low (barring AKT’s catastrophic strike), and how the economy was eventually renewed through the 1992 Avoir Fiscal tax reform and the markka’s move to a floating exchange rate; and how the banking crisis, especially SKOP’s foreign-currency loans, remained severe. The conversation also covers the division of labour between the President (Mauno Koivisto) and the Prime Minister, the perils of election-year budgets, the limits of debt-financed stimulus, and fighter-jet procurement. The more things change, the more they stay the same.

Transcript

English transcript derived from validated English subtitles (WebVTT · SRT). Timestamps link to the original video.

00:00 Looking back at the numbers now, they really were absolutely terrible. I get the feeling that some decision-makers simply had no idea how ugly the economic situation was. I found a list of the results of Finland’s 20 largest companies for the year 1991. And of those 20, four managed to turn a profit. The other 16 companies racked up losses of over 10 billion markka - that’s 15 times as much. There wasn’t even a serious discussion about what would happen if we ended up in a similar situation again, the kind we were in in 1991 - what would we do then, now that we have a fixed exchange rate that’s completely locked in place. Until now, when it’s been noticed that the euro is a far, far more challenging environment than was imagined. That utopian idea that once the EU member states adopt a common currency, the common currency would also force them into the same stall when it comes to running their economies - well, that’s turned out to be completely untrue.

01:04 And we’re paying a pretty high price for that now. If I had to pick out the single decision that had the biggest impact on how Finland’s economy - or rather, public finances - managed to return to balance so incredibly fast in the 1990s. You have to remember that we started out with massive borrowing when the recession hit, in the early stage of the recession, which continued into 1992 and even 1993, but then we came back very quickly. And what decisively helped with that was that tax revenues grew so dramatically. Corporate tax revenue, which was around two billion or so in 1992, thanks to the reform had risen to an annual seven billion euros by the year 2000. Well then, welcome to the Neuvottelija channel. My guest today is Esko Aho. Welcome. Thank you. This is a kind of book-analysis discussion. You’ve published this book, ‘1991 - The Year of Black Swans,’ which is now in its sixth printing.

02:10 Yeah, six printings have already gone out, and hopefully at least a few more once the year gets going a bit. Yeah, we’ll put the links up, and you can listen to it as well. As a bit of a contrast, I’m actually in this stock exchange club’s book club, where we went through your excellent book, and before that we did Barack Obama’s first memoir. The Americans always do official memoirs for their presidents. And then there’s one about Erkki Liikanen’s time as commissioner. And I don’t think this book is the same kind of thing - it’s a portrait of an era, not a portrait of a person. Would you say that’s accurate? That’s at least what I tried to do. My intention wasn’t to write memoirs or my own interpretation of events, but to try to create a picture of the era and share a bit of a generational experience. I think that was also one of the ideas I had in mind while I was writing the book. -Yeah, 30 years have passed, and I’m already old enough that I was already an adult back then, and I was a business school student, and for me it was a good

03:10 time. I bought stocks with my student loan, and they rose incredibly, and In a way, nothing bad to say - even my parents didn’t lose their jobs - but for many Finns it was the great recession of history. I think there’s a lot of misremembering around it, and especially those who didn’t live through it end up relying on folklore. I think there were at least three of these black swans - could you walk through them, what were the worst blows that hit Finland’s national economy? The first was of course completely outside our control, and that was the collapse and breakup of the Soviet Union, which hit Finland economically extremely hard. It’s been said that about half of the economic drop during the recession came from the contraction of trade with the Soviet Union. And then the second was our own economic crisis, which looked to many like a sudden collapse,

04:13 but which actually had fairly long roots, which I’ve described in the book. You could say that the seeds of the recession were sown right after the mid-1980s. And the third - I guess you could call it a black swan too, or at least the makings of one. was that Nokia, which had been a great success story in the 1980s, came close to being sold because of its financial difficulties and because of its owners’ loss of confidence, to the Swedish company Ericsson. By autumn 1991 things had gone so far that the purchase price had been agreed, and the terms of the deal had all been settled, except for one. That one thing then killed the whole deal. Namely, Ericsson didn’t want to take on the radio and television manufacturing business. And the sellers didn’t want to sell Nokia without that going into the package too. Yeah, let’s go through all three, but a quick shout-out to Petteri Fagernäs, my old boss.

05:13 Luckily you didn’t manage to sell it to Ericsson on KOP’s behalf. He was probably one of the more disappointed ones in that group, because KOP could have used the money that deal would have brought in. And it wasn’t very pleasant to accept the fact that the company stayed. At least for a while, still under KOP’s ownership too, though KOP gave it up fairly soon after. Those who made that decision have probably regretted it many times over, but that’s a different story. Yeah, I interviewed Nalle for my new negotiation book, and he clearly tried to bring this up. SYP managed to keep its shares, while Pohjola and KOP sold. Back then in the ’90s there was this whole fight between the Ehrnrooths and Wahlroos, which to me as an investment banker was pretty entertaining. But actually Pohjola didn’t sell. That was the funny thing - Pohjola was first teamed up with KOP working on this deal, but then, at the end of 1991, after the deal with Ericsson had fallen through, SYP and Pohjola then indeed found each other.

06:18 Yrjö Niskanen and Casimir Ehrnrooth struck a deal like this in the end, that the company would stay in Finnish ownership after all. One of them became chairman of the board, and the other vice chairman. Yeah, and the rest is history. That was really good, and it helped with our recovery in the national economy’s growth in the early 2000s. And apparently it started with these small things - the leadership had become fragmented, there was this whole thing with Kairamo’s suicide, and the leadership had split into two camps that didn’t really know how to talk to each other, that kind of thing too. In Kairamo’s time it was pretty clear that Kairamo was number one and the CEO was number two. But then when he took his own life, Vuorilehto, who had been the CEO, became the president, and Kalle Isokallio became CEO. And communication between them wasn’t up to much. It’s claimed the problems were also on the board’s side.

07:26 so that the only ones on speaking terms were the board chairman Mika Tiivola and the CEO Isokallio, who were actually family - Kalle was, and still is, married to Tiivola’s daughter. Yeah, and he writes entertaining prose. Yes, he’s been very good at that. I’m not entirely sure he was just as good as a Nokia executive - that’s up for debate. Yeah, but he didn’t sell it to Ericsson at least, so let’s give him that. Well then we could move on - there was another suicide at KOP too, sort of a dark time. Now the suicide rate among Finns has actually collapsed, and we’re the happiest nation in the world, but the 1980s were a darker time, in a way. Interesting, by the way - I just looked this up, because the common claim is always that when the recession hit, suicides turned sharply upward. In 1990 suicides hit their peak - right around then, just before, or actually at the very moment the economic collapse began. That’s when the decline in the number of suicides also began.

08:28 Yeah, and actually this is a recurring theme in your book. That these sins of the past just keep weighing things down, in a way. And first an election budget was made, and then on top of that an election supplementary budget was passed. I found it funny - Iiro Viinanen, who was sort of the tough guy in your government, even he wanted a supplementary budget back in 1990. So in a way, they were letting off the last bit of steam. It wasn’t actually a supplementary budget - it was additions made to the budget, done in a completely irregular way. So right after the government had gotten the budget to parliament, the parliamentary groups, the government party groups, agreed to add another billion on top - when exactly the opposite should have been done. And nobody could bring about any discipline or order, neither the finance minister nor the prime minister. The prime minister maybe didn’t try all that hard, but Holkeri certainly did try, though his own parliamentary group walked right over him.

09:28 Yeah, then there’s Liikanen, who went off to become commissioner right at the peak, in a way. There were these incomes-policy settlements made, one of them probably under his name too, which were actually pretty tough. And those pretty steep increases were then left for your government to pay the price for, in a way. Actually, right before he left, you could say one of the last things was getting an incomes agreement done, which happened in ‘90. I think it was January of ‘90, if I remember right - it was made under the name of the Kallio agreement. Once it was finalized, it was called the great celebration of incomes policy. Its goal was that over the following two years, real earnings in Finland could rise, based on that agreement, by a total of 5 percent, if I remember right.

10:32 Yeah, moderate spending. And of course it was completely the wrong kind of agreement, at completely the wrong time, and the wrong message for everyone. It was made at exactly the moment the economy hit its peak. Yeah, and then some other arrows were pulled taut around then too - in 1989 there was this small revaluation. At the time there was this, I think, pretty crazy group called Friends of the Strong Currency. And in a way there was still this final climax to come. This revaluation was done to cap off that early stretch. And then the capital markets were liberalized in the 1980s, out of which came this boom of Skopbank selling foreign loans into Finland. So in a way all of this was brewing there. Yes, you could say there were clear mistakes, but there was also bad luck - things happened to fall at the wrong time. For example, liberalizing the currency markets, the money markets, was inevitable, but in many respects it also landed at exactly the wrong time.

11:37 at a time when other things in the economy were also heading rapidly upward. The terms of trade improved, which brought billions more into the national economy, and trade with the Soviet Union was also very profitable, though it had actually already started declining at that point. The price of oil dropped, which also helped Finland’s economy further. So in a way the fuel that was freed up and put to use through the liberalization of the money markets, and through the resulting growth in lending, was really fuel that set things alight. Yeah. So then you came into the show as sort of the new guy - I think you were already a two-term MP, some kind of veteran. Third-term. Third-term, okay. And you were just a touch older than Sanna Marin, but back then you were Finland’s youngest prime minister. And that’s apparently where Väyrynen’s only mistake happened - that for strange reasons he decided to step aside as the Centre Party’s chairman.

12:38 Right, that paved the way for becoming prime minister. So in the summer of 1990 I was elected Centre Party chairman. And it was quite a surprise to everyone that Väyrynen announced in March 1990 that he would no longer seek to continue as party leader. I believe he imagined he’d be able to lead the party from a bit more of a distance, and in that way also ease some of the tensions, that had built up on the political field between him and President Koivisto, and a bit with Sorsa too. So that was his assumption, and it’s simply an impossible idea. In today’s conditions you can’t have a two-headed party leadership - or if you do, it usually doesn’t work. Yeah, well the previous government was the Coalition Party and the Social Democrats, and it didn’t work out for them in the election anyway. A blood-curdling election win, I think that’s what it was called back then.

13:39 That’s what it was called, and there was solid logic behind it. It was Seppo Kääriäinen’s logic. He saw that the Centre Party had no other way into government than to win such a big election victory that the blue-red coalition couldn’t continue. Because the will to continue in that coalition was very strong right down to the wire. And it’s claimed that at KOP’s shareholders’ meeting, held a couple of days before the election in March 1991, everyone there was of the opinion that the government coalition would carry on as before, even if the election result shook that coalition up a little. But then when the results came up on the screen, everyone knew within the first seconds that it was over. Yeah, and the impression I got was that Koivisto was maybe a bit relieved not to have to work with Väyrynen anymore, and in a way took you under his wing. He recommended, for instance, making these recordings, and kept very meticulous records of everything, and that’s where you got the material for this.

14:43 But in between, other combinations were considered too, there was the Social Democrats, and then in the end they settled on the Coalition Party. And for me Iiro Viinanen stands out as really strong in that story, but there was a similar thing going on there too - wasn’t Ilkka Suominen the leader? Yeah, Suominen was still the Coalition Party’s chairman up until the 1991 election, and a bit after it too. And he was, in my view, he had many good qualities. And I also assumed he’d be the finance minister I’d be sharing government responsibility with. And it was quite a surprise when he stepped aside. He cited his health at the time and said he was so exhausted that he no longer felt he could handle the job of finance minister. At the time it felt like a bit of a stretch as an explanation, but I do understand it in a way, since he surely saw how difficult times were coming and knew what he’d be walking into.

15:50 So it was probably a perfectly valid reason he gave. But the fact that Iiro Viinanen came in next was quite a surprise, and that whole drama in parliament the previous autumn raised doubts about how on earth Viinanen would be able to keep things under control, since the budget process had completely gotten away from him that autumn. And he justified it afterward by saying he had no choice but to go along, because otherwise the Social Democrats would have grabbed all the benefits for themselves - which I thought was a terribly poor explanation, because if you’re the leading government party - and the Coalition Party was the prime minister’s party at that point - its parliamentary group shouldn’t be allowed to just walk over its own leader like that. That’s why I was very skeptical when his name came up. But pretty soon it turned out Viinanen was actually tough as nails, and things started going smoothly with him. You could say quite frankly, unexpectedly well. We were also maybe a good, fitting kind of different from each other, but at the same time we had the same understanding of what needed to be done.

16:55 so the division of labor came about pretty naturally, but a division of labor where the goal was the same. Yeah, and in a way it wasn’t the old top dogs but new faces that were thrown into the fire, and then that fire turned out to be pretty fierce, and this started raining down especially in the summer, when AKT went on strike, and exports started dropping and the currency reserves started walking away, and then this strong tension built up, in a way, with this stronghold of the strong markka camp, which wanted, for dogmatic reasons, to keep the exchange rate too strong. And at the same time, in a way, there were these export-industry employers and employees, who wanted, openly or at least behind the scenes, an exchange-rate correction. At the same time the public was somehow seeing these lists of cuts and so on coming.

17:56 We could dig into that a bit - the tension between the strong-markka camp and, in a way, the camp that wanted good prices to boost exports. How persistent was that situation, and how hard was it to manage? Well, first of all there were clearly two different schools of thought. One still believed it was just a kind of temporary disturbance that would pass quickly. And there were - or let’s say there was also a group backing that same line of thinking, whose interests strongly favored holding on to the fixed exchange rate, and who had been heavily involved in exploiting foreign borrowing. And among the banks, KOP - and Skopbank especially, of course - but KOP, which was still the dominant player compared to Skopbank, its interests clearly lay in keeping the exchange rate fixed and unchanged.

19:00 And then there’s the other school of thought, which saw that we now had such big problems that there simply was no other way through them. And looking back at the numbers now, they really were absolutely terrible. I get the feeling that some decision-makers simply had no idea how ugly the economic situation was. That’s probably best illustrated by the fact that I only recently found - I didn’t even get it into the book in time - I found a list of the results of Finland’s 20 largest companies for the year 1991. And of those 20, four managed to turn a profit - namely Neste, Kesko, Kone and Valio. And their combined profit in 1991 was a bit over 700 million markka, so something like just over 100 million euros. Whereas the other 16 companies racked up losses of over 10 billion markka - so 15 times as much.

20:11 Those numbers were just shocking. If we had a similar situation now, with the corporate sector in the shape it was in in 1991, that would truly be a total catastrophe. I count it as a blessing that our companies are doing well now and are in reasonably good shape, even though times are challenging. Yeah, so competitiveness had been destroyed. It had been destroyed, and then of course trade with the Soviet Union pulled the rug out from under production that had no market other than that one. Goods that could be exported to the Soviet Union at a good margin simply had no other market at all. Whether or not they were competitive, those products just didn’t have a market. Yeah, Nalle Wahlroos discusses this in his latest book, that these domestic production chains were, in a way, too integrated. So there was, for instance, no subcontracting from abroad, and basically everything was made domestically, on the terms of the eastern trade.

21:13 And then once that margin and those sales were pulled away, what was left behind in Finland was a pretty brutal cost structure. But that’s a bit like a lot of other things - it’s hard to start cannibalizing a business that’s working well. You have to remember that the level of domestic content was actually set by regulation. So goods exported to the Soviet Union had to have a domestic content rate of 80 percent, so that trade wouldn’t be conducted with foreign products that were simply being passed through to the Soviet Union. That partly led to the phenomenon that Wahlroos has talked about. And then the other rule was that for big companies, a third of turnover came from Soviet trade, but two-thirds of the margin. So it was extremely profitable trade. And then when it disappeared from under them, it hit extremely hard - not just turnover, but profitability even more so.

22:17 Nokia’s a good example of that too - in ‘91, Nokia also lost a telecom-equipment market worth billions from under it. I’d guess proportionally even more came out of the margin than that 1.3, or maybe 2.3. It was a very high-margin, good-margin business. Yeah, this question actually came up in relation to the fact that, on top of all this, it was also the year the Soviet Union collapsed, and the YYA treaty was dissolved - breaking what had been treated almost like a sacred dogma, at least according to a lot of people’s accounts - because if you’d asked about this in the ’80s, nobody would even have believed it was possible, and of course nobody believed the Berlin Wall would fall either. So the question, in a way, is whether - as Russia separated from the Soviet Union and tensions grew between Gorbachev and Yeltsin, between the Soviet Union and the Russian Federation - whether it would somehow have been possible to pass Finland’s eastern trade on to Russia, or whether Russia was simply so bankrupt that there was no exporting to it anymore?

23:30 There was no way at all to shift quickly from Soviet trade to trade with Russia. Russia had, after all, inherited the whole bankruptcy that the Soviet Union had run into. Its economy did slowly start recovering from that, but very slowly. Our trade did start up again already in 1992 and 1993. It grew a little already in 1992, but then 1993 was a clear growth year. There was definitely some recovery, but that kind of sudden swing back the other way was impossible to imagine. Plus, Russia also shifted toward market-based solutions, which meant that kind of idea, The idea that we’d still have quotas and bilateral barter trade, which Soviet trade was based on right up until 1990, simply wasn’t conceivable anymore. In that sense, Finland’s position in relation to the East had also changed.

24:34 Yeah, and that was maybe more of the political game, which in itself was interesting - the YYA treaty was thought about hard, there were attempts, and it almost became the Soviet Union’s very last state treaty. on dissolving the YYA treaty, but then it ended up becoming Russia’s first equivalent treaty instead apparently right around then, as it went right over Christmas. Yeah, so in a short span of time a massive change was made to Finland’s foreign and security policy. Why not in the fundamentals of economic policy too, because we did have this, in a way there was this dismantling of the postwar-era system and turning it in a different direction. It happened incredibly fast, within a few weeks. And the trigger for that really did come from the coup attempt in the Soviet Union. That was sort of the final seal that drove the move to break away from that old position. We started preparing to apply for EU membership.

25:36 And you could say Finland, in a way, repositioned itself within Europe. We also got new neighbors. Let’s spell it out - Russia became a new neighbor. The Soviet Union and Russia were not the same thing. And then, second, the Baltic states became independent nearby, and Estonia became our independent neighbor. Yeah, the impression I got there was that Koivisto apparently used the KGB as a source. The KGB probably felt more loyalty to the Soviet Union than to Russia. Yeltsin, though, was seen as a fairly weak guy. He was an alcoholic and so on, but Yeltsin ended up winning this game anyway - so there was, in a way, a brief moment where Koivisto at least didn’t go along with backing the Baltic states’ independence. Koivisto wasn’t alone in that. You have to remember that the Soviet Union was one of the two world powers. It had nuclear weapons. It was a strong state - militarily strong, at any rate, because of its nuclear weapons, especially its nuclear arsenal.

26:41 That’s why everywhere in the world - in the United States, President Bush, in France Mitterrand, and Germany’s Kohl, Koivisto too - everyone thought the best thing that could happen was for the Soviet Union’s reforms to succeed in a way that kept things under Gorbachev’s control. And the fear that if things slipped out of Gorbachev’s control and chaos broke out, that fear was very great. And confidence in Yeltsin wasn’t very high, because his persona had stirred up quite a lot of confusion. And people maybe didn’t really grasp just how strong he actually was in the eyes of ordinary citizens in Russia. His strength really only became visible when he climbed up on that tank to give a speech against the coup attempt. That’s when he became an undisputed leader figure, and that’s when he was also taken note of all over the world.

27:42 You could say Koivisto took note of him as the real leader that same Friday of the week, when at a session of the Russian Federation’s Supreme Soviet, Yeltsin literally took Gorbachev by the hand and coached him on what he had to talk about and what he had to say. You could see right there that power had changed hands. Heikki Talvitie, who was our ambassador in Moscow, put it well - that this week Russia swallowed the Soviet Union. And that’s really what it was. Koivisto certainly realized and understood that by the end of that week. Then things also started moving faster in Finnish politics. Yeah, and there was this aside, that apparently Koivisto only really talked to you about it - the rest of the government wasn’t kept in the loop, at least on foreign policy. Well, let’s put it this way - the foreign minister certainly had a lot of dealings with the president, but Koivisto’s starting point, right from the beginning, was that the prime minister also had to be active in foreign policy.

28:48 He made sure that I was kept aware of everything. He said he was following the principle Kekkonen had introduced, that parliamentarism in foreign policy works by the president keeping the prime minister up to date on what he’s doing and what he intends to do. Koivisto followed that same principle too. In many other respects too, he was much more Kekkonen-like than he himself wanted to let on, and especially more than many of his supporters imagined. When he was elected president in the winter of 1982, a lot of people voted for him thinking, now we’re getting rid of Kekkonen, now we’ll get a completely different kind of president. But he was, as I said, a lot more Kekkonen-like than many people imagined. Yeah, apparently there was something about a columnist, and using the machinery of the state to hunt him down, that kind of thing. Yes, so much so that the same touchy sensitivity about his own position, which was typical of Kekkonen too, was also there in Koivisto.

29:54 so that where Kekkonen used the Chancellor of Justice to hunt down the identity behind the pen name of Veikko Viides, a Suomen Kuvalehti columnist, so he could vent his anger at the right target, in the same way Koivisto used the head of the Security Police, Seppo Tiitinen, to hunt down who ‘Kuntokalpa’ was, the writer criticizing him and others in the columns of Keskisuomalainen. Both of them had a pretty similarly direct way of operating. It’s actually pretty funny that Tiitinen, the head of the Security Police, made sure to warn Juhani Suomi and Erkki Laatikainen, who were behind Kuntokalpa, But he apparently never shared that knowledge with the president - so even though the president wanted to know who Kuntokalpa was, Tiitinen didn’t want to tell him, even though he himself knew perfectly well how things really stood.

30:55 Yeah, it’s always remembered that we were just totally submissive and Finlandized, but there were plenty of these counterweights too - all these Tamminiemi estate-splitters and the like, who held up pretty well against that. Yeah, and then I’d say, you could talk for a long time about this Finlandization. I entered national-level political life in Finland already in the early 1970s. And of course there were a lot of aspects that were unpleasant, where things probably went too far in taking the Soviet Union’s wishes into account, or some people went too far, at least. But then, on the other hand, there was also constant tough back-and-forth with the Soviet Union and with Soviet officials. And on certain matters, people held pretty firmly to what they considered important for themselves. And when a lot of people say things could have been different somehow, it’s worth reading the discussions from the Tehran summit during the Second World War.

31:58 and the discussions among Roosevelt, Churchill and Stalin - there’s no ambiguity left there about whose sphere of influence all three of those men placed Finland in. Yeah, and I interviewed Vesa Kanniainen, who’s written a few books with Libera, and he’s actually stood up for this maligned YYA treaty, saying it’s actually a pretty ingenious kind of pressure-release arrangement between a strong neighbor and a weak one, that there was a lot of good in it too, even though it too has been remembered somewhat as this kowtowing kind of agreement. Plus, for example, in that discussion in Tehran, it was actually Churchill himself who said, that of course the Soviet Union had to be able to get the St. Petersburg area, or the Leningrad area as it was then, into a secure state. It has interests that have to be taken into account. And then when the war ended, we weren’t given any other guidance than, try to get along with those Russians. Yeah. Well, that turned into - Sweden slipped into the EU, and then we went and applied and followed along.

33:05 They didn’t slip in - they decided to apply for membership a bit before we did. But the membership negotiations were actually held at the same time, and in fact the decisions on membership happened largely in parallel, even though each country of course made its decision from its own starting point. Yeah. Well then we could move on to this domestic anguish, and that’s where the AKT strike came in, which was clearly agonizing, and the timing couldn’t have been worse. Then after that, they looked for a kind of internal devaluation solution, and what emerged from that was the Sorsa agreement, and it actually got surprisingly far along, Could you give us a taste of how close we came to that era’s version of the ‘kiky’ competitiveness pact? Yeah, that AKT strike was a good example of just how poorly our decision-making grasped how deep a hole we were in.

34:11 and a month-long strike at the same time the national economy is in complete free fall, that was of course a completely irresponsible act, but nothing could be done about it. Even the labor market leaders on the employee side tried to get some kind of resolution, but it lasted, if I remember right, about four weeks, and it definitely made an already bad crisis worse. But the paradox of it is also that on the very same day, or almost the same time, that the strike began, there was a tough fight going on over at what rate the markka would be pegged to the ECU. Our currency basket, the one the markka was pegged to, that basket was, in a way, being changed, and the idea was to adopt the European Union’s - or back then the European Community’s - notional currency unit.

35:12 And that would have been the moment to do a devaluation and correct the rate. And in fact, the AKT strike gave those who didn’t want to touch the markka’s value - these supporters of a strong, or stable, markka - an extra argument, because it was easy to say, well what good would that even do, when a strike is already being used to grab extra benefits. And in that sense the strike was unlucky in many ways. Well, what followed from that was doing the ECU peg without any change to the exchange rate. I was pushing for that too, but I lost that fight. So what followed from that was that it became clear - everyone knew there was no other way but to make these adjustments without touching the exchange rate, which meant the cost level had to be brought down by other means. And that’s how a package came together, which ended up being finally sealed by bank governor Kalevi Sorsa. It went under the name of the Sorsa agreement, and it came very close to succeeding, but then it ran into these clashes of interest, where it was impossible for either the Paper Workers’ Union or the Metalworkers’ Union to accept even small cuts in earnings.

36:32 When the paper union and the metal union wouldn’t get on board, the other union leaders backed off too. The result was that the central labor-market agreement fell apart in their hands, and we ended up drifting into an exchange-rate change, a devaluation, in the autumn of November 1991. It was inevitable by then, nothing more could be done about it. Defending the markka had become a completely hopeless task, and so a devaluation was carried out. Yeah, apparently there was still a small flicker of hope that SAK would take it under its wing, but then the metal and paper industries just coldly said their job was to protect their own members’ interests, and that this was someone else’s problem. So formally it went through there - SAK’s governing board approved it - but when it came to the individual unions signing the agreement, nobody wanted to put their name on paper, and that’s what killed it. You could say that if I’d been responsible for the position of public-sector and domestic-market-sector workers, I’d have rushed to put my name on that paper, because it would have made sure the burden of the recession was shared much more evenly.

37:54 Now that we ended up having to use, first the devaluation and then the floating, a weakening of the exchange rate as a strong lever for boosting competitiveness, what followed from that was that the burden ended up being distributed extremely unfairly. And that really was a very bad outcome, especially for the public sector. Yeah, and as you put it in the book, we never really learned how to negotiate that internal devaluation, which would have come in useful many times later on. so that kind of culture of internal agreement just never developed, in a way. Right, the breakthrough that would have been needed there, understanding, so to speak, that you have to be able to adapt to rapid market changes through various arrangements concerning employment too, that just never got done. And when we moved to the euro - or actually when the ERM peg was made already in 1996, before the actual euro decision - somehow the rapid recovery of the economic situation meant that there wasn’t even a serious discussion about what would happen if we ended up in a situation similar to the one we were in in 1991.

39:12 What would we do then, with a fixed exchange rate completely locked in place, and no possibility of devaluing anymore. And that discussion simply couldn’t be had. We had that kind of political climate back then, where there was no room at all to consider alternatives. Buffers of a sort were created, but they were more just window dressing. No real means of adjustment were sought or looked for, or even considered necessary. It was imagined that we were now in a new union that guaranteed everything would stay stable and predictable. That story went over well, until now, when it’s been noticed that the euro is actually a far more challenging environment than imagined. And that utopian idea, that once the EU member states move to a common currency, the common currency would also force them into the same stall when it comes to running their economies - well, that’s turned out to be completely untrue.

40:13 And we’re paying a pretty high price for that now. Yeah, two reflections on that - the metal and paper unions, or today’s forest industry, maybe not by coincidence, were exactly the two unions here, 30 years later, where the employers then decided to move to local bargaining. So the paper industry employers pulled out of it entirely. We’re heading into unknown territory now - free bargaining. And then over in the technology industry, they decided to split into two associations. So one branch that still uses collective agreements, and then, in a way, one area for the free labor market. It somehow feels like in these 30 years, this tripartite system hasn’t really achieved much of anything. Back then there was still a fairly widespread belief that the same mechanisms that had handled the industrialization phase would also suit this new era. The best example of that is something I’m actually going to write about in my next book too.

41:14 I found - I saw it on paper while reading - I found a speech Kalevi Sorsa gave in the spring of 1992, in which he criticized the government’s base as too narrow, saying the coalition should be broadened. It’s pretty interesting that a member of the central bank’s board is arranging the country’s government, but that was what was called the custom of the land back then. The Social Democrats would probably have suited him fine. He wanted the SDP in government, but he said even that wasn’t enough. The labor market organizations should be in government too. That describes well what kind of mindset there was. The thinking was that if you just sit down at a big table and reach agreement, then all agreements will turn out well. We’d already had a brilliant example of that not working, back at the time of the Kallio agreement, among others. That Kallio agreement really belonged to a completely different world, when you think about what should actually have been decided. But that faith in consensus, that belief that reaching agreement is a value in itself, was incredibly strong.

42:20 And maybe now we’re gradually realizing that it doesn’t help to try to agree on certain things among ourselves here, because if that agreement isn’t built on realistic ground, it’s worth nothing. Yeah, and maybe a couple of facts I dug up here, about what’s remembered from the ’90s. Of course interest rates were high, but they were high everywhere. In Finland the long-term rate was 12 percent, but Sweden had exactly the same rate. And these euro-area countries too had rates above 10 percent. Back then you’d just be in a situation where the national debt would pick up another tenth on top of that, without anyone doing anything. And if you’ve also got a budget deficit on top of that, it’s a pretty different situation from now, where the interest rate doesn’t punish you. This is apparently one of the biggest problems for today’s decision-makers - understanding what kind of world it was 30 years ago. First of all, money wasn’t available to just anyone - you had to go humbly and borrow it, ask for it.

43:26 I myself made trips abroad to help secure our access to credit. And then, the lender had a genuine, perfectly relevant question. How do you intend to pay your loan back? And the repayment periods weren’t 30 years out - they were a few years out. And in fact, the state was the only one in Finland that could get long-term foreign credit. Not a single company could get it, nor could a single bank, which put the state in an absolutely critical position when it came to this borrowing. And if the state had somehow ended up in a situation where confidence in its ability to manage the economy and these matters was lost, then the whole boat would have come loose from its moorings entirely. Yeah, we got some questions here on the Neuvottelija channel, and Kari Suojanen asked whether you think the current government could, manage to take a clear 10 percent in a single year, the way it needs to get to budget balance,

44:26 or the other way around, through some means, so Kari Viitala just went ahead and asked, whether today’s decision-makers, with today’s attitudes, would have made it through the recession of the ’90s? Today’s attitudes are based on such a different world, that this comparison is unfair in both directions. You shouldn’t go around advising what should have been done in the early ’90s without knowing the conditions. And of course you could just as well say that the mechanisms of the early ’90s themselves aren’t relevant today, because the world has changed radically. For example, the fact that interest rates are this low means states have more room to maneuver. On top of that, we’re in the middle of this big global crisis, where all states are using debt significantly as leverage to get through it. What I think is good to keep in mind, though, is that debt is always debt.

45:32 The idea that it doesn’t matter at all how much debt there is - that’s really a crazy idea, because it isn’t possible for interest rates to stay at zero or negative indefinitely. This is actually a sign of sickness. Economies are sick, and in sick economies interest rates fall, and have fallen, below zero. As economies recover and things get put in order, money starts to acquire a price again. At that point every billion borrowed starts to cost something. That’s always good to keep in mind. Then we could move on to this ‘clocking’ discussion. I personally like to use the word ‘clocking,’ because ‘devaluation’ gives the wrong picture. The first clocking lasted a single day, in autumn 1991. Then came the 1992 clocking, which was a permanent one, until we ended up in that ERM mechanism in 1996.

46:37 Almost all European countries ended up clocking either once or twice. Sweden has kept clocking ever since, essentially forever. its krona, for example. But in a way this first clocking was called a devaluation, and it happened because the Sorsa agreement collapsed and, in a way, the foreign currency reserves ran out, and the Bank of Finland threw in the towel. I personally have a poor impression of Kullberg - it seemed like he was both politically incapable and economically incapable. This is of course just my own judgment - they pursued a strong-currency policy and couldn’t even manage to communicate it politically. This first clocking happened, and it brought some benefit. And at the same time, out of what remained of the Sorsa agreement, fairly moderate increases were still secured. Yes, so I have to say, to the labor-market mechanism’s credit, that even though the Sorsa agreement got botched and never got finished,

47:41 right after the devaluation, a couple of weeks later if I remember right, a zero-increase agreement was reached for the labor market, which really did matter a lot for the recovery. You have to remember that the recovery really did start almost immediately. So if you look at how our exports and industrial production developed, the exchange-rate change had an effect right away. But it’s clear that this downturn had a long tail, and especially employment, the domestic-market sector, the banking sector and public finances, their decline continued for a long time after the exchange-rate change had been made. But you had this fact, that apparently, in terms of GDP at least, out of that dip, as much as four-fifths of it actually happens before the devaluation, and the remaining 20 percent only after. Right. In practice, that clocking really was a total game changer - the return to a market-rate price. Yeah. Let’s put it this way - that roughly 12 percent that GDP fell from its peak in the first quarter of 1990,

48:49 down to its lowest level in the first quarter of 1993, well, of that 12 percent, by the end of 1991 10 percentage points of it had already been clawed back. So that’s something like five-sixths of it. Yeah. Then the export currency reserves started coming in, and right away these big Masa-Yards cruise ship orders came in. Those came after the clocking, that is. Many European countries - famously, for instance, Soros broke the pound over exactly the same kind of pricing error. In my view, that fixed-currency policy was a pricing error. When those imbalances got too extreme, then, in a way, things returned through the market mechanism, that is, through clocking, to a more accurate rate. Then in 1992 we returned to a purely market-based mechanism, meaning the markka got a market price. Yeah. And it started strengthening from there, and interest rates kept dropping as the markka found its market pricing.

49:53 People somehow remember the markka itself as bad, but in my view it was that stable, artificially pegged markka that was the problem - it created those market distortions, not the markka itself. Yeah. And it’s really interesting that this stable-markka doctrine - you could say the Bank of Finland was, so to speak, its seal-keeper here on the financial-system side. And then it really did become an article of faith for the Holkeri government. So much so that both Holkeri and Sorsa stressed that only parties who believed the markka had to stay fixed could join the government. That was an article of faith that wasn’t only Finnish - it was the prevailing doctrine across large parts of Europe, which then crumbled in the early ’90s, only to return via the euro to the belief that the convergence needed for currencies to be stable can be achieved by locking everyone into a single currency, which then forces everyone to behave the same way.

51:12 That makes economies similar, or makes them adapt to the same competitive conditions. That turned out to be a completely wrong assessment. If you look at what happened to Greece under the euro, and to Italy, Spain, Portugal under the euro, during the first ten years, interest rates stayed roughly at the same level as elsewhere in Europe. But economic productivity was in a completely different class - much worse. Public spending grew - Greece especially just kept growing its public sector without any restraint at all. All these imbalances there started to grow. And once again we were in that same artificial situation, where it was simply incomprehensible that the interest-rate spread between Germany and Greece was almost zero, even though there was a huge difference in performance. Yeah, well the markets were right about that - there was this shared fear, which then… Well, let’s put it this way - maybe a different solution should have, and could have, been made there.

52:16 Yeah, I agree - I actually wrote some blog posts about it too, hoping that Tsipras would hold his ground. But right at the last moment he caved - once Varoufakis had resigned too, he decided to accept Greece’s third bailout package. For about one week there, it would have been possible to give the drachma its own rate. That’s where it slipped away. Yeah, it slipped away. At the time there was fear the sickness would spread everywhere else too, and that was the biggest reason. But as I said, it may be that, from the perspective of how history gets written afterward, it would have been the better path. Yeah, but this is what we’ve got. So then Nokia did end up staying in Finnish ownership after all. The exchange rate then, in a way, was set to a market price. Interest rates started falling, and then even the state’s finances started to normalize. But all of this, even at the end of 1991, was still just a dream.

53:18 Even though you said that, in a way, the turning point had already happened by then. Is there a sequel coming from you that tells the story of this turn for the better? Yeah, well I am indeed already continuing to write, and there were a lot of big decisions in that period. The decision to support the banks, which was a necessary part of restoring the economy to health. And at the time, the amounts of money used felt absolutely staggering and impossible. But now, looking at what’s been needed today to support the banking system, the investments needed to prop up the financial system, what was spent back then really was small change by comparison. but big, of course, given the conditions at the time, and big decisions too, about what to actually do with the banks. People imagined the banks were saved, but actually not much was left of the ones that had handled things worst. KOP disappeared from the map, the Finnish Workers’ Savings Bank disappeared from the map, and then KOP too went its own way into SYP,

54:23 and out of that a whole new banking structure emerged. Our banking structure really was rebuilt from scratch during that period. Then we got a whole new tax system. You could almost say the entire tax system was completely overhauled in a single year. So that was - was that ‘92? Yeah, actually I was a fan of the avoir fiscal system - that’s what really drove Finnish ownership up in a big way. I thought that was a really good thing. There’s actually an interesting theory about that too - whether it was, for instance, this joint effort by Niskakangas and Vesa Vainio, that later scrapped this system and ended up causing damage to Finland down the line. Right, but the basic idea behind this corporate tax reform was an incredibly simple one, and simple is often very effective. The idea was to put an end to all this tax gimmickry that everyone had been supporting and pushing for.

55:26 Industry too loved every kind of tax arrangement under the sun and pushed as hard as it could to get them written into the tax system. Then it was decided instead to bring the tax rate down as low as possible and to scrap almost all of these vague profit-smoothing mechanisms. What came out of that was a system that, in itself, didn’t actually lighten the tax burden. If you look at the effective tax rate relative to companies’ earnings, for instance, it may well be that taxation actually tightened up a little. But because it became a fair, simple, clear system, it became an enormously effective incentive for companies to build up their own equity and make smart decisions. It worked so well that if I had to pick out the single decision that had the biggest impact on how Finland’s public finances managed to return to balance so incredibly fast in the 1990s.

56:27 You have to remember that we started out with massive borrowing when the recession hit, in the early stage of the recession, which continued into 1992 and even 1993, but then we came back very quickly. And what decisively helped with that was that tax revenues grew so dramatically. Corporate tax revenue, which was around two and a half billion - or two billion or so - in 1992, thanks to the reform had risen to an annual seven billion euros by the year 2000. So in euro terms that’s from two billion up to seven billion, and that was quite a windfall. Yeah, well I hope you’ll go into that more in your later books. Maybe here’s an audience question - I don’t know if this is a bit unfair to Koivisto, but there was a sense that with this banking crisis, Koivisto later held this so-called ‘Koivisto conclave’ in ‘92, at which Koivisto apparently weighed in on some Supreme Court decision.

57:28 Apparently no actual influencing took place, but at least there’s this theory, that people feel Koivisto came a bit too close to trampling on Montesquieu’s separation of powers. I don’t know, but the banking crisis left a lot of people traumatized. Some people have this theory that the authorities were a bit harsh in places, and that gets pinned on Koivisto personally, maybe. I don’t know - do you think that’s fair criticism? Well, I think it refers to that one event held at the Presidential Palace, which was held, if I remember right, in early 1992, maybe in late winter or early spring of ‘92. I really find it hard to believe it had that much of an impact, based on what you can gather from these accounts. The president’s power in the 1990s wasn’t such anymore that - if Kekkonen had held a similar event, then you might think about it a bit differently.

58:29 But Koivisto had chosen a different way of operating. I wouldn’t go so far as to say - well, actually, it would be an exaggeration to claim it had a major effect on legal practice. But the problem was that the line between misconduct and simple foolishness isn’t entirely clear. It’s a bit of a line drawn in water, where exactly the boundary lies between foolishness and misconduct. That had to be worked out afterward, to some extent, based on the actual court cases. Some of them definitely became traumatic experiences, and there were clear mistakes too - cases were brought to court that shouldn’t have been. But on the other hand it also sent everyone a clear message that the financial system and the banking system had to clean up their act and get their house in order, because that late-’80s way of doing things really was pretty reckless.

59:31 I mentioned that there was Peter Fagernäs’s KOP investment-banking unit, which became Merita Corporate Finance. Then it went to London, to Great Swiss, where a Swedish bad bank operated as an agent for the Swedes. Nordbanken bought Merita for a bargain-basement price, which I thought was a terrible shame. That became Nordea, and in the end Nordea is now a Finnish bank anyway. Happy ending. Yeah, we also had contingency plans for KOP, but then KOP’s owners, the owners’ representatives, took the view that they wouldn’t deal with the state, and would handle things themselves instead, and that may well have been the wrong choice. KOP actually made quite a few wrong choices in the early ’90s. Yeah, that’s right. We sold off those Nokia shares. Those, plus this exchange-rate option too. But Skopbank was probably still a notch worse. Well, it was worse - Skopbank’s story was truly shocking.

60:31 And there was also this element there, where I’d say you can’t just chalk it up to foolishness anymore. Yeah, but we got through this too, and ‘91 ended up as a kind of dip after all, and then, in a way, came these big upturns, and it was tough going. I really do appreciate that I think you handled it well - I was a young man at the time, but I liked that get-things-done attitude that was there, and I realized myself just how hard it was. Speaking of that get-things-done attitude, one topical thing I’m actually writing about right now is the Hornet decision, which was a big decision made right in the middle of the recession. So the decision was made in May of ‘92. And I’ve given a lot of people gray hairs by asking how long it took from when the Air Force finished its own proposal for the fighter jet choice. How long it took from there until the Defence Forces, the Ministry of Defence, the Defence Council, the government’s finance committee, and finally the Council of State had made the decision.

61:44 And the value of the decision, in year-2000 money, was 3.16 billion, once you calculate what that big decision ended up costing. That’s how long the whole thing took. Yeah, well I haven’t really followed that, even though apparently that’s coming up again now too - having to buy new fighter jets again. Yeah, that’s actually why I did this reckoning. It actually took six days, but that included May Day, which fell on a Friday, and then Saturday and Sunday, during which nothing happened. Actually you could say that when the Air Force commander came from Jyväskylä to Helsinki on Monday morning, the 4th of May 1992, then by Wednesday evening - just over two days later, in three days - it had been turned into a decision of the Council of State. Yeah, but we got the Hornets, and in a way, NATO-compatible equipment. This is interesting, by the way - the same kinds of themes are back now, 30 years later - we’re ordering fighter jets again, and we’re back to a 10 percent stimulus package again.

62:52 Yeah, those have to be bought with borrowed money too. Yeah, maybe we’ll do that tax reform too. Good, thank you. That’s it. My guest has been Esko Aho, and we’ve been talking about the year 1991, the Year of Black Swans. Thank you. Thank you.