1 00:00:00,020 --> 00:00:04,200 Looking back at the numbers now, they really were absolutely terrible. 2 00:00:04,840 --> 00:00:14,100 I get the feeling that some decision-makers simply had no idea how ugly the economic situation was. 3 00:00:14,400 --> 00:00:20,520 I found a list of the results of Finland's 20 largest companies for the year 1991. 4 00:00:21,740 --> 00:00:25,180 And of those 20, four managed to turn a profit. 5 00:00:25,220 --> 00:00:31,980 The other 16 companies racked up losses of over 10 billion markka - that's 15 times as much. 6 00:00:32,700 --> 00:00:38,600 There wasn't even a serious discussion about what would happen if we ended up in a similar situation again, 7 00:00:38,620 --> 00:00:44,560 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. 8 00:00:44,720 --> 00:00:50,360 Until now, when it's been noticed that the euro is a far, far more challenging environment than was imagined. 9 00:00:50,760 --> 00:01:04,780 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. 10 00:01:04,780 --> 00:01:07,000 And we're paying a pretty high price for that now. 11 00:01:07,190 --> 00:01:20,500 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. 12 00:01:20,660 --> 00:01:31,560 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. 13 00:01:31,850 --> 00:01:37,500 And what decisively helped with that was that tax revenues grew so dramatically. 14 00:01:38,579 --> 00:01:50,160 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. 15 00:01:50,340 --> 00:01:56,400 Well then, welcome to the Neuvottelija channel. My guest today is Esko Aho. Welcome. 16 00:01:56,780 --> 00:01:57,220 Thank you. 17 00:01:57,860 --> 00:02:10,479 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. 18 00:02:10,759 --> 00:02:17,500 Yeah, six printings have already gone out, and hopefully at least a few more once the year gets going a bit. 19 00:02:17,760 --> 00:02:20,400 Yeah, we'll put the links up, and you can listen to it as well. 20 00:02:20,940 --> 00:02:25,040 As a bit of a contrast, I'm actually in this stock exchange club's book club, 21 00:02:25,240 --> 00:02:30,460 where we went through your excellent book, and before that we did Barack Obama's first memoir. 22 00:02:30,900 --> 00:02:33,700 The Americans always do official memoirs for their presidents. 23 00:02:34,280 --> 00:02:36,460 And then there's one about Erkki Liikanen's time as commissioner. 24 00:02:37,290 --> 00:02:41,880 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. 25 00:02:42,060 --> 00:02:43,400 Would you say that's accurate? 26 00:02:43,600 --> 00:02:45,000 That's at least what I tried to do. 27 00:02:45,760 --> 00:02:50,340 My intention wasn't to write memoirs or my own interpretation 28 00:02:50,340 --> 00:02:56,680 of events, but to try to create a picture of the era and share a bit of a generational experience. 29 00:02:56,840 --> 00:02:59,980 I think that was also one of the ideas I had 30 00:03:00,000 --> 00:03:01,580 in mind while I was writing the book. 31 00:03:02,040 --> 00:03:07,280 -Yeah, 30 years have passed, and I'm already old enough that I was already an adult 32 00:03:07,280 --> 00:03:10,800 back then, and I was a business school student, and for me it was a good 33 00:03:10,800 --> 00:03:15,720 time. I bought stocks with my student loan, and they rose incredibly, and 34 00:03:15,740 --> 00:03:21,920 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. 35 00:03:23,670 --> 00:03:31,120 I think there's a lot of misremembering around it, and especially those who didn't live through it end up relying on folklore. 36 00:03:31,280 --> 00:03:40,400 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? 37 00:03:40,520 --> 00:03:53,300 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. 38 00:03:53,590 --> 00:04:01,560 It's been said that about half of the economic drop during the recession came from the contraction of trade with the Soviet Union. 39 00:04:02,380 --> 00:04:13,040 And then the second was our own economic crisis, which looked to many like a sudden collapse, 40 00:04:13,090 --> 00:04:17,239 but which actually had fairly long roots, which I've described in the book. 41 00:04:17,420 --> 00:04:24,060 You could say that the seeds of the recession were sown right after the mid-1980s. 42 00:04:24,610 --> 00:04:32,060 And the third - I guess you could call it a black swan too, or at least the makings of one. 43 00:04:32,120 --> 00:04:41,460 was that Nokia, which had been a great success story in the 1980s, came close to being sold because of its financial difficulties 44 00:04:41,830 --> 00:04:46,700 and because of its owners' loss of confidence, to the Swedish company Ericsson. 45 00:04:47,740 --> 00:04:55,560 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. 46 00:04:55,760 --> 00:04:57,680 That one thing then killed the whole deal. 47 00:04:57,960 --> 00:05:02,640 Namely, Ericsson didn't want to take on the radio and television manufacturing business. 48 00:05:02,640 --> 00:05:07,260 And the sellers didn't want to sell Nokia without that going into the package too. 49 00:05:07,420 --> 00:05:13,960 Yeah, let's go through all three, but a quick shout-out to Petteri Fagernäs, my old boss. 50 00:05:13,960 --> 00:05:17,200 Luckily you didn't manage to sell it to Ericsson on KOP's behalf. 51 00:05:17,200 --> 00:05:22,160 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. 52 00:05:22,980 --> 00:05:28,220 And it wasn't very pleasant to accept the fact that the company stayed. 53 00:05:28,920 --> 00:05:33,040 At least for a while, still under KOP's ownership too, though KOP gave it up fairly soon after. 54 00:05:33,300 --> 00:05:39,040 Those who made that decision have probably regretted it many times over, but that's a different story. 55 00:05:39,280 --> 00:05:45,500 Yeah, I interviewed Nalle for my new negotiation book, and he clearly tried to bring this up. 56 00:05:46,220 --> 00:05:49,840 SYP managed to keep its shares, while Pohjola and KOP sold. 57 00:05:50,060 --> 00:05:57,540 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. 58 00:05:57,780 --> 00:06:00,320 But actually Pohjola didn't sell. 59 00:06:00,740 --> 00:06:06,540 That was the funny thing - Pohjola was first teamed up with KOP working on this deal, 60 00:06:06,570 --> 00:06:13,560 but then, at the end of 1991, after the deal with Ericsson had fallen through, 61 00:06:13,880 --> 00:06:17,800 SYP and Pohjola then indeed found each other. 62 00:06:18,420 --> 00:06:24,120 Yrjö Niskanen and Casimir Ehrnrooth struck a deal like this in the end, 63 00:06:24,120 --> 00:06:27,140 that the company would stay in Finnish ownership after all. 64 00:06:27,820 --> 00:06:30,320 One of them became chairman of the board, and the other vice chairman. 65 00:06:30,600 --> 00:06:31,760 Yeah, and the rest is history. 66 00:06:31,770 --> 00:06:36,680 That was really good, and it helped with our recovery 67 00:06:36,860 --> 00:06:41,740 in the national economy's growth in the early 2000s. 68 00:06:43,160 --> 00:06:55,960 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. 69 00:06:56,320 --> 00:07:05,420 In Kairamo's time it was pretty clear that Kairamo was number one and the CEO was number two. 70 00:07:05,430 --> 00:07:15,360 But then when he took his own life, Vuorilehto, who had been the CEO, became the president, and Kalle Isokallio became CEO. 71 00:07:17,920 --> 00:07:25,960 And communication between them wasn't up to much. It's claimed the problems were also on the board's side. 72 00:07:26,040 --> 00:07:41,600 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. 73 00:07:42,190 --> 00:07:44,820 Yeah, and he writes entertaining prose. 74 00:07:44,870 --> 00:07:51,480 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. 75 00:07:51,480 --> 00:07:54,700 Yeah, but he didn't sell it to Ericsson at least, so let's give him that. 76 00:07:55,120 --> 00:08:00,960 Well then we could move on - there was another suicide at KOP too, sort of a dark time. 77 00:08:01,020 --> 00:08:06,820 Now the suicide rate among Finns has actually collapsed, and we're the happiest nation in the world, 78 00:08:06,820 --> 00:08:08,460 but the 1980s were a darker time, in a way. 79 00:08:09,260 --> 00:08:13,780 Interesting, by the way - I just looked this up, because the common claim is always that when the recession hit, 80 00:08:14,010 --> 00:08:16,920 suicides turned sharply upward. 81 00:08:18,020 --> 00:08:22,100 In 1990 suicides hit their peak - right around then, just before, 82 00:08:22,330 --> 00:08:24,840 or actually at the very moment the economic collapse began. 83 00:08:24,920 --> 00:08:27,960 That's when the decline in the number of suicides also began. 84 00:08:28,300 --> 00:08:31,820 Yeah, and actually this is a recurring theme in your book. 85 00:08:33,019 --> 00:08:36,680 That these sins of the past just keep weighing things down, in a way. 86 00:08:36,760 --> 00:08:43,740 And first an election budget was made, and then on top of that an election supplementary budget was passed. 87 00:08:43,740 --> 00:08:47,820 I found it funny - Iiro Viinanen, who was sort of the tough guy in your government, 88 00:08:47,820 --> 00:08:50,360 even he wanted a supplementary budget back in 1990. 89 00:08:51,180 --> 00:08:53,640 So in a way, they were letting off the last bit of steam. 90 00:08:53,660 --> 00:09:00,460 It wasn't actually a supplementary budget - it was additions made to the budget, done in a completely irregular way. 91 00:09:01,140 --> 00:09:13,800 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. 92 00:09:13,800 --> 00:09:21,980 And nobody could bring about any discipline or order, neither the finance minister nor the prime minister. 93 00:09:22,640 --> 00:09:28,380 The prime minister maybe didn't try all that hard, but Holkeri certainly did try, though his own parliamentary group walked right over him. 94 00:09:28,660 --> 00:09:35,460 Yeah, then there's Liikanen, who went off to become commissioner right at the peak, in a way. 95 00:09:37,220 --> 00:09:43,040 There were these incomes-policy settlements made, one of them probably under his name too, which were actually pretty tough. 96 00:09:43,530 --> 00:09:48,620 And those pretty steep increases were then left for your government to pay the price for, in a way. 97 00:09:48,700 --> 00:10:01,900 Actually, right before he left, you could say one of the last things was getting an incomes agreement done, which happened in '90. 98 00:10:03,580 --> 00:10:10,180 I think it was January of '90, if I remember right - it was made under the name of the Kallio agreement. 99 00:10:10,640 --> 00:10:16,540 Once it was finalized, it was called the great celebration of incomes policy. 100 00:10:17,600 --> 00:10:30,880 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. 101 00:10:32,120 --> 00:10:33,380 Yeah, moderate spending. 102 00:10:33,660 --> 00:10:41,660 And of course it was completely the wrong kind of agreement, at completely the wrong time, and the wrong message for everyone. 103 00:10:42,340 --> 00:10:46,140 It was made at exactly the moment the economy hit its peak. 104 00:10:46,380 --> 00:10:53,660 Yeah, and then some other arrows were pulled taut around then too - in 1989 there was this small revaluation. 105 00:10:53,720 --> 00:10:58,860 At the time there was this, I think, pretty crazy group called Friends of the Strong Currency. 106 00:10:58,860 --> 00:11:01,680 And in a way there was still this final climax to come. 107 00:11:01,800 --> 00:11:04,960 This revaluation was done to cap off that early stretch. 108 00:11:05,900 --> 00:11:16,040 And then the capital markets were liberalized in the 1980s, out of which came this boom of Skopbank selling foreign loans into Finland. 109 00:11:16,140 --> 00:11:17,800 So in a way all of this was brewing there. 110 00:11:18,400 --> 00:11:27,780 Yes, you could say there were clear mistakes, but there was also bad luck - things happened to fall at the wrong time. 111 00:11:27,820 --> 00:11:36,800 For example, liberalizing the currency markets, the money markets, was inevitable, but in many respects it also landed at exactly the wrong time. 112 00:11:37,160 --> 00:11:43,640 at a time when other things in the economy were also heading rapidly upward. 113 00:11:44,320 --> 00:11:48,200 The terms of trade improved, which brought billions more into the national economy, 114 00:11:48,570 --> 00:11:52,340 and trade with the Soviet Union was also very profitable, 115 00:11:52,340 --> 00:11:54,560 though it had actually already started declining at that point. 116 00:11:54,660 --> 00:11:58,640 The price of oil dropped, which also helped Finland's economy further. 117 00:11:58,700 --> 00:12:13,480 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. 118 00:12:13,650 --> 00:12:20,840 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. 119 00:12:20,880 --> 00:12:21,480 Third-term. 120 00:12:21,760 --> 00:12:28,100 Third-term, okay. And you were just a touch older than Sanna Marin, but back then you were Finland's youngest prime minister. 121 00:12:28,100 --> 00:12:37,980 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. 122 00:12:38,120 --> 00:12:45,340 Right, that paved the way for becoming prime minister. So in the summer of 1990 I was elected Centre Party chairman. 123 00:12:45,960 --> 00:12:55,980 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. 124 00:12:57,260 --> 00:13:08,860 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, 125 00:13:09,080 --> 00:13:16,400 that had built up on the political field between him and President Koivisto, and a bit with Sorsa too. 126 00:13:17,240 --> 00:13:22,280 So that was his assumption, and it's simply an impossible idea. 127 00:13:22,350 --> 00:13:27,800 In today's conditions you can't have a two-headed party leadership - or if you do, it usually doesn't work. 128 00:13:28,220 --> 00:13:34,920 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. 129 00:13:35,240 --> 00:13:39,200 A blood-curdling election win, I think that's what it was called back then. 130 00:13:39,600 --> 00:13:43,200 That's what it was called, and there was solid logic behind it. 131 00:13:43,220 --> 00:13:46,200 It was Seppo Kääriäinen's logic. 132 00:13:46,520 --> 00:13:55,940 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. 133 00:13:56,580 --> 00:13:59,940 Because the will to continue in that coalition was very strong right down to the wire. 134 00:14:00,000 --> 00:14:18,040 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. 135 00:14:18,550 --> 00:14:24,400 But then when the results came up on the screen, everyone knew within the first seconds that it was over. 136 00:14:24,460 --> 00:14:34,760 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. 137 00:14:35,000 --> 00:14:43,000 He recommended, for instance, making these recordings, and kept very meticulous records of everything, and that's where you got the material for this. 138 00:14:43,630 --> 00:14:49,580 But in between, other combinations were considered too, there was the Social Democrats, and then in the end they settled on the Coalition Party. 139 00:14:49,660 --> 00:14:56,840 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? 140 00:14:56,880 --> 00:15:04,240 Yeah, Suominen was still the Coalition Party's chairman up until the 1991 election, and a bit after it too. 141 00:15:05,090 --> 00:15:13,500 And he was, in my view, he had many good qualities. 142 00:15:14,770 --> 00:15:25,380 And I also assumed he'd be the finance minister I'd be sharing government responsibility with. 143 00:15:25,920 --> 00:15:28,320 And it was quite a surprise when he stepped aside. 144 00:15:28,940 --> 00:15:39,140 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. 145 00:15:39,980 --> 00:15:49,720 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. 146 00:15:50,440 --> 00:15:53,980 So it was probably a perfectly valid reason he gave. 147 00:15:54,040 --> 00:16:11,640 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. 148 00:16:11,740 --> 00:16:31,140 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. 149 00:16:31,240 --> 00:16:36,180 That's why I was very skeptical when his name came up. 150 00:16:36,960 --> 00:16:44,960 But pretty soon it turned out Viinanen was actually tough as nails, and things started going smoothly with him. 151 00:16:46,080 --> 00:16:48,760 You could say quite frankly, unexpectedly well. 152 00:16:49,810 --> 00:16:55,780 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. 153 00:16:55,840 --> 00:17:01,760 so the division of labor came about pretty naturally, but a division of labor where the goal was the same. 154 00:17:02,240 --> 00:17:10,920 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, 155 00:17:11,040 --> 00:17:17,800 and this started raining down especially in the summer, when AKT went on strike, 156 00:17:17,900 --> 00:17:24,579 and exports started dropping and the currency reserves started walking away, and then this strong tension built up, in a way, 157 00:17:24,819 --> 00:17:32,340 with this stronghold of the strong markka camp, which wanted, for dogmatic reasons, to keep the exchange rate too strong. 158 00:17:32,900 --> 00:17:40,860 And at the same time, in a way, there were these export-industry employers and employees, 159 00:17:40,860 --> 00:17:46,020 who wanted, openly or at least behind the scenes, an exchange-rate correction. 160 00:17:46,620 --> 00:17:54,920 At the same time the public was somehow seeing these lists of cuts and so on coming. 161 00:17:56,000 --> 00:18:06,480 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. 162 00:18:06,740 --> 00:18:12,000 How persistent was that situation, and how hard was it to manage? 163 00:18:12,060 --> 00:18:24,680 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. 164 00:18:25,840 --> 00:18:44,820 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. 165 00:18:44,900 --> 00:18:53,480 And among the banks, KOP - and Skopbank especially, of course - but KOP, which was still the dominant player compared to Skopbank, 166 00:18:53,510 --> 00:18:59,960 its interests clearly lay in keeping the exchange rate fixed and unchanged. 167 00:19:00,780 --> 00:19:07,160 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. 168 00:19:07,250 --> 00:19:11,640 And looking back at the numbers now, they really were absolutely terrible. 169 00:19:11,740 --> 00:19:21,580 I get the feeling that some decision-makers simply had no idea how ugly the economic situation was. 170 00:19:22,440 --> 00:19:34,800 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. 171 00:19:35,240 --> 00:19:45,940 And of those 20, four managed to turn a profit - namely Neste, Kesko, Kone and Valio. 172 00:19:46,350 --> 00:19:56,860 And their combined profit in 1991 was a bit over 700 million markka, so something like just over 100 million euros. 173 00:19:57,000 --> 00:20:07,580 Whereas the other 16 companies racked up losses of over 10 billion markka - so 15 times as much. 174 00:20:11,880 --> 00:20:13,980 Those numbers were just shocking. 175 00:20:14,020 --> 00:20:22,760 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. 176 00:20:22,900 --> 00:20:29,560 I count it as a blessing that our companies are doing well now and are in reasonably good shape, even though times are challenging. 177 00:20:29,880 --> 00:20:33,080 Yeah, so competitiveness had been destroyed. 178 00:20:33,180 --> 00:20:42,780 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. 179 00:20:43,600 --> 00:20:50,620 Goods that could be exported to the Soviet Union at a good margin simply had no other market at all. 180 00:20:50,640 --> 00:20:56,040 Whether or not they were competitive, those products just didn't have a market. 181 00:20:56,080 --> 00:21:06,180 Yeah, Nalle Wahlroos discusses this in his latest book, that these domestic production chains were, in a way, too integrated. 182 00:21:06,180 --> 00:21:13,440 So there was, for instance, no subcontracting from abroad, and basically everything was made domestically, on the terms of the eastern trade. 183 00:21:13,440 --> 00:21:20,060 And then once that margin and those sales were pulled away, what was left behind in Finland was a pretty brutal cost structure. 184 00:21:20,120 --> 00:21:31,300 But that's a bit like a lot of other things - it's hard to start cannibalizing a business that's working well. 185 00:21:31,540 --> 00:21:39,180 You have to remember that the level of domestic content was actually set by regulation. 186 00:21:39,410 --> 00:21:44,340 So goods exported to the Soviet Union had to have a domestic content rate of 80 percent, 187 00:21:44,900 --> 00:21:51,120 so that trade wouldn't be conducted with foreign products that were simply being passed through to the Soviet Union. 188 00:21:52,170 --> 00:21:55,300 That partly led to the phenomenon that Wahlroos has talked about. 189 00:21:55,420 --> 00:22:06,140 And then the other rule was that for big companies, a third of turnover came from Soviet trade, but two-thirds of the margin. 190 00:22:06,580 --> 00:22:08,780 So it was extremely profitable trade. 191 00:22:09,320 --> 00:22:16,920 And then when it disappeared from under them, it hit extremely hard - not just turnover, but profitability even more so. 192 00:22:17,040 --> 00:22:40,620 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. 193 00:22:40,700 --> 00:23:03,060 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. 194 00:23:03,840 --> 00:23:30,220 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? 195 00:23:30,280 --> 00:23:40,500 There was no way at all to shift quickly from Soviet trade to trade with Russia. 196 00:23:40,540 --> 00:23:46,600 Russia had, after all, inherited the whole bankruptcy that the Soviet Union had run into. 197 00:23:47,059 --> 00:23:52,980 Its economy did slowly start recovering from that, but very slowly. 198 00:23:53,060 --> 00:23:56,140 Our trade did start up again already in 1992 and 1993. 199 00:23:57,260 --> 00:24:02,180 It grew a little already in 1992, but then 1993 was a clear growth year. 200 00:24:02,360 --> 00:24:09,540 There was definitely some recovery, but that kind of sudden swing back the other way was impossible to imagine. 201 00:24:09,960 --> 00:24:15,039 Plus, Russia also shifted toward market-based solutions, which meant that kind of idea, 202 00:24:15,060 --> 00:24:27,860 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. 203 00:24:28,400 --> 00:24:33,960 In that sense, Finland's position in relation to the East had also changed. 204 00:24:34,300 --> 00:24:44,840 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. 205 00:24:44,940 --> 00:24:50,560 on dissolving the YYA treaty, but then it ended up becoming Russia's first equivalent treaty instead 206 00:24:50,720 --> 00:24:53,180 apparently right around then, as it went right over Christmas. 207 00:24:53,510 --> 00:25:01,520 Yeah, so in a short span of time a massive change was made to Finland's foreign and security policy. 208 00:25:01,520 --> 00:25:07,380 Why not in the fundamentals of economic policy too, because we did have this, 209 00:25:07,380 --> 00:25:12,459 in a way there was this dismantling of the postwar-era system 210 00:25:12,480 --> 00:25:17,680 and turning it in a different direction. It happened incredibly fast, within a few weeks. 211 00:25:17,680 --> 00:25:22,660 And the trigger for that really did come from the coup attempt in the Soviet Union. 212 00:25:22,660 --> 00:25:30,840 That was sort of the final seal that drove the move to break away from that old position. 213 00:25:33,059 --> 00:25:36,500 We started preparing to apply for EU membership. 214 00:25:36,540 --> 00:25:41,920 And you could say Finland, in a way, repositioned itself within Europe. 215 00:25:42,340 --> 00:25:46,600 We also got new neighbors. Let's spell it out - Russia became a new neighbor. 216 00:25:47,060 --> 00:25:49,080 The Soviet Union and Russia were not the same thing. 217 00:25:49,700 --> 00:25:57,300 And then, second, the Baltic states became independent nearby, and Estonia became our independent neighbor. 218 00:25:57,440 --> 00:26:03,720 Yeah, the impression I got there was that Koivisto apparently used the KGB as a source. 219 00:26:03,900 --> 00:26:08,420 The KGB probably felt more loyalty to the Soviet Union than to Russia. 220 00:26:09,360 --> 00:26:23,340 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. 221 00:26:23,420 --> 00:26:25,420 Koivisto wasn't alone in that. 222 00:26:25,800 --> 00:26:30,220 You have to remember that the Soviet Union was one of the two world powers. 223 00:26:30,700 --> 00:26:32,720 It had nuclear weapons. 224 00:26:33,110 --> 00:26:41,780 It was a strong state - militarily strong, at any rate, because of its nuclear weapons, especially its nuclear arsenal. 225 00:26:41,880 --> 00:27:02,140 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. 226 00:27:02,240 --> 00:27:08,340 And the fear that if things slipped out of Gorbachev's control and chaos broke out, that fear was very great. 227 00:27:08,640 --> 00:27:17,400 And confidence in Yeltsin wasn't very high, because his persona had stirred up quite a lot of confusion. 228 00:27:17,840 --> 00:27:25,900 And people maybe didn't really grasp just how strong he actually was in the eyes of ordinary citizens in Russia. 229 00:27:25,960 --> 00:27:34,900 His strength really only became visible when he climbed up on that tank to give a speech against the coup attempt. 230 00:27:35,480 --> 00:27:42,760 That's when he became an undisputed leader figure, and that's when he was also taken note of all over the world. 231 00:27:42,920 --> 00:28:01,120 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. 232 00:28:01,240 --> 00:28:04,320 You could see right there that power had changed hands. 233 00:28:05,259 --> 00:28:13,340 Heikki Talvitie, who was our ambassador in Moscow, put it well - that this week Russia swallowed the Soviet Union. 234 00:28:13,460 --> 00:28:15,040 And that's really what it was. 235 00:28:15,540 --> 00:28:22,160 Koivisto certainly realized and understood that by the end of that week. 236 00:28:22,360 --> 00:28:25,360 Then things also started moving faster in Finnish politics. 237 00:28:25,780 --> 00:28:35,660 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. 238 00:28:35,930 --> 00:28:47,420 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. 239 00:28:48,020 --> 00:28:51,420 He made sure that I was kept aware of everything. 240 00:28:51,420 --> 00:29:09,280 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. 241 00:29:09,900 --> 00:29:13,500 Koivisto followed that same principle too. 242 00:29:13,560 --> 00:29:25,380 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. 243 00:29:25,870 --> 00:29:35,600 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. 244 00:29:35,930 --> 00:29:40,380 But he was, as I said, a lot more Kekkonen-like than many people imagined. 245 00:29:40,480 --> 00:29:45,100 Yeah, apparently there was something about a columnist, and using the machinery of the state to hunt him down, that kind of thing. 246 00:29:45,100 --> 00:29:54,360 Yes, so much so that the same touchy sensitivity about his own position, which was typical of Kekkonen too, was also there in Koivisto. 247 00:29:54,440 --> 00:30:11,580 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, 248 00:30:11,660 --> 00:30:24,380 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. 249 00:30:25,040 --> 00:30:29,380 Both of them had a pretty similarly direct way of operating. 250 00:30:29,920 --> 00:30:39,980 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, 251 00:30:40,620 --> 00:30:55,320 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. 252 00:30:55,520 --> 00:31:04,360 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. 253 00:31:06,540 --> 00:31:11,740 Yeah, and then I'd say, you could talk for a long time about this Finlandization. 254 00:31:11,750 --> 00:31:19,080 I entered national-level political life in Finland already in the early 1970s. 255 00:31:19,150 --> 00:31:23,800 And of course there were a lot of aspects that were unpleasant, 256 00:31:23,940 --> 00:31:31,980 where things probably went too far in taking the Soviet Union's wishes into account, 257 00:31:32,170 --> 00:31:33,060 or some people went too far, at least. 258 00:31:33,640 --> 00:31:39,140 But then, on the other hand, there was also constant tough back-and-forth with the Soviet Union and with Soviet officials. 259 00:31:39,280 --> 00:31:46,140 And on certain matters, people held pretty firmly to what they considered important for themselves. 260 00:31:46,440 --> 00:31:58,280 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. 261 00:31:58,420 --> 00:32:09,700 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. 262 00:32:10,040 --> 00:32:19,160 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, 263 00:32:19,160 --> 00:32:27,760 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, 264 00:32:28,060 --> 00:32:31,260 even though it too has been remembered somewhat as this kowtowing kind of agreement. 265 00:32:31,600 --> 00:32:37,360 Plus, for example, in that discussion in Tehran, it was actually Churchill himself who said, 266 00:32:37,360 --> 00:32:45,040 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. 267 00:32:46,500 --> 00:32:48,860 It has interests that have to be taken into account. 268 00:32:50,179 --> 00:32:55,940 And then when the war ended, we weren't given any other guidance than, 269 00:32:56,200 --> 00:32:57,900 try to get along with those Russians. 270 00:32:58,220 --> 00:33:04,900 Yeah. Well, that turned into - Sweden slipped into the EU, and then we went and applied and followed along. 271 00:33:05,380 --> 00:33:11,220 They didn't slip in - they decided to apply for membership a bit before we did. 272 00:33:11,220 --> 00:33:21,300 But the membership negotiations were actually held at the same time, and in fact the decisions on membership happened largely in parallel, 273 00:33:22,500 --> 00:33:27,080 even though each country of course made its decision from its own starting point. 274 00:33:27,320 --> 00:33:30,800 Yeah. Well then we could move on to this domestic anguish, 275 00:33:30,820 --> 00:33:35,300 and that's where the AKT strike came in, which was clearly agonizing, 276 00:33:35,320 --> 00:33:38,280 and the timing couldn't have been worse. 277 00:33:39,020 --> 00:33:45,720 Then after that, they looked for a kind of internal devaluation solution, 278 00:33:45,740 --> 00:33:50,280 and what emerged from that was the Sorsa agreement, and it actually got surprisingly far along, 279 00:33:50,760 --> 00:33:56,700 Could you give us a taste of how close we came to that era's version of the 'kiky' competitiveness pact? 280 00:33:57,620 --> 00:34:11,600 Yeah, that AKT strike was a good example of just how poorly our decision-making grasped how deep a hole we were in. 281 00:34:11,700 --> 00:34:18,580 and a month-long strike at the same time the national economy is in complete free fall, 282 00:34:18,580 --> 00:34:24,300 that was of course a completely irresponsible act, but nothing could be done about it. 283 00:34:24,300 --> 00:34:32,399 Even the labor market leaders on the employee side tried to get some kind of resolution, 284 00:34:32,399 --> 00:34:38,620 but it lasted, if I remember right, about four weeks, and it definitely made an already bad crisis worse. 285 00:34:39,280 --> 00:34:53,760 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. 286 00:34:54,100 --> 00:35:12,200 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. 287 00:35:12,300 --> 00:35:18,278 And that would have been the moment to do a devaluation and correct the rate. 288 00:35:19,080 --> 00:35:27,320 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, 289 00:35:27,960 --> 00:35:36,180 because it was easy to say, well what good would that even do, when a strike is already being used to grab extra benefits. 290 00:35:36,800 --> 00:35:40,560 And in that sense the strike was unlucky in many ways. 291 00:35:40,640 --> 00:35:45,660 Well, what followed from that was doing the ECU peg without any change to the exchange rate. 292 00:35:46,500 --> 00:35:49,160 I was pushing for that too, but I lost that fight. 293 00:35:49,670 --> 00:35:58,600 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, 294 00:35:58,630 --> 00:36:02,480 which meant the cost level had to be brought down by other means. 295 00:36:03,030 --> 00:36:10,140 And that's how a package came together, which ended up being finally sealed by bank governor Kalevi Sorsa. 296 00:36:10,320 --> 00:36:30,780 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. 297 00:36:32,320 --> 00:36:38,660 When the paper union and the metal union wouldn't get on board, the other union leaders backed off too. 298 00:36:39,340 --> 00:36:50,660 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. 299 00:36:51,980 --> 00:36:55,560 It was inevitable by then, nothing more could be done about it. 300 00:36:55,760 --> 00:37:01,340 Defending the markka had become a completely hopeless task, and so a devaluation was carried out. 301 00:37:01,480 --> 00:37:15,720 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. 302 00:37:15,800 --> 00:37:27,800 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. 303 00:37:27,880 --> 00:37:54,180 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. 304 00:37:54,320 --> 00:38:06,080 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, 305 00:38:06,400 --> 00:38:11,340 what followed from that was that the burden ended up being distributed extremely unfairly. 306 00:38:11,980 --> 00:38:16,000 And that really was a very bad outcome, especially for the public sector. 307 00:38:16,160 --> 00:38:24,200 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. 308 00:38:24,260 --> 00:38:28,660 so that kind of culture of internal agreement just never developed, in a way. 309 00:38:29,440 --> 00:38:35,140 Right, the breakthrough that would have been needed there, understanding, so to speak, 310 00:38:35,140 --> 00:38:44,400 that you have to be able to adapt to rapid market changes through various arrangements concerning employment too, 311 00:38:44,650 --> 00:38:46,400 that just never got done. 312 00:38:47,260 --> 00:39:11,840 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. 313 00:39:12,400 --> 00:39:19,060 What would we do then, with a fixed exchange rate completely locked in place, and no possibility of devaluing anymore. 314 00:39:19,660 --> 00:39:22,280 And that discussion simply couldn't be had. 315 00:39:22,360 --> 00:39:29,560 We had that kind of political climate back then, where there was no room at all to consider alternatives. 316 00:39:30,000 --> 00:39:35,460 Buffers of a sort were created, but they were more just window dressing. 317 00:39:35,640 --> 00:39:42,800 No real means of adjustment were sought or looked for, or even considered necessary. 318 00:39:42,860 --> 00:39:50,780 It was imagined that we were now in a new union that guaranteed everything would stay stable and predictable. 319 00:39:51,740 --> 00:39:59,360 That story went over well, until now, when it's been noticed that the euro is actually a far more challenging environment than imagined. 320 00:39:59,520 --> 00:40:13,860 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. 321 00:40:13,880 --> 00:40:16,180 And we're paying a pretty high price for that now. 322 00:40:16,260 --> 00:40:31,740 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. 323 00:40:31,800 --> 00:40:35,480 So the paper industry employers pulled out of it entirely. 324 00:40:35,660 --> 00:40:38,980 We're heading into unknown territory now - free bargaining. 325 00:40:39,530 --> 00:40:43,320 And then over in the technology industry, they decided to split into two associations. 326 00:40:43,320 --> 00:40:49,060 So one branch that still uses collective agreements, and then, in a way, one area for the free labor market. 327 00:40:49,180 --> 00:40:55,220 It somehow feels like in these 30 years, this tripartite system hasn't really achieved much of anything. 328 00:40:56,000 --> 00:41:08,320 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. 329 00:41:08,760 --> 00:41:13,620 The best example of that is something I'm actually going to write about in my next book too. 330 00:41:14,100 --> 00:41:24,000 I found - I saw it on paper while reading - I found a speech Kalevi Sorsa gave in the spring of 1992, 331 00:41:24,460 --> 00:41:31,640 in which he criticized the government's base as too narrow, saying the coalition should be broadened. 332 00:41:32,010 --> 00:41:37,820 It's pretty interesting that a member of the central bank's board is arranging the country's government, 333 00:41:37,830 --> 00:41:40,220 but that was what was called the custom of the land back then. 334 00:41:40,560 --> 00:41:41,920 The Social Democrats would probably have suited him fine. 335 00:41:42,460 --> 00:41:45,760 He wanted the SDP in government, but he said even that wasn't enough. 336 00:41:46,260 --> 00:41:48,120 The labor market organizations should be in government too. 337 00:41:49,060 --> 00:41:52,340 That describes well what kind of mindset there was. 338 00:41:52,640 --> 00:42:00,140 The thinking was that if you just sit down at a big table and reach agreement, then all agreements will turn out well. 339 00:42:01,080 --> 00:42:06,160 We'd already had a brilliant example of that not working, back at the time of the Kallio agreement, among others. 340 00:42:06,560 --> 00:42:12,200 That Kallio agreement really belonged to a completely different world, when you think about what should actually have been decided. 341 00:42:12,440 --> 00:42:19,720 But that faith in consensus, that belief that reaching agreement is a value in itself, was incredibly strong. 342 00:42:20,340 --> 00:42:30,800 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. 343 00:42:31,100 --> 00:42:37,740 Yeah, and maybe a couple of facts I dug up here, about what's remembered from the '90s. 344 00:42:37,900 --> 00:42:41,740 Of course interest rates were high, but they were high everywhere. 345 00:42:41,860 --> 00:42:48,760 In Finland the long-term rate was 12 percent, but Sweden had exactly the same rate. 346 00:42:49,560 --> 00:42:52,280 And these euro-area countries too had rates above 10 percent. 347 00:42:52,360 --> 00:42:59,820 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. 348 00:43:00,040 --> 00:43:07,040 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. 349 00:43:07,300 --> 00:43:13,720 This is apparently one of the biggest problems for today's decision-makers - understanding what kind of world it was 30 years ago. 350 00:43:14,140 --> 00:43:25,980 First of all, money wasn't available to just anyone - you had to go humbly and borrow it, ask for it. 351 00:43:26,160 --> 00:43:32,260 I myself made trips abroad to help secure our access to credit. 352 00:43:32,540 --> 00:43:38,060 And then, the lender had a genuine, perfectly relevant question. 353 00:43:38,760 --> 00:43:41,040 How do you intend to pay your loan back? 354 00:43:41,540 --> 00:43:46,000 And the repayment periods weren't 30 years out - they were a few years out. 355 00:43:46,800 --> 00:43:51,080 And in fact, the state was the only one in Finland that could get long-term foreign credit. 356 00:43:51,210 --> 00:43:58,840 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. 357 00:43:58,990 --> 00:44:08,080 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, 358 00:44:08,240 --> 00:44:11,880 then the whole boat would have come loose from its moorings entirely. 359 00:44:12,480 --> 00:44:16,040 Yeah, we got some questions here on the Neuvottelija channel, 360 00:44:16,040 --> 00:44:20,320 and Kari Suojanen asked whether you think the current government could, 361 00:44:21,640 --> 00:44:24,320 manage to take a clear 10 percent in a single year, 362 00:44:24,320 --> 00:44:26,340 the way it needs to get to budget balance, 363 00:44:26,690 --> 00:44:28,280 or the other way around, through some means, 364 00:44:28,440 --> 00:44:33,060 so Kari Viitala just went ahead and asked, 365 00:44:33,400 --> 00:44:39,920 whether today's decision-makers, with today's attitudes, would have made it through the recession of the '90s? 366 00:44:41,480 --> 00:44:44,280 Today's attitudes are based on such a different world, 367 00:44:44,340 --> 00:44:48,940 that this comparison is unfair in both directions. 368 00:44:48,940 --> 00:44:54,060 You shouldn't go around advising what should have been done in the early '90s without knowing the conditions. 369 00:44:54,300 --> 00:44:57,878 And of course you could just as well say that the mechanisms of the early '90s themselves 370 00:44:57,900 --> 00:45:04,080 aren't relevant today, because the world has changed radically. 371 00:45:05,520 --> 00:45:13,920 For example, the fact that interest rates are this low means states have more room to maneuver. 372 00:45:15,280 --> 00:45:24,498 On top of that, we're in the middle of this big global crisis, where all states are using debt significantly 373 00:45:24,520 --> 00:45:31,840 as leverage to get through it. What I think is good to keep in mind, though, is that debt is always debt. 374 00:45:32,720 --> 00:45:40,600 The idea that it doesn't matter at all how much debt there is - that's really a crazy idea, because it isn't 375 00:45:41,300 --> 00:45:50,340 possible for interest rates to stay at zero or negative indefinitely. This is actually a sign of sickness. 376 00:45:51,320 --> 00:45:58,940 Economies are sick, and in sick economies interest rates fall, and have fallen, below zero. 377 00:45:59,360 --> 00:46:06,800 As economies recover and things get put in order, money starts to acquire a price again. 378 00:46:07,220 --> 00:46:12,620 At that point every billion borrowed starts to cost something. That's always good to keep in mind. 379 00:46:12,980 --> 00:46:16,460 Then we could move on to this 'clocking' discussion. 380 00:46:16,600 --> 00:46:22,660 I personally like to use the word 'clocking,' because 'devaluation' gives the wrong picture. 381 00:46:23,800 --> 00:46:27,880 The first clocking lasted a single day, in autumn 1991. 382 00:46:28,060 --> 00:46:34,700 Then came the 1992 clocking, which was a permanent one, until we ended up in that ERM mechanism in 1996. 383 00:46:37,540 --> 00:46:43,100 Almost all European countries ended up clocking either once or twice. 384 00:46:43,340 --> 00:46:45,900 Sweden has kept clocking ever since, essentially forever. 385 00:46:46,480 --> 00:47:01,780 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. 386 00:47:01,840 --> 00:47:10,220 I personally have a poor impression of Kullberg - it seemed like he was both politically incapable and economically incapable. 387 00:47:10,300 --> 00:47:20,180 This is of course just my own judgment - they pursued a strong-currency policy and couldn't even manage to communicate it politically. 388 00:47:21,060 --> 00:47:26,340 This first clocking happened, and it brought some benefit. 389 00:47:26,500 --> 00:47:31,520 And at the same time, out of what remained of the Sorsa agreement, fairly moderate increases were still secured. 390 00:47:31,540 --> 00:47:40,820 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, 391 00:47:41,020 --> 00:47:49,940 right after the devaluation, a couple of weeks later if I remember right, a zero-increase agreement was reached for the labor market, 392 00:47:50,660 --> 00:47:53,700 which really did matter a lot for the recovery. 393 00:47:54,200 --> 00:47:57,260 You have to remember that the recovery really did start almost immediately. 394 00:47:57,700 --> 00:48:05,380 So if you look at how our exports and industrial production developed, the exchange-rate change had an effect right away. 395 00:48:05,890 --> 00:48:16,500 But it's clear that this downturn had a long tail, and especially employment, the domestic-market sector, the banking sector and public finances, 396 00:48:16,780 --> 00:48:22,020 their decline continued for a long time after the exchange-rate change had been made. 397 00:48:22,280 --> 00:48:27,440 But you had this fact, that apparently, in terms of GDP at least, out of that dip, 398 00:48:27,490 --> 00:48:33,180 as much as four-fifths of it actually happens before the devaluation, and the remaining 20 percent only after. 399 00:48:33,220 --> 00:48:33,400 Right. 400 00:48:34,080 --> 00:48:38,660 In practice, that clocking really was a total game changer - the return to a market-rate price. 401 00:48:39,099 --> 00:48:48,400 Yeah. Let's put it this way - that roughly 12 percent that GDP fell from its peak in the first quarter of 1990, 402 00:48:49,260 --> 00:48:53,080 down to its lowest level in the first quarter of 1993, 403 00:48:53,260 --> 00:48:58,600 well, of that 12 percent, by the end of 1991 404 00:48:59,660 --> 00:49:02,980 10 percentage points of it had already been clawed back. 405 00:49:02,980 --> 00:49:07,480 So that's something like five-sixths of it. 406 00:49:07,720 --> 00:49:13,060 Yeah. Then the export currency reserves started coming in, 407 00:49:13,060 --> 00:49:16,900 and right away these big Masa-Yards cruise ship orders came in. 408 00:49:17,240 --> 00:49:19,760 Those came after the clocking, that is. 409 00:49:19,800 --> 00:49:26,980 Many European countries - famously, for instance, Soros broke the pound over exactly the same kind of pricing error. 410 00:49:27,400 --> 00:49:30,540 In my view, that fixed-currency policy was a pricing error. 411 00:49:30,760 --> 00:49:35,940 When those imbalances got too extreme, then, in a way, things returned through the market mechanism, 412 00:49:35,940 --> 00:49:37,820 that is, through clocking, to a more accurate rate. 413 00:49:38,359 --> 00:49:46,580 Then in 1992 we returned to a purely market-based mechanism, meaning the markka got a market price. 414 00:49:46,640 --> 00:49:53,380 Yeah. And it started strengthening from there, and interest rates kept dropping as the markka found its market pricing. 415 00:49:53,520 --> 00:50:01,860 People somehow remember the markka itself as bad, but in my view it was that stable, 416 00:50:02,939 --> 00:50:08,280 artificially pegged markka that was the problem - it created those market distortions, not the markka itself. 417 00:50:08,560 --> 00:50:26,260 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. 418 00:50:26,340 --> 00:50:32,500 And then it really did become an article of faith for the Holkeri government. 419 00:50:32,860 --> 00:50:44,100 So much so that both Holkeri and Sorsa stressed that only parties who believed the markka had to stay fixed could join the government. 420 00:50:44,160 --> 00:51:12,780 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. 421 00:51:12,940 --> 00:51:21,220 That makes economies similar, or makes them adapt to the same competitive conditions. 422 00:51:21,660 --> 00:51:24,700 That turned out to be a completely wrong assessment. 423 00:51:24,900 --> 00:51:33,260 If you look at what happened to Greece under the euro, and to Italy, Spain, Portugal under the euro, during the first ten years, 424 00:51:33,570 --> 00:51:38,040 interest rates stayed roughly at the same level as elsewhere in Europe. 425 00:51:38,240 --> 00:51:53,220 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. 426 00:51:53,940 --> 00:52:06,660 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. 427 00:52:06,740 --> 00:52:11,800 Yeah, well the markets were right about that - there was this shared fear, which then... 428 00:52:12,010 --> 00:52:16,160 Well, let's put it this way - maybe a different solution should have, and could have, been made there. 429 00:52:16,480 --> 00:52:24,840 Yeah, I agree - I actually wrote some blog posts about it too, hoping that Tsipras would hold his ground. 430 00:52:24,950 --> 00:52:32,840 But right at the last moment he caved - once Varoufakis had resigned too, he decided to accept Greece's third bailout package. 431 00:52:32,920 --> 00:52:38,160 For about one week there, it would have been possible to give the drachma its own rate. 432 00:52:38,200 --> 00:52:39,340 That's where it slipped away. 433 00:52:40,080 --> 00:52:40,640 Yeah, it slipped away. 434 00:52:42,100 --> 00:52:47,060 At the time there was fear the sickness would spread everywhere else too, and that was the biggest reason. 435 00:52:47,680 --> 00:52:56,060 But as I said, it may be that, from the perspective of how history gets written afterward, it would have been the better path. 436 00:52:56,640 --> 00:52:59,140 Yeah, but this is what we've got. 437 00:52:59,680 --> 00:53:04,660 So then Nokia did end up staying in Finnish ownership after all. 438 00:53:04,960 --> 00:53:07,600 The exchange rate then, in a way, was set to a market price. 439 00:53:07,700 --> 00:53:13,560 Interest rates started falling, and then even the state's finances started to normalize. 440 00:53:13,560 --> 00:53:18,200 But all of this, even at the end of 1991, was still just a dream. 441 00:53:18,360 --> 00:53:22,020 Even though you said that, in a way, the turning point had already happened by then. 442 00:53:22,619 --> 00:53:27,300 Is there a sequel coming from you that tells the story of this turn for the better? 443 00:53:27,660 --> 00:53:32,480 Yeah, well I am indeed already continuing to write, and there were a lot of big decisions in that period. 444 00:53:35,079 --> 00:53:39,460 The decision to support the banks, which was a necessary part of restoring the economy to health. 445 00:53:40,250 --> 00:53:45,340 And at the time, the amounts of money used felt absolutely staggering and impossible. 446 00:53:45,350 --> 00:53:48,680 But now, looking at what's been needed today to support the banking system, 447 00:53:48,880 --> 00:53:54,660 the investments needed to prop up the financial system, what was spent back then really was small change by comparison. 448 00:53:54,780 --> 00:54:01,900 but big, of course, given the conditions at the time, and big decisions too, about what to actually do with the banks. 449 00:54:02,060 --> 00:54:13,620 People imagined the banks were saved, but actually not much was left of the ones that had handled things worst. 450 00:54:14,000 --> 00:54:23,980 KOP disappeared from the map, the Finnish Workers' Savings Bank disappeared from the map, and then KOP too went its own way into SYP, 451 00:54:23,980 --> 00:54:31,020 and out of that a whole new banking structure emerged. Our banking structure really was rebuilt from scratch during that period. 452 00:54:31,420 --> 00:54:37,000 Then we got a whole new tax system. You could almost say the entire tax system was completely overhauled in a single year. 453 00:54:37,360 --> 00:54:38,360 So that was - was that '92? 454 00:54:38,950 --> 00:54:45,140 Yeah, actually I was a fan of the avoir fiscal system - that's what really drove Finnish ownership up in a big way. 455 00:54:45,320 --> 00:54:47,840 I thought that was a really good thing. 456 00:54:48,020 --> 00:54:58,060 There's actually an interesting theory about that too - whether it was, for instance, this joint effort by Niskakangas and Vesa Vainio, 457 00:54:58,060 --> 00:55:01,880 that later scrapped this system and ended up causing damage to Finland down the line. 458 00:55:02,800 --> 00:55:16,860 Right, but the basic idea behind this corporate tax reform was an incredibly simple one, and simple is often very effective. 459 00:55:16,940 --> 00:55:25,340 The idea was to put an end to all this tax gimmickry that everyone had been supporting and pushing for. 460 00:55:26,580 --> 00:55:34,640 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. 461 00:55:35,200 --> 00:55:44,280 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. 462 00:55:44,900 --> 00:55:50,760 What came out of that was a system that, in itself, didn't actually lighten the tax burden. 463 00:55:51,020 --> 00:55:57,260 If you look at the effective tax rate relative to companies' earnings, for instance, 464 00:55:57,620 --> 00:56:00,640 it may well be that taxation actually tightened up a little. 465 00:56:00,960 --> 00:56:03,860 But because it became a fair, simple, clear system, 466 00:56:03,940 --> 00:56:08,460 it became an enormously effective incentive for companies to build up their own equity 467 00:56:08,840 --> 00:56:11,580 and make smart decisions. 468 00:56:11,660 --> 00:56:27,260 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. 469 00:56:27,420 --> 00:56:38,320 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. 470 00:56:38,630 --> 00:56:44,260 And what decisively helped with that was that tax revenues grew so dramatically. 471 00:56:45,220 --> 00:56:59,500 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. 472 00:56:59,670 --> 00:57:05,000 So in euro terms that's from two billion up to seven billion, and that was quite a windfall. 473 00:57:05,100 --> 00:57:09,040 Yeah, well I hope you'll go into that more in your later books. 474 00:57:09,280 --> 00:57:20,440 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, 475 00:57:20,700 --> 00:57:28,660 at which Koivisto apparently weighed in on some Supreme Court decision. 476 00:57:28,760 --> 00:57:32,040 Apparently no actual influencing took place, but at least there's this theory, 477 00:57:32,150 --> 00:57:37,660 that people feel Koivisto came a bit too close to trampling on Montesquieu's separation of powers. 478 00:57:38,070 --> 00:57:41,520 I don't know, but the banking crisis left a lot of people traumatized. 479 00:57:41,660 --> 00:57:49,380 Some people have this theory that the authorities were a bit harsh in places, 480 00:57:49,540 --> 00:57:53,840 and that gets pinned on Koivisto personally, maybe. I don't know - do you think that's fair criticism? 481 00:57:54,140 --> 00:57:59,080 Well, I think it refers to that one event held at the Presidential Palace, 482 00:58:00,060 --> 00:58:05,960 which was held, if I remember right, in early 1992, maybe in late winter or early spring of '92. 483 00:58:07,300 --> 00:58:12,900 I really find it hard to believe it had that much of an impact, 484 00:58:12,900 --> 00:58:16,400 based on what you can gather from these accounts. 485 00:58:16,460 --> 00:58:27,500 The president's power in the 1990s wasn't such anymore that - if Kekkonen had held a similar event, 486 00:58:27,500 --> 00:58:29,080 then you might think about it a bit differently. 487 00:58:29,080 --> 00:58:31,360 But Koivisto had chosen a different way of operating. 488 00:58:31,420 --> 00:58:38,340 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. 489 00:58:38,400 --> 00:58:52,379 But the problem was that the line between misconduct and simple foolishness isn't entirely clear. 490 00:58:52,800 --> 00:59:01,200 It's a bit of a line drawn in water, where exactly the boundary lies between foolishness and misconduct. 491 00:59:03,040 --> 00:59:07,520 That had to be worked out afterward, to some extent, based on the actual court cases. 492 00:59:07,840 --> 00:59:16,840 Some of them definitely became traumatic experiences, and there were clear mistakes too - cases were brought to court that shouldn't have been. 493 00:59:16,840 --> 00:59:31,520 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. 494 00:59:31,700 --> 00:59:37,200 I mentioned that there was Peter Fagernäs's KOP investment-banking unit, which became Merita Corporate Finance. 495 00:59:37,860 --> 00:59:43,920 Then it went to London, to Great Swiss, where a Swedish bad bank operated as an agent for the Swedes. 496 00:59:45,500 --> 00:59:51,540 Nordbanken bought Merita for a bargain-basement price, which I thought was a terrible shame. 497 00:59:51,720 --> 00:59:55,560 That became Nordea, and in the end Nordea is now a Finnish bank anyway. 498 00:59:55,660 --> 00:59:56,340 Happy ending. 499 00:59:57,160 --> 01:00:03,840 Yeah, we also had contingency plans for KOP, but then KOP's owners, 500 01:00:04,380 --> 01:00:09,880 the owners' representatives, took the view that they wouldn't deal with the state, 501 01:00:09,900 --> 01:00:12,980 and would handle things themselves instead, and that may well have been the wrong choice. 502 01:00:13,300 --> 01:00:18,160 KOP actually made quite a few wrong choices in the early '90s. 503 01:00:18,400 --> 01:00:21,580 Yeah, that's right. We sold off those Nokia shares. 504 01:00:21,580 --> 01:00:25,080 Those, plus this exchange-rate option too. 505 01:00:25,620 --> 01:00:27,660 But Skopbank was probably still a notch worse. 506 01:00:27,660 --> 01:00:31,640 Well, it was worse - Skopbank's story was truly shocking. 507 01:00:31,770 --> 01:00:38,820 And there was also this element there, where I'd say you can't just chalk it up to foolishness anymore. 508 01:00:39,170 --> 01:00:49,680 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. 509 01:00:50,540 --> 01:01:02,740 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. 510 01:01:03,460 --> 01:01:14,440 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. 511 01:01:14,580 --> 01:01:17,420 So the decision was made in May of '92. 512 01:01:18,130 --> 01:01:29,640 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. 513 01:01:30,310 --> 01:01:43,220 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. 514 01:01:44,040 --> 01:01:58,580 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. 515 01:01:59,500 --> 01:02:04,240 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. 516 01:02:04,360 --> 01:02:16,740 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. 517 01:02:16,820 --> 01:02:36,220 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. 518 01:02:36,240 --> 01:02:41,220 Yeah, but we got the Hornets, and in a way, NATO-compatible equipment. 519 01:02:41,960 --> 01:02:52,440 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. 520 01:02:52,960 --> 01:02:55,520 Yeah, those have to be bought with borrowed money too. 521 01:02:56,220 --> 01:02:57,780 Yeah, maybe we'll do that tax reform too. 522 01:02:58,700 --> 01:03:00,620 Good, thank you. 523 01:03:00,860 --> 01:03:09,620 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. 524 01:03:09,940 --> 01:03:10,140 Thank you.