The Bank of Finland Challenged the Government | Jussi Ahokas | Neuvottelija 197

Summary

Jussi Ahokas — economist at the BIOS research unit, doctoral researcher and the Finnish translator of Joan Robinson’s Introduction to the Theory of Employment — goes through the Bank of Finland’s letter to prime-minister-designate Petteri Orpo sentence by sentence. The letter went out on 17 June 2023, the day after the government programme was agreed, and said the entries in section 9.1 were problematic for central bank independence.

The episode’s single piece of news is that the Bank of Finland now confirms, in its own blog, what Willem Buiter told Miettinen in London a decade earlier: a central bank can operate with negative equity. Once the reserve fund is exhausted, a loss may be left uncovered for the time being and recovered from later years’ profits. The BIS published a paper to the same effect at the start of the year.

Ahokas grades the three entries differently, which is what makes the episode more than a partisan reading. The financing risk entry he reads both ways: a government worried about fiscal consequences landing on its own desk through the central banking system may legitimately say so out loud, but a central bank can equally read it as pressure to change its own choices — and that, he thinks, is exactly how it was read. The no-bailout entry he finds pointless, because losses in the purchase programmes were kept national from the outset, so the basic Maastricht rule already covers the ground; it would have been better not written. The systemic risk entry — Finland pushing to limit systemic risk in the eurosystem — he accepts as the most sensible of the three, reading into it a change in the line on EU fiscal coordination and active ECOFIN work.

The national distinction matters throughout. Central banks’ net interest income turned negative when tightening followed the purchase programmes, producing real losses rather than accounting ones. The Bank of Finland covered a round zero result plus operating costs out of reserves running to several billion; many euro-area peers had no buffers or have eaten them. Against that, the Bank’s own demure reminder that it has paid the state over three billion in dividends during the euro era is now in question.

An institutional contradiction is named but not resolved. The Act on the Bank of Finland states independence and the ECB linkage unambiguously; the constitution still carries the spirit in which the Bank sits in connection with parliament, where historically the Parliamentary Supervisory Council had real influence. Both agree the larger point: central bank independence in this form is not divine truth, the US mandate has more pillars than inflation, and a central bank is ultimately one institution of a state that grants it its mandate.

On whether Greece could repeat, Miettinen recalls the ECB being repaid in full on its Securities Markets Programme holdings in the Greek restructuring — a shared recapitalisation in effect — and the era’s sterilised policy of shorting to neutralise the position. Tested against an Italian scenario, Ahokas’s answer is that rates return to zero and margins improve; Miettinen adds that the binding constraint on balance sheet expansion is rising inflation, not negative equity, and that against stagflation modern policy is disarmed.

The closing forecast is the best analytical passage. Ahokas thinks a soft landing more likely than it looks, because monetary tightening has been offset by fiscal loosening: the US is running a bigger deficit this year than last, on the order of 60 per cent of covid-year levels, and an economy pumped that hard does not fall into recession over rates. Europe is more cautious. Finland’s own stance he and Miettinen read as close to neutral once the debt-financed three billion rail package is set against the spending cuts — and the tax package as distributionally regressive, which lowers the marginal propensity to consume.

A note on the source

There are no gaps in the transcription, and the transcript carries no speaker labels, but with a single guest the speakers are reliably distinguishable. The cleaned Finnish cue file corrects proper names and technical terms the automatic transcription mangled, including the ECB’s Securities Markets Programme, transcribed as “S&P”. A figure given for the age of Robinson’s book was garbled and is not repeated here.

Watch

The recording lives on the Neuvottelija channel: Suomen Pankki haastoi hallituksen | Jussi Ahokas | Neuvottelija 197. A Finnish edition of this episode is published at www.neuvottelija.fi.