The indicator for fiscal sustainability monitors that the state of Finland does not lose its ability to meet its fiscal obligations during the transition or thereafter. The background assumption is that the transition happens while Finland is part of the eurozone and international financial markets.
In the era of so-called central bank capitalism, with the European Central Bank (ECB) as the main guarantor of eurozone fiscal stability, the most important factor determining fiscal sustainability is whether or not the ECB commits, if the need arises, to all necessary actions in its power to support eurozone countries.
The second element is the Finnish current account, describing the balance of international imports and exports. A heavily negative current account (due, e.g., to a trade deficit) would lead to increased indebtedness and loss of wealth to foreign countries, entailing a weaker economic position and less fiscal sovereignty. On the other hand, a heavily positive current account (e.g., due to trade surplus) would lead to similar problems in other countries.
The capability of the state to finance its spending has to remain good throughout the period of transition, so that the state can, for its part, finance the necessary measures of ecological reconstruction and continue necessary public spending also after the transition. As a member of the institutions determining eurozone policies, Finland has to do its part to ensure that the capacities of the ECB in guaranteeing Finnish fiscal sustainability are maintained. In addition, Finland has to see that its international trade remains balanced enough.
How is progress measured?
The indicator has two elements: a portrait depicting the commitment of ECB (“whatever it takes” or not), and a meter indicating the status of the current account. Several factors underlie the powers the ECB has in guaranteeing the fiscal capacities of the eurozone countries. First and foremost are the agreements defining the monetary union, and the prevailing political and legal interpretations of those agreements. Also the views that the directors of the ECB have on the global economy and its development, and the decisions they make on the basis of those views, are of crucial importance. The signals that the ECB gives to the markets are the major conduit for all these factors: in practice, the statements of the president of the ECB have a decisive influence on the fiscal status of the eurozone countries. If the president, currently Christine Lagarde, says that the ECB will do whatever it takes to make sure eurozone countries will be able to take care of their financial obligations, the markets will take note and the solvency of the countries is no longer questioned.
Statistics Finland provides monthly data on the current account, including a 12 months moving average which is used in the dashboard (however, the indicators on this website are not automatically updated, i.e., the data is not up to date).
We have separated fiscal sustainability from its usual context, that of economic growth, and see it as an independent indicator. The reason for the separation is that ecological reconstruction should not be secondary to economic growth – it must be carried through regardless of economic growth. In addition, economic growth is often in contradiction with the other goals of the dashboard; especially the goals of rapid emission reduction and decreased natural resource use are typically in conflict with economic growth. The separation is possible since money and debt are socially instituted facts, and not in any direct way connected to objectively scarce resources, such as precious metals. Societies can always redefine their monetary systems. Ultimately, labour, skills, technology, natural resources and political imagination are the limiting factors on what societies can achieve.
After money backed by gold was replaced by so-called fiat money in the 1970’s, there is no need for a monetarily sovereign actor to look into its coffers to see if there is anything left. A monetarily sovereign actor issuing its own currency creates money literally out of nothing. The recovery after the global financial crisis in 2008 and the concomitant eurozone crisis was largely due to new money created by the ECB, as it started a massive program of buying financial assets, especially government bonds. When the previous president of the ECB Mario Draghi in 2012 uttered the famous words “whatever it takes” – the central bank would do everything in its power to support the euro – the interest rates on eurozone countries’ debts fell dramatically, as the markets saw that the risk of default disappeared. After this commitment from the central bank, public debt became much lighter to bear.
In 2020, the corona pandemic and the measures taken against it halted economic activity around the world in an unprecedented manner. States were forced to accrue large additional debts in order to prevent and alleviate private sector crises. The public debts of all eurozone countries rose, the limits of the growth and stability pact were dismissed, and even Germany abandoned its statutory commitment to a balanced budget.
The central bank and numerous economists have recommended that states should start a more active fiscal policy in order to help the economy recover and to, for instance, speed up climate investments. The measures that the central bank takes in order to keep interest rates low are not enough. It may be said that states have drifted close to the view of functional finance formulated by Abba Lerner: the goal is not a balanced budget for its own sake, but rather the pursuit of the goals of society and the economy with the help of the budget, regardless whether that means a surplus or a deficit. From the perspective of ecological reconstruction, it is important to note that unlike private consumption the public budget can be democratically directed towards common goals. The state can invest in projects that are essential for the transition but are for one reason or another neglected by the private sector.
As a small country Finland must adapt to the parameters of the eurozone, even though it can for its part make interventions in the public debate and have a say in negotiating future policies. If the rest of the eurozone were to consume and invest through additional debt, it would be a big risk if Finland would not do the corresponding investments in employment, health, technology and low-carbon infrastructure. On the other hand, if the eurozone were to subject itself to a strict market discipline – i.e., leave fiscal sustainability to the mercy of private investors – it would be a big risk for Finland to implement the transition via more public debt. At the moment, it seems that the ECB will support the euro and the solvency of eurozone countries against any eventuality well into the future.