Finland
became a state in the European Union in 1995 and adopted the euro at its birth
in 1999. In terms of population, the state is between Wisconsin and Minnesota,
both of which are states in the United States. The Finnish culture prizes
saving as well as paying-off debt on time. As the Wall Street Journal put it, the Finns are more German in this sense
than are the Germans themselves. It is easy to understand, therefore, why the
Finns would not have been excited about the write-offs in Greek government in
2012. The Finnish cultural attribute here is an ideological proclivity. Such a value-system so deeply held can even
eclipse or interfere with an otherwise unfettered risk-return trade-off
presumed to be part of the market mechanism. Just as the risk-return
investment-pricing froze rather than adjusted upward with the leap in risk in
CDOs and the related insurance swaps that occurred on Wall Street in 2007 and
2008, the decisions of Finnish pension fund officers in the wake of the European
debt crisis to pull out of Greek and Spanish bonds rather than simply to demand
a higher rate of return, given the higher risk, likely means that the market
mechanism itself freezes rather than functions at levels of high risk (or when
risk is increasing dramatically). In other words, the theory of the laissez-faire
market, which Adam Smith never advocated, has a serious flaw that is reflected
in the mechanism in operation when there is a spike in risk. Un prix ne marche pas quand il y a beaucoup du risque. The free market
mechanism in the investment market tends to freeze up rather than re-price
instruments whose risk is quickly increasing to a significant degree.
The full essay is in Essays on the E.U. Political Economy, available at Amazon.