From regulated financial markets to Economic and Monetary Union

Abstract

The Bank of Finland s monetary policy operating environment changed fundamentally in the final decades of the 20th century. In the post-war period, many areas of the economy were strongly regulated, both in Finland and across Europe in general. Control was particularly tight in the financial and exchange markets. In some countries, however, market liberalisation had already made considerable progress by the 1970s. The liberalisation of western European markets was completed in the 1980s. Both the rationale and the ability to regulate nationally were slowly crumbling. Confidence in the ability to regulate and in the benefits of regulation was fading, and, at the same time, doubts over the stability of free markets were receding. This change was due particularly to the globalisation of the economy and preparations for European Economic and Monetary Union (EMU). In the final decade of the 20th century, the political economy of Europe underwent deep changes. In the early 1990s, the state-run economies of Eastern Europe collapsed and the communist countries moved to a market economy, partly through a transition bordering on chaos. Meanwhile Western Europe was becoming integrated, and in 1999 eleven countries established EMU. These changes had a particularly strong impact on the Finnish economy and financial markets. The early 1990s were characterised by an unexpected and exceptionally deep recession by European standards. This was, however, followed by a fairly strong recovery towards the end of the decade, and Finland could prepare for EMU membership in an environment of economic stability.