Meeting the Challenge of Monetary Union : Lessons from the Finnish Experience

We study lessons from the experience of Finland in meeting the challenges of joining the euro area at its outset and its subsequent economic success. Traditional optimum currency area theory is too limited a framework for judging the experience in qualifying and membership.Five main factors have an influence on the experience: asymmetric shocks in the country joining the area; the prior conditions, particularly the real exchange rate; structural flexibility of the country; degree of economic, institutional and regulatory integration; attractiveness of the outside option. The main lessons to be learned from the Finnish experience are: the importance of timing; the fact that targeting low inflation and prudent fiscal policy can deliver nominal convergence; the relative merits of prior convergence of economic structures, policies and institutions and favourable starting conditions, as opposed to imminent membership itself changing structural behaviour and providing the discipline for change