In the past couple of years, as the euro zone woes have unfolded, international investors have been transfixed by one small country on the edge of the region: Greece.
They would do well to keep watching another tiddler: Finland. For while Finland has not created much drama, precisely because it is one of the strongest euro zone members, some fascinating discussions are under way. Most notably, as the euro zone crisis rumbles on, some Finnish business and government officials are quietly mulling the logistics of leaving the currency union.
Nobody in Finland expects this to happen soon, if ever; indeed, most policy makers are strongly opposed to the idea. Particularly since many also hope the crisis is dying down, but as Heikki Neimelaeinen, chief executive of the Municipal Guarantee Board says: "We have started openly discussing the mechanism of euro exiting, without indicating that we will initiate such a process." And this, in turn, is sparking some curious economic debates.
Take a look, for example, at a recent research paper from Nordea, the Nordic bank. This paper looks at the question of what might happen if Finland ever decided to run a so-called "parallel currency" system. The idea behind this, as Nordea explains, is that at times of stress it can sometimes seem beneficial for countries to maintain more than one currency unit. Most notably, if a country is trying to leave one currency, keeping that as legal tender alongside a second currency for a period can ensure a country honors its old contracts — and thus avoids a technical default.
In the case of Greece, for example, the idea of maintaining the euro as legal tender alongside the drachma has been floated by some economists as one technique for leaving the euro, without formal default.
This concept has been used in the past, in places such as the Weimar Republic (in 1923), the Soviet Union (when it broke up in the early 1990s), and more recently, in some emerging market regions.
But for Finland the concept is different. If a country such as Greece was to adopt its own currency alongside the euro, it would act from a position of weakness and probably need to force its citizens to hold drachma.
However, says Nordea: "Finland's exit of its own accord would differ from a Greek exit, because a balanced national economy may, theoretically speaking, have two currencies even for a long transition period, and peg the new markka to the euro at a rate of 1:1 during the transition period."
Most notably, under that scenario — of strength — the Finnish central bank could effectively let consumers and customers choose which currency they preferred to use. "Euros will not automatically be converted into markka; all deposits, debt and agreements will remain in euros until the depositors transfer their deposits to markka-denominated accounts and the parties to the agreements amend their contracts," Nordea writes.
It adds that, "during the transition period, the Bank of Finland will offer to exchange euros and markkas at a rate of 1:1 both ways". Only later would the markka float against the euro; and the latter could theoretically remain legal tender.
Whether Finns would "choose" to convert their euros, in this theoretical scenario, would depend on where they think that markka is heading. Right now, most investors would expect it to jump. After all, during the past year Finland has been viewed as a haven. If that continued, it might "lead to a mass movement of investors, which will strengthen the currency more than warranted by the situation of the real economy".
But it is possible to imagine an alternative scenario. Prior to the past decade, Finland experienced periods of financial instability, and the tiny size of any new markka-denominated market might also prompt capital flight.
"A significant proportion of the money invested in Finland during the euro era comes from investors who have been looking for safe euro-denominated investments and are not willing to carry the exchange rate risk associated with a small fringe currency," Nordea notes. "If foreign investors leave ... the liquidity of Finnish markka-denominated listed equity and bond markets will decrease, risk premiums will increase and high fluctuations in prices will become more frequent."
And nobody could count on the European Central Bank to smooth over any wild volatility; after all, one of the central problems with any parallel currency regime is that it is unclear who (if anybody) is supposed to be in charge, or will take responsibility for losses. Little surprise, then, that parallel currencies have rarely worked well for long, or not without draconian capital controls.
Now, as noted above, discussions such as this by Nordea are still hypothetical. After all, as one of Finland's leading investors recently told New York financiers: "The business community and politicians are very scared of leaving the euro ... we are unlikely to do it."
But it is worth remembering that most Finns abhor those ECB bailouts; having embraced creative destruction in their own history, they now loathe moral hazard with a puritan zeal. And the longer the euro zone crisis rumbles on, the easier it becomes to imagine the once-unimaginable.
Perhaps it is time for ECB president Mario Draghi to visit Helsinki; if nothing else, Nordea's report is a timely reminder that it is not just Greece and Spain that now have the capacity to surprise.