In short, devaluation means weakening the domestic currency vis-à-vis foreign currencies. It is a political decision aimed at promoting domestic competitiveness vis-à-vis foreign countries. Before joining the EU, the Finnish state was able to devalue the mark independently, nowadays the devaluation would be a joint decision of the European Union.
The devaluation of the currency affects the competitiveness of domestically produced products both domestically and abroad. Domestic products become cheaper, which increases their sales. Correspondingly, foreign products are becoming more expensive relative to domestic products, which further increases the demand for domestic products. The export industry in particular will benefit from the devaluation, as domestic products will also become cheaper abroad.
What are the effects of devaluation?
There will certainly be many opinions and the outcome of any decision will not be seen until it has been implemented. In addition, history should take into account the situation, problems and thought patterns of the time. What worked or didn’t work before may not be appropriate for the present.
One of the benefits of devaluation is the improvement of the economic situation, which means jobs and growth. However, devaluation can also lead to an inflation-deflationary spiral. As domestic products become cheaper and dominate the market, they no longer have to compete with other products as much, which often reduces the quality of domestic products. However, because it is difficult for one country to produce everything itself, foreign products are becoming more expensive. This causes inflation.
Higher cost of borrowing from abroad than from a domestic loan
Devaluation also leads to a relatively higher cost of borrowing from abroad than from a domestic loan. Nowadays, because of the common currency area, it no longer matters, and it is as safe to borrow from abroad as from Finland. It is worth looking at the real APR. You can look at different loans in our comparison and choose the one that best suits your needs:
Due to the problems caused by inflation
In Finland, the devaluation was used as a monetary policy instrument during the markka period. However, it gave rise to inflation, which was beginning to be seen as a bigger problem. In Finland, due to the problems caused by inflation, other measures were taken, and it was decided to permanently tie the markka to the German mark and the ECU, the pre-euro European currency unit. However, this is generally thought to have been partly to blame for the 1990s recession, in addition to the collapse of the Soviet Union, the banking crisis and German unification. 1999 Finland adopted the euro.
In any case, in our current economic system, deflation will no longer increase the competitiveness of Finnish products, as the euro area currency is common. However, all countries could jointly decide to devalue the euro. Finland, like other EU countries, has both the benefits and the disadvantages of being part of the euro: the economic situation in other countries can raise our own economy upwards, but it can also decline.