2016-02-02 10:48:55
Comparison with Sweden suggests the euro might be partly to blame
Feb 1st 2016 | HELSINKI
THE harbour may be frozen, but that does not stop a ferry with a few intrepid tourists on board from making its way through the ice to Suomenlinna, a former fortress and popular sight-seeing spot near Helsinki. Finns, whose country stretches from the Baltic Sea to the Arctic, are inured to hostile conditions, but their economy seems less hardy. It is stuck in an unrelenting freeze. A centre-right coalition government formed last spring is trying to break the ice, but has not yet got far.
After thriving for several years both before and after joining the euro in 1999, Finland ran into trouble after the financial crisis of 2008. Output plunged by 8.3% in 2009 and GDP declined again for three successive years since 2011. That may turn out to be four years, once the full figures for 2015 are released: in the first nine months of last year output rose by a mere 0.1% compared with the same period in 2014, barely more than in benighted Greece. Short-term indicators suggest that the economy will be flat in early 2016, says Jussi Mustonen, chief economist at the Confederation of Finnish Industries.
Erkki Liikanen, governor of the central bank, explains that Finland has suffered an extraordinary combination of adverse shocks. The most important of these was the misfortune of Nokia, once Finland s biggest company and the world s biggest maker of mobile phones. Just as the rise of Nokia did much to propel the Finnish economy in the decade before the financial crisis accounting for nearly a quarter of growth so its decline in the smartphone era has contributed to subsequent weakness. Another setback was that wages carried on rising despite sagging productivity: unit labour costs are 10-15% higher than those of Finland s trading partners.
Meanwhile the workforce is shrinking as an especially pronounced post-war baby boom and subsequent bust takes its toll. The number of Finns aged 15-64 is falling by almost 0.5% a year. Markku Kotilainen of ETLA, an economic think-tank, reckons that potential growth has halved from around 3% a year before the financial crisis to less than 1.5%. On top of all of this, exports to Russia have plunged by a third in the past year owing to an economic slump there, as well as trade sanctions. Russia now buys just 5.8% of Finland s exports, down from 10% in 2012.
The Finnish economic and social model is being challenged, says the OECD in a new survey. Yet Finland is well-placed to find new sources of growth. According to a report on competitiveness from the World Economic Forum, it ranks second globally for innovation, reflecting in particular its copious scientists and engineers and its record of collaboration between universities and industry on R&D. As many as 15,000 people attended the annual Slush startup conference in Helsinki in November. Startups are an ideology among young Finns, observes Mr Kotilainen. Encouraging them is a priority of the government. Much of a 1.6 billion ($1.7 billion) initiative to promote growth over the next three years will foster the use of new technology.
More generally, however, the government, which has been running a deficit of around 3% of GDP, is administering the same bitter pills of austerity and structural reforms that countries in southern Europe have previously had to swallow. The austerity programme, which will only be partially offset by the temporary growth package, will eventually realise savings of 4 billion around 2% of GDP in 2019, mainly through spending cuts. Further parsimony lies ahead in the 2020s for a country where public expenditure is 58% of GDP, the highest in the European Union (the average is 47%).
The most important reform is an overhaul of the labour market, says Olli Rehn, the economy minister, who as a former European commissioner used to prescribe similar medicine elsewhere in the euro area. Finland s system of national collective bargaining was once a strength, enabling wage agreements to take into account overall economic constraints, but it is now keeping wages too high. The government advocates a more flexible system, in which firms will have greater freedom to reach their own deals with workers.
This should help restore Finland s lost competitiveness by ensuring that wage increases are below those in the rest of the euro area and helping to create agreements that achieve higher productivity at individual firms. A more immediate boost should come from reforms that bring down costs by increasing working time for example, by scrapping two national holidays and curbing public-sector leave. The government wants employers and unions to agree upon a package that achieves such a lowering in costs, but they have failed four times. If they cannot reach a deal, the government will impose measures in the spring, warns Alexander Stubb, the finance minister.
But one obstacle to Finland s revival goes largely unmentioned. Had the country retained its own currency, the difficult and protracted adjustment that it is now seeking by lowering domestic costs could have been achieved much more easily by allowing the markka to depreciate. Finland s economic woes stand in contrast with the robust performance of its larger and more diversified neighbour, Sweden, which kept the krona. Although the euro is not the only factor, Finland s output is now 7.3% lower than at its previous peak worse than in Spain or Portugal (see chart). Sweden s, by contrast, is 8.6% higher.
That is not much of a guide to the Finnish government, however: if one thing has been learnt during the euro crisis it is that leaving the single currency would be hazardous and costly. The only path for Finland is to regain lost ground within the monetary union, however painful that might be.