Finland Times

 

The Finnish economy is in a bad way and there are currently no signs that it will heal in the very near future.

Beneath the reassuring surface of everyday life, statisticians churn out a steady stream of data chronicling the narrative of an economy stuck in limbo, and with no clear roadmap out of the doldrums.

In his 2015 draft budget proposal, recently-appointed Finance Minister Antti Rinne spelled out a bleak forecast. "There is low growth potential for the economy because of a lack of growth in the number of working age people, structural changes have destroyed existing production capacity and productivity growth has slowed significantly," he prophesied for the year ahead.

Rinne had the numbers to back up his grim account: unemployment for 2014 was expected to come in at 8.6 percent and remain at 8.5 percent in 2015, while ministry officials expected 2014 to be a zero-growth year for the economy. Some small comfort, given that the economy had contracted in the two previous two years: -1.2 percent in 2013 and -1.5 percent in 2012.

With just about six months left before parliamentary elections in Finland, policymakers and indeed the entire political leadership appear to be biding time before a new government gets a mandate to tear up the now hopelessly-outdated economic program laid out by the government of ex-Prime Minister Jyrki Katainen back in 2011.

Still, incumbent Prime Minister Alexander Stubb clearly does not want to appear to be in a holding pattern ahead of the poll - he has also been looking to Sweden for inspiration.

The Finnish PM has called on the former Swedish Finance Minister Anders Borg, credited with introducing daring economic reforms, to review and report on the Finnish economy.

"It's always good to have external views on the economy and economic policy and the Finns are often keen on hearing external views, e.g. views from the OECD, IMF, and the European Commission. Those opinions are listened to, are important contributions but then again one can ask what's new can Anders Borg introduce into the debate on economic policy?" queried Vesa Vihriala, Managing Director of the Research Institute of the Finnish Economy ETLA.

But Pasi Holm of the Pellervo Economic Research Institute PTT says Sweden is a natural reference point for Finland as it's one of the most robust economies in the Nordics. Strong finances and solid underlying economic fundamentals ensured that Finland's western neighbor was able to reasonably weather the shocks of the global financial crisis and the sluggish demand in the European Union caused by the Eurozone crisis.

Above all Holm says, the major internal factor affecting Finland's current lackluster economic performance is its lack of competitiveness, especially in the trade and export sector - and especially compared to Sweden. According to Holm the country lags behind its Nordic sister to the tune of 10 percent in this metric.

"In Finland the public sector is a relatively big player in wage negotiations, but in Sweden they have decided that wages are led by the export sector, other sectors follow what is competitive for the export sector. So this method of wage determination has helped Sweden maintain competitiveness," Holm added.

Vihriala agrees, pointing out that Finland's Eurozone and European Union commitments give it very little room to maneuver in terms of wielding monetary policies such as currency devaluations to boost competitiveness.

He said that the government would do well to focus on the structural reforms needed to free up the Finnish economy and set it on a path to growth. He pointed to Finland's rapidly ageing workforce, saying that measures are needed to increase the labor supply. Vihriala hailed a recent multi-sectoral agreement to increase the retirement age to 65, however he said more is needed to increase labor market participation rates.

"There we need to increase labor mobility: when people are losing their jobs we have to make sure there are ways and incentives for people to move to new jobs, but also given that we are a part of the currency union it's important that our wage formation functions accordingly," Vihriala observed.