Finnish Prime Minister Alexander Stubb said lawmakers must abandon their political differences and draft a set of measures to help cut debt after the Nordic country was stripped of its AAA rating.
Standard & Poor’s one-step downgrade of Finland to AA+ from AAA leaves Germany and Luxembourg as the euro area’s last top- rated members. The step also marks the latest defeat for a government dogged by a fractious parliament and shrinking coalition. S&P said the economy faces a protracted period of stagnation, with an aging population complicating efforts to balance the budget and reduce debt.
“Finland needs a new medium-term plan to rescue the economy,” Stubb, who took office in June after his predecessor Jyrki Katainen joined the European Commission, said yesterday in a statement. “The government-opposition setting must not become an impediment in that work.”
Stubb, who said in August that Finland is caught in a “lost decade,” now faces a possible confidence vote over his handling of fiscal policy from The Finns, a euro-skeptic party. Another opposition party has said it may seek early elections. The 46-year-old oversees an economy whose gross domestic product is 6 percent below its 2008 level with public debt set to almost double in the decade through 2017, according to S&P.
“Some believe economic growth will fix things,” Stubb said in an interview on YLE Radio Suomi today. “We need to continue economic reforms. We can’t wait for growth.”
Held up as a model of prudent fiscal policy at the height of Europe’s debt crisis just three years ago, Finland has emerged as one of northern Europe’s weakest economies. The government needs to revive a manufacturing sector whose main growth engines -- a technology industry once led by Nokia Oyj and paper producers -- are faltering after years of decline.
“It remains uncertain whether other sectors can consistently compensate for the output loss in Finland’s wood and paper industry and its electronics industry,” S&P said on Friday.
The slowdown coincided with Europe’s debt crisis and budget cutting measures that dragged Finland into a recession. S&P said above-average wage growth and below-average productivity have exacerbated the country’s economic sclerosis. Finland is at least half a decade behind Spain and Portugal in matching pay with productivity, ETLA research institute said last year.
Slowing growth in Russia, whose economy has been buffeted by sanctions, is adding to Finland’s export pain. For a third consecutive year the economy will fail to grow, according to the Finance Ministry.
To deal with the country’s predicament, Stubb has invited the opposition to a meeting with the government, the Bank of Finland and labor market institutions on Oct. 15.
S&P faulted Finland for slowness in achieving necessary reforms. Stubb said yesterday bills on the agreed structural measures will be introduced in parliament by Dec. 4 to allow implementation before the general election in April.
Finland’s government has pushed through austerity policies equivalent to 2.8 percent of projected 2018 GDP, delivering 6.4 billion euros ($8.1 billion) of spending cuts and tax increases since 2011 in a bid to keep its AAA rating, according to the Finance Ministry. Those measures “are enough at this stage,” Stubb said. Government debt will breach the EU’s 60 percent-of-GDP rule next year, compared with 33 percent in 2008.
The coalition, which last month shrank to four parties after starting out with six in 2011, has failed to deliver any of its key economic policy goals. It fell short on halting debt growth by 2015, missed its 1 percent central-government deficit target, hasn’t raised the employment rate to 72 percent and lost its prized AAA credit rating.
“The alarm bells have been ringing for a long time, but the government hasn’t taken that seriously enough,” Stubb said. “This cannot continue.”
Economy Minister Jan Vapaavuori said in an interview last month that Finland can’t afford to lose its top rating. While large economies including the U.S. have weathered ratings downgrades without seeing their bond markets suffer, smaller economies like Finland’s wouldn’t fare as well, Vapaavuori said then.
Yet Finance Minister Antti Rinne sees no need to adjust fiscal policy in light of the rating cut, because the government has already taken steps to address the issues, he said in an Oct. 10 statement. He says Finland’s main challenge is finding new sources of growth.
Finland’s Nordic peers Sweden, Norway and Denmark all still carry AAA credit grades.