Prime Minister Alexander Stubb said it will take Finland as long as four years to turn around the ailing economy and regain its AAA credit rating.
Stubb plans to implement a revamp of the social, pension and municipal systems in the next six months, followed by a longer-term survival strategy to be carried out in the coming two-to-four years, the 46-year-old said in an interview.
“I will turn every stone, look under every stub of a tree, of how we can do it,” Stubb said today in Helsinki. “I think this was a good wake-up call to all of us, and those who did not understand that our economy is not in a good shape, should have woken up at this stage.”
Finland, which was held up as a model of fiscal prudence just three years ago at the height of Europe’s debt crisis, has emerged as one of northern Europe’s weakest economies. The government needs to revive a manufacturing sector whose main motors -- a technology industry once led by Nokia Oyj and paper producers -- are faltering.
Standard & Poor’s on Oct. 10 cut Finland one step to AA+ from AAA, saying the economy faces a protracted period of stagnation and an aging population, complicating efforts to balance the budget and reduce debt. Neighbors Sweden, Norway and Denmark all still carry AAA credit grades.
S&P’s downgrade of Finland 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. Stubb’s governing partner, the Social Democrats, has called for stimulus to boost the ailing economy.
“I hope if everything goes well that at a maximum it would take four years to get the AAA status back,” Stubb said. “At a minimum it will take two years.”
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 to bring forward elections scheduled for April. The premier said that he plans to serve out the rest of the term because an early vote would lead to political instability and delay much-needed measures.
Stubb, who took office in June after his predecessor Jyrki Katainen joined the European Commission, 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.
The slowdown coincided with Europe’s debt crisis and austerity 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 to productivity, research institute ETLA said last year.
“The primary factors affecting the Finnish credit rating are exogenous, that is the state of the European economy, global recovery and Russia,” said Valtteri Ahti, strategist at Evli Bank Oyj in Helsinki. Another issue is whether there is “sufficient political capital to enforce reform” after the elections.
“Neither of these factors is in Stubb’s hands,” Ahti said. “Finnish interest rates are low, because investors price in near certain repayment.”
Finland’s 10-year bond yield rose one basis point to 1.03 percent at 1:12 p.m. in London. The difference between Finnish debt and similar-maturity German bonds widened 0.5 basis point to 13 basis points, still the narrowest spread in the single-currency area.
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.
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.
“For me, this is a survival game,” Stubb said today. “It’s about the upkeep of our welfare system, not the downgrading of it. It depends on how we finance it and how we restructure it.”