Devaluation Goal Is Thwarted as Finns Fail to Adjust to the Euro

The head of Finland’s main business union says the country’s labor market has failed to adapt to the euro as the economy now faces a fourth consecutive year of contraction.

The necessary “internal devaluation” is not happening, said Jyri Hakamies, chief executive officer at the Confederation of Finnish Industries, known locally as EK. That’s because Finland’s labor market system, after almost 17 years inside the single currency regime, still “isn’t equipped to deal with the euro environment,” he said.

Finnish workers have so far failed to adapt to their currency regime
Finnish workers have so far failed to adapt to their currency regime

The comments follow a breakdown in talks this month in which unions rejected a 5 percent cut in labor costs that had been sought by the government and employers. The ruling administration is now trying to pass a law that will, among other measures, reduce the number of holidays in an effort to force through pay cuts through other channels.

“When we had our own currency, this kind of competitiveness problem was solved by devaluing our markka,” Hakamies said in an interview in Helsinki. “Now we don’t have our own currency, and here we are.’’

Europe’s Laggard

The government calculates that Finland needs to lower its labor costs by up to 15 percent to catch up with its main trade partners, Sweden and Germany. Erkki Liikanen, the governor of Finland’s central bank and a European Central Bank council member, says Finnish unions need to find a solution that won’t lead to job cuts further down the road. ECB Executive Board member Benoit Coeure said that euro nations that have committed to the right reforms have seen economic rewards.

“We see in a lot of countries in the euro zone where reforms have been decided and implemented in a bold way, it starts yielding results,” he said in Helsinki on Friday. “Look at the growth rate in Ireland, look at the growth rate in Spain. So it is a fact that if reforms are implemented in a bold way, it can bring effective results in terms of growth and jobs.”

Finland’s economy has shrunk for the past three years and Nordea, the biggest Nordic bank, published a forecast on Wednesday predicting further contraction in 2015. Finland will be the weakest EU economy by 2017, when it will grow at less than half the pace of Greece, according to the European Commission.

“I am very worried because Finland already has the weakest outlook among all European countries, and by our own initiatives, we will weaken our situation further,” Hakamies said. The risk is that Finland will next year continue to be hobbled by strikes like the ones that halted postal services this autumn, he said.

Prime Minister Juha Sipila has so far failed to persuade labor market parties to agree to pay cuts. Negotiations between workers and employers groups were broken off earlier this month. Hakamies says that “for now” there are “no talks under way,” though the government is trying to bring parties back to the table.

Irish Inspiration

Hakamies points to Ireland as an example of a nation that successfully rebuilt its economy to become more competitive after its debt crisis. Ireland’s gross domestic product probably expanded 6 percent in 2015, and will grow 4.5 percent next year, the commission estimates.

Hakamies acknowledges that Finland has been able to moderate the pace of wage growth somewhat in recent years. “But that is too slow a path if we are to catch up with our competitors.”

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