Time Running Out for Nordic Euro Member in Search of Devaluation

  • Finnish Finance Minister Stubb says old models no longer work
  • Trade unions, employers given until April 5 to cut labor costs

Finland is running out of time to reboot its labor market and repair its ailing economy, according to Finance Minister Alexander Stubb.

With the euro zone’s northernmost nation falling far behind Sweden and Germany in terms of cost competitiveness, the government in Helsinki has given trade unions and employers less than two months to suggest how to reduce labor costs by 5 percent. The carrot is a cut in labor taxes. The stick, cuts to the welfare state. The goal: internal devaluation.

"This spring will be make-or-break for the Finnish economy," Stubb said in an interview at his office in Helsinki. Get it right, and "we’ll see Finland again move towards an economic miracle."

Finland’s tale shows how quickly a nation’s economic fate can turn. It made giant strides in the 1990s and early 2000s, climbing international rankings for competitiveness, education and innovation. But it still hasn’t recovered from the 2008 crisis, said Stubb. At least three years of contraction have led the minister to characterize his country as the latest "sick man of Europe."

The numbers back up the diagnosis. Finland’s unemployment rate is forecast to remain above 9 percent at least until 2017. And in that year, Finland will be the worst-performing economy in the entire European Union, commission estimates show.

Since taking office in May 2015, the government of self-made millionaire Juha Sipila has been arguing that his country must adopt painful reforms if it wants to maintain a generous welfare state and stay competitive.

New Rules

By far the most contentious issue involves cutting labor costs and making the market more flexible. This means taking a hard look at a Nordic bastion: collective bargaining.

"We have very centralized bargaining, both in terms of wages and working time," Stubb said. "This doesn’t necessarily reflect the realities of a global economy.”

But government efforts to change the status quo have so far only resulted in protests and strikes.

According to Lauri Lyly of SAK, Finland’s biggest union, using the law to cut holidays and sick leave compensation would be "a guillotine nobody wants."

That position is echoed by Antti Rinne, leader of the biggest opposition party in parliament, the Social Democrats.

Setting wages must happen within existing labor agreements, Rinne told parliament Tuesday, "not through forced legislation.”

Sipila and Stubb now want labor market parties to provide an alternative plan by April 5. It’s the same day the government is due to submit its budget framework.

"The sooner I get the figures from the labor unions and industry, the easier it will be for us to calculate how we should take the economy forward," Stubb said.

Finland has been suffering from a combination of faltering exports to a key trade partner, Russia, as well as a collapse of its paper and consumer electronics industries. But according to Stubb, the problem is even more fundamental.

"In Finland we were used to increasing the size of the welfare state because we had so many people in the labor force," he said. These days "we have less and less hands out in the work field paying for more and more people who are outside. We must make structural changes." Stubb says recommendations by the International Monetary Fund, the European Union and the OECD support the government’s approach.

Getting more people into the workforce is key, and the government targets having 72 percent of Finns aged 15-65 in employment. Meeting that goal means creating 110,000 new jobs by 2019.

So for a man who ran the 2014 Berlin marathon in 3 hours and 11 minutes, this long-distance race starts with a sprint.

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