Struggling Finland Is Trying to Cut Wages Without Causing a Riot

  • Government wants to boost competitiveness amid downgrade
  • Prime Minister Sipila retains popularity despite planned cuts

At the height of the European sovereign debt crisis, internal devaluation -- economists’ jargon for "cutting wages" -- was the recipe of choice for addressing the woes of the euro zone’s periphery.

Several years on, governments with a view of the Mediterranean or the Atlantic have tried to boost competitiveness with mixed results. Crucially, those efforts have come at a high political price. Just ask the leaders of mainstream parties in Greece, Spain Portugal or Italy.

Now, Finland is having a go.

After three years of recession, and with little scope for maneuver on the spending front (the government is holding talks Tuesday on how to find extra savings worth 400 million euros, or 456 million dollars), the ruling coalition says Finland must lower labor costs or face more credit rating downgrades.

So, how do you cut your workers’ salaries without stoking anti-EU sentiments, provoking massive unrest or suffering the ultimate punishment -- being ousted from power?

4-point plan

Here’s how it’s being done in Finland by the center-right coalition government of former businessman Juha Sipila and his Brussels-savvy finance and economic ministers, Alexander Stubb and Olli Rehn:

  • Persuade unions that an overall cut in labor costs of around 5 percent is in their best interest, since it will eventually fuel growth by boosting exports, then gently bash their heads together with those of employers until they agree on a plan and a deadline -- in this case June 2016 

  • Threaten to impose measures by law if they don’t come up with a solution, but brace yourself for compromises. The Labor Pact now being completed involves shifting the onus of some social contributions to workers from employers; persuading people to work an extra 24 hours a year at the same pay; and cutting the public sector’s holiday bonuses by 30 percent

  • Get unions and employers to agree to a temporary wage freeze -- for a minimum of one year

  • Increase labor market flexibility by, for example, creating so-called "time banks," which help redistribute work when it’s most needed

In due course, those measures should lead to rising employment and extra fiscal revenue that can be used to restore purchasing power and obtain re-election.

So far, most Finns have responded to the austerity drive in typical phlegmatic style, causing only limited disruptions to economic activity. And unlike other cash-strapped governments in the euro zone, Sipila’s government still retains some degree of popularity (the fact that Finns continue to enjoy a relatively strong social safety net certainly helps allay many concerns).

Still, there’s plenty of time for things to go wrong before the next elections are due, in 2019.

Potential pitfalls

There’s a very concrete risk that reluctant unions may eventually water down and even sink the deal. Moreover, even if labor costs are actually cut by 5 percent (the current calculations point to around 4 percent), there’s no guarantee that reducing labor costs will translate into greater exports, as the demise of Nokia’s consumer electronics business has shown.

Antti Rinne of the opposition Social Democratic Party points out that "Finland’s biggest problem is that we lack companies that have products and services that are demanded in international markets."

For him, the government is taking a big gamble by putting all of its political eggs in one basket, since there’s a concrete risk that cutting disposable incomes will simply stifle domestic demand and jeopardize any hope of future growth.

Put another way, the short-term pain is certain; the long-term gain isn’t. That’s not something that’s likely to reassure Finland’s bond holders.