Finland’s Millionaire Premier Freezes Pay in Bid to Save Economy

  • Prime Minister wants to freeze pay, but boost productivity
  • Finland is a role model with its internal devaluation, PM says

Juha Sipila.

Photographer: Tomi Setala/Bloomberg

The Nordic region’s only euro member is still struggling with austerity.

After being stripped of its top AAA credit grade at all three major ratings companies, the government is asking Finns to tighten their belts to keep up with the Germans and the Swedes, who are more productive exporters. Failure to do so will jeopardize Finland’s path away from economic limbo and growing indebtedness, the government warns.

Prime Minister Juha Sipila, a self-made millionaire who won elections last year on pledges to reinvigorate Finland’s ailing post-Nokia economy, says exports are the key to economic success. But that requires Finns to produce more without getting more pay if the nation is to close a competitiveness gap as wide as 15 percent relative to its main trading partners.

“We’re behind our main competitor countries,” Sipila said in an interview in Helsinki on Wednesday. “Our problem is that exports are lagging and that growth relies on domestic demand.” But if the economy is to recover, “exports should become the growth motor again.”

Finland has been trapped in a low-growth cycle since exiting a series of economic contractions in 2015. Its once dominant paper industry has succumbed to the advent of digital media. The poster child of its consumer technology boom, Nokia Oyj, sold its handset unit off to Microsoft in 2013 after failing to see the potential of smart phones. And the economic crisis in Russia, with whom Finland shares the EU’s longest border, has battered trade.

Dark Picture

In an interview last month, Finnish Trade Minister Kai Mykkanen said the picture is “very dark” as protectionist rhetoric dominates the U.S. election and east-west geopolitical ties deteriorate. Finland relies on exports for about 40 percent of its GDP. The country has booked a trade deficit almost every month this year, as exports have shrunk some 15 percent from December through August.

Finns have already waved goodbye to the prospect of pay rises. Workers agreed to a measly 0.4 percent this year and will get no pay increase at all in 2017. From 2018, “exporting industries will set the base” for pay talks, Sipila said.

With pay levels under control, Sipila says the next step is to ensure that Finns actually produce more -- essentially forcing them to accept pay cuts per unit produced.

“There the government does not have much influence as it depends on the companies,” he said. “But my gut feeling, from speaking with top exporters, is that a 5 percent productivity increase is not a problem.”

Internal Devaluation

The prime minister says his country’s ability to cope with the government’s program of belt tightening is an example for others. “Many colleagues from euro countries have been amazed how we managed to do an internal devaluation,” he said. “It’s pretty rare to achieve this.”

Speaking to local reporters on Sunday, Sipila noted that European Commission President Jean-Claude Juncker “keeps holding Finland up as an amazing example, proving that it’s possible to get broad backing for reforms.”

But not everyone is convinced. Juhana Brotherus, an economist at Helsinki-based housing credit institution, HYPO, says the government isn’t investing enough in future industries, and focusing too much on cutbacks.

“It’s clear the government’s goals are out of reach,” though “it remains to be seen by how much,” Brotherus said by e-mail. Instead of just cutting back, “Finland needs to reinvent its export base. New industries, companies and products should be fostered, not damped.”

Sipila also acknowledges that even by effectively cutting wages, the export picture remains bleak. “The shadows coming from global markets are hampering growth,” he said. But for now, Finland’s “problem is that our growth relies on domestic demand.”

Before it's here, it's on the Bloomberg Terminal.