Austerity Nears End of the Line in Finland as Economy Surprises

  • Cost cuts have narrowed competitiveness gap to Sweden, Germany
  • More jobs are needed to get finances back on track: minister

Finland’s economic stewards, used to presenting bad news, are getting positively giddy.

The self-described sick-man of Europe is now showing signs of real progress after years of tough budget cuts and tax increases. That may allow the country to avoid further austerity, its finance minister, Petteri Orpo, said in an interview Helsinki on Thursday.

Petteri Orpo on April 20.

Photographer: Roni Rekomaa/Bloomberg

“We have left recession clearly behind us,” Orpo said. “We’ve had a predictable economic policy and that’s starting to bring results.”

Those results will likely mean a still modest expansion of 1.6 percent this year, accelerating from 1.4 percent last year, according to the Bank of Finland. But the economy is gaining a broader growth base, helped by a recovery in exports and a surprising revival in consumer confidence even as unemployment hovers at about 9 percent.

The nation in 2015 exited a three-year recession, which was triggered by woes for Nokia Oyj, Finland’s paper-making industry and a sanctions-induced slump in Russia, at the time among Finland’s biggest trade partners. The government is now expecting a gain in exports, boosted by major investments coming in the car, pulp and ship-building industries.

Orpo says that the turnaround can partly be attributed to measures that have made Finnish products more competitive internationally. The government last year forced unions to accept an agreement to bring down labor costs by making Finns work longer hours and for lower pay

The labor cost gap, which in 2015 was estimated to be 10 percent to 15 percent higher than its main competitors, will continue to narrow as wages are rising faster in key countries such as Sweden and Germany, Orpo said. 

“We must now stick to salary moderation in order to not to lose the advantage we’ll get with labor pact,” he said. Wage talks spanning most industries next autumn will be “challenging,” he said.

While the time for dire measures may be coming to an end, Orpo says that more is still needed to get the country back on its feet and for the government to meet its fiscal targets. Raising the employment rate to 72 percent from about 68.9 percent now is the key to solving imbalances, Orpo says.

The government is working on new measures to boost employment, including better matching of open vacancies and the unemployed. New jobs are often popping up in the urban areas in southern and western Finland, while the bulk of the unemployed live in remote areas in the east and the Arctic north.

Part of this will also include strengthening incentives to get more people into the labor market. Trade unions will have until end of the year to come up with proposals to make the labor market more flexible.

“There’s no groundbreaking single measure to solve unemployment problem, instead we need to implement countless smaller measures to reform the system,” Orpo said.

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