Devaluation Proves Its Use in Finland With a Little Outside Help

  • Efforts to promote internal devaluation appear to be working
  • Economists warn benefits may unravel in upcoming wage talks

One year after its tortured approval, Prime Minister Juha Sipila’s efforts to boost competitiveness by forcing through a deal to lower labor costs are beginning to bear fruit.

Finland’s economy is growing at its fastest pace in years, exports are surging and consumer confidence is the highest in the euro area. Not bad for a country that until recently called itself the new "sick man of Europe."

Sipila, a self-made millionaire who built his own wood-fired car, managed to pull off the trick that Upton Sinclair famously has said was impossible: Getting people to understand something when their salary depends on them not understanding it.

After years of recession a bitter pill was needed for Finland, which as part of the euro zone is unable to rely on a weakening currency to support exports. 

The deal brokered by the center-right government in 2016 is designed to lower unit labor costs by about 4 percent and freeze wages until the end of this year. This is done by shifting some social contributions from employers to workers, making employees work an extra day per year and even cutting holiday bonuses in the public sector.

While a broader global recovery also plays a large part in Finland’s revival, businesses have been able to secure new orders on the back of the Competitiveness Pact, according to Jorma Turunen, the head of the Federation of Finnish Technology Industries, which represents companies such as Nokia Oyj.

Mercedes Jobs

At the Valmet Automotive Oy assembly line in Uusikaupunki, 240 kilometers northwest of Helsinki, which makes luxury Mercedes cars for Daimler AG, the impact of the labor deal is being felt.

Valmet Automotive Oy assembly line in Uusikaupunki.

Photographer: Roni Rekomaa/Bloomberg

The plant is being hailed as a symbol of Finland’s economic comeback after it secured a contract to produce Mercedes’ GLC sports utility vehicle, boosting employment to as much as 3,800 workers -- a record. That’s up from 1,957 at the end of last year, providing the 15,000-person town with a crucial lifeline.

Ilpo Korhonen, Valmet Automotive’s chief executive officer, said that while the GLC deal was secured before the outcome of the labor pact was known, the deal has boosted productivity at the factory and "will have an impact on our contracts in the future."

Ilpo Korhonen

Photographer: Roni Rekomaa/Bloomberg

But the country must now be vigilant not to backslide, Finland’s finance minister, Petteri Orpo warns.

While he’s the first to agree that the pact is helping, that work could unravel if workers start viewing the next round of wage talks as pay-back time.

"We must stick to salary moderation in order not to lose the benefits of the labor pact," he said in a recent interview in Helsinki.

‘Lost Ground’

Whether that will hold true when the 2018 wage talks start after the summer is unclear. Tapio Bergholm, an economist at Finland’s largest trade union federation, SAK, has said its members are "quite eager to regain the lost ground" on holidays and pay.

Orpo, the finance minister, said that the dire situation of the country’s public finances will not allow for any significant pay rises in 2018. But with trade unions keen to defend their members and the government preoccupied with potential unrest within the ruling coalition, the unwinding of the labor pact is not beyond the realm of possibility.

Even so, the labor pact’s most important consequence is that it shows Finland’s social partners are able to reach an agreement on very delicate issues, said Heidi Schauman, chief economist at Aktia Bank Oyj.

After years of employers blaming their woes on labor market rigidity, the pact adds an element of "predictability about the future" and provides reassurances to business that "labor costs will not surge," she said.

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