Tough Economic Decisions Come After Finnish Elections

Recently, I visited Finland. A sense of crisis has finally arrived in Helsinki but much precious time has been missed. The past record of solid economic growth has stalled with the economy in recession for three out of the last five years.

On April 19, Finnish voters are likely to vote out the ruling government coalition: conservative National Coalition Party, the Social Democrats, the Swedish People’s Party and the Christian Democrats.

The opposition Center Party is expected to lead the new government, along with the SDP and possibly the eurosceptic True Finns. (“Steinbock: Europeans are turning into Finns, CNBC, Sept 12, 2011: http://www.cnbc.com/id/44486508)   “They are a populist party but they are realistic in economic issues,” says Juha Sipilä, chairman of the Center Party and a businessman.

Economic erosion

Ahead of the elections, Alexander Stubb, the current conservative prime minister, complained to The Financial Times that his conservatives had been “bound by shackles coming from the left.” But that’s a bit like the tale’s fox who said “sour” to the rowan berries out of reach.

In Finland, the conservatives have been in the government since the onset of the European sovereign debt crisis. After Stubb’s precursor Jyrki Katainen left for Brussels in summer 2014, the party’s support has plunged in Finland.

When Finland joined the EU, it was led by the Social Democratic PM Paavo Lipponen in 1995-2003. According to his memoirs, “the conservatives have spoiled the cost discipline.”

Finnish growth is expected to decline to 0.5% in 2015. In February, inflation declined to -0.1%. In January and February, industrial production declined almost 5% from previous year. Unemployment has climbed to 10.1%.

Recently, Fitch revised its outlook on Finland’s long-term foreign and local currency status from stable to negative. Standard and Poor’s docked Finland’s rating to AA+ already in October 2014.

The engines of the economy have deteriorated. Not so long ago, Finnish electronics still accounted for more than 20% of exports; today, 11%. Finnish exports are dominated by metal-engineering (32%), chemical industry (25%) and forest industry (20%).

Across Europe, export-led growth is lingering. Second, many Finnish multinationals – from forestry (Stora Enso, UPM) to metal-engineering (Wärtsilä, Metso, KONE) – enjoyed their greatest globalization benefits in the past decade or two. Third, as long as Nokia was thriving, it contributed disproportionately to the Finnish economy, through tax revenues, investment, and jobs. Now the effect has been the reverse (although Nokia’s recent $16.6 billion Alcatel-Lucent deal suggests that there may be some light in the horizon, finally)..

In a small Nordic country of 5.3 million inhabitants, the economy is fueled by a handful of industries, which are dominated by few large corporations. The top-10 Finnish companies account for 33% and the top-100 companies for almost 70% of all exports, respectively. Some 80% of Finnish exports continue to be dominated by Europe. With foreign direct investment, the reliance on Europe remains overwhelming, even amid its lost decade.  (“When Europe stagnates, where shall Finland compete? Kauppapolitiikka (Trade Policy), Finnish Foreign Ministry, April 14, 2011: http://www.formin.finland.fi/public/default.aspx?contentid=218248&contentlan=1&culture=fi-FI ).

Finally, there are secular, long-term challenges. As wages are falling and both household and corporate investment plans are postponed, Finland is beginning to suffer from Europe’s fastest aging population. Since the crisis year 2008, the Finnish debt-to-GDP has soared from 28% to 47%. The challenge is to pay for their pensions and healthcare.

Efforts to reverse the decline

According to CEO Jorma Turunen of Finnish Technology Industries, the net income of Finnish technology industry firms was on average just 0.9% relative to revenues in 2013. That is a far cry from the “good old days” of 2000-2005 (7.3%), not to speak of the pre-crisis years of 2006-2007 (12%).

Since fall 2008, the export-led growth model has been spluttering, while current account deficits began in the early 2010s.

CEO Jyri Häkämies, former conservative Minister of Economic Affairs, of the Confederation of Finnish Industries (EK) would like to freeze wages for years ahead.

When the popular conservative Jan Vapaavuori replaced Häkämies as Minister of Economic Affairs, he said he wants to shift competitiveness to the center of Finnish industrial policy. “We know what needs to be done,” he says.

In the private sector, senior executives and trade association leaders expect market-driven reforms, along with CEO Risto Penttilä of  the Finnish Central Chambers of Commerce.

Even innovation investments are no longer immune to restructuring. Recently, when the cost-conscious bureaucrats sought to reduce Finnish R&D expenditures, Pekka Soini, a former Nokia executive who currently heads the influential Finnish Funding Agency for Technology and Innovation TEKES, was able to garner a chorus of leading business executives to oppose such measures.

At Finpro which promotes internationalization of Finnish companies, CEO Markus Suomi, another former Nokia executive, says that “we need more investment, more internationalization.”

Furthermore, the US-EU led sanctions on Russia have had a particularly adverse impact on Finnish exports to and investments in Russia. Deepening bilateral friction has not helped matters.

On Sunday, Russia’s Foreign Ministry said that moves by Finland and Sweden toward closer ties with NATO were of “special concern.” Finnish conservatives are for NATO membership but some 25-30% of the Finns support such aspirations, while almost 45% remain against the membership.  (“NATO and Northern Europe,” American Foreign Policy Interests, Sept 3, 2008: http://www.tandfonline.com/doi/abs/10.1080/10803920802313939

Time to face the facts

“Finnish economy will not grow as a result of cuts alone,” says Mauri Pekkarinen, the centrist chairman of the Parliament’s Committee of Commerce and former Minister of Economic Affairs. “Exclusive attention to cuts will reduce the near-minimal growth, cause deflation, economic erosion and new cuts of public expenditures.”

While Pekkarinen was criticizing the election debate in Finland, he was also sending a signal to the new government. In the absence of adequate fiscal support, a single-minded obsession with austerity has created too much mass unemployment across Europe, while eroding competitiveness.

What really matters is that different interest groups find an effective political consensus to surpass key economic challenges. The Finns need more flexible labor markets, adequate deregulation and a decisive push for innovation-led competitiveness.

In order to sustain its high living standards and generous social model, Finland can no longer price itself out of global competition. (“Steinbock: Is Finland pricing itself out from global competition?” CNBC, Nov 19, 2012:  http://www.cnbc.com/id/49885367) The priorities should be reforms for growth, determined but gradual, fiscal consolidation, and measures to address lingering financial stability concerns.

After seven years of missed opportunities, Sipilä’s Center Party needs to effect structural reforms.

Dan Steinbock is research director of International Business at India China and America Institute (USA), visiting fellow at Shanghai Institutes for International Studies (China) and in the EU-Center (Singapore)