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Apr 16, 2015 | 09:07 GMT

6 mins read

Fixing the Economy After Finnish Elections

Fixing the Economy After Finnish Elections
(HEIKKI SAUKKOMAA/AFP/Getty Images)
Summary

Finland will hold general elections April 19. The nation's political landscape is currently fragmented and the polls will likely yield a multi-party coalition that balances the competing forces. Regardless of the alliances that form, Helsinki's new government will probably work to restart economic growth and restore Finland's competitiveness. This could involve introducing spending cuts, negotiating with unions for wage moderation and reforming the country's healthcare and pension systems. The next government will also face tough choices on Greece at a time when Athens will be under pressure to request additional financial assistance from the eurozone.

The eurozone crisis has been particularly tough on countries in Mediterranean Europe. Finland, however, is a reminder that the economic malaise has reached Nordic Europe as well. In 2014, the Finnish economy contracted for the third consecutive year, and its 2015 growth prospects are modest. The European Union expects Finland to grow by only 0.8 percent this year, but Finland's Ministry of Finance recently admitted that growth could be even lower. According to Eurostat, unemployment in Finland reached 9.1 percent in February, below the eurozone average of 11.3 percent but considerably above Finland's pre-crisis level of 6.4 percent in 2008.

The Finnish forestry industry and electronics sector were once the pillars of the nation's economic strength, but they are both in decline now. The struggles of Nokia — Finland's iconic corporation — are representative of this decay. Membership in the eurozone, however, has reduced Helsinki's room to maneuver by barring the country from applying monetary policies to restore competitiveness.

In addition to feeling the reverberations of the eurozone crisis, the Finnish economy has also been affected by Russia's financial problems. Russia consumes nearly 10 percent of Finland's exports. This trade has been negatively affected by a declining ruble and EU sanctions on Moscow. Finland's exports fell 4 percent year on year in February, mostly because of lower exports to Russia. A weaker ruble has also reduced the number of Russians traveling to Finland, hurting both the tourism sector and retailers in Finland's southeastern border area.

While these outside factors have compounded Finland's difficulties, many of its problems are actually structural. When Finland's export-led technology industry was booming in the mid-2000s, wages in the private and public sectors skyrocketed. According to Eurostat, Finland's average hourly labor cost was 32.3 euros ($34.41) in 2014, above the eurozone average of 29.2 euros and higher than those of Germany, Austria and Italy. In 2000, before the start of Finland's boom, the country's average hourly labor cost was below Germany's. This has already impacted trade; in 2011 Finland transitioned from running constant trade surpluses to trade deficits.

Finland's finances are still strong, but the country's fiscal deficit reached 3.2 percent of its GDP in 2014, meaning Helsinki had exceeded the EU's limit of 3 percent for the first time in almost two decades. According to Finland's Ministry of Finance, the deficit will not fall below the EU threshold until 2018.

More important, demographic change threatens the long-term sustainability of Finland's financial system. The European Commission projects that Finland will have one of Europe's biggest proportional increases in expenditures on healthcare over the next 50 years. Similarly, pension expenditures are forecast to increase at more than twice the EU average by 2060. In 2013, the Finnish Pension Alliance interest group reported that for the first time in the system's history, pensions being paid out exceeded the amount paid in. The European Union forecasts that Finland's working age population will decline by over 5 percent this decade, something that could weaken the country's growth potential. According to the Finnish Business and Policy Forum, immigration is partially mitigating the effect of demographic change, but Finland must double its intake of immigrants to around 34,000 per year to sustain its labor force.

Spending Cuts

Considering Finland's current situation, it is not surprising that the economy is a key electoral issue. Finland has a parliamentary system in which large coalitions are generally needed to form governments. Prime Minister Alexander Stubb's conservative party, the National Coalition Party, leads Finland's incumbent government. The current governing coalition formed after the 2011 general elections and originally consisted of six parties, but it recently reduced to four. Opinion polls show the opposition Centre Party will likely win the election with roughly 23 percent of the vote.

Whether or not these polls are correct, the winner of the Finnish elections will need to form alliances, just as previous governments have done. Regardless of the specific alliances that emerge, the new coalition will seek to introduce measures to cut spending and increase labor productivity. Finland has fiscal room for stimulus policies because its debt is now around 60 percent of GDP — remarkably low for a eurozone member. Most political parties, however, favor moderating public sector spending and reducing labor costs rather than rolling out state-sponsored spending programs.

The current low oil prices and a relatively weak euro could give Helsinki some space to apply these policies. The composition of the government will affect the pace and depth of these measures. The Social Democratic Party of Finland, for example, recently suggested that spending cuts and tax hikes should be introduced but stretched out over an eight-year period. But Finland will probably move toward fiscal consolidation after the election. A key challenge for the next government will be preventing spending cuts from undermining Finland's already weak prospects for economic growth.

The Election and the Eurozone

The outcome of Finland's elections — and the composition of its new government — will also impact the rest of the eurozone. To different degrees, Finnish politicians are wary of providing financial assistance to countries in Southern Europe, and bailouts have been especially controversial. The April 19 elections will be important because the next government in Helsinki will have to participate in the negotiations between Greece and its lenders. Athens' current bailout program ends in late June, and the Greek government will be under pressure from the Eurogroup to request a third bailout program. Even if the parties reach an agreement, eurozone parliaments will have to ratify the program, a process that will create friction in Finland.

The situation will be particularly complex if Finland's Euroskeptic party, The Finns Party, enters the government. The party is critical of the European Union and NATO, and it has opposed previous bailout programs for Greece. While the party has never been in power, current opinion polls show it will get roughly 16 percent of the vote, potentially making it an attractive coalition partner for the larger parties. Indeed, on June 7, Centre Party leader Juha Sipila stated his party "could do business" with The Finns Party despite the ideological differences between the two.

The ongoing crisis in Ukraine has reignited Finland's traditional debate regarding potential NATO membership. In recent months, Finnish Prime Minister Alexander Stubb suggested the country should consider entering the military alliance. However, Finland will not make such a move without a referendum, and the public remains divided over the issue. In the coming years, Finland will continue its close cooperation with NATO, but formal membership is unlikely.

In a recent interview, Stubb said the past four years of a multi-party government coalition have been a "traumatic experience" and admitted that Helsinki has failed to introduce substantial reforms. After the election, the parties' first goal will be to form a working coalition. Once a government is in place, Helsinki will have to face tough choices to prevent the omens of Finland's "lost decade" from coming true.

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