This is why Finland has driven such a hard bargain on the bailout of Greece

One of the features of the bailout negotiations for Greece were rumours that Finland was pushing for a harder terms. Indeed at times it was supposed to be suggesting it would vote no. This has been a much longer-term theme as back at the time of previous bailouts Finland asked for collateral in return for its participation in the loans which have been made to Greece. From the European Parliament.

On 20 February 2012, the governments of Greece and Finland agreed the terms of a collateral deal with Finland for its involvement in EFSF loans. According to media reports, the above collateral takes the form of Greek bonds worth EUR 800 million, which Greece is required to release to a trustee company.

Actually there are doubts about how good this collateral would be in the rather likely scenario of further debt write downs for Greece but let us move on. Whilst there are political issues in Finland with the True Finns the essential issue may come as a surprise to a casual observer as it is an economic one. Finland too is struggling economically leading to questions as to whether it can cope with Euro area membership.

What has happened?

Back on the 20 th of April I pointed out that as recently as 2013 Finland was being lauded as an economic role-model. This of course is always a dangerous place to be! By February 2014 the OECD tried to continue that story but found itself having to tell us this.

More recently, however, competitiveness has deteriorated and output has fallen, as electronics and forestry collapsed.

Okay so what does that mean?

It went through a double dip and output is still about 6% below its late 2007 peak . More recently, GDP has expanded weakly since the second quarter of 2013 and the recovery is expected to be slow.

Let me bring this more up to date and let me do so by showing you a chart from the Washington Post which compares Finland to its neighbour Sweden.


As you can see a minor underperformance has become quite a big deal since the credit crunch hit. It might be quite nice to have interest-rate flexibility and exchange-rate flexibility in such an environment but of course via its membership of the Euro Finland does not have it. So we face the likelihood that Finland is struggling with life under Euro membership and what was that about never believing anything until it is officially denied? Below are excerpts from Finance Minister Stubbs in the New York Times.

He believes the suggestions that Finland would be better off without the euro are “rubbish”.

Perhaps they should have shown him the chart above! Anyway he was not finished.

“Devaluation is a little like doping in sports,” Stubb said. “It gives you perhaps a short-term boost, but in the long run, it’s not beneficial.”

What happened to the Finnish economy?

As ever it is too simplistic to have only one reason. Finland saw two of its major producers hit trouble as I pointed out on April 20 th.

The electronics sector has collapsed, falling from 6% of total value added in 2007 to little more than 1% recently, led by Nokia’s tumble in the mobile phone market. The erosion of wood and paper production has been more gradual, but of almost similar magnitude.

Back in the day Nokia was some 4% of Finland’s GDP so its decline has had quite an impact on its own. Also a more recent factor has been the economic travails of Russia with which Finland shares a border. As the Russian economy has hit the buffers and indeed with the oil price at US $55 in Brent Crude terms looks unlikely to recover soon there is plainly a continuing problem for Finland and its trade with Russia.

The Euro is not to blame except on a very minor scale for any of this but where it does have a role is that it prevents Finland from responding with a weaker currency. Here we hit a very awkward point for Finance Minister Stubbs. If devaluation is such a bad idea why has the European Central Bank via negative interest-rates (-.0.2%) and substantial QE (Quantitative Easing) bond purchases amongst other measures acting to push the Euro lower?

Also a Euro depreciation only helps with Finnish trade with non-Euro countries whereas a general depreciation would help with all trade. Accordingly the latter would have a stronger effect.

The Biter Bit

Ironically what is left is the internal devaluation model which Finland has been so enthusiastic in recommending for Greece. From Bloomberg.

Prime Minister Sipila wants Finnish labor to cost 5 percent less by 2019,

That’s what I mean by the biter bit! Even worse if this does not happen he is suggesting that Finland will need its own austerity package. If we look at the competitive position then one cannot help the feeling that this is a start and not a finish to the process.

Unit labor costs in Finland, where gross domestic product has contracted for the past three years, are almost 20 percent higher than those of its main trading partners, including Germany.

On this road there is a clear similarity between Greece and Finland, much more so than Finland would like to admit.

What is the latest data?

This tells us that the economic contraction which has been in play since 2012 continues.

Seasonally adjusted output decreased by 0.5 per cent in May from the month before. Adjusted for working days, output fell by 1.2 per cent from May 2014.

If we look into the detail the driving force of this was manufacturing and construction.

Secondary production decreased by four per cent

Whilst it is an erratic series so care is needed the mood is not lifted by the fact that orders for the manufacturing sector fell by 8.6% in May.

If we look at industrial production the outlook is poor too.

According to Statistics Finland, output of total industries adjusted for working days was 5.1 per cent lower in May 2015 than twelve months earlier.


We advance on the numbers here with trepidation after noting the situation described above and we are right to do so.

The unemployment rate was 10.0 per cent, having been 9.2 per cent in June of the year before….The number of unemployed persons was 22,000 higher than one year ago.

The mood is not improved if we switch to the employment data which is more of a leading indicator than the unemployment numbers.

There were 35,000 fewer employed than in June of the previous year.

Private Debt

A contracting economy is not the best way to deal with debt issues but whilst Finland’s public debt numbers are good the private-sector has been more active in this area. From April 20th

In May 2012 more than half of first-time
buyers had a loan-to-value ratio (LTV) in excess of 90% and more than 40% had a LTV over 100% (FINFSA,
2012)………. The government is reducing allowances for mortgage interest tax deduction, making borrowing less attractive.

Mind you I would suggest that an official interest-rate of -0.2% might be operating in the opposite direction to that claimed in the last sentence don’t you? The Bank of Finland puts it like this.

Finnish household debt as a percentage of income (120%) is still relatively moderate in comparison with the other Nordic countries. The pace of debt accumulation has, however, been rapid;

I note their choice of comparison too…


We can see that it is far too simplistic to blame the Euro for all of Finland’s economic woes. However there is a clear nuance to this which is that even according to the Bank of Finland the outlook remains dim.

Finland will not catch up with the pace of recovery in the other euro area countries. Due to weak cyclical conditions and the structural problems in the economy, the stagnation of economic growth in Finland will have prevailed for close to 10 years by the end of the forecast period.

Here we move into more awkward territory as the lower oil and indeed other commodities prices (Dr. Copper has hit a 6 year low today) combined with expansionary ECB monetary policy has meant that elsewhere in the Euro area 2015 has been a good year so far. Not Finland though. Accordingly it is true that Finland would be helped by having a more flexible exchange-rate or to be more precise in recent times it too has struggled with Euro membership and the level of its exchange-rate. However it would appear that its Finance Minister continues to sing to a different beat.

Too blind to see it
Too blind to see what you were doing
Too blind to see it
Too blind to see what you were doing (Kym Sims)


33 thoughts on “This is why Finland has driven such a hard bargain on the bailout of Greece

  1. We are ALL headed to where Greece is.
    We may go more slowly, and by more circuitous routes, but it’s all the neoliberal scheme.
    Poverty without social provision for the benefit of TPTB.

      • That is the only purpose of austerity.
        It is absolutely unnecessary, even counter-productive, in terms of reducing govt. debt.
        Further, that with their social model, where the cumulative effect of the possibilities for extra leave, means it is it is possible to work FIVE YEARS LESS THAN Greeks by the age of 60, where they have superior health and child care than Greece, they should be in the vanguard of those hammering down on Greece, like right-wing, neo-liberal thugs, is contemptible.

        With allies like these, who needs enemies?

    • Only if we are stupid enough to borrow our way to bankruptcy. EU expansion means wage convergence and there are plenty of winners as well as losers. Our politicians failed to foresee this or failed to spell out the consequences.
      The best possible outcome is a minor temporary correction whilst Eastern European wages converge.

      Capitaism has always meant growth spurts and tough periods or feast and famine in biology. But average wealth over centuries increases. And capitalism generally manages to put plenty of food on the tables, Communism meant queueing for bread in the hope your family might eat tonight and famines like Stalin’s deliberate Holodmor.

  2. Hi Shaun,

    The Finnish Fin Min’s name is Axel Stubb; I think “Stubbs” was the name other builder in Fawlty Towers, the foil to Mr O’Reilly. A bit like in another farce where Finland is the foil to Greece (surely Greece is the Mr O’Reilly of Europe, “Mr Fawlty, if the good Lord had meant us to be bankrupt he’d never have let us join the Euro…etc)

    Anyway, Axel Stubb used to be Prime Minister of Finland and he is married to an English woman from Solihull. He also once famously told David Cameron that the British needed to “wake up and smell the coffee” regarding the Euro. I’m not sure if he’s been to Solihull recently, but coffee is about all you can smell in a morning, as seemingly every single shop in the High Street sells the wretched stuff. The only other smell in Solihull is that of Land Rover products being churned out in record numbers. Mr Stubb might like to contrast JL-R’s figures with those of the Finnish auto industry and then decide who would be best advised in terms of coffee smelling. Finnish output is dependent on a short term contract Valmet has with Mercedes to produce about 500 A-Series Mercs each week (and which ends next year) and a contract to build new models of the electric Fisker executive car after the original owner went bust (no I haven’t heard of it either).

    Have a great weekend all!


    • “…. a contract to build new models of the electric Fisker executive car …”

      good god , wouldnt touch that bag of poo with a bargepole !

      no wonder Finland’s going bust , what are they smoking ?

      Certainly not popcorn !


    • Hi Andy Z

      Thanks and I have corrected it. I wondered where I had got the name Stubbs from and as you say it does seem appropriate in a way. You may like this I spotted in this weeks BBC 2 Yes Minister episode.

      Sir Humphrey ” He (Jim Hacker) says he believes in the European ideal
      Sir Arnold “Ha,Ha,Ha, Ha ,Ha
      Sir Humphrey “But you know how it is with politicians. They get taken in by their own speeches!

  3. The four largest net contributors in per capita terms are Denmark, Finland, Germany, Italy.
    The four largest net contributors as a proportion of GDP are Denmark, Italy, Germany, Finland.

    The four largest net recipients in absolute terms are Poland, Greece, Hungary, Portugal.
    The four largest net recipients in per capita terms are Luxembourg, Lithuania, Estonia, Greece

    there was I thinking Finland paid for it all , seem Greece owes Denmark some thanks 🙂

    Then again Greece is in the Euro zone and Denmark is not ! ( tied of course )

    …” Due to weak cyclical conditions and the structural problems in the economy, the stagnation of economic growth…”

    Hey isnt that Carney’s line ?

    Dear Finland

    Despite what your ruling class says , the euro has and will make you poorer as its designed to make Germany great again, remember how that worked out last time ? ( with the Russians in WW 2)

    Your holidays are more expensive ( Greece ) and you as a people will have to borrow like crazy in the asset inflation to come , if you think the last 10 years were bad , think again.

    You government has been co-opted to make you debt slaves , as is the plan for all in the Greater Franko-German Empire , that so called European Union (snark snark ) . Handcuffs or cages that golden, are still handcuffs/cages but you’ll better off in them , there is no other way , no , none, just keep believing that and all will be well ( for them ) .

    Your leaders and top 1% will be better off though and will praise you for making their lives a little more pleasant and comfortable as you services and wage decrease , remember , you can eat cake!


    • The Euro was actually designed to keep a check on German expansionism, and was demanded in return for re-unification.
      It’s GERMANY which isn’t playing by the rules.
      Worked a treat, eh?

      • You wait until the Nord-stream gas pipeline expansion between Russia and Germany is built to more than double capacity as then between them they will control the majority of Europe’s gas supply!

        For Europe this may well be another ‘completion moment’ like the Kiel canal.

  4. Although I’m no fan of half currency unions like the LMU and Euro, how much of the problems are due to the Euro and how much due to management complacency (Nokia) and declining paper and wood production (paperless office) compared to Sweden?

    With Germany cheating on Eurozone wage expansion and inflation to gain an advantage and large trade surplus compared to the other Euro countries this may well long term come back to haunt them. The Eurozone has had the expected difficult birth so far, but I don’t think they realise that this may have been the easy bit compared to the complete integration of the diverse economic, legal and tax systems of the Eurozone countries.

    Now do they adopt Luxemburgs or French tax rates, German or Greek government management and tax collection systems or Finnish or Italian legal systems? Even if the politicians do come up with grandiose integration systems I suspect that there will be not only resistance from the various Governments and their vested interests, but more so from the people who have never consented to ‘Le Project Grand’ with its lack of democracy and accountability.

    • Hi Rods

      To answer your question mostly not as a cause. For example Nokia seems to be a (bad) management issue that echoes say British Leyland to some extent. The paper/forestry issue is slightly different as maybe a lower exchange rate might have helped. As to Russia the Rouble would have fallen against whatever currency the Finns has chosen.

      I think that matters are different in terms of response. Whatever the view of the ECB interest-rate rises in 2011 on the overall Euro area it did not fit the Finns that well. Also the strong Euro phase of 2012-14. The Finns might have liked their own monetary policy through this phase.

      However there is an undercut because if we say that Finland would be better off now if it had not been in the Euro over the past 5 years we also have to note that right now it would presumable be a mixture of Denmark and Sweden. Oh what a tangled web and all that…

    • Hi Rods,

      Am curious why you think Germany is cheating ? Do you think they are breaking rules / treaties ? If so, which ones ?

      I know Germany went through some harsh reforms in the early 2000s, aimed at improving business competitivity. but capitalism is about competition, improvement and adapting to new market conditions. Long term improvements in wealth / living standards can only be achieved by increased productivity. Much of Eastern Europe has joined the common market and the wage differencials is forcing adaptation on Western European economies. Many countries would find change easier (by devaluation) if they were outside the EURO.

      The EU has mixed results. In Bulgaria, our politicians are under scrutiny and the Russian style political assassinations of the 1990s are not happening now. Both Romanian & Bulgarian democratic systems are dubious but they are hugely better than Belarus or Ukraine’s systems. EU influence is helping in this. The contradiction here is that Western European voters would have never approved EU expansion had they understood the impact on their wages. Western European voters would have never approved Schengen expansion if they read about Hungarian border police routinely accepting bribes. (Der Spiegel)

      But the EU has real problems. It’s lack of proper democracy and accountability is a critcal flaw. Cameron talks of reforming the EU, but it’s a nearly impossible mission.

      • Hi ExpatinBG,

        Here is one of the articles that explains how Germany cheated on the 2% inflation targeting to gain a competitive advantage.

        As you can see France followed the 2% and ended up at a cost disadvantage to Germany and Southern Europe exceeded it to end up with an even bigger problem. This explains Germany’s cost advantage and surplus and the problems for a fixed currency area in one graph! IMO there are two ways to fix this; Germany has a dose of wage inflation (politically impossible after the 1920’s), or there are capital transfers like the UK does to poorer regions like Scotland, Wales and Northern Ireland (political suicide after West-East currency unification at the wrong rate and unpopular Western additional taxes to cover the Eastern costs black hole). The alternative is financial stress, deindustrialization to those countries that can’t compete with the German cost / productivity standard (where this is the equivalent to the Gold Standard of the early 20th century) and the eventual breakup (after much damage to Europe economically) of the Euro. The austerity / deflation / cost saving route is a very painful one that can work as the Baltic countries have shown, if the medicine is taken all at once to minimise the length of the pain. If Greece had been more proactive with reforms, they after much pain they would probably now be growing again with sovereign debt and interest rate restructuring (longer and lower respectively) making the debts more affordable.

        Having half a currency is what the French did with the Latin Monetary Union in the 19th century and exactly the same mistakes are being made with the Euro! The only way to fix this is to make it a full currency and political union to form the EUSSR. This was always the Delor’s plan with putting the cart before the horse with half a currency union to create a financial crisis and to use this to force through a full political union with the French run (with French protectionist laws) EU in charge, but German economic cheating has put them on the throne and IMO the rise of Asia etc. has made the EU economically too small to become a successful protectionist area.

        The problem with the EU is that the idealist politicians (particularly French, trying again to impose (and failing again) French Hegemony on Europe) have always been way ahead of the population and when national Governments realise they are being abolished (the UK already have with UKIP, and Tory ‘renegotiations’ and a false referendum which will commit us to the full union) and the population realise the full implications of a complete political union they will vote for extreme parties like Le Pens NF, so they don’t go there. It will be the EUSSR as the EU is not a democracy and that is a fatal flaw for wealth creation. Only the appointed EU commission can introduce legislation into their parliament and however exteem to the left (or occasionally right) some of the appointments are particularly from Southern Europe, their particular axe to grind to introduce wealth destroying legislation will never have to face the test of the ballot box, which most of the time keeps countries mainly on the middle straight and narrow, muddling through, wealth creating path.

        The EEC was set up as a European trading club and that part, especially with the single trading area has worked reasonably well (for an overly bureaucratic system) and brought much additional trade, wealth and for Eastern Europe much need political reforms. The Delors / Mitterrand French power grab to form the EU, Euro and ever closer union to the EUSSR has been a disaster for all the countries involved and will get much, much worse (politically and economically) before it falls apart (probably also taking the trading area with it). I just hope it is settled peacefully and opportunists on the EU border don’t take advantage.

        This week’s Mauldin Economics “Thoughts from the Frontline” newsletter has a very good US prospective on the Euro and Greek disasters, with the following insightful and excellent advice to the Greek Government: “Don’t bring a knife to a gunfight”! 🙂

        • The BBC’s partiality on the Independence referendum caused tens of thousands to turn out at BBC Scotland’s HQ in mass protests about misuse of its position.
          The BBC was effectively campaigning for a NO vote.

        • Thanks for the link. I’d agree deals with Germans based on treaty rules. But a gentleman’s agreement – have you watched Schumacher driving ?

          In the real world, wages are usually set by business not centrally planned by government. Suggests to me that uniform wage inflation targeting is no more realistic than the fixed exchange rates of the single currency. Economic convergence contradicts everyone maintaining equal wage inflation.

          Now France could try emulate Germany’s Hartz 4 reforms, but do you fancy Calais being blocked for months ?

          It is worth recalling that Chirac was very keen on EMU, Kohl was unenthusiastic but agreed in a backroom deal which secured France’s support for German reunification.

  5. Hi Shaun,

    One thing about Finland, have you ever seen any Finns living outside their own country? I haven’tr although I see British, Greeks, Serbians, Indians, West Jamaicans, Chinese, Polish, Russians living outside their countries. Finland must be doing something right.

  6. It is not just internal devaluation that is needed to restore competitiveness in this environment but to actually outpace any further cost cutting in Germany say. And you have to do it very quickly or you will have no decent sized productive base. In the meantime one’s budget deficits balloon as the tax base is eroded…or, if you keep cutting these deficits too, then obviously demand disappears from the economy and….you are back to that smaller productive base anyway.

    The other effect that doesn’t seem to be commented on re the Eurozone banking architecture is the effect on circulating money of running deficits with other countries in the Eurozone.

  7. Hi Shaun, I’ll include a link to average wages across Europe.

    A logical consequence of EU expansion with freedoms like the right to work is wage convergence. Compare wages between Poland & Finland, what trend should we expect over the next 10 years ?

    Likewise, the French protests over farm payouts can be linked to uncompetitive farming. The CAP hasn’t made French farmers more productive, but it has made European food bills higher. This protectionism hurts Europe’s poorest consumers hardest.

    • Have you seen the low-nutrition, high residue, low flavour, long-shelf-life, wrong textured, cosmetically perfect rubbish that high efficiency farming delivers?

      I grow as much of my own food as I can. (ALL our fruit and veg except oranges and peaches).

      • Growing good food is a competitive advantage, and discerning consumers are willing to pay a premium. Competition is good for consumers, CAP monopoly is bad for consumers.

        Historically the CAP used a floor price for agricultural products. A floor price provides no incentives to improve quality, it only provides an incentive to overproduce any old muck. CAP is an anti-consumer means of taking from the poor and giving to the land owning gentry.

        • “Growing good food is a competitive advantage”
          Not if the cost of producing it prices it out of reach of all but the wealthy.

    • I think both arguments from you and therrawbuzzin are right but that still leaves me with no definitive “answer”.

      • There is also economies of scale. NZ sheep farms are larger and have fewer staff per 10,000 sheep. But EU import quotas prevent real competition from benefitting consumers. Ditto Argentinian beef.

        Fair competition should improve both quality and price of sale goods.

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