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.
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)