HELSINKI May 11Vesa Vihavainen is worried.
Merivaara, his Finnish-based hospital bed-making business, is
struggling - just like the economy that Finns once held up to
debt-laden Greeks as a model of what national thrift can
Weak sales mean Merivaara has had to lay off staff as
Finland fails to find an exit from a two-year recession. That
spiral of lost jobs and income is also wrecking the country's
cherished reputation for sound public finances.
Finland's school-masterly advice, prominent in a chorus of
northern European criticism when euro zone debtors asked for
bailouts, may come back to haunt its policymakers as they
struggle to agree on reforms from taxes to pensions.
While southern Europe starts to win back investors after
years of donor-imposed job losses and welfare cuts, Finnish
welfare costs and taxes have risen as jobs are lost. Government
levies as a share of gross domestic product (GDP) have jumped to
a European Union high, piling costs onto the private sector.
Finnish exports, investments and retail sales are all
tumbling and firms are putting out profit warnings.
"The Finnish economy has drifted into the same reference
group with Italy and France," the EU's top economic official
Olli Rehn said, referring to the two big euro zone economies
whose finances linger outside the bloc's fiscal limits.
"We have no time to lose," said Rehn, a Finn, last month.
But with parliamentary elections in a year's time and Prime
Minister Jyrki Katainen due to step down next month, serious
cost cutting looks unlikely for now.
"We would need a brave government to implement the needed
reforms," Danske Bank economist Pasi Kuoppamaki said.
But the chance of that happening decreased further on
Friday, when social democrats replaced their leader, Finance
Minister Jutta Urpilainen, with union boss Antti Rinne, who has
advocated state take a bigger role in the economy.
And with the opposition talking mainly about small cuts to
welfare and incremental changes, elections are unlikely to
produce anything beyond policy fine-tuning.
Finland's GDP is still about 5 percent below its 2007 level,
a bigger lag than the euro zone average and well below its main
export competitors, Sweden and Germany.
The economy shrank 1.4 percent last year, and on Monday, the
European Commission forecast it to grow 0.2 percent this year
and 1.0 percent next - the second-weakest in the euro zone on
both counts, beating only bailed-out Cyprus.
Netherlands, another debt-crisis hardliner, also has seen
economy contract, but its struggles are smaller than Finland's
and has returned to export-led growth.
In the euro zone, only Malta and Estonia are less
competitive than Finland on pricing. Companies such as Merivaara
produce less, but labour costs have not fallen nearly as much.
While Finnish leaders are worried, about half the deficit
trimming has been achieved by raising taxes. Government revenue
as a share of GDP rose to 56.3 percent this year, the highest in
the EU and more than 10 percentage points above the EU average.
"The question is: How can Finland finance a public sector of
this size, and the answer is: 'It really can't, at least if it
wants the economy to grow'," Nordea analyst Jan von Gerich said.
Merivaara's sales of hospital beds and surgical tables show
rising domestic costs coupled with the strong euro are
increasingly hampering exports, which go mainly to Scandinavia
and Russia, where the economy has stagnated.
"Price competitiveness is getting tougher all the time,"
Merivaara's Vihavainen said. "Labour here is expensive, and we
are far from markets, which adds to transportation costs."
Besides, health care spending across the globe is being
squeezed by cuts in public budgets - a cause Finland championed.
"Why would we listen to countries that are not taking care
of their own public finances?" said its EU minister Alexander
Stubb in 2011.
He could become prime minister next month.
Even after two years of recession, there are few empty
storefronts. Unemployment has risen, but is still well below the
EU average, which has made it easier to delay reforms.
Finland has kept its top triple-A credit rating, earned by
reforms undertaken after a deep recession in the early 1990s.
But its pristine fiscal reputation "is more the past than the
present," Pimco portfolio manager Andrew Bosomworth said.
Foreigners hold 90 percent of its sovereign debt, and
Finland may find its cost of borrowing drifting higher as debt
investors look more closely at its current performance.
"When investors think next time whether they should buy more
or reduce Finland's weight (in their portfolios), it may be that
they'll act differently," Nordea's von Gerich said.
LOST RECIPE FOR GROWTH
Finland, with 5.5 million people, has lost about 100,000
industrial jobs in 10 years. Phonemaker Nokia's woes have
grabbed global headlines, but traditional Finnish strongholds of
machinery and paper sectors are shedding jobs too.
In a February report to government, economists Bengt
Holmstrom, Sixten Korkman and Matti Pohjola called the current
crisis "to some extent even worse" than that of the early 1990s,
when unemployment rates were close to 20 percent.
"Productivity growth has stopped in a never-before-seen
manner and there is a lack of ideas to speed it up. The recipe
for growth has been lost," they said.
Finns must shrink their welfare state and, put simply, work
harder, they said. The OECD has just given a similar message.
In Finland, Sweden serves as a yardstick for almost
anything, and Finland has fallen well behind. Sweden has
rebounded from the financial crisis well and its economy is
expected to grow about 3 percent this year and next.
Mobile games have often been touted as a Finnish success
story, with global hits including Clash of Clans and Angry
Birds. But the sector employs only about 2,000 people at home.
Finland also lags on reform: Sweden has cut taxes and
brought the welfare state to an affordable level.
With many Finnish export-goods makers training their workers
to perform highly specialised tasks, they have sought to keep
the staff employed. Now lay-off notices are more frequent, and
with capacity use at less than four-fifths, even an export
upswing is unlikely to mean more hiring or investments.
"There is no positive news for Finland in any scenario, at
least not in the near future," Nordea's von Gerich said.
(Editing by Alistair Scrutton/Ruth Pitchford)