June 3, 2016 / 8:20 PM / a year ago

Finland government strikes deal with unions to boost stagnant economy

Juha Sipila of the Centre Party is pictured after he was voted to become the next prime minister at the parliament in Helsinki May 28, 2015. Vesa Moilanen/Lehtikuva viaFile Photo

HELSINKI (Reuters) - After a year of negotiations and strikes, Finland's center-right government convinced the country's unions on Friday to accept an 'internal devaluation' that will cut workers' benefits for the first time in a century.

The largest trade unions and main business representatives approved a proposed labor reform pact intended to boost export competitiveness in the stagnant economy of the Nordic country, a euro member state.

The reform pact will increase annual working hours, lower holiday bonuses, freeze wages for a year and increase pension contributions for workers while lowering them for employers.

"Today, we are making history in Finland. Only few countries are able to make a decision this tough by a joint agreement," Prime Minister Juha Sipila wrote on a blog post.

"With these measures, we will significantly catch up the competitiveness of Sweden and Germany."

With the country's largest industrial workers' union on board, around 85 percent of Finnish workers have now signed up for the deal. The government has promised to sweeten the deal with tax cuts.

High costs and rigid labor markets have been seen as a major obstacle for spurring growth in the country which has been pressured by a decline in Nokia's former telephone handset business, recession in neighboring Russia and a fast-ageing population.

A preliminary agreement on the labor pact was reached in March but on-off talks between individual trade unions and business lobbies continued right up to the Friday deadline.

To reach the deal, the government had to compromise on its ambition to shift away from centralized wage-setting toward company-level labor deals - a move seen boosting small companies in particular.

Some entrepreneurs and analysts said the deal was insufficient to spur growth significantly.

"This pact does not fix the structural problems in the Finnish economy," said Mikael Pentikainen, managing director of the Federation of Finnish Enterprises.

According to the World Economic Forum, Finland currently has the most rigid wage negotiation system in a comparison of 140 countries.

The Finnish economy is forecast by the European Commission to expand 0.7 percent this year, less than any other EU country except Greece.

But data earlier on Friday showed the gross domestic product had expanded more than initially estimated in the first quarter, fueling hopes of a stronger recovery.

Editing by Tom Heneghan

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