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Finland and the euro crisis



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IN THE historic heart of Helsinki, great cruise ships can be glimpsed across the harbour ready for their next trip. Just two hours across the Gulf of Finland is Tallinn in Estonia. Continue due south and a weary traveller will eventually reach Athens. If Greece is the awkward customer among southern Europe’s debtor nations, Finland is the stroppy partner among northern creditor nations. It has insisted on special terms on its contributions to euro-zone bail-outs since mid-2011 by getting collateral on its lending. Government ministers avoid high-flown rhetoric about European unity: the foreign minister recently caused a fuss by saying that Finland has contingency plans for a break-up of the euro.

 

From one perspective, it is hard to see why Finland is being so anxious. The country thrived for the best part of a decade after it joined the single currency in 1999. And although it suffered in the recession of 2008-09 it has since made a robust recovery.

 

Finland’s public finances are healthy, too, certainly compared with those elsewhere in the euro area. Of the six remaining AAA–rated countries in the 17-strong zone, it is the only one not facing the risk of a downgrade, according to Moody’s, a ratings agency. Public debt is only about 50% of GDP, much lower than Germany’s 80.

 

But from another perspective, Finland’s performance looks disappointing. An alternative destination from Helsinki on one of those monster cruise ships is due west to Stockholm. Unlike Finland, Sweden chose not to join the euro. Until the crisis, that made little difference. Both countries did well; if anything Finland’s performance was stronger.

 

The Finns suffered a much sharper recession than the Swedes, and Finland’s recovery has been less ebullient. Moreover, the Finnish economy has stumbled of late: GDP fell by 1% in the second quarter in Finland, whereas it rose by 1.4% in Sweden.

 

Sweden continues to run a large current-account surplus (worth 7% of GDP in 2011) whereas Finland swung into deficit last year for the first time since 1993.

 

Some of this reflects setbacks to Nokia, Finland’s falling mobile-phone star (see article), whose share of Finnish GDP has shrivelled to an eighth of what it was at its peak a decade ago. But there are other worries. Mainstay industries, such as wood and paper production, have also been doing badly.

 

The economy’s longer-term prospects add to the gloom. In a survey of the Finnish economy published early this year it was estimated that GDP would grow by just 1.7% a year between 2016 and 2030. The bills for a rapidly ageing population are coming due, as the bumper crop of babies born after the second world war retires.

 

The coalition government formed in mid-2011 and led by the conservative prime minister, Jyrki Katainen, has adopted measures to improve the structural budget balance by 2% of GDP in 2015. The fiscal tightening will be especially marked next year, with value-added tax on consumption rising by one percentage point.

 

Painful reforms are required. Finland needs to raise its retirement age.

As times turn hard at home, many Finns bristle at having to bail out what they regard as profligate euro-zone countries that have not played by the rules.

 

And despite the dislike for bail-outs, Finnish public opinion continues to favour the euro, which is also backed by both business and the unions. One reason lies in another destination that the big cruise-ships visit - nearby St Petersburg. Joining the euro had a security dimension, through binding Finland more closely into Europe and so providing a bulwark against Russia (still its largest trading partner).

 

Finns may not be dreaming of a future outside the single currency, but their reluctance to help makes them a prime example of the "rescue fatigue" now afflicting much of northern Europe.

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